SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended November 30, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934.
Commission file number 0-15525
CAPITAL ASSOCIATES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1055327
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7175 WEST JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's $.008 par value common
stock at January 16, 1998, was 5,077,007.
Exhibit Index - Page 18
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - November 30, 1997
and May 31, 1997 3
Consolidated Statements of Income - Three and Six
Months Ended November 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Six Months Ended November 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Exhibit Index 18
Signature 20
2 of 20
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
ASSETS
November 30, May 31,
1997 1997
----------- --------
Cash and cash equivalents $ 9,861 $ 6,194
Receivables from affiliated limited partnerships 437 726
Accounts receivable, net 2,936 417
Equipment held for sale or re-lease 2,196 1,242
Residual values and other receivables arising from
equipment under lease sold to private investors 2,908 4,334
Net investment in direct finance leases 19,033 7,700
Leased equipment, net 71,647 71,443
Investments in affiliated limited partnerships 6,577 6,642
Deferred income taxes 2,300 2,300
Other assets 5,631 3,674
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 35,000 41,845
-------- --------
$158,526 $146,517
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Recourse bank debt $ 20,380 $ 20,712
Accounts payable - equipment purchases 28,093 30,231
Other liabilities 13,634 10,607
Discounted lease rentals 72,042 61,466
--------- ---------
134,149 123,016
--------- ---------
Stockholders' equity:
Common stock 32 32
Additional paid-in capital 16,855 16,897
Retained earnings 7,730 6,854
Treasury stock (240) (282)
--------- ---------
Total stockholders' equity 24,377 23,501
--------- ---------
$ 158,526 $ 146,517
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except earnings per share)
Three Months Ended Six Months Ended
------------------------------- ---------------------------
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
------------- ------------ ------------ ------------
Revenue:
Equipment sales to affiliated
limited partnerships $ 12,321 $ 17,645 $ 23,703 $ 30,077
Other equipment sales 54,458 46,435 78,933 65,039
Leasing 4,132 3,761 8,549 7,736
Interest 937 1,052 1,892 2,230
Other 1,391 718 2,200 1,496
---------- ---------- ---------- ----------
Total revenue 73,239 69,611 115,277 106,578
---------- ---------- ---------- ----------
Costs and expenses:
Equipment sales 49,466 62,864 84,003 92,996
Equipment acquired from
affiliated limited partnership 15,338 - 15,338 -
Leasing 2,849 2,195 5,653 4,278
Operating and other 2,603 2,171 5,093 4,684
Provision for losses 230 80 400 105
Interest:
Non-recourse debt 1,318 1,430 2,667 2,981
Recourse debt 455 543 955 1,022
---------- ---------- ---------- ----------
Total costs and expenses 72,259 69,283 114,109 106,066
---------- ---------- ---------- ----------
Net income before income taxes 980 328 1,168 512
Income tax expense 245 82 292 128
---------- ---------- ---------- ----------
Net income $ 735 $ 246 $ 876 $ 384
========== ========== ========== ==========
Earnings per common and dilutive
common equivalent share: $ 0.14 $ 0.05 $ 0.16 $ 0.07
========== ========== ========== ==========
Weighted average number of common and dilutive
common equivalent shares outstanding used in
computing earnings per share: 5,383,000 5,384,000 5,375,000 5,342,000
========== ========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
---------------------
November 30,
1997 1996
--------- ---------
Net cash provided by operating activities $ 27,007 $ 21,729
-------- --------
Cash flows from investing activities:
Equipment purchased for leasing, net (23,084) (20,806)
Investment in leased office facility and
capital expenditures (371) (170)
Net receipts from affiliated limited partnerships 544 940
-------- --------
Net cash used for investing activities (22,911) (20,036)
-------- --------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 5,334 1,527
Principal payments on discounted lease rentals (5,456) (4,194)
Proceeds from sales of common stock 25 6
Purchase of non-employee stock options - (138)
Net borrowings (payments) on revolving credit
facilities (965) 3,491
Net borrowings (payments) on Term Loan 633 (2,167)
-------- --------
Net cash used for financing activities (429) (1,475)
-------- --------
Net increase in cash and cash equivalents 3,667 218
Cash and cash equivalents at beginning of period 6,194 2,851
-------- --------
Cash and cash equivalents at end of period $ 9,861 $ 3,069
======== ========
Supplemental schedule of cash flow information:
Recourse interest paid $ 955 $ 1,022
Non-recourse interest paid 776 749
Income taxes paid 225 87
Income tax refunds received 70 314
Supplemental schedule of non-cash investing and
financing activities:
Increase in residual values and other receivables
relating to equipment sale transactions 1,540 1,286
Discounted lease rentals assigned to lenders arising
from equipment sales transactions 942 -
Assumption of discounted lease rentals in lease
acquisitions 18,498 -
Fair value of assets acquired, net of cash 5,342 -
Liabilities assumed and incurred in acquisition 5,342 -
The accompanying notes are an integral part
of these consolidated financial statements.
5 of 20
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for annual financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. For
further information, please refer to the financial statements of Capital
Associates, Inc. (the "Company"), and the related notes, included within
the Company's Annual Report on Form 10-K for the fiscal year ended May 31,
1997 (the "1997 Form 10-K"), previously filed with the Securities and
Exchange Commission.
The balance sheet at May 31, 1997 has been derived from the audited
financial statements included in the Company's 1997 Form 10-K.
2. Acquisition
-----------
Effective November 1, 1997, CAII acquired all of the outstanding shares of
DBL, Inc. d/b/a Connecting Point, in exchange for $1,200,000 in cash (paid
in December and included in Other Liabilities) and a $2,140,000 four year
note. The Company may be required to make additional payments of up to
$221,750 per year ending October 31, 2001, contingent upon the results of
Connecting Point's operations over the course of that period. Connecting
Point is a desktop information technology solutions integrator and
equipment reseller.
The $2,140,000 note payable to the sellers (included in Other Liabilities)
earns interest at the rate of 10% per annum and is payable in monthly
installments of $58,000 beginning December 12, 1997 through November 12,
2000, and $42,056.86 beginning December 12, 2000 and continuing through
November 12, 2001. Interest expense from the date of acquisition through
November 30, 1997 was approximately $18,000. The note is secured by a
second lien in all the assets of Connecting Point.
The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed based on their fair values at the
date of acquisition. The excess of the purchase price over the fair values
of the net assets acquired of approximately $2.0 million (which will
increase for any future contingent cash payment), has been recorded as
goodwill, and is being amortized on a straight-line basis over 15 years.
The amount of goodwill amortized during the quarter ended November 30, 1997
was approximately $11,000.
6 of 20
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Acquisition, continued
-----------
The Company's Consolidated Statements of Operations reflect the results of
operations for Connecting Point for the period from acquisition through
November 30, 1997, which was not significant.
3. Recourse Bank Debt
------------------
On November 26, 1997, the Company obtained a new $60 million senior,
secured debt facility (the "Senior Facility") in the form of a term loan
("Term Loan"), an acquisition term loan ("Acquisition Term Loan"), working
capital revolving credit loans ("Working Capital Facility") and warehouse
revolving credit loans ("Warehouse Credit Facility"). The lender group
consists of the agent bank, CoreStates Bank, N.A., and participating
lenders, BankBoston, N.A., Colorado National Bank, Norwest Bank Colorado,
N.A., and European America Bank (the "Lender Group"). The term of the
Senior Facility expires on November 25, 1998 and may be renewed annually in
Lender's sole discretion. Interest on the Senior Facility is tied to the
Lender Group's prime rate or the LIBOR rate (8.25% and 5.685%, respectively
at November 30, 1997) plus the Applicable Margin. The principal terms of
the Senior Facility are as follows:
Warehouse Working Term Acquisition
(Dollars in thousands) Credit Facility Capital Facility Loan Term Loan
--------------- ---------------- ------- -----------
Maximum Amount $ 51,000 $ 5,000 $ 2,800 $ 1,200
Borrowings at
November 30, 1997 19,000 5,000 2,800 -0-
Potential availability at
November 30, 1997 32,000 -0- -0- 1,200
Applicable Prime Rate Margin 0.0% .25% .75% .75%
Applicable LIBOR Rate Margin 2.5% 2.75% 3.00% 3.00%
The Term Loan has an amortization term of two years with a balloon payment
of $1.4 million. The Acquisition Term Loan has an amortization term of four
years. The Acquisition Term Loan commitment is expected to be funded by the
Lender Group during January 1998. The proceeds will be used for the
Connecting Point acquisition discussed in Footnote 2 of the Notes to
Consolidated Financial Statements.
The Company is required to pay a quarterly commitment fee equal to .375% of
the unused portion of the Working Capital Facility and the Warehouse Credit
Facility. The Senior Facility contains certain provisions which limit the
Company as to additional indebtedness, sale of assets, liens, guarantees,
and distributions. Additionally, the Company must maintain certain
specified financial ratios. The Senior Facility replaces the terminated
Bank Facility, which was to expire under its terms as of November 30, 1997.
7 of 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations
---------------------
GENERAL COMMENTS
Operating results are subject to fluctuations resulting from several
factors, including (i) the seasonality of lease originations, (ii)
variations in the relative percentages of the Company's leases entered into
during the period which are classified as DFLs or OLs, or are sold for fee
income and (iii) the level of fee income obtained from the sale of leases
in excess of lease equipment cost. The Company will adjust its mix of OLs
and DFLs and volume of leases sold to private investors from time to time,
when and as the Company determines that it would be in its best interests,
taking into account profit opportunities, portfolio concentration, residual
risk and its fiduciary duty to originate leases for its PIFs.
Because the Company finances certain of its lease transactions with
recourse and non-recourse debt, the ultimate profitability of leasing
transactions is dependent, in part, on the difference between the interest
rate inherent in the lease and the underlying debt rate. Certain of the
Company's competitors have access to lower cost funds than the Company.
However, the Company has developed relationships with various private
investors and formed various strategic alliances with investors that have a
lower cost of capital enabling the Company to originate and sell leases at
competitive prices. Currently, as a result of the present relatively low
interest rate environment and resulting relatively low lease rates, the
Company sells the majority of leases it originates to private investors
having a lower cost of capital than the Company.
LEASE ORIGINATIONS
Presented below is a schedule showing volume and placement of new lease
originations during the six months ended November 30, 1997 and November 30,
1996, respectively (in thousands):
Six Months Ended
--------------------------
November 30, November 30,
1997 1996
------------ ------------
Placement of lease originations:
Equipment under lease sold to PIFs $ 24,000 $ 28,000
Equipment under lease sold to private investors 75,000 45,000
Leases added to the Company's lease
portfolio (a significant portion of
which will subsequently be sold) 21,000 39,000
-------- --------
Total lease origination volume $120,000 $112,000
======== ========
Leasing is an alternative to financing equipment with debt. Therefore, the
ultimate profitability of the Company's leasing transactions is dependent,
in part, on the general level of interest rates. Lease rates tend to rise
and fall with interest rates, although lease rate movements generally lag
interest rate movements.
8 of 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
LEASE ORIGINATIONS, continued
The Company is able to originate a certain amount of leases with higher
lease rates. Such leases are generally sold to the PIF's because, as PIF
sponsor, the Company has a fiduciary responsibility to maximize investor
returns and does so by blending the higher yielding transactions with
investment grade credit quality leases having lower rates. However, given
the present market environment, the number of higher yielding transactions
having adequate credit quality is limited, and consequently, the volume of
leases available for sale to the PIF's is limited. The Company's response
to these conditions has been to limit the amount of funds it raises from
PIF investors. Consequently, future equipment sales to PIF's are expected
to comprise a smaller percentage of total placements of new lease
originations.
The Company continues to evaluate additional sources of capital (including
sources such as securitization, a private debt placement and/or a secondary
stock offering) which would provide the liquidity necessary to
significantly add leases to its own portfolio. The goal of such financing
would be to lower the Company's cost of capital and expand the availability
of capital. The Company believes this will enable it to originate leases
for its own portfolio which have competitive market lease rates and good
credit quality. The Company believes that in the present market there are
significant opportunities to originate leases having these characteristics.
However, the Company's present capital structure (i.e., both cost of
capital and amount available) precludes taking full advantage of market
opportunities for such leases. Should the Company be successful in
identifying and closing on new sources of capital (for which no assurance
can be given), it intends to grow its own lease portfolio.
INTERIM FINANCIAL RESULTS
Presented below are schedules showing condensed income statement categories
and analyses of changes in those condensed categories derived from the
Consolidated Statements of Income (in thousands), prepared solely to
facilitate the discussion of results of operations that follows:
Condensed Consolidated Condensed Consolidated
Statements of Income The effect on Statements of Income The effect on
for the three months net income for the six months net income
ended November 30, of changes ended November 30, of changes
---------------------- between ---------------------- between
1997 1996 years 1997 1996 years
--------- ---------- ------------- ---------- -------- -------------
Equipment sales margin $ 1,975 $ 1,216 $ 759 $ 3,295 $ 2,120 $ 1,175
Leasing margin (net of interest
expense on discounted lease rentals) 902 1,188 (286) 2,121 2,707 (586)
Other income 1,391 718 673 2,200 1,496 704
Operating and other expenses (2,603) (2,171) (432) (5,093) (4,684) (409)
Provision for losses (230) (80) (150) (400) (105) (295)
Interest expense on recourse debt (455) (543) 88 (955) (1,022) 67
Income taxes (245) (82) (163) (292) (128) (164)
------- ------- ------- ------- ------- -------
Net income $ 735 $ 246 $ 489 $ 876 $ 384 $ 492
======= ======= ======= ======= ======= =======
9 of 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
INTERIM FINANCIAL RESULTS, continued
EQUIPMENT SALES
Equipment sales revenue and the related equipment sales margin consists of
the following (in thousands):
Three Months Ended
----------------------------------------------- Increase
November 30, 1997 November 30, 1996 (Decrease)
------------------- --------------------- -----------------
Revenue Margin Revenue Margin Revenue Margin
-------- ------ -------- ------- ------- ------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 12,321 $ 264 $ 17,645 $ 372
Equipment under lease sold to private investors 51,215 471 45,778 590
-------- ------- -------- -------
63,536 735 63,423 962 $ 113 $ (227)
-------- ------- -------- ------- ------- ------
Transactions subsequent to initial lease term
(remarketing revenue):
Sales of off-lease equipment 2,593 590 548 147
Sales-type leases 56 56 61 59
Excess collections (cash collections in excess
of the associated residual value from equipment
under lease sold to private investors) 594 594 48 48
-------- ------- -------- -------
3,243 1,240 657 254 2,586 986
Deduct related provision for losses - (230) - (80) - (150)
-------- ------- -------- ------- ------- ------
Realization of value in excess of provision
for losses 3,243 1,010 657 174 2,586 836
Add back related provision for losses - 230 - 80 - 150
-------- ------- -------- ------- ------- ------
3,243 1,240 657 254 2,586 986
-------- ------- -------- ------- ------- ------
Total equipment sales $ 66,779 $ 1,975 $ 64,080 $ 1,216 $ 2,699 $ 759
======== ======= ======== ======= ======= ======
Six Months Ended
----------------------------------------------- Increase
November 30, 1997 November 30, 1996 (Decrease)
------------------- --------------------- -----------------
Revenue Margin Revenue Margin Revenue Margin
-------- ------ -------- ------- ------- ------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 23,703 $ 530 $ 30,077 $ 643
Equipment under lease sold to private investors 74,983 903 64,018 957
--------- ------- -------- -------
98,686 1,433 94,095 1,600 $ 4,591 $ (167)
--------- ------- -------- ------- ------- -------
Transactions subsequent to initial lease term
(remarketing revenue):
Sales of off-lease equipment 2,721 633 772 273
Sales-type leases 56 56 61 59
Excess collections (cash collections in excess of
the associated residual value from equipment
under lease sold to private investors) 1,173 1,173 188 188
--------- ------- -------- -------
3,950 1,862 1,021 520 2,929 1,342
Deduct related provision for losses - (400) - (105) - (295)
--------- ------- -------- ------- ------- -------
Realization of value in excess of provision for losses 3,950 1,462 1,021 415 2,929 1,047
Add back related provision for losses - 400 - 105 - 295
--------- ------- -------- ------- ------- -------
3,950 1,862 1,021 520 2,929 1,342
--------- ------- -------- ------- ------- --------
Total equipment sales $ 102,636 $ 3,295 $ 95,116 $ 2,120 $ 7,520 $ 1,175
========= ======= ======== ======= ======== =======
10 of 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
Equipment Sales to PIF's
------------------------
Equipment sales to the PIFs decreased and are expected to decrease further
because three of the PIFs are in their planned liquidation stage. Once a
PIF enters the liquidation stage, it no longer acquires equipment under
lease. Presently, two PIFs are actively acquiring leases compared to four
PIFs which were actively acquiring leases during fiscal 1997.
Equipment Sales to Private Investors
------------------------------------
Equipment sales to private investors increased principally because more
leases were identified and closed as a result of increased productivity of
the field lease originations team. The increased volume of the field lease
originators is primarily due to (i) the Company's efforts to improve its
marketing activities, including focusing on customer relationships and
vertical integration (i.e., the development of specialized equipment and
remarketing expertise) and (ii) the development of strategic alliances with
investors having lower cost of capital enabling the Company to originate
and sell leases at competitive prices.
During the three months ended November 30, 1997 and 1996, payments from one
lessee accounted for 11% and 14%, respectively, of total leasing revenue
and 11% and 14% for the six months ended November 30, 1997 and 1996,
respectively. In addition, other equipment sales revenue related to
equipment leased to that lessee accounted for 27% and 62% of total other
equipment sales revenue during the three months ended November 30, 1997 and
1996, respectively and 28% and 62% for the six months ended November 30,
1997 and 1996, respectively.
Remarketing of the Portfolio and Related Provision for Losses
-------------------------------------------------------------
The Company has successfully realized gains on the remarketing of its
portfolio of equipment after the initial lease term for the past twenty-two
consecutive quarters. The remarketing of equipment for an amount greater
than its book value is reported as part of equipment sales margin (if the
equipment is sold) or leasing margin (if the equipment is re-leased). The
realization of less than the carrying value of equipment is recorded as
provision for losses (which is typically not known until remarketing after
the expiration of the initial lease term). As shown in the table above, the
realizations from sales exceeded the provision for losses during the three
and six months ended November 30, 1997 and November 30, 1996, even without
considering realizations from remarketing activities recorded as leasing
margin.
11 of 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
Remarketing of the Portfolio and Related Provision for Losses, continued
--------------------------------------------------------------
Residual values are established equal to the estimated value to be received
from the equipment following termination of the lease. In estimating such
values, the Company considers all relevant facts regarding the equipment
and the lessee, including, for example, the equipment's remarketability,
upgrade potential and the probability that the equipment will remain in
place at the end of the initial lease term. The nature of the Company's
leasing activities is that it has credit and residual value exposure and,
accordingly, in the ordinary course of business, it will incur losses
arising from these exposures. The Company performs quarterly assessments of
its assets to identify other than temporary losses in value. The Company's
policy is to record allowances for losses as soon as any
other-than-temporary declines in asset values are known. However,
chargeoffs are recorded upon the termination or remarketing of the
underlying assets. As such, chargeoffs will primarily occur subsequent to
the recording of the allowances for losses.
Margins from remarketing sales (i.e., sales occurring after the initial
lease term) are affected by the number and dollar amount of equipment
leases that mature in a particular quarter. As shown in the tables above,
because (i) the Company sold substantially all new lease originations to
its PIFs or private investors and retained very few lease originations for
its own account during the fiscal years preceding fiscal year 1995, and
(ii) in accordance with GAAP, the Company does not consolidate the results
of its PIFs, generally, each quarter, fewer leases mature and less
equipment is available for remarketing. However, revenue from remarketing
sales increased during the three and six months ended November 30, 1997,
compared to the three and six months ended November 30, 1996, primarily due
to the sale of investor-owned grocery store furniture and fixtures on which
the Company had a retained residual interest. Although fluctuations will
occur as discussed in the preceding sentence, in general, remarketing
revenue and margin are expected to remain at levels which are lower than
fiscal 1997 and prior years. The Company's ability to remarket additional
amounts of equipment and realize a greater amount of remarketing revenue in
future periods is dependent on adding additional leases to its portfolio.
However, adding leases to the Company's portfolio will not immediately
increase the pool of maturing leases because new leases typically are not
remarketed until after their initial term (which averages approximately
four years).
The provision for losses recorded during the three and six months ended
November 30, 1997 primarily related to the following:
* Other-than-temporary declines in the value of equipment which occurred
primarily because lessees returned equipment to the Company at the end
of lease. The Company had previously expected to realize the carrying
value of such equipment through lease renewals and proceeds from sales
of the equipment to the original lessees. The fair market value of the
equipment re-leased or sold to third parties is considerably less than
was anticipated, and
12 of 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
----------------------
Remarketing of the Portfolio and Related Provision for Losses, continued
--------------------------------------------------------------
* The anticipated sale of two off-lease commuter aircraft. The Company
engaged MCC Financial, an expert commuter aircraft remarketer, to
remarket the aircraft. That agent determined that the aircraft could
be released within a reasonable remarketing period for an amount that
would recover the Company's full carrying value over time, or sold for
cash immediately but at a book loss. The Company has elected to sell
the aircraft immediately after determining that the proceeds could be
more effectively redeployed in its vertical integration activities and
for the equity portion of a potential financing program for leases.
The provision for loss reflects sales offers the Company has received.
LEASING MARGIN
Leasing margin consists of the following (in thousands):
Three Months Ended Six Months Ended
----------------------------- ---------------------------
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
------------ ------------- ------------ ------------
Leasing revenue $ 4,132 $ 3,761 $ 8,549 $ 7,736
Leasing costs and expenses (2,849) (2,195) (5,653) (4,278)
Net non-recourse interest expense
on related discounted lease rentals (381) (378) (775) (751)
--------- -------- --------- --------
Leasing margin $ 902 $ 1,188 $ 2,121 $ 2,707
========= ======== ========= ========
Leasing margin ratio 22% 32% 25% 35%
== == == ==
The increase in leasing revenue and leasing costs during the three and six
months ended November 30, 1997, compared to the three and six months ended
November 30, 1996 is primarily due to growth in the Company's lease
portfolio.
Leasing margin ratio fluctuates based upon (i) the mix of direct finance
leases and operating leases, (ii) remarketing activities, (iii) the method
used to finance leases added to the Company's lease portfolio, and (iv) the
relative age and types of leases in the portfolio (operating leases have a
lower leasing margin early in the lease term, increasing as the term passes
and the majority of leases added to CAI's portfolio have been operating
leases). Interest expense arising from non-recourse bank debt (discounted
lease rentals) is reflected in leasing margin, but interest arising from
the warehouse facility is not reflected in leasing margin. Leasing margin
and the related leasing margin ratio decreased primarily as a result of a
decrease in the number of leases in the remarketing phase and a related
decline in the amount of remarketing rents.
13 of 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
OTHER INCOME
Other income consists of the following (in thousands):
Three Months Ended Six Months Ended
----------------------------- ---------------------------
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
------------ ------------- ------------ ------------
Fees and distributions from the
Company-sponsored PIFs $ 1,298 $ 639 $ 1,978 $ 1,228
Fees from private programs 77 - 113 -
Interest on income tax refunds - - - 103
Other 16 79 109 165
------- ------ -------- --------
$ 1,391 $ 718 $ 2,200 $ 1,496
======= ====== ======== ========
The increase in fees and distributions from the Company-sponsored PIFs for
the three and six months ended November 30, 1997 compared to the three and
six months ended November 30, 1996 reflects a gain of $890,000, related to
the sale of substantially all the leases owned by PaineWebber Preferred
Yield Fund and a similar type of loss of $100,000 on the Capital Preferred
Yield Fund.
As of December 31, 1997, two Company-sponsored PIF's were liquidated and
two other PIF's had sold substantially all their assets. As a result of the
effective termination of operations of the PIFs, fees and distributions
from the Company-sponsored PIF's are expected to decline in the future. As
of December 31, 1997, there are three remaining Company-sponsored PIF's
actively engaged in leasing activities.
OPERATING AND OTHER EXPENSES
The aggregate amount of operating and other expenses increased
approximately $432,000 and $409,000 for the three and six months ended
November 30, 1997, respectively, when compared to the three and six months
ended November 30, 1996. Approximately one-half the increase reflects the
acquisition of DBL, Inc. described in Footnote 2 of Notes to Consolidated
Financial Statements. The Company has 25 sales and marketing employees as
of November 30, 1997 compared to 17 as of November 30, 1996. and the
remaining increase represents labor costs related to additional sales and
marketing personnel.
INCOME TAXES
Income tax expense is provided on income at the appropriate federal and
state statutory rates applicable to such earnings. The aggregate statutory
tax rate is 40%, adjusted for utilization of the Company's ITC carryforward
(see Note 10 to Notes to Consolidated Financial Statements in the 1997 Form
10-K).
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
II. Liquidity and Capital Resources
-------------------------------
The Company's activities are principally funded by proceeds from sales of
on-lease equipment (to its PIFs or private investors), non-recourse debt,
recourse bank debt (see Note 3 to Notes to Consolidated Financial
Statements), rents, fees and distributions from its PIFs, sales or
re-leases of equipment after the expiration of the initial lease terms and
other cash receipts from non-recurring items such as settlements of legal
proceedings. Management believes the Company's ability to generate cash
from operations is sufficient to fund operations, as shown in the
accompanying Consolidated Statements of Cash Flows.
The Company refinanced its bank facility. See Note 3 to Notes to
Consolidated Financial Statements for a description of the Company's Bank
Facility.
The Company is offering units of its latest PIF, CPYF-IV, for sale to the
general public. Through November 30, 1997, the Company sold $42.7 million
of Class A units. The Company has up to $7.3 million of Class A units in
CPYF-IV available for sale, which will represent a future source of
liquidity and acquisition fee income for the Company. Two of the Company's
PIFs, including CPYF-IV, are using a portion of their available cash to
purchase additional equipment from the Company. The Company expects to sell
a total of approximately $55 million of equipment to these PIFs during
fiscal year 1998. Five of the Company's PIFs are in their liquidation stage
and are no longer purchasing material amounts of equipment.
Inflation has not had a significant impact upon the operations of the
Company.
III. Acquisition
-----------
Effective November 1, 1997, the Company acquired all of the outstanding
shares of DBL, Inc., d/b/a Connecting Point. See Note 2 to Notes to
Consolidated Financial Statements for a description of the related
acquisition. The increase in Accounts Receivable, net and Other Assets, was
primarily due to the assets acquired from Connecting Point.
Connecting Point was acquired to obtain specific high technology equipment
expertise which is expected to provide the Company with (i) access to new
markets which will allow the Company to record higher residual values and
to support lease origination, (ii) greater confidence in pricing and
estimating residual values and (iii) the ability to provide enhanced
equipment expertise and evaluation services to our customers.
IV. New Accounting Pronouncements
-----------------------------
See Recently Issued Financial Accounting Standards under Note 1 to Notes to
Consolidated Financial Statements in the Company's 1997 Form 10-K for a
discussion about the impact of new accounting pronouncements on the
Company's financial position or results of operations.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
V. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act
---------------------------------------------------------------------------
of 1995
-------
The statements contained in this report which are not historical facts may
be deemed to contain forward-looking statements with respect to events,
the occurrence of which involve risks and uncertainties, and are subject to
factors that could cause actual future results to differ both adversely and
materially from currently anticipated results, including, without
limitation, the level of lease originations, realization of residual
values, the availability and cost of financing sources and the ultimate
outcome of any contract disputes. Certain specific risks associated with
particular aspects of the Company's business are discussed in detail
throughout Item 2 of this report and Parts I and II of the 1997 Form 10-K
when and where applicable.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) OTHER. The Company is involved in other routine legal proceedings
incidental to the conduct of its business. Management believes
that none of these legal proceedings will have a material adverse
effect on the financial condition or operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
--------
b. Reports on Form 8-K
-------------------
None
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Item No. Exhibit Index
- -------- -------------
10.59 Loan and Security Agreement, dated as of November 26, 1997 by and
between Capital Associates, Inc., and Capital Associates
International, Inc. as Borrowers and CoreStates Bank, N.A., as
Agent and Issuing Bank and each of the Financial Institutions now
or hereafter shown on the Signature pages of this Agreement.
11A Computation of Primary Earnings Per Share. A computation of fully
diluted earnings per share is not presented as dilution is less
than 3%.
27 Financial Data Schedule
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Exhibit 11A
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Three Months Ended Six months Ended
------------------------------ -----------------------------
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Shares outstanding at beginning of period 5,017,000 5,002,000 5,016,000 4,994,000
Shares issued during the period
(weighted average) 4,000 - 2,000 5,000
Issuance of treasury shares upon exercise
of incentive stock options 15,000 - 15,000 -
Dilutive shares contingently issuable upon
exercise of options (weighted average) 671,000 616,000 673,000 720,000
Less shares assumed to have been purchased
for treasury with assumed proceeds
from exercise of stock options
(weighted average) (324,000) (234,000) (331,000) (313,000)
Effect of non-employee stock option
buy-out - - - (64,000)
--------- -------- --------- ---------
Total shares, primary 5,383,000 5,384,000 5,375,000 5,342,000
========= ========= ========= =========
Net income $ 735,000 $ 246,000 $ 876,000 $ 384,000
========= ========= ========= =========
Income per common and common
equivalent share, primary $ 0.14 $ 0.05 $ 0.16 $ 0.07
========= ========= ========= =========
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CAPITAL ASSOCIATES INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL ASSOCIATES, INC.
Registrant
Date: January 20, 1998 By: /s/Anthony M. DiPaolo
---------------------
Anthony M. DiPaolo,
Senior Vice-President and
Chief Financial Officer
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