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 February 28, 1994
[ ] 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 March 23, 1994, was 9,725,618.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - February 28, 1994
and May 31, 1993 3
Consolidated Statements of Operations - Three and
Nine Months Ended February 28, 1994 and 1993 4
Consolidated Statements of Cash Flows - Nine Months
Ended February 28, 1994 and 1993 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Exhibit Index 17
Signature 19
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except par value)
ASSETS
February 28, May 31,
1994 1993
(Note 1)
Cash and cash equivalents, including
restricted funds of $753 and $1,697,
respectively $ 2,002 $ 3,210
Accounts receivable, net of allowance
for doubtful accounts of $604 and
$593, respectively 759 1,715
Income tax refunds receivable 255 1,870
Equipment held for sale or re-lease 5,049 461
Residual values and other receivables
arising from equipment under lease
sold to private investors 5,373 5,071
Notes receivable arising from
sale-leaseback transactions 35,069 42,674
Net investment in direct finance leases 26,564 51,649
Leased equipment, net 22,172 39,174
Investments in affiliated limited
partnerships 12,958 15,200
Other 6,330 6,084
Discounted lease rentals assigned to
lenders arising from equipment sales 110,557 113,527
$ 227,088 $280,635
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving Credit Facility $ 594 $ 21
Accounts payable and other liabilities 9,548 10,414
Term Loan 24,454 37,836
Deferred income taxes 1,553 1,500
Obligations under capital leases arising
from sale-leaseback transactions 34,967 42,496
Discounted lease rentals 135,020 168,065
206,136 260,332
Stockholders' equity:
Common stock 59 59
Additional paid-in capital 16,612 16,604
Retained earnings 4,332 3,691
Treasury stock (51) (51)
Total stockholders' equity 20,952 20,303
$ 227,088 $ 280,635
See accompanying notes
<TABLE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except earnings per share)
Three Months Ended Nine Months Ended
February 28, February 28, February 28, February 28,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenue:
Equipment sales to affiliated
limited partnerships $ 5,578 $ 8,868 $ 55,102 $ 41,085
Other equipment sales 8,889 7,591 34,149 25,266
Leasing 2,804 5,716 10,642 20,854
Interest 3,949 3,700 11,468 12,103
Other 1,077 788 3,178 2,476
Total revenue 22,297 26,663 114,539 101,784
Costs and expenses:
Equipment sales 12,570 14,020 83,078 57,899
Leasing 1,216 2,473 4,212 10,042
Operating and other expenses 3,100 3,279 9,371 10,329
Interest:
Non-recourse debt 4,577 5,307 14,207 17,223
Recourse debt 422 716 1,441 2,646
Provision for losses 100 285 1,160 1,785
Total costs and expenses 21,985 26,080 113,469 99,924
Income before income taxes 312 583 1,070 1,860
Income tax expense 125 233 428 744
Net income $ 187 $ 350 $ 642 $ 1,116
Earnings per common
and common equivalent share $ 0.02 $ 0.03 $ 0.06 $ 0.11
Weighted average number of
common and common equivalent
shares outstanding 10,851,000 10,427,000 10,978,000 9,818,000
</TABLE>
See accompanying notes
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
February 28, February 28,
1994 1993
Net cash provided by operating
activities $ 4,941 $ 13,808
Cash flows from investing activities:
Recovery of investment in
direct finance leases 11,073 15,688
Equipment purchased for leasing (1,886) (9,457)
Net receipts from affiliated
limited partnerships 1,494 1,997
Proceeds from sales of equipment
held for investment 7,230 633
Proceeds from sales of lease rentals 5,410 -
Net cash provided by investing
activities 23,321 17,861
Cash flows from financing activities:
Proceeds from discounting of
lease rentals 2,478 6,731
Principal payments on discounted
lease rentals (19,147) (26,434)
Proceeds from sales of common stock 8 14
Net payments on recourse debt (12,809) (15,478)
Net cash used in financing activities (29,470) (35,167)
Net decrease in cash (1,208) (3,498)
Cash at beginning of period (3,210) 7,026
Cash at end of period $ 2,002 $ 3,528
Supplemental schedule of cash flow
information:
Recourse interest paid $ 1,340 $ 2,996
Non-recourse interest paid 2,537 4,862
Income taxes paid 181 1,470
Income tax refunds received 1,614 -
Supplemental schedule of non-cash
investing and financing activities:
Discounted lease rentals assigned
to lenders arising from equipment
sales transactions 29,081 11,191
Assumption of discounted lease
rentals in lease acquisitions 15,675 20,405
Residual values and other receivables
arising from equipment under lease
sold to private investors 2,019 -
Notes receivable relating to equipment
sale transactions 7,605 6,855
Obligations under capital leases
arising from sale-leaseback
transactions 7,529 6,761
See accompanying notes
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM 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 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, 1993 (the "1993 Form 10-K"), previously filed
with the Securities and Exchange Commission.
The balance sheet at May 31, 1993 has been derived from the
audited financial statements included in the Company's 1993
Form 10-K. The consolidated balance sheet as of May 31,
1993 and the consolidated statements of operations for the
three and nine months ended February 28, 1993 have been
restated to reflect the adoption of Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes", as discussed further in Note 3 to Notes to
Consolidated Interim Financial Statements.
Certain reclassifications have been made to prior periods'
financial statements to conform to the current period's
presentation.
2. Credit Facility
The Company's recourse operating credit facility ("Credit
Facility") consists of two facilities, a revolving credit
facility (the "Revolving Credit Facility") and a term
facility (the "Term Loan"). The availability under the
Revolving Credit Facility is equal to (1) the lesser of
$10.75 million or (2) the Borrowing Base amount, reduced by
the outstanding indebtedness under the Revolving Credit
Facility. As of February 28, 1994, the Borrowing Base
amount was approximately $6.0 million, and the outstanding
indebtedness under the Revolving Credit Facility was $.6
million, leaving approximately $5.4 million of availability
under the Revolving Credit Facility to fund the Company's
working capital needs.
The outstanding principal balance of the Term Loan as of
February 28, 1994 was $24,454,000. Principal reductions
under the Term Loan are scheduled to occur as follows (in
thousands):
Three months ended May 31, 1994 $ 3,955
Twelve months ended May 31, 1995 16,446
Balance remaining at May 31, 1995
(the scheduled termination date of
the Credit Facility) 4,053
$ 24,454
As of the time these financial statements were prepared,
there were no Defaults or Events of Default existing under
the Credit Facility.
The Revolving Credit Facility bears interest at the Mellon
Bank, N.A. Prime Rate plus 1%, payable monthly, in arrears.
On February 28, 1994, Mellon's Prime Rate was 6.0%. The
Term Loan bears interest at a fixed rate of 6.0%, payable
monthly, in arrears.
3. Income Taxes
Effective June 1, 1993, the Company adopted SFAS 109. SFAS
109 requires the recognition of deferred tax liabilities
and assets for the future income tax consequences of events
that have been recognized in the Company's financial
statements or tax returns.
The Company elected to adopt SFAS No. 109 by restating
fiscal years 1993 and 1992 financial statements. The
effects of the restatement on net income and related per
share amounts for the three and nine months ended February
28, 1993 are as follows:
Three Months Ended Nine Months Ended
February 28, 1993 February 28, 1993
As previously reported:
Net income $ 278,000 $ 805,000
Net income per
common share .03 .08
As restated:
Net income $ 350,000 $ 1,116,000
Net income per
common share .03 .11
Change in net $ 72,000 $ 311,000
income due to
adoption of SFAS 109
Income taxes are provided on net income at the appropriate
federal and state statutory rates. The effective overall
tax rate for fiscal year 1993 was 40%.
The Company files state income tax returns in 50 states.
Statutory state income tax rates vary between 0% and 12%.
The changing mix of business among states impacts the
Company's aggregate effective state income tax rate. The
Company estimates that its effective tax rate will remain
at 40% for fiscal year 1994.
4. Equipment Held for Sale or Re-lease
Equipment held for sale or re-lease, recorded at the lower
of cost or market value expected to be realized through
sale or re-lease, consists of equipment previously leased
to end users which has been returned to the Company
following lease expiration. The February 28, 1994 carrying
value consists primarily of one jet aircraft.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
I. Results of Operations
Presented below are schedules (prepared solely to facilitate the
discussion of results of operations that follows) showing condensed
income statement categories and analyses of changes in those
condensed categories derived from the Consolidated Statements of
Operations.
<TABLE>
Condensed Consolidated Condensed Consolidated
Statements of Operations The effect on Statements of Operations The effect on
for the Three Months net income of for the Nine Months net income of
Ended February 28, changes between Ended February 28, changes between
1994 1993 periods 1994 1993 periods
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 1,897 $ 2,439 $ (542) $ 6,173 $ 8,452 $ (2,279)
Leasing margin (net of
interest expense on
discounted lease rentals) 960 1,636 (676) 3,691 5,692 (2,001)
Other income 1,077 788 289 3,178 2,476 702
Operating and other expenses (3,100) (3,279) 179 (9,371) (10,329) 958
Provision for losses (100) (285) 185 (1,160) (1,785) 625
Interest expense on recourse
debt (422) (716) 294 (1,441) (2,646) 1,205
Income taxes (125) (233) 108 (428) (744) 316
Net income $ 187 $ 350 $ (163) $ 642 $ 1,116 $ (474)
</TABLE>
Equipment Sales
Equipment sales revenue (and related equipment sales margin)
consists of the following (in thousands):
<TABLE>
Three Months Ended February 28, Increase
1994 1993 (Decrease)
Revenue Margin Revenue Margin Revenue Margin
<S> <C> <C> <C> <C> <C> <C>
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 5,578 $ 76 $ 8,868 $ 182
Equipment under lease sold to
private investors 6,435 164 3,699 468
12,013 240 12,567 650 $ (554) $ (410)
Transactions subsequent to initial lease
termination:
Sales of off-lease equipment 1,230 682 2,386 555
Sales-type leases 359 110 456 185
Excess collections (cash collections
in excess of the associated residual
value from equipment under
lease sold to private investors) 865 865 1,050 1,049
2,454 1,657 3,892 1,789 (1,438) (132)
$14,467 1,897 $16,459 2,439 $(1,992) $ (542)
Provision for losses (100) (285)
Realizations of value in excess of
provision for losses $ 1,797 $2,154
</TABLE>
<TABLE>
Nine Months Ended February 28, Increase
1994 1993 (Decrease)
Revenue Margin Revenue Margin Revenue Margin
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 55,102 $ 1,346 $ 41,085 $ 1,048
Equipment under lease sold to
private investors 27,387 903 8,932 648
82,489 2,249 50,017 1,696 $ 32,472 $ 553
Transactions subsequent to initial lease
termination:
Sales of off-lease equipment 3,771 1,624 9,264 2,321
Sales-type leases 1,334 643 3,795 1,160
Excess collections (cash collections
in excess of the associated residual
value arising from equipment under
lease sold to private investors) 1,657 1,657 3,275 3,275
6,762 3,924 16,334 6,756 (9,572) (2,832)
$89,251 6,173 $66,351 8,452 $22,900 ($2,279)
Provision for losses 1,160 1,785
Realizations of value in excess of
provision for losses $ 5,013 $6,667
</TABLE>
As discussed below, to maintain profitable results of
operations, the Company is selling more leased equipment
during its initial lease term (shown in the preceding table
as an increase in sales revenue of leases during the
initial lease term of $32,472,000 for the nine months ended
February 28, 1994) to offset the decrease in sales margins
from transactions subsequent to initial lease termination
(shown in the preceding table as a decrease of $9,572,000
in revenue from Transactions subsequent to initial lease
termination for the nine months ended February 28, 1994).
In the ordinary course of business, the Company will (i)
sell new lease originations to its PIFs (to the extent the
PIFs have funds available for such purpose) or private
investors, and (ii) sell seasoned lease transactions
(previously originated leases held in the Company's
portfolio) to private investors when the profit is
desirable or to reduce perceived residual exposure. The
Company expects to continue to sell leased equipment during
the initial lease term to maintain profitable results of
operations during fiscal 1994. To the extent such sales
involve seasoned lease transactions, it will increase the
effect of portfolio run-off.
The table below demonstrates that the decline in the Company's
lease portfolio during the nine months ended February 28, 1994
is attributable primarily to equipment sales:
<TABLE>
Discounted lease
Direct finance rentals, net of
leases, operating discounted lease
leases, net and rentals assigned Net investment
equipment held to lenders arising in leased
for sale or re-lease from equipment sales equipment
<S> <C> <C> <C>
As of May 31, 1993 $ 91,284 $ (54,538) $ 36,746
Net change arising from
Syndication and PIF sales
activities (17,893) 11,510 (6,383)
Sale of lease rentals(1) (3,899) 2,933 (966)
Provision for losses (1,160) - (1,160)
Non-recourse debt balloon
pay-off (see page 12) - 2,300 2,300
Change as a result of
portfolio run-off (14,546) 13,332 (1,214)
As of February 28, 1994 $ 53,786 $ (24,463) $ 29,323
(1) The Company recorded a gain of $305,000 on the sale of the
underlying lease rentals for the nine months ended February
28, 1994.
</TABLE>
A significant portion of the Company's net assets consists
of aircraft. To reduce the concentration of aircraft in
its portfolio, during the first fiscal quarter 1994 the
Company sold three aircraft under lease. The following
table summarizes the Company's investment in aircraft as of
February 28, 1994 and May 31, 1993 (in thousands):
February 28, May 31,
1994 1993
Leased equipment, net of
accumulated depreciation $ 12,658 $ 23,836
Equipment held for sale or
re-lease 4,820 -
Associated non-recourse debt (5,198) (12,425)
12,280 11,411
Residual values and other
receivables arising from
equipment under lease sold
to private investors 1,045 1,008
Net investment in aircraft $ 13,325 $ 12,419
Approximately $5.6 million (net of non-recourse debt of
$4.2 million) of the Company's current $13.3 million of net
investment in aircraft is represented by two jet aircraft.
Leases on these aircraft expire December 31, 1996. The
Company has entered into a commitment to sell the two
aircraft subject to obtaining an appraisal satisfactory to
the buyer. The commitment provides for the sale of one
aircraft in May 1994, and the sale of the other aircraft in
August 1994. The sales price of each aircraft approximates
their net book value as of the date of sale.
During the third fiscal quarter 1994, the lease expired on
a jet aircraft having a net book value of $5 million. The
aircraft was returned to the Company and is included in
Equipment Held for Sale or Re-Lease. The Company's
investment in such aircraft was subject to non-recourse
"balloon" debt of approximately $2.3 million which was
payable in full upon expiration of the lease and,
accordingly, the Company funded such payment using the
availability under the Revolving Credit Facility during the
fiscal third quarter 1994. The aircraft is presently
undergoing maintenance and refurbishment. Upon
completion, the Company intends to remarket the aircraft
through re-lease or sale to other third party users.
Equipment Sales to PIFs
Equipment sales to PIFs increased during the nine months
ended February 28, 1994, as compared to the similar period
in fiscal 1993, principally because more leases that
satisfied the Company's Underwriting Standards were
identified, in part as a result of the opening of new sales
offices.
Under applicable regulatory guidelines, the Company is
entitled to receive various fees and distributions in
connection with its activities related to its sponsored
PIFs. One such fee, an acquisition fee payable upon sale
of equipment under lease to a PIF, is, in general, subject
to a regulatory maximum amount over the term of a PIF.
Acquisition fees earned by the Company from equipment sales
to one of its PIFs reached the regulatory maximum during
fiscal year 1992 and, during first fiscal quarter 1994, the
maximum was reached for another PIF. These circumstances
will have an impact on reported equipment sales margins in
future periods, but are not expected to impact total
PIF-related income (after costs of equipment sales) in
future periods because other allowable fees and
distributions are expected to increase during such periods.
Equipment Sales to Private Investors
The Company re-opened its private investor sales department
during the second fiscal quarter 1993 and has hired two
experienced private equity salespersons, and as a result,
equipment sales to private investors increased during both
the third fiscal quarter 1994 and the nine months ended
February 28, 1994, as compared to the similar periods in
fiscal year 1993. The development of a customer base of
private investors is a principal operating goal for the
Company.
Remarketing Sales
Margins from remarketing sales (i.e., sales occurring after
the initial lease term) are affected by the amount of
equipment leases that matures in a particular quarter. In
general, as the size of the Company's lease portfolio
declines, fewer leases mature and less equipment is
available for remarketing each quarter. As a result,
remarketing revenue has declined during both the third
fiscal quarter and nine months ended February 28, 1994
compared to the comparable periods in fiscal 1993. 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. Accordingly, the Company is
pursuing financing opportunities to obtain funds to add to
its own portfolio, such as lease securitization and other
financing possibilities. See the discussion of financing
possibilities under "Business Plan" below.
Provision for Losses
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
likelihood that the lessee will re-lease the equipment.
The Company performs ongoing quarterly assessments of its
assets to identify other than temporary losses in value.
Provision for losses result from the realization of less
than the carrying value of equipment (which is typically
not known until remarketing subsequent to the initial lease
termination has occurred). The remarketing of equipment
for an amount greater than its book value is reported as
equipment sales margin or as leasing margin. As shown on
pages 8 and 9 of 19, the realizations from sales were at a
value in excess of the provision for losses, even without
considering realizations from remarketing activities
recorded as leasing margin (see discussion below).
Leasing Margin
Leasing margin consists of the following (in thousands):
<TABLE>
Three Months Ended Nine Months Ended
February 28, February 28,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Leasing revenue $ 2,804 $ 5,716 $ 10,641 $ 20,854
Leasing costs and expenses (1,216) (2,473) (4,212) (10,042)
Net interest expense on
associated discounted
lease rentals (628) (1,607) (2,738) (5,120)
Leasing margin $ 960 $ 1,636 $ 3,691 $ 5,692
Leasing margin ratio 34% 29% 35% 27%
</TABLE>
Leasing margin has declined and is expected to decline
further as a result of portfolio run-off. See the
discussion under "Business Plan" below. The leasing margin
ratio has increased as a result of remarketing activities,
which include the rental proceeds from renewing, extending
or re-leasing equipment before and after the end of the
initial lease term.
Other Income
During the first fiscal quarter 1994, the Company received
a $2 million income tax refund, consisting of $1.6 million
that was previously recorded as "Income tax refunds
receivable", and an additional $.4 million of interest that
was recorded in first fiscal quarter 1994 as "Other
income". Other income for the third fiscal quarter 1994
included $.3 million related to a sales tax audit recovered
from lessees in excess of amounts previously considered
recoverable.
Operating and Other Expenses
Operating and other expenses decreased $.2 million (6%) and
$1 million (9%) for the three and nine months ended
February 28, 1994, as compared to the comparable periods in
fiscal year 1993. The decrease principally reflects a
reduction in salaries and wages. As of February 28, 1994,
the Company had 115 full-time employees compared to 149
full-time employees at November 30, 1992 and 117 full-time
employees at February 28, 1993. As the portfolio has
run-off, the Company has decreased the size of its back
office staff while adding revenue producing lease
origination and private equity syndication personnel. The
Company had opened eleven field sales offices as of
February 28, 1994.
Interest Income and Expense
Interest revenue arises when equipment financed with
non-recourse debt is sold to investors. The Consolidated
Statements of Operations reflect an equal amount of
interest expense. The decline in interest expense on
non-recourse debt, (net of the associated interest
revenue), was due to portfolio run-off.
The decrease in interest expense on recourse debt reflects
the decline in the outstanding balance of the Credit
Facility.
Income Taxes
Effective June 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for
Income Taxes". See Note 3 to Notes to Consolidated Interim
Financial Statements.
II. Liquidity and Capital Resources
The Company's activities are principally funded by the
Revolving Credit Facility, rents, proceeds from sales of
on-lease equipment, non-recourse debt, fees and
distributions from its PIFs, and sales or re-leases of
equipment during and after the expiration of the initial
lease terms.
Cash held by the PIFs available for purchase of equipment
from the Company is:
As of February 28,
1994 1993
Available cash $ 11,937 $ 19,637
Cash committed for
equipment purchases 9,419 8,062
Uncommitted cash $ 2,518 $ 11,575
Currently, one PIF, Capital Preferred Yield Fund-II,
("CPYF-II") is actively selling units to the public. Four
other PIFs have ceased offering units, however, they
generate cash for purchase of equipment from operating
activities. The Company anticipates that $9 million of
additional cash available for purchase of equipment will be
generated by the four PIFs during third fiscal quarter
1994. During the fourth fiscal quarter 1994, CPYF-II will
cease offering units for sale to the public. The Company
has substantially completed the registration of up to $50
million of units in a new PIF, Capital Preferred Yield
Fund-III, ("CPYF-III"), for sale to the public. The
Company anticipates commencing the offering of unit sales
in CPYF-III following the termination of the offering for
sale to the public of units in CPYF-II.
Management believes the Company's ability to generate cash
from operations is sufficient to fund operations,
particularly when operations are viewed as including
investing and financing activities. In this context, it
should be noted that the Company reduced its aggregate
outstanding indebtedness under its Credit Facility by $12.8
million since May 31, 1993 and improved its recourse
debt-to-equity ratio as follows:
As of
February 28, May 31,
1994 1993
Recourse debt outstanding
under the Credit Facility $ 25,048 $ 37,857
Stockholder equity $ 20,952 $ 20,303
Recourse debt/stockholder's
equity 1.20 to 1 1.86 to 1
III. Business Plan
As discussed in the 1993 Form 10-K, during fiscal year
1991, the Company agreed with its Lenders to begin repaying
its Credit Facility. Accordingly, during the last four
months of fiscal year 1991, fiscal years 1992 and 1993 and
during the nine months ended February 28, 1994, the Company
used substantially all of its cash flow after payment of
operating expenses to pay down its Credit Facility.
As a result of making these repayments, the Company did not
have the funds necessary to significantly add to its
leasing portfolio. Because a leasing portfolio declines in
size as it matures, the Company's leasing portfolio and
related revenue have declined since 1991. The Revolving
Credit Facility provides a limited amount of funds to the
Company to invest in new leases. However, this level of
funds is not sufficient to maintain the current portfolio
and, accordingly, the current level of remarketing profits
may not be achievable in the future. Therefore,
maintaining the current level of profitability is
dependent principally upon equipment sales margins from new
lease originations and seasoned lease transactions (see the
discussion on page 9 of 19) and/or development of new
sources of revenue related to the Company's core business.
The Company's current business plan is designed to maintain
profitable operations. The amount of longer-term future
profits, if any, will largely depend on the amount of new
capital available to the Company. Such capital may be in a
variety of forms including new recourse debt, additional
equity (which could include a sale of the Company, possibly
coupled with an infusion of new funds into the Company from
the purchaser), securitized financing vehicles or equity
provided from private purchases of equipment originated by
the Company or strategic alliances/combinations with other
leasing companies. The Company is actively pursuing
financing possibilities. No assurance can be given,
however, that the Company will be successful in operating
profitably, developing new sources of revenue or in
obtaining access to new financing.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
With respect to the pending CIS Corporation ("CIS")
litigation in connection with its Chapter 11 bankruptcy
proceeding, in January, 1994, the Trustee of the CIS
bankruptcy estate filed an amended complaint seeking to
recover $1,121,074.88 for rent, taxes and other amounts
due from CAII under subleases on which CIS is
sublessor and CAII is sublessee, in addition to the
$145,000 preference claim which was asserted in the
original complaint filed in October, 1991. CAII filed
an answer and counterclaims on March 11, 1994 asserting
that CIS owes CAII $1,227,609.59 in unpaid rent and
other charges. Of this amount, CAII is asserting that
approximately $850,000 is entitled to administrative
expense priority. In addition, CAII responded to the
Trustee's discovery requests.
CAII is pursuing its claims against CIS and vigorously
defending against the claims asserted by the Trustee.
Although management believes that the ultimate outcome
of these claims should not have a material adverse
impact on the Company's financial position and that any
amounts ultimately owed by CAII to CIS should be
completely, or at least substantially, offset by amounts
owed by CIS to CAII, it is not possible to predict the
ultimate outcome of this litigation at this time.
There have been no material developments (other than
those discussed above regarding the CIS litigation)
during third fiscal quarter 1994 with respect to the
legal proceedings described in the Company's fiscal 1993
Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
a. Included as exhibits are the items listed in the
Exhibit Index. The Company will furnish to its
shareholders a copy of any of the exhibits listed
therein upon payment of $.25 per page to cover the
costs to the Company of furnishing the exhibits.
b. There were no reports on Form 8-K filed during the
three months ended February 28, 1994.
Item No. Exhibit Index
11A Computation of Primary Earnings Per Share. A computation
of fully diluted earnings per share is not presented as it
is the same as the computation of primary earnings per
share.
Exhibit 11A
<TABLE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Three Months Ended Nine Months Ended
February 28, February 28, February 28, February 28,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Shares outstanding at
beginning of period 9,654,000 9,273,000 9,654,000 8,948,000
Shares issued during
the period
(weighted average) 61,000 346,000 54,000 330,000
Dilutive shares
contingently issuable
upon exercise of options
(weighted average) 2,265,000 2,295,000 2,287,000 1,492,000
Less shares assumed to
have been purchased
for treasury with
assumed proceeds
from exercise of
stock options
(weighted average) (1,129,000) (1,487,000) (1,017,000) (952,000)
Total shares, primary 10,851,000 10,427,000 10,978,000 9,818,000
Net income $ 187,000 $ 350,000 $ 642,000 $1,116,000
Net income per share,
primary $ 0.02 $ 0.03 $ 0.06 $ 0.11
</TABLE>
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: March 28, 1994 By: /s/Anthony M. DiPaolo
Anthony M. DiPaolo,
Senior Vice-President and Controller
(Principal Accounting Officer)
