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, 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 January 11, 1995, was 10,179,747.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - November 30, 1994
and May 31, 1994 3
Consolidated Statements of Operations - Three and
Six Months Ended November 30, 1994 and 1993 4
Consolidated Statements of Cash Flows - Six
Months Ended November 30, 1994 and 1993 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Exhibit Index 21
Signature 23
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
NOVEMBER 30, MAY 31,
1994 1994
------------ -------
Cash, including restricted funds of
$1,682 and $1,567, respectively $ 2,490 $ 2,072
Accounts receivable, net of allowance for doubtful
accounts of $204 and $343, respectively 777 1,375
Income tax refunds receivable - 250
Equipment held for sale or re-lease 5,095 5,242
Residual values and other receivables arising from
equipment under lease sold to private investors 4,260 5,098
Net investment in direct finance leases 17,091 18,106
Leased equipment, net 13,313 15,615
Investments in affiliated limited partnerships 10,981 12,178
Other 4,765 5,779
Notes receivable arising from sale-leaseback
transactions 26,850 32,417
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 84,799 111,593
--------- ---------
$ 170,421 $ 209,725
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving Credit Facility $ 4,108 $ 49
Accounts payable and other liabilities 6,752 8,187
Term Loan 11,500 18,718
Deferred income taxes 800 830
Obligations under capital leases arising from
sale-leaseback transactions 26,807 32,337
Discounted lease rentals 98,909 128,505
--------- ---------
148,876 188,626
--------- ---------
Stockholders' equity:
Common stock 62 60
Additional paid-in capital 16,899 16,689
Retained earnings 4,635 4,401
Treasury stock (51) (51)
--------- ---------
Total stockholders' equity 21,545 21,099
--------- ---------
$ 170,421 $ 209,725
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1994 1993 1994 1993
------------ ------------ ------------ ------------
Revenue:
Equipment sales to
affiliated limited
partnerships $ 7,531 $ 21,882 $ 16,238 $ 49,525
Other equipment sales 10,895 9,616 14,112 25,259
Leasing 1,625 3,609 3,723 7,838
Interest 2,961 4,008 6,325 7,520
Other 1,384 785 2,767 2,101
---------- ---------- ---------- ----------
Total revenue 24,396 39,900 43,165 92,243
---------- ---------- ---------- ----------
Costs and expenses:
Equipment sales 17,532 29,661 28,035 70,508
Leasing 821 1,288 1,748 2,996
Operating and other
expenses 2,379 3,167 5,243 6,273
Provision for losses 25 145 225 1,060
Interest
Non-recourse debt 3,260 4,887 6,976 9,630
Recourse debt 261 464 549 1,018
---------- ---------- ---------- ----------
Total costs and
expenses 24,278 39,612 42,776 91,485
---------- ---------- ---------- ----------
Net income before
income taxes 118 288 389 758
Income tax expense 47 115 155 303
---------- ---------- ---------- ----------
Net income $ 71 $ 173 $ 234 $ 455
========== ========== ========== ==========
Earnings per common
and common equivalent
share $ 0.01 $ 0.02 $ 0.02 $ 0.04
========== ========== ========== ==========
Weighted average number of
common and dilutive common
equivalent shares
outstanding used in
computing earnings
per share 10,744,000 11,029,000 10,782,000 11,043,000
========== ========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
--------------------------
NOVEMBER 30, NOVEMBER 30,
1994 1993
------------ ------------
(Note 3)
Net cash provided by operating activities $ 9,672 $ 20,332
-------- ---------
Cash flows from investing activities:
Equipment purchased for leasing (5,536) (1,847)
Net receipts from affiliated public income
funds ("PIFs") 1,059 1,030
Sale of the investment in Corporate Express, Inc. 677 -
-------- ---------
Net cash used for investing activities (3,800) (817)
-------- ---------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 1,215 2,479
Principal payments on discounted lease rentals (3,722) (12,794)
Proceeds from sales of common stock 212 -
Net payments on recourse debt (3,159) (9,752)
-------- ---------
Net cash used for financing activities (5,454) (20,067)
-------- ---------
Net increase (decrease) in cash 418 (552)
Cash at beginning of period 2,072 3,210
-------- ---------
Cash at end of period $ 2,490 $ 2,658
======== =========
Supplemental schedule of cash flow information:
Recourse interest paid $ 38 $ 1,003
Non-recourse interest paid 640 1,878
Income taxes paid 319 181
Income tax refunds received 898 1,614
Supplemental schedule of non-cash investing and
financing activities:
Discounted lease rentals assigned to lenders
arising from equipment sales transactions 3,123 28,050
Assumption of discounted lease rentals in
lease acquisitions 3,347 15,675
Increase in other receivables relating to
equipment sale transactions 558 1,658
Defeasance of discounted lease rentals
related to bankrupt lessee 518 -
The accompanying notes are an integral part
of these consolidated financial statements.
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 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, 1994 (the "1994 Form 10-K"), previously filed with the
Securities and Exchange Commission.
The balance sheet at May 31, 1994 has been derived from the audited
financial statements included in the Company's 1994 Form 10-K.
Certain reclassifications have been made in the 1994 financial
statements to conform to the 1995 presentation.
2. Debt Facilities
On December 2, 1994, the Company refinanced its existing recourse
operating debt facility (the "Old Debt Facility") with a new recourse
operating debt facility (the "New Debt Facility"). The Old Debt
Facility consisted of two facilities, a term loan facility (the "Old
Term Loan") and a revolving credit facility (the "Old Revolving Credit
Facility"). On December 2, 1994, the outstanding principal balance of
the Old Term Loan (plus accrued and unpaid interest) was $11.5 million,
and the outstanding principal balance of the Revolving Credit Facility
(plus accrued and unpaid interest and fees) was $3.5 million. The
Company repaid the outstanding principal balances of both facilities,
accrued and unpaid interest on both facilities and fees and other costs
owing under the Old Debt Facility to the lenders thereunder (the "Old
Lenders") with proceeds from the New Debt Facility, and the Old Lenders,
the Company, Capital Associates International, Inc. ("CAII"), and
certain of the Company's other subsidiaries executed a joint Settlement
Agreement and Release of Liens and Claims.
The lenders under the New Debt Facility are Norwest Bank Colorado,
National Association (the "Agent"), Norwest Equipment Finance, Inc. (the
"Collateral Agent") and First Interstate Bank of Denver, N.A.
(collectively referred to herein as the "New Lenders"). The Borrower
under the New Debt Facility is CAII. The New Debt Facility consists of
three facilities, a term loan facility (the "New Term Loan"), a working
capital facility (the "Working Capital Facility") and a warehouse
facility (the "Warehouse Facility").
The principal amount of the New Term Loan is $13 million. CAII is
entitled to use the proceeds of the New Term Loan solely to retire the
outstanding balance of the Old Debt Facility and to pay all costs and
expenses of closing the New Debt Facility. The Company drew the entire
principal amount of the New Term Loan on December 2, 1994 together with
a drawdown of $2.5 million on the Warehouse Facility, and used the
proceeds as follows: (1) $11.5 million to repay the entire outstanding
principal balance of, plus accrued and unpaid interest on, the Old Term
Loan, (2) $3.6 million to repay the entire outstanding principal balance
of, plus accrued and unpaid interest and fees on, the Old Revolving
Credit Facility and (3) $.4 million to pay fees and costs of closing the
New Debt Facility.
The New Term Loan is a 36-month facility. The principal amount of the
New Term Loan is payable in 36 substantially equal monthly installments.
Principal reductions under the New Term Loan are scheduled to occur as
follows (in thousands):
Six Months ending May 31, 1995 $ 2,167
Fiscal Year ending May 31, 1996 4,333
Fiscal Year ending May 31, 1997 4,333
Fiscal Year 1998 through
November 30, 1997 (the scheduled
termination date of the New Term Loan) 2,167
--------
$ 13,000
========
CAII is obligated, under certain circumstances, to make Mandatory
Principal Payments (as defined below) under the New Debt Facility. A
portion of such Mandatory Principal Payments may be applied to the
outstanding principal balance of the New Term Loan. See the discussion
of Mandatory Principal Payments below.
The New Term Loan bears interest at the Agent's Prime Rate plus .75%,
payable monthly, in arrears. On December 2, 1994, the Agent's Prime
Rate was 8.5%.
The principal amount of the Working Capital Facility is $5 million. The
Working Capital Facility is a revolving facility. CAII has the right to
borrow, repay and reborrow under the Working Capital Facility up to the
principal amount thereof.
CAII is entitled to use the proceeds of the Working Capital Facility for
its short-term working capital purposes and for the warehousing of
leases pending the funding of such leases under the Warehousing Facility
or the obtaining of permanent financing with respect thereto. On
December 2, 1994, the Working Capital Facility had no balance
outstanding and the availability under the Working Capital Facility was
$5 million.
The Working Capital Facility is a 12-month facility. The outstanding
principal balance of the Working Capital Facility, along with all
accrued and unpaid interest thereon, is payable in full on November 30,
1995. As discussed above, CAII is obligated, under certain
circumstances, to make mandatory principal payments under the New Debt
Facility ("Mandatory Principal Payments"). A Mandatory Principal
Payment will be required if, and to the extent that, the outstanding
principal balances of the New Term Loan and the Working Capital Facility
advances, in the aggregate, at any time result in a Collateral Coverage
Ratio (as discussed below) of less than 1.25 to 1.00. Mandatory
Principal Payments will be applied first to the outstanding principal
balance of the Working Capital Facility and next to the outstanding
principal balance of the New Term Loan.
The Working Capital Facility bears interest at the Agent's Prime Rate
plus .75%, payable monthly, in arrears. As discussed above, on December
2, 1994, the Agent's Prime Rate was 8.5%.
The principal amount of the Warehouse Facility is currently $12 million
(subject to increase to up to $32 million as described below). The
Warehouse Facility is a revolving facility. CAII has the right to
borrow, repay and reborrow under the Warehouse Facility up to the
principal amount thereof.
CAII is entitled to use the proceeds of the Warehouse Facility for
acquiring or funding leases for resale or as temporary financing pending
the securing of permanent financing for any such leases. On December 2,
1994, the outstanding principal balance under the Warehouse Facility was
$2.5 million.
The availability under the Warehouse Facility is equal to the lesser of
(1) $12 million (subject to increase to up to $32 million as described
below) and (2) the Warehouse Borrowing Base (i.e., the lesser of $12
million (subject to increase to up to $32 million as described below) or
97.5% of the sum of the present value of eligible warehouse lease
rentals and 50% of eligible warehouse lease residual values), reduced by
the outstanding indebtedness under the Warehouse Facility. As of
December 2, 1994, (a) the Warehouse Borrowing Base amount was
approximately $3.1 million, (b) the outstanding principal balance under
the Warehouse Facility was approximately $2.5 million and (c) the
remaining availability under the Warehouse Facility was approximately
$9.5 million.
The loan agreement evidencing the New Debt Facility (the "New Loan
Agreement") contemplates that additional lenders ("Additional Lenders")
may be added to the New Loan Agreement until the principal amount of the
Warehouse Facility is increased to $32 million. The Lenders have the
right to approve or disapprove the addition of any Additional Lender(s)
to the New Loan Agreement.
The Warehouse Facility bears interest at the Agent's Prime Rate plus
.50%, payable monthly, in arrears. As discussed above, on December 2,
1994, the Agent's Prime Rate was 8.5%.
The New Debt Facility (1) is collateralized by all of CAII's assets and
(2) is senior, in order of priority, to all of CAII's indebtedness,
other than liens which are senior by operation of law, other liens to
which the Lenders have subordinated their position and non-recourse
financing liens on specific equipment and leases. The Company and
certain of the Company's and CAII's subsidiaries have guaranteed CAII's
obligations under the New Loan Agreement and have pledged all of their
assets, with limited exceptions, to collateralize their guaranties.
The New Loan Agreement requires CAII to (1) ensure that the Company
maintains, on a consolidated basis, an Interest Coverage Ratio (i.e.,
the ratio of pre-tax earnings, as defined, plus interest expense to
interest expense) of not less than 1.20 to 1.00, (2) maintain a
Collateral Coverage Ratio (i.e., the ratio of Working Capital leases and
other eligible investment assets to the outstanding principal balances
of the Term Loan and Working Capital Facility) of not less than 1.25 to
1.00, (3) ensure that the Company maintains, on a consolidated basis, a
Leverage Ratio (i.e., the ratio of all recourse debt of the Company to
shareholders' equity) of not greater than 2.50 to 1.00, (4) ensure that
the Company maintains, on a consolidated basis a Tangible Net Worth of
not less than $20 million (increased by 75% of annual net income, with
no reduction for losses), (5) maintain a Cash Flow Coverage Ratio (i.e.,
the ratio of the Company's cash flow (as defined) to its debt service
requirements) of not less than 1.40 to 1.00, (6) maintain, from and
after February 28, 1996, a Non-Residual Collateral Coverage Ratio (i.e.,
the Collateral Coverage Ratio calculated without taking into account
residual values) of not less than 1.15 to 1.00 and (7) maintain an
Equipment Classification Concentration Limit (i.e., equipment type,
excluding inventory aircraft) of no greater than 15% of the net book
value of all of CAII's equipment.
CAII is obligated to pay the following on-going fees under the New Debt
Facility: (1) a Working Capital Commitment Fee equal to .50% per annum
on the daily average unused Working Capital commitment, payable
quarterly in arrears, and (2) a Warehousing Commitment Fee equal to
.375% per annum on the daily average unused Warehouse Facility
commitment, payable quarterly in arrears, and (3) reasonable fees and
out-of-pocket costs associated with each of the Agents audits or
inspections of CAII's collateral or business, not to exceed four audits
in any calendar year. In addition, CAII has agreed to acquire, at its
own cost, an interest rate protection contract with respect to not less
than 50% of the principal amount of the New Term Loan. As of the time
these financial statements were prepared, CAI was in the process of
obtaining quotes for an interest rate contract.
As of the time these financial statements were prepared, there were no
defaults existing under the New Debt Facility.
The New Debt Facility significantly restricts CAII's ability to pay
dividends, or loan or advance funds to the Company.
3. Consolidated Statements of Cash Flow
Consistent with the reclassification described in the Company's first
quarter fiscal 1995 report on Form 10-Q, the principal portion of
receipts of direct financing leases and proceeds from sales of equipment
have been classified as "Cash flows from operating activities".
Previously, such amounts were reported as "Cash flows from investing
activities".
The effect of the reclassifications on previously issued financial
statements is as follows:
Six months ended
November 30, 1993
----------------------
Previously Restated
Reported Amounts
---------- --------
Net cash provided by operating activities $ 4,710 $ 20,332
Net cash provided by (used for) investing
activities 14,805 (817)
Net cash used for financing activities (20,067) (20,067)
-------- --------
Net decrease in cash and cash equivalents $ (552) $ (552)
========= ========
4. Bankrupt Lessee
During the second quarter fiscal 1994, a lessee filed for bankruptcy
protection under Chapter 11 of the Bankruptcy code. The aggregate net
book value of equipment under four leases with this lessee is $486,000
at November 30, 1994. The lessee has not remitted its quarterly lease
payments due January 1, 1995. Potential outcomes are (i) the lessee
affirms its leases and the Company collects all rents due under the
leases or (ii) the lessee rejects one or more of the leases and returns
the underlying equipment to the Company. If the leases are rejected and
the equipment is returned to the Company, it is possible that
remarketing proceeds will be less than the net book value of the
equipment. However, if the lessee affirms the leases, the Company would
not be subject to a loss. The lessee has not made its intentions known
at this time and, accordingly, a loss is not probable at this time.
Regardless of the lessee's decision to accept or reject the leases,
management believes that the ultimate outcome will not have a material
adverse impact on the Company's financial position.
Item 2. Management's Discussion and Analysis of Financial Conditiona 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>
<CAPTION>
Condensed Consolidated Condensed Consolidated
Statements of Operations Statements of Operations
for the Three Months for the Six Months
Ended November 30, ended November 30,
------------------------ Effect on ------------------------ Effect on
1994 1993 net income 1994 1993 net income
--------- ---------- ---------- --------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 894 $ 1,837 $ (943) $ 2,315 $ 4,275 $ (1,960)
Leasing margin (net of
interest expense on
discounted lease rentals) 505 1,442 (937) 1,324 2,732 (1,408)
Other income 1,384 785 599 2,767 2,101 666
Operating and other expenses (2,379) (3,167) 788 (5,243) (6,272) 1,029
Provision for losses (25) (145) 120 (225) (1,060) 835
Interest expense on recourse debt (261) (464) 203 (549) (1,018) 469
Income taxes (47) (115) 68 (155) (303) 148
-------- -------- ------ -------- -------- --------
Net income $ 71 $ 173 $ (102) $ 234 $ 455 $ (221)
======== ======== ====== ======== ======== ========
</TABLE>
Equipment Sales
Equipment sales revenue (and related equipment sales margin) consists of
the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
-------------------------------------------- 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 $ 7,531 $ 206 $ 21,882 $ 538
Equipment under lease sold to
private investors 9,924 70 7,872 319
-------- ------- -------- ------- --------- ---------
17,455 276 29,754 857 $ (12,299) $ (581)
-------- ------- -------- ------- --------- ---------
Transactions subsequent to initial lease
termination ("Remarketing Sales"):
Sales of off-lease equipment 673 327 1,127 441
Sales-type leases 124 117 232 154
Excess collections (cash collections in
excess of the associated residual
value from equipment under lease sold
to private investors) 174 174 385 385
-------- ------- -------- ------- --------- ---------
971 618 1,744 980 (773) (362)
Provision for losses (25) (145) 120
-------- ------- -------- ------- --------- ---------
Remarketing sales results in excess
of provision for losses 971 593 1,744 835 (773) (242)
-------- ------- -------- ------- --------- ---------
Total equipment sales $ 18,426 $ 869 $ 31,498 $ 1,692 $ (13,072) $ (823)
======== ======= ======== ======= ========= =========
SIX MONTHS ENDED NOVEMBER 30,
-------------------------------------------- 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 $ 16,238 $ 427 $ 49,525 $ 1,270
Equipment under lease sold to
private investors 11,722 256 20,951 738
-------- ------- -------- ------- --------- --------
27,960 683 70,476 2,008 $ (42,516) $ (1,325)
-------- ------- -------- ------- --------- --------
Transactions subsequent to initial lease
termination ("Remarketing Sales"):
Sales of off-lease equipment 1,078 585 2,540 942
Sales-type leases 602 337 976 533
Excess collections (cash collections in
excess of the associated residual
value from equipment under lease
sold to private investors) 710 710 792 792
-------- ------- -------- ------- --------- --------
2,390 1,632 4,308 2,267 (1,918) (635)
Provision for losses (225) (1,060) 835
-------- ------- -------- ------- --------- --------
Remarketing sales results in excess
of provision for losses 2,390 1,407 4,308 1,207 (1,918) 200
-------- ------- -------- ------- --------- --------
Total equipment sales $ 30,350 $ 2,090 $ 74,784 $ 3,215 $ (44,434) $ 1,125
======== ======= ======== ======= ========= ========
</TABLE>
Equipment Sales to PIFs and to Private Investors
Equipment sales to PIFs significantly decreased during the six months
ended November 30, 1994, as compared to the similar period in fiscal
1994, principally because fewer leases were identified and closed that
satisfied the PIF's underwriting standards. The first two quarters of
fiscal 1994 were the largest quarters with respect to equipment sales to
the PIFs during that fiscal year, and were substantially greater than
the historical average for quarterly sales to PIFs.
Equipment sales to private investors for the first fiscal six months
1994 included sales of approximately $13.2 million of "seasoned" leases
(i.e., previously originated leases held in the Company's portfolio).
As the Company's lease portfolio has declined in size (sometimes
referred to herein as "portfolio run-off"), fewer seasoned leases have
been available for sale (as the Company sold approximately $5 million of
seasoned leases to private investors during 1995). During the first
fiscal six months 1995, equipment sales to private investors consisted
primarily of new leases originated for sale to private investors,
however, not enough leases were originated to offset the decline in the
sale of seasoned leases.
Remarketing Sales and Provision for Losses
The remarketing of equipment for an amount greater than its book value
is reported as equipment sales margin or as leasing margin. 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) is recorded as provision for loss. As shown
in the table above, the realizations from sales exceeded the provision
for losses for the first fiscal six months 1995, even without
considering realizations from remarketing activities recorded as leasing
margin, as discussed below.
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 has declined in size, fewer leases have matured and less
equipment has been available for remarketing each quarter. As a result,
remarketing revenue declined during the first fiscal six months 1995
compared to the comparable period in fiscal 1994. However, as shown
above, the margin from remarketing sales increased during first fiscal
six months 1995, although no assurances can be given that this trend
will continue. In the absence of significant additions to the lease
portfolio, management believes that remarketing revenue and margin will
decline in future quarters.
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. The Company has not identified material
probable new losses during the six months ended November 30, 1994;
however, see Note 4 to Notes to Consolidated Financial Statement for
discussion regarding an identified loss contingency.
During the first fiscal six months 1994, a greater than expected amount
of equipment under lease that the Company expected to be released was,
instead, terminated and returned to the Company. The amounts recovered
(and expected to be recovered) from the sale of such equipment were less
than the previously estimated residual value, and accordingly, an
appropriate provision for loss was recorded during first fiscal six
months 1994. The Company also recorded a provision for loss of $180,000
for the possible sale of one of its aircraft during the first fiscal six
months 1994.
LEASING MARGIN
Leasing margin consists of the following (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
------------------- ----------------
1994 1993 1994 1993
------ ------ ------ ------
Leasing revenue $ 1,625 $ 3,609 $ 3,723 $ 7,838
Leasing costs and expenses (821) (1,288) (1,748) (2,996)
Net interest expense on related
discounted lease rentals (299) (879) (651) (2,110)
------- -------- -------- --------
Leasing margin $ 505 $ 1,442 $ 1,324 $ 2,732
======= ======== ======== ========
Leasing margin ratio 31% 40% 36% 35%
== == == ==
Leasing margin has declined and is expected to decline further as a
result of portfolio run-off. See the discussion under "Business Plan"
below. As the portfolio runs off, the declining basis for calculating
quarterly leasing margin will result in ratios that vary from quarter to
quarter.
OTHER INCOME
Other Income consists of the following (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
Fees and distributions from the
Company-sponsored PIFs $ 784 $ 804 $ 1,562 $ 1,594
Sale of the investment in
Corporate Express, Inc. stock 411 - 671 -
Interest on income tax refunds - - 178 431
Other, principally recovery of
sales and property tax amounts
previously expensed 189 (19) 356 76
------- ------- ------- --------
$ 1,384 $ 785 $ 2,767 $ 2,101
======= ======= ======= ========
Other than fees and distributions from the company-sponsored PIFs, the
Company does not expect to realize material amounts in the future with
respect to the other items listed above.
OPERATING AND OTHER EXPENSES
Operating and other expenses decreased $1.0 million (16%) for the first
fiscal six months 1995 as compared to the comparable period in fiscal
year 1994. The decrease principally reflects a reduction in salaries
and wages, accomplished, in part, through a reduction-in-force of 29
full-time employees during June 1994. As of November 30, 1994, the
Company had 91 full-time employees compared to 119 full-time employees
at November 30, 1993.
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) is due to
portfolio run-off.
The decrease in interest expense on recourse debt reflects the decline
in the outstanding balance of the Old Debt Facility.
The changes in the Company's lease portfolio during the six months ended
November 30, 1994 consisted of the following:
<TABLE>
<CAPTION>
Discounted lease
Direct finance rentals, net of
leases, operating discounted lease
leases, net and rentals assigned Net investment
equipment held to lenders arising in lease
for sale or re-lease from equipment sales portfolio
-------------------- -------------------- --------------
<S> <C> <C> <C>
As of May 31, 1994 $ 38,963 $ (16,912) $ 22,051
Leases added to the Company's lease
portfolio 5,468 (3,347) 2,121
Leases added to the Company's lease
portfolio (and sold in December 1994) 2,751 - 2,751
Leases sold to private investors (4,946) 2,266 (2,680)
Provision for losses (225) - (225)
Change as a result of portfolio run-off (6,512) 3,883 (2,629)
--------- --------- ---------
As of November 30, 1994 $ 35,499 $ (14,110) $ 21,389
========= ========= =========
A jet aircraft having a net book value of $5 million is included in
Equipment Held for Sale or Re-Lease. The Company is attempting to
remarket the aircraft through re-lease or sale.
Borrowings under the Old Revolving Credit Facility increased from
$49,000 at May 31, 1994 to $4,108,000 at August 31, 1994. As shown in
the table above, the increase results from the utilization of such
borrowings to add leases to the Company's lease portfolio.
MATERIAL NON-EARNING ASSETS
A significant portion of the Company's stockholders' equity of
approximately $22 million is represented by these material non-earning
assets: (i) a jet aircraft with a carrying value of approximately $5
million as discussed above, and (ii) maximum possible amounts receivable
under the MBank contracts of approximately $11 million (with a carrying
value of approximately $3 million) as discussed in the Company's annual
report on Form 10-K for the year ended May 31, 1994. The Company's
results of operations would be improved if funds from conversion of the
above assets were invested in a lease portfolio. Management believes
that these conversions can occur without loss to the Company. However,
the timing of such conversion is not predictable.
II. Liquidity and Capital Resources
The Company's activities are principally funded by its Working Capital
and Warehouse Credit Facilities, rents, proceeds from sales of on-lease
equipment (to its PIFs and third party investors), non-recourse debt,
fees and distributions from its PIFs and sales of on lease equipment to
its PIFs or third-party investors and/or re-leases of equipment during
and after the expiration of the initial lease terms and other cash
receipts.
Currently, only one PIF, Capital Preferred Yield Fund-III, ("CPYF-III")
is selling units to the public. Through November 30, 1994 CPYF III sold
$11.3 million of units. In recent months, there has been a decline in
units sales which the Company believes can be attributed to the rise in
rates of fixed income securities. Four of the Company's PIFs including
CPYF-III are in the reinvestment stage and are using a portion of their
available cash to purchase additional equipment from the Company. Two
of the Company's PIFs are in the liquidation stage and are no longer
purchasing equipment.
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 through November 30, 1994, the
Company reduced its aggregate outstanding indebtedness under its Debt
Facility by $3.2 million since May 31, 1994 and has improved its
recourse debt-to-equity ratio as follows:
November 30, 1994 May 31, 1994
----------------- ------------
Recourse debt outstanding under the
Debt Facility $ 15,608 $ 18,767
Stockholders' equity $ 21,545 $ 21,099
Recourse debt/stockholders' equity .72 to 1 .89 to 1
However, as the recourse debt outstanding has declined, the Company's
lease portfolio has also declined. As discussed in Note 2 to Notes to
Consolidated Financial Statements, on December 2, 1994, the Company
replaced its Old Debt Facility with a New Debt Facility. Under the New
Debt Facility a greater amount of financing is available to the Company
to originate new leases. As the Company utilizes the New Debt Facility
to originate leases, the recourse debt/stockholders equity ratio is
expected to increase.
III. Revised Business Plan
As discussed in the 1994 Form 10-K, beginning in fiscal year 1991, the
Company agreed with its Old Lenders to begin repaying its Old Debt
Facility. As discussed herein, on December 2, 1994, the Company
refinanced its Old Debt Facility with proceeds drawn on its New Debt
Facility. Beginning in fiscal 1991 and continuing through December 1,
1994, the Company used substantially all of its available cash flow
(after payment of operating expenses) to repay its Old Debt Facility.
As a result of making these repayments, the Company did not have funds
to significantly add to its own leasing portfolio, and, accordingly, the
portfolio shrank, leasing revenue declined and the ultimate
profitability of the Company's core leasing business declined.
On December 2, 1994, the Company closed its New Debt Facility. See Note
2 to Notes to Consolidated Financial Statements for a detailed
discussion of the New Debt Facility. The Working Capital Facility and
the Warehouse Facility provide the Company with $17 million (which,
under certain circumstances, may increase to up to $37 million) to fund
new lease originations and purchases. The Company believes that the
level of funding available under the New Debt Facility should enable the
Company to (1) increase the size of its own lease portfolio, (2)
originate/acquire additional leases for sales to its PIFs and private
equity investors, (3) ultimately increasing leasing revenue and related
profits and (4) reduce overall borrowing costs since the Company was
subject to significant legal and restructuring costs under the Old Debt
Facility which it no longer incurs under the New Debt Facility.
In its fiscal 1995 Business Plan, the Company identified the following
primary goals for fiscal year 1995: (1) maintain profitability, (2)
continue to build the Company's lease marketing and private equity
syndication capabilities, (3) replace its Old Debt Facility, (4) further
reduce G&A and (5) take appropriate steps to position the Company to
access new capital in future years.
In October 1994, the Company evaluated its performance for the first
quarter fiscal year 1995 against its 1995 Business Plan goals and
concluded the following:
* although the Company had reported a profit of $.02 per share for the
first quarter, its ninth consecutive profitable quarter, the profit
resulted largely from "other income" items (e.g., the sale of a
portion of the Company's Corporate Express stock and interest on
income tax refunds) and not from the Company's core leasing business;
* although the Company had been continually enhancing its lease
origination capabilities by adding lease originators, the level of
lease originations were substantially below their 1995 Business Plan
targets - hence the sales of PIF units, leases sold to the PIFs, lease
revenues and lease profits were all below their projected first fiscal
quarter 1995 Business Plan targets;
* the Company had entered into negotiations with its New Lenders to
replace the Old Debt Facility; and
* G&A costs were substantially on target.
In November 1994, senior management determined that lease originations,
sales of PIF units, equipment sold to the PIFs, lease revenues, and
private equity sales for the second quarter fiscal 1995 were below their
1995 Business Plan targets. Senior management, in the face of these
results, revised its 1995 Business Plan (the "Revised 1995 Business
Plan"), taking the following steps:
* the Company re-assigned the responsibility for lease originations from
its Senior Vice President-Marketing to its President and Chief
Executive Officer;
* the Company appointed a National Sales Manager;
* the Company retained a recruiting firm to assist in hiring additional
field lease origination personnel;
* the Company decided to terminate its non-productive non-core business
activities and focus its attention solely on its core business
activities; and
* the Company focused on purchasing wholesale lease transactions as an
interim measure until it could complete the rebuilding of its field
sales force and bring new lease originations in line with its Revised
1995 Business Plan targets.
The Company also identified several other factors which could adversely
impact profitability in the future:
* because of the flattening of the yield curve for debt securities
during calendar year 1994, lease rates are not rising in line with the
Company's cost of funds;
* even if lease originations increase significantly, growth in the
Company's profits will be slow because as a portfolio grows, under
generally accepted accounting principles, operating leases tend to
have a negative leasing margin after interest expense during the early
term of such leases;
* the cost of funds for many of the Company's competitors is lower than
the Company's cost of funds; and
* certain of the Company's competitors also price transactions with tax
benefits not available to the Company.
A significant portion of the Company's stockholders' equity of
approximately $22 million is represented by two material non-earning
assets: (1) a jet aircraft with a carrying value of approximately $5
million as discussed on page 15 of 23, and (2) maximum possible amounts
receivable under the MBank contracts of approximately $11 million (with
a carrying value of approximately $3 million) as discussed in the
Company's annual report on Form 10-K for the year ended May 31, 1994.
The Company's results of operations would be improved if funds from
conversion of the above assets were invested in a lease portfolio.
Management believes that these conversions can occur without loss to the
Company. However, the timing of such conversion is not predictable.
For the prior three years, the Company could not originate a significant
amount of leases for its own account because it did not have the
financing to fund and hold those incremental originations. Now, as
discussed above, the Company believes that it has the necessary funds
under its New Debt Facility to (1) increase the size of its own lease
portfolio, (2) originate/acquire additional leases for sales to PIFs
and private equity investors and (3) ultimately increase revenue and
related profits. The Company is aggressively seeking to hire qualified,
experienced field lease originators to originate new leases for the
Company's own portfolio and for sale to third parties. However,
assuming that the Company is successful in hiring such persons, (a) it
will take a period of time before new lease transactions can be closed,
(b) new operating lease transactions "throw off" losses (for financial
reporting purpose) during their early years and (c) the Company will
incur substantial hiring and deal costs in increasing the size of its
field originations force and adding new leases to its portfolio. During
this period, the Company may realize small operating losses or reduced
operating profits as a result of these costs.
The amount of longer-term, future profits from these efforts will
depend, at least in part, on the amount of capital available to the
Company and the cost of that capital relative to the cost of capital of
the Company's competitors. The Company will continue to seek out new
sources of lower cost capital, including, among other things, (1)
expanding the availability under its Warehouse Facility, (2) obtaining
additional nonrecourse debt, (3) attracting new equity capital (which
could include a sale of all or a part the Company, possibly coupled with
an infusion of new funds into the Company from the purchaser), (4)
structuring securitized financing vehicles, (5) obtaining equity from
private purchases of equipment leases originated or purchased by the
Company and/or (6) entering into strategic alliances/combinations with
other leasing/financial services companies. No assurances can be given,
however, that (A) the steps being taken by the Company will improve the
Company's profitability or even maintain profitability, (B) will provide
the Company with, or access to, additional sources of capital.
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
a. There have been no material developments in the MBank Litigation
(see the discussion of the MBank Litigation in the 1994 Form
10-K) since the date of the 1994 Form 10-K, except for the
following: (1) discovery is completed and the parties have filed
all of their pre-trial briefs, (2) the court held oral argument
on several of the pending summary judgment motions and (3) the
parties are awaiting the court's decision on those summary
judgment motions.
b. The Company is involved in various legal proceedings ordinary,
routine and incidental to its business. In the opinion of senior
management, none of these proceedings, individually or in the
aggregate, should, if determined adversely to the Company, have
an adverse effect on the Company or its operations.
Item 4. Submission of Matters to a Vote of Security Holders
The 1994 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") was held on October 13, 1994. At the Annual Meeting, James
D. Edwards, Gary M. Jacobs, Dennis J. Lacey, William B. Patton, Jr.,
Peter F. Schabarum, and James D. Walker were re-elected as directors
of the Company.
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 November 30, 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.
EX-27 Financial Data Schedule
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,
1994 1993 1994 1993
------------ ------------ ------------ ------------
Shares outstanding at
beginning of period 10,062,000 9,654,000 9,759,000 9,654,000
Shares issued during
the period
(weighted average) 3,000 - 302,000 -
Shares earned but not
issued under the CEO
Bonus Plan - 50,000 - 50,000
Dilutive shares
contingently issuable
upon exercise of
options
(weighted average) 1,887,000 2,286,000 1,966,000 2,286,000
Less shares assumed to
have been purchased
for treasury with
assumed proceeds
from exercise of
stock options
(weighted average) (1,208,000) (961,000) (1,245,000) (947,000)
----------- ----------- ----------- ----------
Total shares, primary 10,744,000 11,029,000 10,782,000 11,043,000
=========== =========== =========== ==========
Net income $ 71,000 $ 173,000 $ 234,000 $ 455,000
=========== =========== =========== ==========
Income per common and
common equivalent
share, primary $ 0.01 $ 0.02 $ 0.02 $ 0.04
=========== =========== =========== ==========
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 17, 1995 By: /s/Anthony M. Dipaolo
--------------------------------
Anthony M. DiPaolo,
Senior Vice-President and Controller
(Principal Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> NOV-30-1994
<CASH> 2,490
<SECURITIES> 0
<RECEIVABLES> 981
<ALLOWANCES> 204
<INVENTORY> 5,095
<CURRENT-ASSETS> 0
<PP&E> 13,313
<DEPRECIATION> 0
<TOTAL-ASSETS> 170,421
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 62
0
0
<OTHER-SE> 21,412
<TOTAL-LIABILITY-AND-EQUITY> 170,421
<SALES> 30,350
<TOTAL-REVENUES> 43,165
<CGS> 28,035
<TOTAL-COSTS> 29,783
<OTHER-EXPENSES> 5,243
<LOSS-PROVISION> 225
<INTEREST-EXPENSE> 7,525
<INCOME-PRETAX> 389
<INCOME-TAX> 155
<INCOME-CONTINUING> 234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
