<PAGE>
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 August 31, 1995
[ ] 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 October 9, 1995, was 10,125,247.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - August 31, 1995
and May 31, 1995 3
Consolidated Statements of Income - Three Month
Ended August 31, 1995 and 1994 4
Consolidated Statements of Cash Flows - Three
Months Ended August 31, 1995 and 1994 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 15 - 16
Item 6. Exhibits and Reports on Form 8-K 16
Exhibit Index 17
Signature 20
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
ASSETS
August 31, May 31,
1995 1995
---------- -------
Cash and cash equivalents $ 2,459 $ 923
Accounts receivable, net of allowance for doubtful
accounts of $314 and $308, respectively 1,125 563
MBank receivable - 10,800
Equipment held for sale or re-lease 82 66
Residual values and other receivables arising from
equipment under lease sold to private investors 5,592 5,608
Net investment in direct finance leases 19,346 19,319
Leased equipment, net 23,218 19,987
Investments in affiliated limited partnerships 9,959 10,316
Other 2,202 2,970
Deferred income taxes 1,800 1,800
Notes receivable arising from sale-leaseback transactions 17,984 21,037
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 56,019 65,283
--------- ---------
$ 139,786 $ 158,672
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Working Capital Facility $ - $ 1,531
Warehouse Facility 7,638 12,156
Accounts payable and other liabilities 15,288 13,446
Term Loan 9,750 10,833
Obligations under capital leases arising from
sale-leaseback transactions 17,980 21,024
Discounted lease rentals 66,574 77,192
--------- ---------
117,230 136,182
--------- ---------
Stockholders' equity:
Common stock 64 63
Additional paid-in capital 16,976 16,961
Retained earnings 5,574 5,517
Treasury stock (58) (51)
--------- ---------
Total stockholders' equity 22,556 22,490
--------- ---------
$ 139,786 $ 158,672
========= =========
The accompanying notes are an integral part
of these consolidated financial tatements.
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CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except earnings per share)
Three Months Ended
------------------------
August 31, August 31,
1995 1994
---------- ----------
Revenue:
Equipment sales to affiliated limited partnerships $ 17,447 $ 8,706
Other equipment sales 8,567 3,218
Leasing 2,242 2,098
Interest 2,075 3,364
Other 879 1,383
-------- --------
Total revenue 31,210 18,769
-------- --------
Costs and expenses:
Equipment sales 24,801 10,502
Leasing 1,337 927
Operating and other expenses 1,718 2,865
Provision for losses 25 200
Termination of Stockholders' Agreement (Note 3) 325 -
Interest:
Non-recourse debt 2,296 3,716
Recourse debt 613 288
-------- --------
Total costs and expenses 31,115 18,498
-------- --------
Net income before income taxes 95 271
Income tax expense 38 108
-------- --------
Net income $ 57 $ 163
======== ========
Earnings per common and dilutive common equivalent share:
Primary $ .01 $ .02
======== ========
Fully diluted $ .01 $ .02
======== ========
Weighted average number of common and dilutive
common equivalent shares outstanding used in
computing earnings per share:
Primary 10,788,000 10,820,000
========== ==========
Fully diluted 11,115,000 10,820,000
========== ==========
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)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
-------------------------
August 31, August 31,
1995 1994
---------- ----------
Net cash provided by operating activities $ 12,291 $ 2,971
-------- --------
Cash flows from investing activities:
Equipment purchased for leasing (2,466) (1,462)
Investment in leased office facility (110) (14)
Net receipts from affiliated public income funds ("PIFs") 291 639
Sale of a portion of the investment in Corporate Express, Inc. - 263
-------- --------
Net cash used for investing activities (2,285) (574)
-------- --------
Cash flows from financing activities:
Proceeds from discounting of lease rentals - 1,093
Principal payments on discounted lease rentals (1,354) (1,890)
Proceeds from sales of common stock 16 212
Net payments on recourse debt (7,132) (2,301)
-------- --------
Net cash used for financing activities (8,470) (2,886)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,536 (489)
Cash and cash equivalents at beginning of period 923 2,072
-------- --------
Cash and cash equivalents at end of period $ 2,459 $ 1,583
======== ========
Supplemental schedule of cash flow information:
Recourse interest paid $ 563 $ 296
Non-recourse interest paid 208 334
Income taxes paid 1,027 200
Supplemental schedule of non-cash investing and financing activities:
Discounted lease rentals assigned to lenders arising from
equipment sales transactions - 713
Assumption of discounted lease rentals in lease acquisitions - 18
Increase in other receivables relating to equipment sale transactions 3,621 1,434
Cancellation of discounted lease rentals related to bankrupt lessee - 518
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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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,
1995 (the "1995 Form 10-K"), previously filed with the Securities and
Exchange Commission.
The balance sheet at May 31, 1995 has been derived from the audited
financial statements included in the Company's 1995 Form 10-K.
Certain reclassifications have been made to prior periods' financial
statements to conform to the current periods' presentation.
2. MBank Proceeds
--------------
On August 23, 1995, the Company received $10.8 million in settlement of its
claims in connection with the MBank Litigation (which is discussed in
detail in Footnote 15 to Notes to Consolidated Financial Statements which
were included in the 1995 Form 10-K). In accordance with the terms of the
settlement, on August 28, 1995, the Company delivered $2.2 million to Bank
One Texas, N.A. ("Bank One"), in repayment of the monies received from Bank
One in 1992 (along with interest thereon), as required by that certain
Purchase Agreement, dated as of December 30, 1991, by and among the Company
and Bank One. On September 8, 1995, Bank One, which is continuing to pursue
its claim to obtain title to the MBank Equipment (see Part II, Item 1.
Legal Proceedings, (a) MBank Litigation) rejected the tender and returned
the $2.2 million to the Company (while purporting to reserve all rights to
make a claim to such funds in the future). On September 12, 1995, the
Company deposited the $2.2 million returned by Bank One in an
interest-bearing escrow account with Norwest Bank, N.A., pending resolution
of Bank One's ongoing claims to the MBank Equipment. The Company used the
balance of the settlement proceeds, i.e., $8.6 million, to paydown its
short-term, recourse Working Capital Facility and Warehouse Facility.
3. Termination of Stockholders' Agreement
--------------------------------------
Effective as of August 31, 1995, Mr. Durliat, a stockholder of the Company,
Mr. Jacobs, a stockholder and director of the Company, and the Company,
constituting all of the remaining parties to the Stockholders' Agreement
(see Exhibits 10.5(a), 10.5(b) and 10.42 referenced in the 1995 Form 10-K)
agreed to terminate the Stockholders' Agreement. In connection therewith,
the Company notified Messrs. Durliat and Jacobs that it intended to cease
making premium payments for the key-man life insurance maintained by the
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Termination of Stockholders' Agreement, continued
--------------------------------------
Company to fund its obligation to repurchase Mr. Durliat's and Mr. Jacobs'
Company common stock upon the occurrence of certain events and, in
accordance with the terms of the Stockholders' Agreement, Mr. Durliat and
Mr. Jacobs exercised their options to acquire such insurance policies for
fifty percent (50%) of their net cash surrender values. As of August 31,
1995, the aggregate net cash surrender value of (1) Mr. Durliat's policies
was $415,446 (which Mr. Durliat is purchasing from the Company for
$207,723) and (2) Mr. Jacobs' policies was $239,102 (which Mr. Jacobs is
purchasing from the Company for $119,551). During fiscal year 1995, the
Company paid premiums of $51,212 and $37,323, respectively, with respect to
the life insurance policies covering Mr. Durliat and Mr. Jacobs.
4. Cash and Cash Equivalents
------------------------------
Cash and cash equivalents include highly liquid investments with a maturity
of three months or less.
7 of 20
<PAGE>
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 Income.
Condensed Consolidated
Statements of Income The effect on
for the Three Months net income of
Ended August 31, changes between
1995 1994 periods
-------- -------- ---------------
(in thousands)
Equipment sales margin $ 1,213 $ 1,422 $ (209)
Leasing margin (net of
interest expense on
discounted lease rentals) 684 819 (135)
Other income 879 1,383 (504)
Operating and other expenses (1,718) (2,865) 1,147
Provision for losses (25) (200) 175
Termination of Stockholders' Agreement (325) - (325)
Interest expense on recourse debt (613) (288) (325)
Income taxes (38) (108) 70
------- ------- -------
Net income $ 57 $ 163 $ (106)
======= ======= =======
Equipment Sales
---------------
Equipment sales revenue (and related equipment sales margin) consists of
the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended August 31,
--------------------------------------------- Increase
1995 1994 (Decrease)
-------------------- -------------------- --------------------
Revenue Margin Revenue Margin Revenue Margin
------- ------ ------- ------ ------- ------
Transactions during initial lease term:
Equipment under lease sold to PIFs $ 17,447 $ 351 $ 8,706 $ 221
Equipment under lease sold to
private investors 7,690 320 1,797 187
-------- ------- -------- -------
25,137 671 10,503 408 $ 14,634 $ 263
-------- ------- -------- ------- -------- ------
Transactions subsequent to initial lease term:
Sales of off-lease equipment 454 283 406 259
Sales-type leases 223 59 478 218
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 200 200 537 537
-------- ------- -------- -------
877 542 1,421 1,014 (544) (472)
Provision for losses - (25) - (200) 175
-------- ------- -------- ------- -------- --------
Realization of value in excess of
provision for losses 877 517 1,421 814 (544) (297)
-------- ------- -------- ------- -------- --------
Total equipment sales $ 26,014 $ 1,188 $ 11,924 $ 1,222 $ 14,090 $ (34)
======== ======= ======== ======= ======== ========
</TABLE>
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
Equipment Sales to PIFs and to Private Investors
------------------------------------------------
Equipment sales to PIFs and equipment sales to private investors increased
during the three months ended August 31, 1995, as compared to the
comparable period in fiscal 1995, principally because more leases were
identified and closed due to the increased productivity of the field lease
originations team. The increased volume of the field lease originators is
primarily due to the Company's efforts to improve its market activities
including the hiring of new lease originators.
Remarketing of the Portfolio and Provision for Losses
-----------------------------------------------------
The remarketing of equipment for an amount greater than its book value is
reported as equipment sales margin (if the equipment is sold) or as leasing
margin (if the equipment is re-leased). 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 losses. As shown in the table above, the realizations from
sales exceeded the provision for losses for the first three months fiscal
1996, even without considering realizations from remarketing activities
recorded as leasing margin as discussed below. This circumstance of
realizing in excess of the aggregate carrying value on the Company's
portfolio has occurred for the last thirteen quarters.
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 Company had not significantly
added leases to its lease portfolio during the four years prior to May 31,
1995, fewer leases have matured and less equipment has been available for
remarketing each quarter. As a result, remarketing revenue declined during
the first three months fiscal 1996 compared to the comparable period in
fiscal 1995. Remarketing revenue and margin are expected to decline further
in future quarters as maturing leases continue to decrease. 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 frequency of maturing leases
because new leases typically are not remarketed until after the initial
term (which averages three to four years).
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
release the equipment. The nature of the Company's leasing activities is
that it has credit exposure and residual value exposure and, accordingly,
in the ordinary course of business, it will incur losses from those
exposures. The Company performs ongoing quarterly assessments of its assets
to identify other than temporary losses in value.
Remarketing Sales and Provision for Losses
------------------------------------------
During the first fiscal quarter 1995, a lessee returned an IBM mainframe
computer to the Company. The Company had previously expected to realize the
carrying value of this equipment through additional month-to-month rents
and proceeds from the sale of the equipment. The provision for losses
recorded during the first fiscal quarter 1995 primarily related to this
equipment.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
Leasing Margin and Equipment Under Lease
Leasing margin consists of the following (in thousands):
Three Months Ended
August 31,
-------------------
1995 1994
-------- -------
Leasing revenue $ 2,242 $ 2,098
Leasing costs and expenses (1,337) (927)
Net interest expense on related discounted lease rentals (221) (352)
------- -------
Leasing margin $ 684 $ 819
======= =======
Leasing margin ratio 31% 39%
======= =======
The increase in both leasing revenue and leasing costs and expenses during
first quarter fiscal 1996, as compared to first quarter fiscal 1995, was
primarily due to growth in the Company's lease portfolio. These revenue and
expense amounts are expected to increase further as the Company continues
to grow its lease portfolio. Net interest expense on discounted lease
rentals (non-recourse debt) did not grow proportionately because the
Company is using its recourse debt facility to finance the leases held for
its own account and leases held pending sale to the PIFs and third party
investors.
Leasing margin and the related leasing margin ratio primarily decreased as
a result of a decrease in remarketing activities as discussed above.
The changes in the Company's equipment under lease during the three months
ended August 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
-------------------- -------------------- --------------
As of May 31, 1995 $ 39,372 $ (11,909) $ 27,463
Leases added to the Company's lease
portfolio (a portion of which will be sold
during the remainder of fiscal year 1996) 8,111 - 8,111
Leases sold to PIFs and private investors (2,274) - (2,274)
Related provision for losses (25) - (25)
Change as a result of portfolio run-off (2,538) 1,354 (1,184)
--------- ---------- ----------
As of August 31, 1995 $ 42,646 $ (10,555) $ 32,091
========= ========= =========
</TABLE>
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
Other Income
Other Income consists of the following (in thousands):
Three Months Ended
August 31,
-------------------
1995 1994
------ ------
Fees and distributions from the Company-sponsored PIFs $ 678 $ 777
Sale of the investment in Corporate Express, Inc. stock - 260
Interest on income tax refunds - 178
Interest on MBank receivable 141 -
Other, principally recovery of sales and
property tax amounts previously expensed 60 168
------ ------
$ 879 $1,383
====== ======
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 Income items listed above.
Operating and Other Expenses
Operating and other expenses decreased $1.1 million (40%) for the first
quarter fiscal 1996 as compared to the comparable period in fiscal 1995.
The decrease included the following more significant reductions:
* $250,000 for capitalized initial direct costs related to the increase
in lease origination volume.
* $200,000 for compensation expenses primarily related to the reduction
in force effective June 30, 1994 (first fiscal quarter 1995).
* $200,000 for differences between estimated incentive compensation and
actual payments as modified by the Company's Board of Directors.
* $150,000 for the elimination of restructuring costs associated with the
Company's prior debt facility.
* $100,000 for legal fees primarily related to the MBank litigation.
* $100,000 for insurance costs.
* $100,000 for other cost-cutting strategies implemented by management.
As of August 31, 1995, the Company had 95 full-time employees, compared to
86 full-time employees at August 31, 1994. The growth is due to increases
in the number of revenue producing lease origination, private equity
syndication and PIF wholesaler personnel.
Termination of Stockholders' Agreement Expense
See Note 3 to Notes to Consolidated Financial Statements for more
information concerning (1) the termination of the Stockholders' Agreement,
(2) the termination of the Company's obligation to continue to make premium
payments on certain key-man life insurance policies and (3) the transfer of
those life insurance policies to the two stockholders whose lives are
insured in exchange for cash payments from the stockholders in an amount
equal to 50% of the net cash surrender values of those policies as of
August 31, 1995.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations, continued
---------------------
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.
Recourse interest expense increased $325,000 (113%) for the first quarter
fiscal 1996, as compared to the first quarter fiscal 1995. As discussed
above, the Company is financing more lease originations with its recourse
lines of credit as opposed to discounted lease rentals (non-recourse debt).
In addition, there was an increase in the average interest rate charged on
the recourse lines of credit which is partially offset by a decrease in
restructuring costs as discussed above.
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%.
As discussed in Item 5. Other Information, a transaction is contemplated in
which the Company's largest shareholder will obtain more than fifty percent
of the ownership and voting rights of the Company ("a change in control").
If that change in control is completed, depending upon the terms and
conditions of such transaction, under federal income tax rules, the amount
of ITC carryforwards and AMT carryforwards that could be utilized to reduce
income tax liability in any year may be significantly limited. However, the
Company had previously established a valuation allowance for deferred taxes
due to uncertainty that the full amount of the ITC carryforward would be
utilized prior to expiration. The change in control and any resulting
limitation on the ITC carryforward is not expected to reduce the
recoverability of the amount of the deferred income tax assets, net of the
valuation allowance.
II. Liquidity and Capital Resources
-------------------------------
The Company's activities are principally funded by its Working Capital
Facility and Warehouse Facility, rents, proceeds from sales of on-lease
equipment (to its PIFs and private investors), nonrecourse debt, fees and
distributions from its PIFs, sales and re-leases of equipment after the
expiration of the initial lease terms and other cash receipts.
On August 23, 1995, the Company received $10.8 million in settlement of its
claims in the MBank Litigation. On September 12, 1995, the Company
deposited $2.2 million of the settlement proceeds in an interest-bearing
escrow account with Norwest Bank, N.A., pending resolution of Bank One's
ongoing claims to the MBank Equipment. The Company used the balance of the
settlement proceeds, i.e., $8.6 million, to paydown its short-term,
recourse Working Capital Facility and Warehouse Facility. For more
information concerning this matter, see Note 2 to Notes to Consolidated
Financial Statements.
12 of 20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
II. Liquidity and Capital Resources, continued
-------------------------------
The Company's Working Capital Facility and Warehouse Facility both mature
on November 30, 1995. After application of the MBank settlement proceeds,
as of August 31, 1995, the outstanding balance and the availability under
(1) the Working Capital Facility were $0 and $5 million, respectively, and
(2) the Warehouse Facility were $7.6 million and $24.4 million,
respectively. Management believes that the Company has adequate financial
resources to fund its operations during the remainder of fiscal year 1996.
First fiscal quarter 1996 lease originations of $30.1 million were financed
through $14.7 million of sales to the PIFs, $7.1 million of sales to
private investors, and the remainder for the Company's account of
approximately $8.3 million through the use of the Company's cash, accounts
payable and the Warehouse Facility.
During July 1995, the Company and certain of its sponsored PIFs entered
into an agreement to debt finance up to $40 million of lease receivables
with a lender as part of a lease securitization program. As with
nonrecourse debt financings of lease rentals, securitized financings are
also collateralized by the leased equipment and related rentals, and the
Company has no recourse liability to the lender for repayment of the debt.
The Company selected this securitized debt vehicle because of attractive
interest rates and anticipates that certain unleveraged leases will be debt
financed using this facility.
Currently the Company is offering units of CPYF III for sale to the public.
During first quarter fiscal 1996, the Company sold $5.2 million of Class A
units of CPYF III (bringing total sales of Class A units of CPYF III to $29
million). During the remainder of fiscal year 1996, the Company has up to
$21 million of Class A units in CPYF III available for sale, which will
represent a source of liquidity and acquisition fee income for the Company.
As shown in the accompanying Statements of Cash Flows, net receipts from
affiliated PIFs decreased for the first fiscal quarter 1996, compared to
the first fiscal quarter 1995. The principal reason for the decrease is
that two of the Company's PIFs are now in their liquidation stage and as
such, cash distributions from these two PIFs to the Company will be less
than distributions in prior periods.
III. Business Plan
-------------
The Company has identified several factors which could adversely impact
profitability in the future:
* because of the generally flat yield curve, lease rates (which are
reflective of long-term rates) are not significantly higher than the
Company's cost of funds (which primarily reflect short-term rates) and,
accordingly it is difficult to maintain a substantial spread between
lease rates and the Company's cost of funds;
* 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.
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<PAGE>
III. Business Plan, continued
-------------
The Company believes that it has the necessary funding capability for
fiscal year 1996 to (1) continue to increase the size of its own lease
portfolio, and (2) originate/acquire additional leases for sales to PIFs
and private equity investors. However, while growing the Company's lease
origination function and adding new leases to the Company's portfolio will
positively affect the Company's results of operations over time, such
actions will not positively affect the Company's results of operations in
the near term because (a) it will take a period of time before new lease
transactions can be closed, (b) new operating lease transactions "throw
off" lower returns (for financial reporting purposes) during their early
term and (c) the Company will incur additional costs in increasing its
marketing capabilities. During this period of growth, the Company may
realize small operating losses or reduced operating profits as a result of
these circumstances. In addition to factors related to growing the
portfolio discussed above, operating results are subject to fluctuations
resulting from several of other factors, including variations in the
relative percentages of the Company's leases entered into during the period
which are classified as DFLs, OLs, or sold for fee income.
The ability of the Company to operate profitably in the future will depend
largely on the amount of new capital available to the Company and the cost
of that capital. The Company continues to explore possible sources of new
capital including, for example, obtaining new or additional recourse debt,
obtaining new equity capital, obtaining equity capital from private
investor purchases of equipment leases originated by the Company and/or
entering into strategic alliances/combinations with other leasing or
financial services companies. The Company intends to invest any new capital
that it obtains in new lease originations for its own account or portfolio
acquisitions of leases. If the Company is unsuccessful in obtaining new
capital, the ability of the Company to continue to operate profitably will
depend on (1) equipment sales margins from new lease originations, (2)
origination leases for its own portfolio with a substantial rate spread,
(3) remarketing of equipment at a profit and (4) further reducing its
operating costs.
14 of 20
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) MBank Litigation. On August 15, 1995, the Federal Deposit Insurance
Corporation (the "FDIC"), The Prudential Insurance Company
("Prudential"), Texas Commerce Bank, N.A. ("TCB") and the Company
entered into a settlement agreement (the "Settlement Agreement") in
connection with their respective claims in the MBank Litigation (which
is discussed in detail in Footnote 15 to Notes to Consolidated
Financial Statements which were included in the 1995 Form 10-K).
Pursuant to the Settlement Agreement, on August 23, 1995, the Company
received $10.8 million in settlement of its claims against Prudential,
TCB and FDIC (see Note 2 to Notes to Consolidated Financial Statements
for a discussion of how the Company has applied the settlement
proceeds).
See Note 15 to Notes to Consolidated Financial Statements included in
the 1995 Form 10-K for a discussion of the claims asserted against the
Company by Bank One, N.A., in its first amended complaint ("Bank One's
Amended Complaint"). Bank One's Amended Complaint does not assert any
money damage claims against the Company. The Company has filed a motion
with the United States District Court for the Northern District of
Texas, Dallas Division (the "District Court"), which has agreed to
retain jurisdiction over the claims in the MBank Litigation that were
not resolved in the Settlement Agreement, asking the District Court to
dismiss the claims asserted against the Company in Bank One's Amended
Complaint. The District Court has not ruled on the Company's motion as
of the date of this Quarterly Report.
(b) PaineWebber Class Action. The Company is not aware of any material
developments with respect to this matter since the filing of the 1995
Form 10-K.
(c) Other. The Company is also involved in 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 5. Other Information
-----------------
(a) Nasdaq National Market System Listing. The Company's common stock
is currently listed on the Nasdaq National Market System ("NMS"). The
Nasdaq Stock Market, Inc. ("Nasdaq") has advised the Company that the
Company is not in compliance with the minimum $1.00 bid price
requirement (or the alternative $3 million value of public float
requirement) for continued listing of its common stock on the NMS (both
tests are collectively referred to herein as "Stock Price
Requirement"). See Part I, Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters in the 1995 Form 10-K for a more
detailed discussion of the events pertaining to this matter that
occurred on or before August 31, 1995.
On September 13, 1995, Nasdaq granted the Company an extension of time
to comply with the Stock Price Requirement through November 1, 1995. In
an effort to meet this deadline, the Company (1) on August 28, 1995,
approved and announced a stock repurchase program and (2) on October 2,
1995, approved a one-for-two reverse stock split. The Company has
authority
15 of 20
<PAGE>
Item 5. Other Information, continued
-----------------
authority under the stock repurchase program to repurchase up to
500,000 shares of common stock from time to time in the open market.
See Part II, Item 6. Exhibits and Report on Form 8-K, (b) and Exhibit
99 attached to the Form 8-K filed on August 31, 1995 for more
information concerning the stock repurchase program. As of the date of
this Quarterly Report, the Company has repurchased 110,900 shares of
common stock pursuant to the repurchase program. See Part II, Item 5.
Other Information, (b) Reverse Stock Split for more information
concerning the reverse stock split. The reverse stock split will not be
effected until the first or second week of November 1995.
No assurance can be given that the Company will be able to satisfy the
Stock Price requirement on or before November 1, 1995. The Company
intends to seek an additional extension of time beyond November 1, 1995
to comply with the Stock Price Requirement. No assurance can be given
that Nasdaq will grant the Company an additional extension of time
beyond November 1, 1995. If the Company does not satisfy the Stock
Price Requirement by November 1, 1995 and cannot obtain an additional
extension of time to comply with such requirement or, if the Company
obtains an additional extension of time but is not able to satisfy the
Stock Price Requirement during the extension period, the Company's
common stock will be de-listed form the NMS and will most likely
thereafter be traded on the OTC Bulletin Board.
(b) Reverse Stock Split. The Board of the Company has approved a
one-for-two reverse split of the Company's common stock (the "Reverse
Split"). Three stockholders of the Company owning approximately sixty
percent (60%) of the outstanding Common Stock have approved the Reverse
Split. Therefore, a vote of the stockholders at the Annual Meeting is
not required. An Information Statement describing the details of the
Reverse Split has been sent to each stockholder of record of the
Company. The Company anticipates that the Reverse Split will become
effective during the first two weeks of November 1995. Further
information regarding the exchange of old stock certificates for new
stock certificates will be sent to all stockholders at that time.
(c) Change of Control. The Company has been advised that its three
largest stockholders are engaged in negotiations concerning the sale of
shares of Common Stock by two of them, Mr. Jacobs, a director, and Mr.
Durliat, to the third, MCC, whose principals, Mr. Buckland and Mr.
Walker, are also directors. The number of shares under consideration
for sale would be sufficient to provide MCC, which currently owns
approximately 30% of the issued and outstanding Common Stock, with more
than 50% of the ownership and voting rights of the Company. While no
agreement has yet been executed, the Company has been advised that the
parties have substantially agreed on the consideration to be paid for
the shares of Common Stock, which will include a premium to the current
market price. The three stockholders are in discussions regarding the
remaining terms and conditions of the proposed transaction.
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. On August 31, 1995, a Form 8-K was filed disclosing the Company's
decision to repurchase up to 500,000 shares of the Company's common
stock from time-to-time in the open market.
16 of 20
<PAGE>
Item No. Exhibit Index
- -------- -------------
11A Computation of Primary and Fully Diluted Earnings Per Share
EX-27 Financial Data Schedule
17 of 20
<PAGE>
Exhibit 11A
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Three Months Ended
----------------------------
August 31, August 31,
1995 1994
---------- ----------
Shares outstanding at beginning of period 10,182,000 9,759,000
Shares issued during the period
(weighted average) 39,000 298,000
Dilutive shares contingently issuable
upon exercise of options
(weighted average) 1,809,000 2,045,000
Less shares assumed to have been
purchased for treasury with assumed
proceeds from exercise of stock options
(weighted average) (1,242,000) (1,282,000)
------------ ------------
Total shares, primary 10,788,000 10,820,000
============ ============
Net income $ 57,000 $ 163,000
============ ============
Income per common and common equivalent
share, primary $ .01 $ 0.02
============ ============
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<PAGE>
Exhibit 11A
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
Three Months Ended
---------------------------
August 31, August 31,
1995 1994
---------- ----------
Shares outstanding at beginning of period 10,182,000 9,759,000
Shares issued during the period
(weighted average) 39,000 298,000
Dilutive shares contingently issuable
upon exercise of options
(weighted average) 1,809,000 2,045,000
Less shares assumed to have been
purchased for treasury with assumed
proceeds from exercise of stock options
(weighted average) (915,000) (1,282,000)
----------- -----------
Total shares 11,115,000 10,820,000
=========== ===========
Net income $ 57,000 $ 163,000
=========== ===========
Income per common and common equivalent
share $ .01 $ 0.02
=========== ===========
19 of 20
<PAGE>
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: October 13, 1995 By:/s/John E. Christensen
----------------------
John E. Christensen,
Senior Vice-President and
Chief Financial Officer
20 of 20
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The schedule contains summary financial information extracted from the
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> Aug-31-1995
<CASH> 2,459
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<RECEIVABLES> 1,125
<ALLOWANCES> 314
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0
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