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, 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 January 9, 1996, was 4,988,348.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - November 30, 1995
and May 31, 1995 3
Consolidated Statements of Income - Three and Six Months
Ended November 30, 1995 and 1994 4
Consolidated Statements of Cash Flows - Six
Months Ended November 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 5. Other Information 17-18
Item 6. Exhibits and Reports on Form 8-K 18
Exhibit Index 19
Signature 21
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
ASSETS
November 30, May 31,
1995 1995
------------ --------
Cash and cash equivalents $ 4,983 $ 923
Accounts receivable, net of allowance for
doubtful accounts of $313 and $308, respectively 987 563
MBank receivable - 10,800
Equipment held for sale or re-lease 156 66
Residual values and other receivables arising from
equipment under lease sold to private investors 3,595 5,608
Net investment in direct finance leases 21,842 19,319
Leased equipment, net 27,826 19,987
Investments in affiliated limited partnerships 9,492 10,316
Other 1,836 2,970
Deferred income taxes 1,800 1,800
Notes receivable arising from sale-leaseback
transactions 14,861 21,037
Discounted lease rentals assigned to lenders
arising from equipment sale transactions 48,816 65,283
-------- --------
$136,194 $158,672
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Working Capital Facility $ 1,755 $ 1,531
Warehouse Facility 15,143 12,156
Accounts payable and other liabilities 13,895 13,446
Term Loan 8,667 10,833
Obligations under capital leases arising
from sale-leaseback transactions 14,865 21,024
Discounted lease rentals 59,490 77,192
-------- --------
113,815 136,182
-------- --------
Stockholders' equity:
Common stock 32 63
Additional paid-in capital 17,011 16,961
Retained earnings 5,634 5,517
Treasury stock (298) (51)
-------- --------
Total stockholders' equity 22,379 22,490
-------- --------
$136,194 $158,672
======== =========
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ------------------------------
November 30, November 30, November 30, November 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
------------ ------------ ------------ ------------
Revenue:
Equipment sales to affiliated
limited partnerships $ 12,119 $ 7,531 $ 29,566 $ 16,238
Other equipment sales 16,498 10,895 25,065 14,112
Leasing 2,542 1,625 4,784 3,723
Interest 1,805 2,961 3,880 6,325
Other 754 1,384 1,633 2,767
---------- ---------- ---------- ----------
Total revenue 33,718 24,396 64,928 43,165
---------- ---------- ---------- ----------
Costs and expenses:
Equipment sales 27,648 17,532 52,449 28,035
Leasing 1,288 821 2,625 1,748
Operating and other expenses 2,090 2,379 3,808 5,243
Provision for losses 25 25 50 225
Termination of Stockholders'
Agreement (Note 3) - - 325 -
Interest:
Non-recourse debt 2,009 3,260 4,305 6,976
Recourse debt 558 261 1,171 549
---------- ---------- ---------- ----------
Total costs and expenses 33,618 24,278 64,733 42,776
---------- ---------- ---------- ----------
Net income before income taxes 100 118 195 389
Income tax expense 40 47 78 155
---------- ---------- ---------- ----------
Net income $ 60 $ 71 $ 117 $ 234
========== ========== ========== ==========
Earnings per common and dilutive
common equivalent share $ 0.01 $ 0.01 $ 0.02 $ 0.04
========== ========== ========== ==========
Weighted average number of common
and dilutive common equivalent
shares outstanding used in
computing earnings per share 5,382,000 5,372,000 5,324,000 5,391,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
November 30, November 30,
1995 1994
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 21,657 $ 9,672
-------- --------
Cash flows from investing activities:
Equipment purchased for leasing (17,681) (5,536)
Investment in leased office facility and capital expenditures (174) (38)
Net receipts from affiliated public income funds ("PIFs") 677 1,097
Sale of a portion of the investment in Corporate Express, Inc. - 677
-------- --------
Net cash used for investing activities (17,178) (3,800)
-------- --------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 1,405 1,215
Principal payments on discounted lease rentals (2,641) (3,722)
Proceeds from sales of common stock 19 212
Repurchases of common stock (247) -
Net borrowings (payments) on recourse debt 1,045 (3,159)
-------- --------
Net cash used for financing activities (419) (5,454)
-------- --------
Net increase (decrease) in cash and cash equivalents 4,060 418
Cash and cash equivalents at beginning of period 923 2,072
-------- --------
Cash and cash equivalents at end of period $ 4,983 $ 2,490
======== ========
Supplemental schedule of cash flow information:
Recourse interest paid $ 1,070 $ 538
Non-recourse interest paid 403 640
Income taxes paid 1,567 319
Supplemental schedule of non-cash investing and financing activities:
Discounted lease rentals assigned to lenders arising from
equipment sales transactions - 3,123
Assumption of discounted lease rentals in lease acquisitions - 3,347
Increase in residual values and other receivables relating to
equipment sale transactions 897 558
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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<PAGE>
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 to 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 pursuing its lawsuit 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.
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<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
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. In November 1995,
Mr. Durliat paid to the Company $218,933.41 for the insurance policies
maintained by the Company on Mr. Durliat's life, and Mr. Jacobs paid to the
Company $128,164.00 for the insurance policies maintained by the Company on
Mr. Jacob's life. 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.
5. Reverse Split
-------------
On November 2, 1995, after obtaining the necessary Board of Director and
stockholder approvals, the Company amended its Certificate of Incorporation
to effect a reverse split of its common stock pursuant to which each share
of common stock issued and outstanding immediately prior to the effective
date of the reverse split was automatically reclassified as, and changed
into, one-half (1/2) share of common stock. The reverse split did NOT change
(1) the par value of the common stock (which remains $.008 per share after
the reverse split), (2) the authorized number of shares of common stock
(which remains at 15,000,000 shares after the reverse split) or (3) the
voting rights of the common stock (which remain at one vote per share of
common stock after the reverse split). Fractional shares of common stock
created in the reverse split were redeemed for cash pursuant to the formula
set forth in the Certificate of Amendment to the Certificate of
Incorporation of the Company.
7 of 21
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Change in Control of Registrant
-------------------------------
On November 10, 1995, MCC Financial ("MCC") acquired voting control of
Capital Associates, Inc. (the "Company") through a private stock transaction
and the delivery of proxies for shares of common stock subject to purchase
in the future pursuant to agreements (the "Stock Purchase Agreements")
executed by and between MCC and Gary M. Jacobs and Jack M. Durliat, two of
the Company's largest shareholders. Pursuant to these Stock Purchase
Agreements, MCC acquired 65,120 shares of common stock (reported
post-reverse split) for a purchase price of $3.30 per share or an aggregate
amount of $214,896. In addition, MCC acquired the right to purchase an
additional 1,245,000 shares of common stock (reported on a post-split basis)
in the future for an aggregate purchase price of approximately $4.5 million.
See Part II, Item 6, EXHIBITS AND REPORTS ON FORM 8-K (b) and Exhibit 99
attached to the Form 8-K filed on November 22, 1995, for more information
concerning the change in control of the Company and the terms of the
November 10, 1995 transaction.
On January 9 and 10, 1996, MCC completed the purchase of 550,000 shares of
common stock (reported post-reverse split) for a purchase price of $3.30 per
share or an aggregate amount of $1,815,000. See Part II, Other Information,
Item 6, EXHIBITS AND REPORTS ON FORM 8-K (b) and Exhibit 99 attached to the
Form 8-K filed on January 16, 1996, for more information concerning purchase
by MCC of the additional 550,000 shares of common stock from Messrs. Durliat
and Jacobs.
8 of 21
<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.
<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
1995 1994 net income 1995 1994 net income
-------- -------- ---------- -------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 969 $ 894 $ 75 $ 2,182 $ 2,315 $ (133)
Leasing margin (net of interest
expense on discounted lease rentals) 1,050 505 545 1,734 1,324 410
Other income 754 1,384 (630) 1,633 2,767 (1,134)
Operating and other expenses (2,090) (2,379) 289 (3,808) (5,243) 1,435
Provision for losses (25) (25) - (50) (225) 175
Termination of Stockholders' Agreement - - - (325) - (325)
Interest expense on recourse debt (558) (261) (297) (1,171) (549) (622)
Income taxes (40) (47) 7 (78) (155) 77
-------- ------- ------- -------- -------- --------
Net income $ 60 $ 71 $ (11) $ 117 $ 234 $ (117)
======== ======= ======= ======== ======== ========
</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
1995 1994 (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 $ 12,119 $ 207 $ 7,531 $ 206 $ 4,588 $ 1
Equipment under lease sold to
private investors 15,954 443 9,924 70 6,030 373
-------- ------ -------- ------ -------- ------
28,073 650 17,455 276 10,618 374
-------- ------ -------- ------ -------- ------
Transactions subsequent to initial lease term:
Sales of off-lease equipment 387 166 673 327 (286) (161)
Sales-type leases 56 52 124 117 (68) (65)
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 101 101 174 174 (73) (73)
-------- ------ -------- ------ -------- ------
544 319 971 618 (427) (299)
Provision for losses - (25) - (25) - -
-------- ------ -------- ------ -------- ------
Realization of value in excess of
provision for losses 544 294 971 593 (427) (299)
-------- ------ -------- ------ -------- ------
Total equipment sales $ 28,617 $ 944 $ 18,426 $ 869 $ 10,191 $ 75
======== ====== ======== ====== ======== ======
</TABLE>
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
Equipment Sales, continued
---------------
<TABLE>
<CAPTION>
Six Months Ended November 30,
---------------------------------------------- Increase
1995 1994 (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 $ 29,566 $ 557 $ 16,238 $ 427 $ 13,328 $ 130
Equipment under lease sold to
private investors 23,645 764 11,722 256 11,923 508
-------- ------- -------- ------- -------- ------
53,211 1,321 27,960 683 $ 25,251 $ 638
-------- ------- -------- ------- -------- ------
Transactions subsequent to initial lease term:
Sales of off-lease equipment 840 449 1,078 585 (238) (136)
Sales-type leases 279 111 602 337 (323) (226)
Excess collections (cash collections in
excess of the associated residual value
from equipment under lease sold to
private investors) 301 301 710 710 (409) (409)
-------- ------- -------- ------- -------- ------
1,420 861 2,390 1,632 (970) (771)
Provision for losses - (50) - (225) - 175
-------- ------- -------- ------- -------- ------
Realization of value in excess of
provision for losses 1,420 811 2,390 1,407 (970) (596)
-------- ------- -------- ------- -------- ------
Total equipment sales $ 54,631 $ 2,132 $ 30,350 $ 2,090 $ 24,281 $ 42
======== ======= ======== ======= ======== ======
</TABLE>
Equipment Sales to PIFs and to Private Investors
------------------------------------------------
Equipment sales to PIFs and equipment sales to private investors increased
during the three and six months ended November 30, 1995, as compared to the
comparable periods 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 marketing activities
including focusing on customer relationships. In this regard, lease
originations from one customer relationship accounted for approximately
one-third of the total lease originations volume for the first six months
of fiscal 1996. Total lease origination volume for the six months ended
November 30, 1995 increased 65% over total lease originations volume for
the comparable period in 1995.
10 of 21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
Remarketing of the Portfolio and 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 three and six months ended
November 30, 1995, 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 fourteen 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 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.
Margins from remarketing sales (i.e., sales occurring after the initial
lease term) are affected by the amount of equipment leases that mature in a
particular quarter. In general, because the Company did not significantly
add 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 since May 31, 1995. For this reason, remarketing
revenue declined during the three and six months ended November 30, 1995,
as compared to the comparable periods 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 pool of maturing leases because new leases typically are not
remarketed until after the initial term (which averages approximately four
years).
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
LEASING MARGIN AND EQUIPMENT UNDER LEASE
Leasing margin consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------------ --------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Leasing revenue $ 2,542 $ 1,625 $ 4,784 $ 3,723
Leasing costs and expenses (1,288) (821) (2,625) (1,748)
Net interest expense on related
discounted lease rentals (204) (299) (425) (651)
-------- ------- -------- --------
Leasing margin $ 1,050 $ 505 $ 1,734 $ 1,324
======== ======= ======== ========
Leasing margin ratio 41% 31% 36% 36%
== == == ==
</TABLE>
The increase in leasing revenue, leasing costs and expenses and leasing
margin during the three and six months ended November 30, 1995, as compared
to the comparable periods in 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 (funded with
non-recourse debt) did not grow proportionately because the Company is
using its recourse debt facility to finance (i) leases held for its own
account and (2) leases held pending sale to the PIFs and third-party
investors.
The changes in the Company's equipment under lease during the six months
ended November 30, 1995 consisted of the following (in thousands):
<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 leased
for sale or re-lease from equipment sales equipment
-------------------- -------------------- --------------
<S> <C> <C> <C>
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) 20,844 (1,405) 19,439
Leases sold to PIFs and private investors (4,857) - (4,857)
Related provision for losses (50) - (50)
Change as a result of portfolio run-off (5,485) 2,640 (2,845)
--------- --------- --------
As of November 30, 1995 $ 49,824 $ (10,674) $ 39,150
========= ========= ========
</TABLE>
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
OTHER INCOME
Other Income consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------------ --------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Fees and distributions from the
Company-sponsored PIFs $ 677 $ 784 $ 1,356 $ 1,562
Sale of the investment in Corporate
Express, Inc. stock - 411 - 671
Interest on income tax refunds - - - 178
Interest on MBank receivable - - 141 -
Other, principally recovery of sales and
property tax amounts previously expensed 77 189 136 356
----- ------ ------- -------
$ 754 $ 1,384 $ 1,633 $ 2,767
===== ======= ======= =======
</TABLE>
OPERATING AND OTHER EXPENSES
Operating and Other Expenses decreased $1.4 million (27%) for the first six
months ended November 30, 1995 as compared to the comparable period in
fiscal 1995. The decrease included the following more significant
reductions:
* $650,000 of capitalized initial direct costs related to lease
origination volume.
* $250,000 of insurance costs.
* $200,000 difference between estimated incentive compensation and actual
payments as modified by the Company's Board of Directors.
* $150,000 of eliminated restructuring costs associated with the
Company's prior debt facility.
* $150,000 of legal fees primarily related to the MBank litigation.
As of November 30, 1995, the Company had 96 full-time employees, compared
to 91 full-time employees at November 30, 1994. The growth is due to
increases in the number of revenue producing lease origination, private
equity syndication and PIF wholesaler personnel.
13 of 21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
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 payments
the Company received from the two stockholders to whom the policies were
assigned.
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 non-recourse interest
expense (net of the associated interest revenue) is due to portfolio
run-off.
Recourse interest expense increased during the first six months of fiscal
1996, as compared to the first six months of fiscal 1995. As discussed
above, the Company is financing more lease originations with its recourse
lines of credit.
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 Note 6 to Notes to Consolidated Financial Statements, a
transaction was completed in which the Company's largest shareholder
obtained more than fifty percent of the ownership and voting rights of the
Company ("a change in control"). Upon completion of a change in control,
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.
14 of 21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
II. Liquidity and Capital Resources, continued
-------------------------------
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. After application of the MBank settlement proceeds,
as of November 30, 1995, the outstanding balance and the availability under
(1) the Working Capital Facility were $1.8 and $3.2 million, respectively,
and (2) the Warehouse Facility were $15.1 million and $16.9 million,
respectively. Management believes that the Company has adequate financial
resources to fund its operations during the remainder of fiscal year 1996.
The Company's Credit Agreement matures on January 31, 1996. The Company has
received acknowledgment that the Credit Agreement will be extended without
material changes through November 30, 1996. The Company expects the renewal
to be signed prior to January 31, 1996.
During the first six months of fiscal 1996, lease originations of $67
million were financed through $26.4 million of sales to the PIFs, $19.9
million of sales to private investors, and the remainder of approximately
$20.7 million, which leases are held for the Company's account, 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 with a lender to debt finance up to $50 million of lease
receivables 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. Aggregate closings to date were $14.4 million for the
Company and its PIFs.
Currently the Company is offering units of CPYF-III for sale to the public.
During the first fiscal six months 1996, the Company sold $11.5 million of
Class A units of CPYF-III (bringing total sales of Class A units of
CPYF-III to $35.2 million). During the remainder of fiscal year 1996, the
Company has up to $14.8 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. During the fourth fiscal quarter 1996, CPYF-III will cease
offering units for sale to the public. The Company intends to offer a
succeeding program upon the closing of the offering of units of CPYF-III
for sale to the public.
15 of 21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
III. Business Plan
-------------
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 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 Company will adjust these percentages from time to
time, when and as the Company determines that it would be in its best
interests, taking into account profit opportunities, portfolio
concentration and residual risk.
Finally, the Company's operating results may be affected by its cost, and
the availability of additional sources, of capital. The cost of funds for
many of the Company's competitors is lower than the Company's cost of
funds. The Company continues to explore all possible sources of additional,
lower cost capital, including obtaining additional capital from sales of a
greater number of leases to private equity purchasers, factoring lease
receivables, securitizing lease receivables and structuring other forms of
creative lease/debt financing.
16 of 21
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) MBANK LITIGATION. 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. Bank One, The Prudential
Insurance Company, Texas Commerce Bank, N.A., and Federal Deposit
Insurance Company have filed summary judgment motions against each
other concerning ownership of the Equipment (the "Other Party Claims").
As of the date of this Quarterly Report, the District Court has not
ruled on (i) the Company's motion or (2) any of the Other Party Claims.
Also see Note 2 to Notes to Financial Statements for information
concerning how the Company applied the settlement proceeds.
(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. In December 1995, the Nasdaq
Stock Market, Inc. ("Nasdaq") affirmed the Company's eligibility for
continued listing on the Nasdaq National Market.
(b) STOCK REPURCHASE. The Company on August 28, 1995, approved and
announced a stock repurchase program. The Company has authority under
the stock repurchase program to repurchase up to 500,000 shares of
stock from time to time in the open market. As of the date of this
quarterly report, the Company has repurchased 129,350 shares of common
stock at an average price of $1.89 (reported on a post-split basis)
pursuant to the repurchase program.
17 of 21
<PAGE>
Item 5. Other Information, continued
-----------------
(c) REVERSE STOCK SPLIT. The Board of the Company approved a
one-for-two reverse split of the Company's common stock (the "Reverse
Split"). The Reverse Split was effective as of November 2, 1995. See
Note 5 to Notes to Consolidated Financial Statements for more
information concerning the reverse split.
(d) CHANGE OF CONTROL. See Part II, Item 6, EXHIBITS AND REPORTS ON
FORM 8-K (b) and Exhibit 99 attached to the Forms 8-K filed on November
22, 1995 and January 16, 1996, for information concerning the change in
control of the Company. See also Note 6 to Notes to Consolidated
Financial Statements for more information concerning the change of
control 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.
- Amendment to Certificate of Incorporation and Reverse Split
Information Statement.
- Termination Agreement
b. On November 22, 1995, a Form 8-K was filed disclosing a change in
control of the Company. On January 16, 1996, a second Form 8-K was
filed with respect to that transaction.
18 of 21
<PAGE>
Item No. Exhibit Index
- -------- -------------
4.2(a) Certificate of Incorporation as filed on October 17, 1986, incorporated
by reference to 4.2(a) of the December 15, 1995 Form S-3.
4.2(b) Certificate of Amendment to Certificate of Incorporation, as filed on
March 3, 1987, incorporated by reference to 4.2(a) of the December 15,
1995 Form S-3.
4.2(c) Certificate of Amendment of Certificate of Incorporation, as filed on
November 2, 1995, incorporated by reference to 4.2(a) of the December
15, 1995 Form S-3.
10.50 Termination Agreement effective as of August 31, 1995 by and among Jack
Durliat, Gary M. Jacobs and CAI and CAII.
11A Computation of Primary Earnings Per Share. A computation of fully
diluted earnings per share is not presented as dilution is less than
3%.
27 Financial Data Schedule
99 Information Statement filed on Form DEF 14C on October 13, 1995.
19 of 21
<PAGE>
Exhibit 11A
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
November 30, November 30, November 30, November 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period 5,113,000 5,031,000 5,091,000 4,880,000
Repurchases of common stock (129,000) - (129,000) -
Shares issued during the period
(weighted average) 3,000 2,000 23,000 151,000
Dilutive shares contingently issuable
upon exercise of options
(weighted average) 1,003,000 943,000 954,000 983,000
Less shares assumed to have been
purchased for treasury with assumed
proceeds from exercise of stock options
(weighted average) (608,000) (604,000) (615,000) (623,000)
---------- ---------- ----------- -----------
Total shares, primary 5,382,000 5,372,000 5,324,000 5,391,000
========== ========== =========== ===========
Net income $ 60,000 $ 71,000 $ 117,000 $ 234,000
========== ========== =========== ===========
Income per common and common
equivalent share, primary $ 0.01 $ 0.01 $ 0.02 $ 0.04
========== ========== ================ ===========
</TABLE>
20 of 21
<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: January 16, 1996 By: /s/John E. Christensen
----------------------
John E. Christensen,
Senior Vice-President and
Chief Financial Officer
21 of 21
TERMINATION AGREEMENT
This Termination Agreement ("Agreement"), effective as of August 31,
1995 (the "Effective Date"), is made by and among (1) Jack Durliat ("Durliat"),
(2) Gary M. Jacobs ("Jacobs"), (3) Capital Associates, Inc., a Delaware
corporation ("CAI"), as assignee and successor in interest to Capital Associates
International, Inc., a Colorado corporation ("CAII"), under and pursuant to that
certain Stockholders' Agreement, dated as of October 27, 1982, as amended from
time to time (the "Stockholders' Agreement"), and (4) CAII. CAI and CAII are
collectively referred to herein as the "Company."
RECITALS
WHEREAS, the original parties to the Stockholders' Agreement were
Durliat, Jacobs, Richard Kazan ("Kazan") and CAII; and
WHEREAS, on November 5, 1986, CAI, the parent corporation of CAII, was
substituted as the "Company," and assumed and succeeded to all of the rights and
obligations of CAII, under the Stockholders' Agreement; and
WHEREAS, Kazan ceased to be a party to the Stockholders' Agreement,
effective as of June 1, 1994, pursuant to that certain Amendment to
Stockholders' Agreement, dated as of June 1, 1994 (the "Amendment"), by and
among the Company, Durliat, Jacobs, Kazan and, solely for purposes of paragraph
8. of the Amendment, MCC Financial Corporation; and
WHEREAS, the parties have determined that it is in their best interests
to (1) terminate the Stockholders' Agreement, and (2) subject to the terms and
conditions of this Agreement, terminate all of their respective rights, duties,
obligations and responsibilities to each other under the Stockholders'
Agreement, effective as of August 31, 1995; and
WHEREAS, in accordance with Articles 2, 3 and 4 of the Stockholders'
Agreement, the Company is currently maintaining, and paying the premiums with
respect to, certain key-man life insurance policies on the lives of Durliat and
Jacobs (which insurance policies are specifically identified by policy on
Exhibit A to this Agreement and are referred to herein by insured individual as
the "Durliat Policies" and the "Jacobs Policies," respectively, and collectively
referred to herein as the "Policies"); and
WHEREAS, concurrent with the termination of the Stockholders' Agreement
as provided for herein, the Company will cease making premium payments for the
Policies; and
1
<PAGE>
WHEREAS, pursuant to the terms of that certain Memorandum of
Understanding, dated August 1, 1990, Durliat and Jacobs have the right to
acquire the Durliat Policies and the Jacobs Policies, respectively, from the
Company in exchange for a cash payment from each of them to the Company in an
amount equal to fifty percent (50%) of the cash value of their respective
Policies as carried on the Company's books at such time; and
WHEREAS, the cash value of the Durliat Policies was $415,446.00 as of
August 31, 1995 (the "Cash Value of the Durliat Policies"); and
WHEREAS, the cash value of the Jacobs Policies was $239,102.00 as of
August 31, 1995 (the "Cash Value of the Jacobs Policies"); and
WHEREAS, CAI (1) has paid $10,673.73 of premium payments on the Durliat
Policies since August 31, 1995, and (2) has paid premiums on the Durliat
Policies prior to August 31, 1995 that relate to periods of time after August
31, 1995, which premiums total $536.68 for the post-August 31, 1995 time period
(the premiums referenced in (1) and (2) are collectively referred to herein as
the "Post-August 31, 1995 Durliat Premiums"); and
WHEREAS, CAI (1) has paid $8,613.00 of premium payments on the Jacobs
Policies since August 31, 1995, and (2) has paid premiums on the Jacobs Policies
prior to August 31, 1995 that relate to periods of time after August 31, 1995,
which premiums total $-0- for the post-August 31, 1995 time period (the premiums
referenced in (1) and (2) are collectively referred to herein as the
"Post-August 31, 1995 Jacobs Premiums"); and
WHEREAS, the premiums for each of the Durliat Policies and the Jacobs
Policies are paid through the periods set forth on Exhibit A to this Agreement.
NOW, THEREFORE, in consideration of the promises and covenants
contained herein, and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties intending to be bound
legally hereby, agree as follows:
i. Effective as of August 31, 1995, the Stockholders' Agreement
shall be terminated in its entirety and, from and after that
date, shall be of no further force or effect.
ii. Subject to the terms and conditions of this Agreement, effective
as of August 31, 1995, each of the parties to this Agreement
waives, and releases each of the other parties to this Agreement
from, his/its respective duties, obligations and responsibilities
now or hereafter existing under the Stockholders' Agreement.
2
<PAGE>
iii. Subject to the terms and conditions of this Agreement and except
as expressly provided herein, effective as of August 31, 1995,
each of the parties to this Agreement hereby waives and releases
any and all of his/its rights, titles, interests, claims,
privileges and/or benefits now or hereafter existing under the
Stockholders' Agreement.
iv. Each of the parties to this Agreement hereby acknowledges and
agrees that he/it is executing this Agreement for and on behalf
of, and intends for this Agreement to be legally binding upon,
himself/itself, his estate, any representative or custodian and
any successor in interest to him/it.
v. (a) Effective as of August 31, 1995, the Company shall transfer
and assign all of its right, title and beneficial interest
in and to, the Durliat Policies to Durliat (or his
assignee(s) or designee(s)); and
(b) at the execution this Agreement, the Company shall deliver
the originals of the Durliat Policies to Durliat; and
(c) at the execution this Agreement, the Company shall deliver
to Durliat properly executed and sealed Ownership
Designation forms from the insuror for each of the Durliat
Policies; and
(d) in exchange for (a), (b) and (c) above, Durliat shall,
concurrently with the execution of this Agreement or
promptly following any later receipt by Durliat of the
original documents evidencing the Durliat Policies and the
issuer documentation acknowledging the transfer and
assignment to Durliat of the Durliat Policies, deliver
(or cause to be delivered) a check to the Company in an
amount equal to the sum of (a) fifty percent (50%) of the
Cash Value of the Durliat Policies and (b) the Post-August
31, 1995 Durliat Premiums.
vi. (a) Effective as of August 31, 1995, the Company shall transfer
and assign all of its right, title and beneficial interest
in and to, the Jacobs Policies to Jacobs (or his
assignee(s) or designee(s)); and
(b) at the execution of this Agreement, the Company shall
deliver the originals of the Jacobs Policies to Jacobs; and
(c) at the execution of this Agreement, the Company shall
deliver to Jacobs properly executed and sealed Ownership
Designation forms from the insuror for each of the Jacobs
Policies; and
(d) in exchange for (a), (b) and (c) above, Jacobs shall,
concurrently with the execution of this Agreement or
promptly following any later receipt by Jacobs of the
original documents evidencing the Jacobs Policies and the
issuer documentation acknowledging the transfer and
assignment to Jacobs of the Jacobs Policies, deliver
(or cause to be delivered) a check to the Company in an
amount equal to the sum of (a) fifty percent (50%) of
the Cash Value of the Jacobs Policies and (b) the Post-
August 31, 1995 Jacobs Premiums.
3
<PAGE>
vii. Following the Effective Date, the Company agrees to cooperate
with Durliat and Jacobs and to effect the transfer of all right,
title and beneficial interest in and to, and record ownership of,
the Durliat Policies and Jacobs Policies to Durliat (and/or his
assignee(s) or designee(s)) and Jacobs (and/or his assignee(s) or
designee(s)), respectively.
viii. This Agreement may be executed in any number of separate
counterparts, each of which shall be an original, but all of
which shall constitute one and the same agreement. Each of the
parties hereto agrees to be bound by a facsimile copy of such
party's signature on this Agreement to the same extent as if the
facsimile were an original. Each of the parties hereto agrees to
accept a facsimile copy of every other party's signature on this
Agreement in lieu of a fully executed original hereof.
ix. This Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of Colorado, without
regard to the principles thereof regarding conflicts of laws.
x. Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision
of the remaining provisions of this Agreement.
xi. This Agreement constitutes and contains the entire agreement of
the parties and supersedes any or all prior negotiations,
correspondence, agreements and understandings between the parties
respecting the subject matter hereof.
xii. Each party to this Agreement shall pay his/its own costs and
expenses, including legal and accounting fees, incurred in
connection with the negotiation of this Agreement and the
consummation of the transactions provided for herein.
xiii. This Agreement may be modified, amended or supplemented only by
duly authorized and executed written agreements, signed by all of
the parties hereto.
xiv. This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Neither this
Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any party hereto without the prior
4
<PAGE>
written consent of the other parties, nor is this Agreement
intended to confer upon any other person, except the parties
hereto, any rights or remedies hereunder; provided, however, that
nothing contained in this Section 14. shall prohibit (or be
construed to prohibit), restrict (or be construed to restrict) in
any way or require (or be construed to require) Durliat or Jacobs
to obtain the prior written consent of the Company to, an
assignment or transfer of the Durliat Policies and/or the Jacobs
Policies to one or more assignees or designees of Durliat or
Jacobs, respectively.
xv. The parties hereto agree that the remedy at law is inadequate,
and that any party hereto shall be entitled to specific
performance in addition to any other remedy he/it may have, in
the event of a breach of this Agreement. Each party hereto waives
the defense that there is an adequate remedy at law in the event
of an action for specific performance of any rights hereunder.
xvi. All notices and other communications hereunder shall be in
writing and shall be deemed given when (i) delivered personally,
upon receipt, (ii) delivered via Federal Express of similar
overnight courier service, on the second business day after
delivery by the sender to Federal Express or other courier
service, (iii) delivered by telecopy, upon confirmation of
receipt or (iv) if mailed by registered or certified mail (return
receipt requested), postage prepaid, on the fifth business day
after mailing. Notice to any party hereto, if mailed, shall be to
the following addresses (or to any other address that a party may
designate by notice to the other parties hereto):
If to Durliat: Mr. Jack Durliat
71 Indigo Way
Castle Rock, CO 80104
Telephone: (303) 660-8181
Telecopy: (303) 660-8765
If to Jacobs: Mr. Gary Jacobs
5650 East Oxford Avenue
Cherry Hills Village, CO 80111-1023
Telephone: (303) 756-8916
Telecopy: (303) 438-5180
If to the Company: Capital Associates, Inc.
Capital Associates International, Inc.
7175 West Jefferson Avenue
Suite 4000
Lakewood, CO 80235
Attn: President and Chief Executive Officer
Telephone: (303) 980-1000
Telecopy: (303) 980-7065
5
<PAGE>
With a copy to: John L. Ruppert, Esq.
Ballard Spahr Andrews & Ingersoll
1225 17th Street, Suite 2300
Denver, CO 80202
Telephone: (303) 292-2400
Telecopy: (303) 296-3956
xvii. In the event of a dispute between the parties arising out of this
Agreement, it is further agreed that a court may award to the
prevailing party in such dispute reasonable attorneys' fee in
addition to costs of suit incurred by the prevailing party.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed as of the Effective Date.
CAPITAL ASSOCIATES, INC.
By: /s/Dennis Lacey
----------------------------------------
Title: President and Chief Executive Officer
CAPITAL ASSOCIATES INTERNATIONAL, INC.
By: /s/Dennis Lacey
----------------------------------------
Title: President and Chief Executive Officer
/s/Jack Durliat
--------------------------------------------
Jack Durliat
/s/Gary Jacobs
--------------------------------------------
Gary Jacobs
6
CAPITAL ASSOCIATES, INC.
7175 WEST JEFFERSON AVENUE
SUITE 4000
LAKEWOOD, COLORADO 80235
INFORMATION STATEMENT
---------------------
This Information Statement is furnished to the holders of the common
stock, par value $.008 per share (the "Common Stock"), of Capital Associates,
Inc. (the "Company"), to inform them as to an action to be taken by the Company
with the written consents of MCC Financial Corporation, a Delaware Corporation
("MCC"), Mr. Gary M. Jacobs and Mr. Jack Durliat (the "Consenting
Stockholders"). The Consenting Stockholders are the record holders of, in the
aggregate, 6,315,179 shares of the Common Stock (representing 61.7% of the
10,232,447 shares outstanding as of October 2, 1995).
The Board of Directors of the Company has approved a one-for-two
reverse Common Stock split (the "Reverse Split"). Since certain stockholders may
hold numbers of shares not evenly divided by two, it is anticipated that
fractional shares of Common Stock will result. Following the Reverse Split,
rather than issue fractional shares, the Company will pay cash to such persons
otherwise entitled to receive fractional shares. Under Delaware law, the
affirmative vote of a majority of the outstanding stock entitled to vote thereon
is required to approve the amendment to the Company's Certificate of
Incorporation that will effect the Reverse Split. The Consenting Stockholders
gave their written consent to the Reverse Split on October 3, 1995. Since the
Consenting Stockholders own more than fifty percent of the outstanding Common
Stock entitled to vote thereon, the Reverse Split has been approved by the
necessary vote of stockholders. Accordingly, the Company is not seeking written
consents from any of its other stockholders.
WE ARE NOT ASKING YOU FOR A CONSENT OR PROXY AND
YOU ARE REQUESTED NOT TO SEND US A CONSENT OR PROXY
This Information Statement is being mailed on or about October 13,
1995, to stockholders of record on October 2, 1995. The Company intends to take
all necessary action to consummate the Reverse Split on or after November 2,
1995 (20 days from the date of the mailing of this Information Statement) (the
"Effective Date").
On October 2, 1995, the closing price of the Company's Common Stock on
the Nasdaq National Market was $0.84.
1
<PAGE>
VOTING SECURITIES
-----------------
The close of business on October 2, 1995, has been fixed by the Board
of Directors as the record date for determination of stockholders entitled to
execute written consents to authorize the Reverse Split. The securities entitled
to consent to the Reverse Split consist of shares of Common Stock. Each share of
Common Stock entitles its owner to one vote. Common Stock is the only
outstanding class of voting securities authorized by the Company's Articles of
Incorporation. The Company's Articles of Incorporation grant to the Board of
Directors the discretion to issue Preferred Stock in series, with various
rights, preferences and privileges, including, among others, voting rights. None
of the Preferred Stock is presently outstanding, and the Board of Directors has
no present plan to issue Preferred Stock.
The following table sets forth, as of October 2, 1995, the number of
shares and percentage of the outstanding Common Stock beneficially owned by each
person known by the Company to own more than 5% of the outstanding Common Stock:
Beneficial Ownership
--------------------------------------
Number of Shares Percent(3)
---------------- ----------
James D. Walker (1) 1,536,582.5 15.00%
8180 Greensboro Drive
Suite 1000
McLean, Virginia 22102
William H. Buckland (1) 1,529,982.5 14.95%
8180 Greensboro Drive
Suite 1000
McLean, Virginia 22102
Jack Durliat 1,350,015 13.20%
18 Borealis Way
Castle Rock, Colorado 80104
Gary M. Jacobs (2) 1,946,607 18.99%
2995 Baseline Road
Boulder, Colorado 80303
All directors and officers as a 6,583,358 64.05%
group (11 persons)
- ------------------------------------
(1) MCC is the record owner of 3,046,499 shares of Common Stock. Messrs.
Walker and Buckland, who are otherwise unrelated to each other, each
own 50% of the issued and outstanding stock of MCC. Mr. Walker owns
10,000 vested stock options. Mr. Buckland owns 3,400 vested stock
options.
(2) Includes (a) 21,942 shares of Common Stock that Mr. Jacobs is entitled
to acquire upon the exercise of vested stock options and (b) 6,000
shares held in the name of Mr. Jacobs' minor children for which he
disclaims beneficial ownership.
(3) Calculated in accordance with Rule 13d-3(d) of the Securities and
Exchange Commission.
2
<PAGE>
REVERSE SPLIT OF COMMON STOCK
-----------------------------
General
- -------
The Board of Directors of the Company has approved an amendment to the
Company's Certificate of Incorporation (the "Certificate of Incorporation") to
effect a one-for-two reverse split of the issued and outstanding shares of
Common Stock. A copy of the amendment to the Certificate of Incorporation
effecting the Reverse Stock Split, in substantially the form in which it is
proposed to be filed, is attached as Exhibit A. The Consenting Stockholders have
approved the Reverse Split which is expected to become effective on the
Effective Date. Each share of Common Stock issued and outstanding immediately
prior to that Effective Date will be reclassified as, and changed into, one-half
of one share of Common Stock.
The Reverse Split will not materially affect any stockholder's
proportionate equity interest in the Company or the relative rights,
preferences, privileges or priorities of any stockholder. In addition, pursuant
to the terms of the Company's stock option and rights plans, the number of
shares issuable upon exercise of outstanding options and rights, and the
exercise price per share, will be proportionately adjusted.
Purpose and Effect of the Reverse Stock Split
- ---------------------------------------------
The Common Stock is trading at or below $1.00 which is the minimum bid
price for continued listing on the Nasdaq National Market, unless, as an
alternative test, the market value of the public float in the Company's Common
Stock is $3 million or more and the Company's net tangible assets equal $4
million or more. Currently, the "public float" for the purpose of this test is
approximately 3,000,000 shares, and on that basis the Company has not met the
alternative test. The National Association of Securities Dealers, Inc. (the
"NASD"), which operates the Nasdaq National Market, has informed the Company
that it may remove the Company from listing on the Nasdaq National Market if the
minimum bid price requirement is not met. In order to avoid such action by the
NASD, the Company's Board of Directors has determined to propose the Reverse
Split. The principal effect of the Reverse Split will be to decrease the number
of outstanding shares of Common Stock from 10,232,447 (as of October 2, 1995) to
approximately 5,116,224 shares, providing that no additional shares have been
issued subsequent to October 2, 1995. The Common Stock issued pursuant to the
Reverse Split will be fully paid and nonassessable. The respective voting rights
and other rights that accompany the Common Stock will not be altered by the
Reverse Split (other than as a result of payment of cash in lieu of fractional
shares (as discussed below)), and the par value of the Common Stock will remain
at $.008 per share. Consummation of the Reverse Split will not alter the number
of authorized shares of the Company's capital stock, which will remain at
17,500,000. Such authorized shares of capital stock consist of 15,000,000 shares
of Common Stock and 2,500,000 shares of preferred stock (none of which shares of
preferred stock has been issued). After giving effect to the Reverse Split, the
number of outstanding shares of Common Stock (as of October 2, 1995) would be as
set forth above, with the result that approximately 9,883,776 shares of Common
Stock would constitute authorized but unissued shares, with approximately
1,486,118 of such shares of Common Stock being reserved for issuance pursuant to
the Company's stock option. At this time, the Company has no plans to issue
additional shares of its Common Stock other than pursuant to outstanding
options.
3
<PAGE>
The Board of Directors believes that a decrease in the number of shares
of Common Stock outstanding without any material alteration of the proportionate
economic interest in the Company represented by individual shareholdings may
increase the trading price of the Common Stock, although no assurance can be
given that the market price of the Common Stock will rise in proportion to the
reduction in the number of shares outstanding resulting from the Reverse Split.
There can be no assurance that the Reverse Split will not adversely
impact the market price of the Common Stock, that the marketability of the
Common Stock will improve as a result of the Reverse Split or that the Reverse
Split will otherwise have any of the effects described herein. If the Company's
stock is removed from listing on the Nasdaq National Market, price information
will be available on the NASD OTC Bulletin Board. However, such information is
not as widely available as Nasdaq National Market information in newspapers and
other publications.
Certificates and Fractional Shares
- ----------------------------------
The Reverse Split will occur on the Effective Date without any action
on the part of stockholders of the Company and without regard to the date or
dates certificates presently representing shares of the Common Stock are
physically surrendered for certificates representing the number of shares of the
Common Stock such stockholders are entitled to receive as a consequence of the
Reverse Split. The certificates presently representing shares of Common Stock
will be deemed to represent one-half the number of shares of Common Stock after
the Effective Date of the Reverse Split. New certificates of Common Stock will
be issued in due course as old certificates are tendered to the Exchange Agent
for exchange or transfer. No fractional shares of Common Stock will be issued
and, in lieu thereof, stockholders holding a number of shares of Common Stock
not evenly divisible by two, and stockholders holding less than two shares of
Common Stock prior to the Effective Date, upon surrender of their old
certificates, will receive cash in lieu of fractional shares of Common Stock.
Such cash payment will not be made until a stockholder presents his old
certificates to the Exchange Agent. The price payable by the Company for the
fractional shares of Common Stock will be equal to the product of (a) the number
of old shares that appears in the numerator of the fraction of a new share,
times (b) the average of either (i) the high bid and low asked prices of one old
share, as reported on the NASD OTC Bulletin Board, or (ii) the closing price of
one old share, as reported on the Nasdaq National Market, whichever alternative
is applicable, for the ten business days immediately preceding the Effective
Date of the Reverse Split for which transactions in the Common Stock are
reported.
Only the fractional shares will be purchased by the Company, as a
result, whole shares will remain outstanding. For example, if stockholder Z owns
125 old shares. Dividing 125 shares by 2, the Reverse Split ratio, would cause
stockholder Z to hold after the reverse split 62.5 new shares. Stockholder Z
would be issued a stock certificate for 62 new shares and would receive a cash
payment (calculated as described above) for his .5 new share fractional
interest.
4
<PAGE>
Source of Funds; Number of Holders
- ----------------------------------
The funds required to purchase the fractional shares are available and
will be paid from the current cash reserves of the Company. The Company's
stockholder list indicates that a portion of the outstanding Common Stock is
registered in the names of clearing agencies and broker nominees. It is,
therefore, not possible to predict with certainty the number of fractional
shares and the total amount that the Company will be required to pay for
fractional share interests. However, it is not anticipated that the funds
necessary to effect the cancellation of fractional shares will be material.
As of October 2, 1995, approximately 225 persons were holders of record
of Common Stock. The Company does not anticipate that the Reverse Split and the
payment of cash in lieu of fractional shares will result in a significant
reduction in the number of holders of record of Common Stock. The Company does
not presently intend to seek, either before or after the Reverse Split, any
change in the Company's status as a reporting company for federal securities law
purposes.
Exchange of Stock Certificates
- ------------------------------
As soon as practicable after the Effective Date, the Company will send
a letter of transmittal to each shareholder of record on the Effective Date for
use in transmitting certificates representing shares of Common Stock ("Old
Certificates") to the Exchange Agent. The letter of transmittal will contain
instructions for the surrender of Old Certificates to the Exchange Agent in
exchange for certificates representing the appropriate number of whole shares in
new Common Stock. No new certificates will be issued to a shareholder until such
shareholder has surrendered all Old Certificates together with a properly
completed and executed letter of transmittal to the Exchange Agent.
Upon proper completion and execution of the letter of transmittal and
return thereof to the Exchange Agent, together with all Old Certificates,
shareholders will receive a new certificate or certificates representing the
number of whole shares of new Common Stock into which their shares of Common
Stock represented by the Old Certificates have been converted as a result of the
Reverse Split. Until surrendered, outstanding Old Certificates held by
shareholders will be deemed for all purposes to represent the number of whole
shares of new Common Stock to which such shareholders are entitled as a result
of the Reverse Split. Shareholders should not send their Old Certificates to the
Exchange Agent until they have received the letter of transmittal. Shares not
presented for surrender as soon as practicable after the letter of transmittal
is sent shall be exchanged at the first time they are presented for transfer.
No service charges will be payable by holders of shares of Common Stock
in connection with the exchange of certificates, all expenses of which will be
borne by the Company. However, if a transfer of ownership is requested, a fee
may be charged.
5
<PAGE>
Federal Income Tax Consequences
- -------------------------------
Except as described below with respect to cash received in lieu of
fractional share interests, the receipt of Common Stock in the Reverse Split
should not result in any taxable gain or loss to stockholders for federal income
tax purposes. The tax basis of Common Stock received as a result of the Reverse
Split (including any fractional share interests to which a stockholder is
entitled) will be equal, in the aggregate, to the basis of the shares exchanged
for the Common Stock. For tax purposes, the holding period of the shares
immediately prior to the effective date of the Reverse Stock Split will be
included in the holding period of the Common Stock received as a result of the
Reverse Split, including any fractional share interests to which a stockholder
is entitled. A stockholder who receives cash in lieu of fractional shares of
Common Stock will be treated as first receiving such fractional shares and then
receiving cash as payment in exchange for such fractional shares of Common
Stock, and will recognize capital gain or loss in an amount equal to the
difference between the amount of cash received and the adjusted basis of the
fractional shares treated as surrendered for cash.
THE FEDERAL INCOME TAX DISCUSSION WITH RESPECT TO THE REVERSE SPLIT SET
FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. ALL STOCKHOLDERS
ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS AS TO ANY FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES APPLICABLE TO THEM WHICH COULD RESULT FROM THE REVERSE
SPLIT.
Effectiveness
- -------------
In accordance with Delaware law and notwithstanding approval of the
amendment by Consenting Stockholders, at any times prior to the filing of the
Certificate of Amendment, the Board of Directors may, in its sole discretion,
abandon the proposed amendment without any further action by stockholders.
6
<PAGE>
EXHIBIT A
Article IV of the Certificate of Incorporation of Capital Associates, Inc. will
be amended by the addition of the following paragraph immediately following
paragraph 3 thereof:
"4. Simultaneously with the effective date of this amendment (the
"Effective Date"), each share of Common Stock issued and outstanding
immediately prior to the Effective Date (the "Old Common Stock") shall
automatically and without any action on the part of the holder thereof be
reclassified as, and changed into, one-half (1/2) of a share of Common
Stock (the "New Common Stock"), subject to the treatment of fractional
share interests, as described below. Such reclassification and change of
Old Common Stock into New Common Stock shall not change the par value per
share of the shares reclassified and changed, which par value shall remain
$.008 per share. Each holder of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of
Old Common Stock (the "Old Certificates", whether one or more) shall be
entitled to receive upon surrender of such Old Certificates to the
Corporation's Exchange Agent for cancellation, a certificate or
certificates (the "New Certificates", whether one or more) representing
the number of whole shares of New Common Stock into which and for which
the shares of the Old Common Stock formerly represented by such Old
Certificates so surrendered, are reclassified under the terms hereof. From
and after the Effective Date, Old Certificates shall represent only the
right to receive New Certificates (and, where applicable, cash in lieu of
fractional shares, as provided below) pursuant to the provisions hereof.
No certificates or scrip representing fractional share interests in New
Common Stock will be issued, and no such fractional share interest will
entitle the holder thereof to vote, or to any rights of a stockholder of
the Corporation. A holder of Old Certificates shall receive, in lieu of
any fraction of a share of New Common Stock to which the holder would
otherwise be entitled, a cash payment therefore in an amount equal to the
product of (a) the number of shares of Old Common Stock that appears in
the numerator of such fraction times (b) the average of either (i) the
high bid and low asked prices of one share of Old Common Stock, as
reported on the NASD OTC Bulletin Board, or (ii) the closing price of one
share of Old Common Stock, as reported on the Nasdaq National Market,
whichever alternative is applicable, for the ten business days immediately
preceding the Effective Date for which transactions in Old Common Stock
are reported. If more than one Old Certificate shall be surrendered at one
time for the account of the same stockholder, the number of full shares of
New Common Stock for which New Certificates shall be issued shall be
computed on the basis of the aggregate number of shares represented by the
Old Certificates so surrendered. In the event that the Exchange Agent
becomes aware that a holder of Old Certificates has not tendered all the
holder's certificates for exchange, the Exchange Agent shall carry forward
any fractional share until all certificates of that holder have been
presented for exchange such that payment for fractional shares to any one
holder shall not exceed the value of one share of Old Common Stock. If any
New Certificate is to be issued in a name other than that in which the Old
Certificates surrendered for exchange are issued, the Old Certificates so
surrendered shall be properly endorsed and otherwise in proper form for
transfer, and the person or persons requesting such exchange shall affix
any requisite stock transfer tax stamps to the Old Certificates
surrendered, or provide funds for their purchase, or establish to the
satisfaction of the Exchange Agent that such taxes are not payable. From
and after the Effective Date, the amount of capital represented by the
shares of the New Common Stock into which and for which the shares of the
Old Common Stock are reclassified under the terms hereof shall be the same
as the amount of capital represented by the shares of Old Common Stock so
reclassified, until thereafter reduced or increased in accordance with
applicable law."
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> NOV-30-1995
<CASH> 4,983
<SECURITIES> 0
<RECEIVABLES> 987
<ALLOWANCES> 313
<INVENTORY> 156
<CURRENT-ASSETS> 0
<PP&E> 27,826
<DEPRECIATION> 0
<TOTAL-ASSETS> 136,194
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 32
0
0
<OTHER-SE> 22,347
<TOTAL-LIABILITY-AND-EQUITY> 136,194
<SALES> 28,617
<TOTAL-REVENUES> 33,718
<CGS> 27,648
<TOTAL-COSTS> 28,936
<OTHER-EXPENSES> 2,090
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 2,567
<INCOME-PRETAX> 100
<INCOME-TAX> 40
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
