SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934.
Commission file number 0-15525
CAPITAL ASSOCIATES, INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1055327
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7175 WEST JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's $.008 par value common
stock at March 26, 1997, was 5,011,357.
Exhibit Index - Page 15
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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 - February 28, 1997
and May 31, 1996 3
Consolidated Statements of Income - Three and
Nine Months Ended February 28, 1997 and
February 29, 1996 4
Consolidated Statements of Cash Flows - Nine Months Ended
February 28, 1997 and February 29, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Exhibit Index 15
Signature 17
2 of 17
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
ASSETS
February 28, May 31,
1997 1996
------------ --------
Cash and cash equivalents $ 6,487 $ 2,851
Receivables from affiliated limited partnership 650 1,849
Accounts receivable, net 981 945
Equipment held for sale or re-lease 115 177
Residual values and other receivables arising from
equipment under lease sold to private investors 4,337 3,374
Net investment in direct finance leases 7,783 14,967
Leased equipment, net 58,290 45,285
Investments in affiliated limited partnershi 7,198 8,759
Other 2,868 3,497
Deferred income taxes 1,721 1,900
Discounted lease rentals assigned to lenders
arising from equipment sale transaction 51,625 43,907
-------- ---------
$142,055 $127,511
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Recourse bank debt $ 13,900 $ 17,538
Accounts payable - equipment purchases 24,601 14,071
Other liabilities 9,132 9,272
Discounted lease rentals 70,988 63,749
--------- ---------
118,621 104,630
--------- ---------
Stockholders' equity:
Common stock 32 32
Additional paid-in capital 16,897 17,026
Retained earnings 6,803 6,121
Treasury stock (298) (298)
--------- ---------
Total stockholders' equity 23,434 22,881
--------- ---------
$ 142,055 $ 127,511
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
3 of 17
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- --------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales to affiliated
limited partnerships $ 25,674 $ 9,580 $ 55,751 $ 39,145
Other equipment sales 43,073 44,218 108,112 69,284
Leasing 3,492 2,692 11,228 7,476
Interest 1,060 1,630 3,290 5,510
Other 703 969 2,199 2,601
---------- ---------- ---------- ----------
Total revenue 74,002 59,089 180,580 124,016
---------- ---------- ---------- ----------
Costs and expenses:
Equipment sales 67,132 53,033 160,128 105,481
Leasing 2,183 1,409 6,462 4,033
Operating and other expenses 2,190 1,997 6,873 6,131
Provision for losses 235 25 340 75
Interest:
Non-recourse debt 1,435 1,905 4,416 6,210
Recourse debt 430 493 1,452 1,664
---------- ---------- ---------- ----------
Total costs and expenses 73,605 58,862 179,671 123,594
---------- ---------- ---------- ----------
Net income before income taxes 397 227 909 422
Income tax expense 99 91 227 169
---------- ---------- ---------- ----------
Net income $ 298 $ 136 $ 682 $ 253
========== ========== ========== ==========
Earnings per common and dilutive
common equivalent share:
Primary $ 0.06 $ 0.03 $ 0.13 $ 0.05
========== ========== ========== ==========
Weighted average number of common
and dilutive common equivalent
shares outstanding used in computing
earnings per share:
Primary 5,384,000 5,297,000 5,335,000 5,315,000
========== ========== ========== ==========
</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>
Nine Months Ended
-------------------------------
February 28, February 29,
1997 1996
------------ -------------
<S> <C> <C>
Net cash provided by operating activities $ 28,803 $ 26,619
-------- --------
Cash flows from investing activities:
Equipment purchased for leasing (23,776) (20,877)
Investment in leased office facility and capital expenditures (333) (163)
Net receipts from affiliated limited partnerships 1,416 1,037
-------- --------
Net cash used for investing activities (22,693) (20,003)
-------- --------
Cash flows from financing activities:
Proceeds from discounting of lease rentals 10,566 6,675
Principal payments on discounted lease rentals (9,273) (4,237)
Deferred financing costs - (118)
Proceeds from sales of common stock 9 19
Purchase of treasury shares - (247)
Purchase of non-employee stock options (138) -
Payments on revolving credit facilities (388) (833)
Payments on Term Loan (3,250) (3,250)
-------- --------
Net cash used for financing activities (2,474) (1,991)
-------- --------
Net increase in cash and cash equivalents 3,636 4,625
Cash and cash equivalents at beginning of period 2,851 923
-------- --------
Cash and cash equivalents at end of period $ 6,487 $ 5,548
======== ========
Supplemental schedule of cash flow information:
Recourse interest paid $ 1,452 $ 1,556
Non-recourse interest paid 1,124 702
Income taxes paid 106 1,598
Income tax refunds received 316 -
Supplemental schedule of non-cash investing and financing activities:
Increase in residual values and other receivables relating to
equipment sale transactions 1,067 897
Discounted lease rentals assigned to lenders arising from
equipment sales transactions 22,499 -
Assumption of discounted lease rentals in lease acquisitions 20,732 -
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5 of 17
<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 only of normal recurring adjustments) considered
necessary for a fair presentation have been included. For further
information, please refer to the financial statements of Capital Associates,
Inc. (the "Company"), and the related notes, included within the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996 (the "1996
Form 10-K"), previously filed with the Securities and Exchange Commission.
The balance sheet at May 31, 1996 has been derived from the audited
financial statements included in the Company's 1996 Form 10-K.
Certain reclassifications have been made to the prior periods' financial
statements to conform to the current periods' presentation.
2. Provision for Losses
--------------------
During the third quarter of fiscal 1997, as a result of (i) a lease having a
net book value of $245,000 at February 28, 1997 with a lessee that filed for
bankruptcy protection under Chapter 11 of the Bankruptcy code during the
third quarter fiscal 1997 and (ii) a "soft" market for re-leasing one of the
Company's aircraft, the Company reserved a provision for loss of $235,000.
6 of 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
I. Results of Operations
---------------------
General Comments
During the three months ended February 28, 1997 the Company reported net
income of $298,000 representing its nineteenth consecutive profitable
quarter.
Operating results are subject to fluctuations resulting from several
factors, including seasonality of lease originations, variations in the
relative percentages of the Company's leases entered into during the period
which are classified as DFLs or OLs or are sold for fee income as well as
the level of fee income obtained from the sale of leases in excess of lease
equipment cost. The Company will adjust the mix of OLs and DFLs and volume
of leases sold to private investors from time to time, when and as the
Company determines that it would be in its best interests, taking into
account profit opportunities, portfolio concentration and residual risk.
Lease Originations
In the ordinary course of business, the Company will continue to (1) sell
new lease originations to its PIFs (to the extent the PIFs have funds
available for such purpose) or private investors and (2) sell seasoned lease
transactions (previously originated leases held in the Company's portfolio)
to private investors. Presented below is a schedule showing new lease
originations volume and the placement of new lease originations during the
nine-month period ended February 28, 1997 as compared to the comparable
period for fiscal year 1996 (in thousands).
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
February 28, February 29,
1997 1996
-------------------------------
<S> <C> <C>
Placement of lease originations:
Equipment under lease sold to PIFs $ 52,880 $ 37,980
Equipment under lease sold to private investors 75,790 59,601
Leases added to the Company's lease portfolio (a significant
portion of which will be sold during fiscal year 1997) 45,061 25,727
--------- ---------
Total lease origination volume $ 173,731 $ 123,308
========= =========
</TABLE>
Leasing is an alternative to financing equipment with debt. Therefore, the
ultimate profitability of the Company's leasing transactions is dependent,
in part, on the general level of interest rates. Lease rates tend to rise
and fall with interest rates, although lease rate movements generally lag
interest rate movements. Because the Company finances its lease
transactions with recourse and non-recourse debt, the ultimate
profitability of leasing transactions is dependent, in part, on the
difference between the interest rate inherent in the lease and the
underlying debt rate ("rate spread"). Certain of the Company's competitors
have access to lower cost funds than the Company. However, the Company has
developed relationships with various private investors and formed various
strategic alliances with companies that have a lower cost of capital
enabling the Company to originate and sell selected leases at competitive
prices.
7 of 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
Interim Financial Results
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 Income Statements of Income
for the three months The effect on for the six months The effect on
ended February 28, net income of ended February 29, net income of
---------------------- changes between ---------------------- changes between
1996 1995 years 1996 1995 years
-------- -------- --------------- -------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Equipment sales margin $ 1,615 $ 765 $ 850 $ 3,735 $ 2,948 $ 787
Leasing margin (net of interest
expense on discounted lease rentals) 934 1,008 (74) 3,640 2,743 897
Other income 703 969 (266) 2,199 2,601 (402)
Operating and other expenses (2,190) (1,997) (193) (6,873) (6,131) (742)
Provision for losses (235) (25) (210) (340) (75) (265)
Interest expense on recourse debt (430) (493) 63 (1,452) (1,664) 212
Income taxes (99) (91) (8) (227) (169) (58)
------- ------- ------- ------- ------- -------
Net income $ 298 $ 136 $ 162 $ 682 $ 253 $ 429
======= ======= ======= ======= ======= =======
</TABLE>
EQUIPMENT SALES MARGIN
Equipment sales revenue (and related equipment sales margin) consists of
the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------- Increase
February 28, 1997 February 29, 1996 (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 $ 25,674 $ 553 $ 9,580 $ 222
Equipment under lease sold to private investors 38,629 447 43,711 343
-------- -------- -------- --------
64,303 1,000 53,291 565 $ 11,012 $ 435
-------- -------- -------- -------- -------- --------
Transactions subsequent to initial lease term:
Sales of off-lease equipment 4,223 394 435 128
Sales-type leases 10 10 - -
Excess collections (cash collections in excess of
the associated residual value from equipment
under lease sold to private investors) 211 211 72 72
-------- -------- -------- --------
4,444 615 507 200 3,937 415
Deduct related provision for losses - (235) - (25) - (210)
-------- -------- -------- -------- -------- --------
Realization of value in excess of provision for losses 4,444 380 507 175 3,937 205
Add back related provision for losses - 235 - 25 - 210
-------- -------- -------- -------- -------- --------
4,444 615 507 200 3,937 415
-------- -------- -------- -------- -------- --------
Total equipment sales and equipment sales margin as
shown on the above schedule of condensed income
statement categories $ 68,747 $ 1,615 $ 53,798 $ 765 $ 14,949 $ 850
======== ======== ======== ======== ======== ========
</TABLE>
8 of 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
EQUIPMENT SALES MARGIN, continued
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------------- Increase
February 28, 1997 February 29, 1996 (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 $ 55,751 $ 1,195 $ 39,145 $ 779
Equipment under lease sold to private investors 102,647 1,404 67,356 1,108
--------- -------- --------- --------
158,398 2,599 106,501 1,887 $ 51,897 $ 712
--------- -------- --------- -------- --------- ---------
Transactions subsequent to initial lease term:
Sales of off-lease equipment 4,995 668 1,276 577
Sales-type leases 71 69 279 111
Excess collections (cash collections in excess of
the associated residual value from equipment
under lease sold to private investors) 399 399 373 373
--------- -------- --------- --------
5,465 1,136 1,928 1,061 3,537 75
Deduct related provision for losses - (340) - (75) - 265)
--------- -------- --------- -------- --------- ---------
Realization of value in excess of provision for losses 5,465 796 1,928 986 3,537 (190)
Add back related provision for losses - 340 - 75 - 265
--------- -------- --------- -------- --------- ---------
5,465 1,136 1,928 1,061 3,537 75
--------- -------- --------- -------- --------- ---------
Total equipment sales and equipment sales margin
as shown on the schedule of condensed income
statement categories listed on the preceding page $ 163,863 $ 3,735 $ 108,429 $ 2,948 $ 55,434 $ 787
========= ======== ========= ======== ========= =========
</TABLE>
Transactions During Initial Lease Term
Equipment sales to PIFs increased during the three and nine months ended
February 28, 1997, as compared to the comparable period in fiscal 1996,
principally because more leases were identified and closed that satisfied
the PIFs underwriting standards.
Equipment sales to private investors increased during the nine months ended
February 28, 1997 primarily because lease originations increased and, as
discussed above, the Company sometimes determines it would be in its best
interests to place certain lease transactions with private investors. Lease
originations from one customer accounted for approximately 45% of the total
lease originations volume for the nine months ended February 28, 1997.
Transactions Subsequent to Initial Lease Term
The Company has been successful in realizing gains on the remarketing of
its equipment after the initial lease term for the past nineteen
consecutive quarters. 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 during the three and nine month periods ended February 28, 1997,
even without considering realizations from remarketing activities recorded
as leasing margin.
9 of 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
EQUIPMENT SALES MARGIN, continued
Transactions Subsequent to Initial Lease Term, continued
Residual values are established equal to the estimated value to be received
from the equipment following termination of the lease. In estimating such
values, the Company considers all relevant facts regarding the equipment
and the lessee, including, for example, the 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 arising from these
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 number and dollar amount of equipment
leases that mature in a particular quarter. In general, because the Company
did not significantly add to its own 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. However,
revenue and margins from remarketing sales increased during the three and
nine month periods ended February 28, 1997, compared to the comparable
periods of 1996 primarily due to the sale of approximately $1.5 million of
earth moving equipment and the early termination sale of approximately $2.5
million of manufacturing equipment. Although quarterly fluctuations will
occur as discussed in the preceding sentence, in general, remarketing
revenue and margin are expected to decline 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).
The provision for losses recorded during the first nine months of fiscal
1997 primarily related to the following:
* $235,000 discussed in Note 2 of Notes to Consolidated Financial
Statements, and
* $105,000 for other-than-temporary declines in the value of equipment
which occurred primarily because lessees returned equipment to the
Company at the end of lease. The Company had previously expected to
realize the carrying value of that equipment through lease renewals and
proceeds from sale of the equipment to the original lessee. The fair
market value of the equipment re-leased or sold to a third party is
considerably less than was anticipated.
The provision for losses recorded during the first nine months of fiscal
1996 did not relate to any significant items because no significant
other-than-temporary declines in the value of the equipment were identified
in the quarterly assessments of the Company's assets.
10 of 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
EQUIPMENT SALES MARGIN, continued
Transactions Subsequent to Initial Lease Term, continued
The changes in the Company's equipment under lease during the nine month
period ended February 28, 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
Discounted lease
Direct finance rentals, net of
leases, operating discounted lease Net
leases, net and rentals assigned investment
equipment held to lenders arising in lease
for sale or re-lease from equipment sales portfolio
-------------------- --------------------- ----------
<S> <C> <C> <C>
As of May 31, 1996 $ 60,429 $ (19,830) $ 40,599
Leases added to the Company's lease portfolio (a
significant portion of which will be sold during
fiscal year 1997) financed through the use of the
Company's cash, accounts payable, non-recourse
bank debt and recourse bank debt under its
Warehouse Facility 45,061 (10,566) 34,495
Leases sold to PIFs and private investors (25,911) 1,767 (24,144)
Related provision for losses (340) - (340)
Change as a result of portfolio run-off (13,051) 9,273 ( 3,778)
---------- --------- ----------
As of February 28, 1997 $ 66,188 $ (19,356) $ 46,832
========== ========= ==========
</TABLE>
LEASING MARGIN
Leasing margin consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- -----------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Leasing revenue $ 3,492 $ 2,692 $ 11,228 $ 7,476
Leasing costs and expenses (2,183) (1,409) (6,462) (4,033)
Net interest expense on related
discounted lease rentals (375) (275) (1,126) (700)
-------- ---------- ---------- ----------
Leasing margin $ 934 $ 1,008 $ 3,640 $ 2,743
======== ========= ========== ==========
Leasing margin ratio 27% 37% 32% 37%
== == == ==
</TABLE>
Leasing margin increased during the nine months ended February 28, 1997,
compared to the comparable period of 1996 primarily due to growth in the
Company's lease portfolio.
11 of 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
LEASING MARGIN, continued
Leasing margin ratio fluctuates based upon (i) the mix of direct finance
leases and operating leases (ii) remarketing activities, and (iii) the
method used to finance leases added to the Company's lease portfolio, as
described in the table above. Interest expense arising from non-recourse
bank debt (discounted lease rentals) is reflected in leasing margin, but
interest arising from the warehouse facility is not reflected in leasing
margin.
OTHER INCOME
Other Income consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- -----------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fees and distributions from the
Company-sponsored PIFs $ 562 $ 895 $ 1,791 $ 2,250
Interest on income tax refunds - - 103 -
Interest on MBank receivable - - - 141
Other 141 74 305 210
------- ------ ------- -------
$ 703 $ 969 $ 2,199 $ 2,601
======= ====== ======= =======
</TABLE>
OPERATING AND OTHER EXPENSES
Operating and Other Expenses increased $0.7 million (12%) for the nine
months ended February 28, 1997 as compared to the comparable period in
fiscal 1996. The principal components of the increase were:
* $450,000 of increased incentive compensation, primarily commissions as
a result of higher levels of originations (see page 7 of 18);
* $200,000 for costs associated with increased marketing activities;
* $150,000 for costs associated with the relocation of the Company's
Chairman of the Board to Denver, Colorado;
* and that Operating and Other Expenses for the nine months ended
February 28, 1997 included (i) $325,000 related to the termination of
the Stockholders' Agreement and (ii) a $200,000 credit resulting from
the difference between estimated incentive compensation and actual
payments as approved by the Company's Board of Directors.
INTEREST EXPENSE ON RECOURSE DEBT
Recourse interest expense decreased due to a decrease in the average
outstanding balance of recourse bank debt.
12 of 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
I. Results of Operations, continued
---------------------
INCOME TAXES
Income tax expense is provided on income at the appropriate federal and
state statutory rates applicable to such earnings. The aggregate statutory
tax rate is 40%, adjusted for utilization of the Company's ITC carryforward
(see Note 11 to Notes to the Consolidated Financial Statements to the 1996
Form 10-K).
II. Liquidity and Capital Resources
-------------------------------
Currently the Company is offering units of CPYF-IV for sale to the public.
Through February 28, 1997, the Company sold $21.2 million of Class A units
of CPYF-IV. For the remainder of the offering period for CPYF-IV (which
ends in April 1998), the Company has $28.8 million of Class A units in
CPYF-IV available for sale, which represent a source of financing for the
placement of lease originations and acquisition fee income to the Company.
III. Business Plan
-------------
The Company believes that it has the necessary funding capability for
fiscal year 1997 to (1) continue to build its lease origination function
and increase its lease origination volume by expanding its field sales
force, (2) continue to modestly increase the size of its own lease
portfolio, (3) originate/acquire additional leases for sales to PIFs and
private investors and (4) build and strengthen its residual remarketing
expertise in identified equipment types, such as material handling
equipment, by "vertical integration" of individuals or companies with
requisite equipment expertise. In addition, the Company continues to focus
on identifying attractive acquisition opportunities.
The Company's operating results may be affected by the availability of
additional sources of capital and the related costs of such capital. The
cost of funds for many of the Company's competitors is lower than the
Company's cost of funds. Therefore, the Company has expanded its debt and
equity placement capabilities with lower cost of capital sources including
private investors, private partnerships, a private income fund with an off
shore investor and other strategic alliances. These funding sources are
intended to provide funds at a cost necessary to facilitate the Company's
competitiveness in certain segments of the lease originations market.
IV. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act
---------------------------------------------------------------------------
of 1995
-------
The statements contained in this report which are not historical facts may
be deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, and are subject to
factors that could cause actual future results to differ both adversely and
materially from currently anticipated results, including, without
limitation, the level of lease originations, realization of residual
values, the availability and cost of financing sources and the ultimate
outcome of any contract disputes. Certain specific risks associated with
particular aspects of the Company's business are discussed in detail
throughout Item 2 of this report and Parts I and II of the 1996 Form 10-K.
13 of 17
<PAGE>
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
(a) HEMMETER LITIGATION. See Note 15 to Notes to Consolidated
Financial Statements included in the 1996 Form 10-K for a
detailed discussion of the Hemmeter Litigation. On July 29, 1996,
the Company received approximately $2 million from the sale of
the equipment which had been leased to Grand Palais Riverboat,
Inc. (the "Lessee") to the purchaser of the Lessee's riverboat
gaming operations.
(b) NASD ARBITRATIONS. CAI Securities Corporation ("CAIS"), a
wholly-owned subsidiary of the Company has been named as a
respondent in three NASD arbitrations initiated by investors in
Leastec Income Fund V. The Company believes CAIS has meritorious
defenses to the claims; however, it is too early to predict the
outcome of any arbitrations.
(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 6. Exhibits and Reports on Form 8-K
a. Exhibits
b. Reports on Form 8-K
None
14 of 17
<PAGE>
Item No. Exhibit Index
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
15 of 17
<PAGE>
Exhibit 11A
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period 5,002,000 4,988,000 4,994,000 5,091,000
Purchase of treasury shares - - - (129,000)
Shares issued during the period
(weighted average) 3,000 - 7,000 24,000
Dilutive shares contingently issuable upon
exercise of options (weighted average) 618,000 997,000 686,000 968,000
Less shares assumed to have been purchased
for treasury with assumed proceeds
from exercise of stock options
(weighted average) (239,000) (688,000) (288,000) (639,000)
Effect of non-employee stock option
buy-out - - (64,000) -
--------- --------- --------- ---------
Total shares, primary 5,384,000 5,297,000 5,335,000 5,315,000
========= ========= ========= =========
Net income $ 298,000 $ 136,000 $ 682,000 $ 253,000
========= ========= ========= =========
Income per common and common
equivalent share, primary $ 0.06 $ 0.03 $ 0.13 $ 0.05
========= ========= ========= =========
</TABLE>
16 of 17
<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: April 3, 1997 By: /s/Anthony M. DiPaolo
-------------------------------
Anthony M. DiPaolo,
Senior Vice-President and
Chief Financial Officer
17 of 17
<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> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 6,487
<SECURITIES> 0
<RECEIVABLES> 1,631
<ALLOWANCES> 30
<INVENTORY> 115
<CURRENT-ASSETS> 0
<PP&E> 58,290
<DEPRECIATION> 0
<TOTAL-ASSETS> 142,055
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 23,402
<TOTAL-LIABILITY-AND-EQUITY> 142,055
<SALES> 163,863
<TOTAL-REVENUES> 180,580
<CGS> 160,128
<TOTAL-COSTS> 179,671
<OTHER-EXPENSES> 6,873
<LOSS-PROVISION> 340
<INTEREST-EXPENSE> 5,868
<INCOME-PRETAX> 909
<INCOME-TAX> 227
<INCOME-CONTINUING> 682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 682
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
