-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, GIhz/+G4j47kZChekAQvlAUsmMj1HtzmP5Cc447NCmFn+Kbmz71o42sHY/BDj6hc 0ksyAqPIq+i8fwr6a3zY9Q== 0000804188-94-000003.txt : 19940114 0000804188-94-000003.hdr.sgml : 19940114 ACCESSION NUMBER: 0000804188-94-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19931130 FILED AS OF DATE: 19940110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL ASSOCIATES INC CENTRAL INDEX KEY: 0000804188 STANDARD INDUSTRIAL CLASSIFICATION: 7377 IRS NUMBER: 841055327 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 34 SEC FILE NUMBER: 000-15525 FILM NUMBER: 94500796 BUSINESS ADDRESS: STREET 1: 7175 W JEFFERSON AVE STE 3000 CITY: LAKEWOOD STATE: CO ZIP: 80235 BUSINESS PHONE: 3039801000 10-Q 1 QUARTERLY REPORT [TEXT] 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, 1993 [ ] 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 $.008par value common stock at January 4, 1994, was 9,710,620. CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION NUMBER Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - November 30, 1993 and May 31, 1993 3 Consolidated Statements of Operations - Three and Six Months Ended November 30, 1993 and 1992 4 Consolidated Statements of Cash Flows - Six Months Ended November 30, 1993 and 1992 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Exhibit Index 17 Signature 19 CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except par value) ASSETS November 30, May 31, 1993 1993 (Note 1) Cash and cash equivalents, including restricted funds of$1,484 and $1,697, respectively $ 2,658 $ 3,210 Accounts receivable, net of allowance for doubtful accounts of $700 and $593, respectively 702 1,376 Income tax refunds receivable 255 1,870 Residual values and other receivables arising from equipment under lease sold to private investors 5,987 5,071 Notes receivable arising from sale-leaseback transactions 37,657 42,674 Net investment in direct finance leases 33,205 51,649 Leased equipment, net 28,406 39,974 Investments in affiliated limited partnerships 13,592 15,200 Other 5,427 6,084 Discounted lease rentals assigned to lenders arising from equipment sales 115,769 113,527 $ 243,658 $280,635 LIABILITIES AND STOCKHOLDERS' EQUITY Revolving Credit Facility $ 89 $ 21 Accounts payable and other liabilities 8,098 10,414 Term Loan 28,016 37,836 Deferred income taxes 1,553 1,500 Obligations under capital leases arising from sale-leaseback transactions 37,530 42,496 Discounted lease rentals 147,616 168,065 222,902 260,332 Stockholders' equity: Common stock 59 59 Additional paid-in capital 16,604 16,604 Retained earnings 4,144 3,691 Treasury stock (51) (51) Total stockholders' equity 20,756 20,303 $ 243,658 $ 280,635 See accompanying notes CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except earnings per share) Three Months Ended Six Months Ended November 30, November 30, November 30, November 30, 1993 1992 1993 1992 (Note 1) (Note 1) Revenue: Equipment sales to affiliated limited partnerships $ 21,882 $ 21,463 $ 49,525 $ 32,216 Other equipment sales 9,616 10,502 25,259 17,675 Leasing 3,609 7,580 7,838 15,138 Interest 4,008 3,767 7,520 8,403 Other 785 790 2,101 1,689 Total revenue 39,900 44,102 92,243 75,121 Costs and expenses: Equipment sales 29,661 28,716 70,508 43,878 Leasing 1,288 3,563 2,996 7,569 Operating and other expenses 3,167 3,631 6,273 7,051 Interest: Non-recourse debt 4,887 5,488 9,630 11,916 Recourse debt 464 930 1,018 1,930 Provision for losses 145 1,140 1,060 1,500 Total costs and expenses 39,612 43,468 91,485 73,844 Income before income taxes 288 634 758 1,277 Income tax expense 115 254 303 511 Net income $ 173 $ 380 $ 455 $ 766 Earnings per common and common equivalent share $ 0.02 $ 0.04 $ 0.04 $ 0.08 Weighted average number of common and common equivalent shares outstanding 11,029,000 9,713,000 11,043,000 9,517,000 See accompanying notes
CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Six Months Ended November 30, November 30, 1993 1992 Net cash provided by operating activities $ 4,710 $ 7,640 Cash flows from investing activities: Recovery of investment in direct finance leases 7,894 10,685 Equipment purchased for leasing (1,847) (7,870) Net receipts from affiliated limited partnerships 1,030 1,289 Proceeds from sales of equipment held for investment 4,768 8,097 Proceeds from sales of lease rentals 2,960 - Net cash provided by investing activities 14,805 12,201 Cash flows from financing activities: Proceeds from discounting of lease rentals 2,479 4,333 Principal payments on discounted lease rentals (12,794) (17,520) Net payments on recourse debt (9,752) (7,871) Net cash used in financing activities (20,067) (21,058) Net decrease in cash (552) (1,217) Cash at beginning of period 3,210 7,026 Cash at end of period $ 2,658 $ 5,809 Supplemental schedule of cash flow information: Recourse interest paid $ 1,003 $ 2,309 Non-recourse interest paid 1,878 3,304 Income taxes paid 181 1,342 Income tax refunds received 1,614 - Supplemental schedule of non-cash investing and financing activities: Discounted lease rentals assigned to lenders arising from equipment sales transactions 28,050 6,679 Assumption of discounted lease rentals in lease acquisitions 15,675 11,846 Residual values and other receivables arising from equipment under lease sold to private investors 1,658 522 Notes receivable relating to equipment sale transactions 5,017 4,522 Obligations under capital leases arising from sale-leaseback transactions 4,966 4,459 See accompanying notes CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. For further information, please refer to the financial statements of Capital Associates, Inc. (the "Company"), and the related notes, included within the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 ("the 1993 Form 10-K"), previously filed with the Securities and Exchange Commission. The consolidated balance sheet as of May 31, 1993 and the consolidated statements of operations for the three and six months ended November 30, 1992 have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes", as discussed further in Note 3 to Notes to Consolidated Interim Financial Statements. Certain reclassifications have been made to prior periods' financial statements to conform to the current period's presentation. 2. Credit Facility The Company's recourse operating credit facility ("Credit Facility") consists of two facilities, a revolving credit facility (the "Revolving Credit Facility") and a term facility (the "Term Loan"). The availability under the Revolving Credit Facility is equal to (1) the lesser of $10.75 million or (2) the Borrowing Base amount, reduced by the outstanding indebtedness under the Revolving Credit Facility. As of November 30, 1993, the Borrowing Base amount was $7.8 million, and the outstanding indebtedness under the Revolving Credit Facility was $89,000, leaving approximately $7.7 million of availability under the Revolving Credit Facility to fund the Company's working capital needs. The outstanding principal balance of the Term Loan as of November 30, 1993 was $28,016,000. Principal reductions under the Term Loan are scheduled to occur as follows (in thousands): Six months ended May 31, 1994 $ 7,426 Twelve months ended May 31, 1995 16,446 Balance remaining at May 31, 1995 (the scheduled termination date of the Credit Facility) 4,144 $ 28,016 At November 30, 1993, CAII had prepaid $400,000 of the scheduled Term Loan payments, representing approximately one-third of one month's scheduled payments. As of the time these financial statements were prepared, there were no Defaults or Events of Default existing under the Credit Facility. CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued) (Unaudited) 2. Credit Facility, (continued) The Revolving Credit Facility bears interest at the Mellon Bank, N.A.'s Prime Rate plus 1%, payable monthly, in arrears. On November 30, 1993, Mellon's Prime Rate was 6.0%. The Term Loan bears interest at a fixed rate of 6.0%, payable monthly, in arrears. 3. Income Taxes Effective June 1, 1993, the Company adopted SFAS 109. SFAS 109 requires the recognition of deferred tax liabilities and assets for the future income tax consequences of events that have been recognized in the Company's financial statements or tax returns. The Company elected to adopt SFAS No. 109 by restating fiscal years 1993 and 1992 financial statements. The effects of the restatement on net income and related per share amounts for the three and six months ended November 30, 1992 are as follows: Three Months Ended Six Months Ended November 30, 1992 November 30, 1992 As previously reported: Net income $ 259,000 $ 527,000 Net income per common share .03 .06 As restated: Net income $ 380,000 $ 766,000 Net income per common share .04 .08 Change in net income due $ 121,000 $ 239,000 to adoption of SFAS 109 Income taxes are provided on net income at the appropriate federal and state statutory rates. The effective overall tax rate for fiscal year 1993 was 40%. The Company files state income tax returns in 50 states. Statutory state income tax rates vary between 0% and 12%. The changing mix of business among states impacts the Company's aggregate effective state income tax rate. The Company estimates that its effective tax rate will remain at 40% for fiscal year 1994. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Results of Operations Presented below are schedules (prepared solely to facilitate the discussion of results of operations that follows) showing condensed income statement categories and analyses of changes in those condensed categories derived from the Consolidated Statements of Operations. Condensed Consolidated Condensed Consolidated Statements of Operations Statements of Operations for the Three Months for the Six Months Ended November 30, Effect on Ended November 30, Effect on 1993 1992 net income 1993 1992 net income (in thousands) Equipment sales margin $ 1,837 $ 3,249 $ (1,412) $ 4,275 $ 6,013 $ (1,738) Leasing margin (net of interest expense on discounted lease rentals) 1,442 2,296 (854) 2,732 4,056 (1,324) Other income 785 790 (5) 2,101 1,689 412 Operating and other expenses (3,167) (3,631) 464 (6,272) (7,051) 779 Provision for losses (145) (1,140) 995 (1,060) (1,500) 440 Interest expense on recourse debt (464) (930) 466 (1,018) (1,930) 912 Income taxes (115) (254) 139 (303) (511) 208 Net income $ 173 $ 380 $ (207) $ 455 $ 766 $ (311)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Results of Operations Equipment Sales Equipment sales revenue (and related equipment sales margin) consists of the following (in thousands): Three Months Ended November 30, Increase 1993 1992 (Decrease) Revenue Margin Revenue Margin Revenue Margin Transactions during initial lease term: Equipment under lease sold to PIFs $21,882 $ 538 $21,463 $ 692 Equipment under lease sold to private investors 7,872 319 5,233 181 29,754 857 26,696 873 $ 3,058 $ (16) Transactions subsequent to initial lease termination: Sales of off-lease equipment 1,127 441 2,741 941 Sales-type leases 232 154 1,414 321 Excess collections (cash collections in excess of the associated residual value arising from equipment under lease sold to private investors) 385 385 1,114 1,114 1,744 980 5,269 2,376 (3,525) (1,396) $31,498 1,837 $31,965 3,249 $ (467) ($1,412) Provision for losses 145 1,140 Equipment realizations in excess of provision for losses $ 1,692 $2,109
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Results of Operations Equipment Sales, continued Six Months Ended November 30, Increase 1993 1992 (Decrease) Revenue Margin Revenue Margin Revenue Margin Transactions during initial lease term: Equipment under lease sold to PIFs $49,525 $ 1,270 $32,216 $ 865 Equipment under lease sold to private investors 20,951 738 5,233 180 70,476 2,008 37,449 1,045 $33,027 $ 963 Transactions subsequent to initial lease termination: Sales of off-lease equipment 2,540 942 6,877 1,767 Sales-type leases 976 533 3,339 976 Excess collections (cash collections in excess of the associated residual value arising from equipment under lease sold to private investors) 792 792 2,225 2,225 4,308 2,267 12,441 4,968 (8,133) (2,701) $74,784 4,275 $49,890 6,013 $24,894 ($1,738) Provision for losses 1,060 1,500 Equipment realizations in excess of provision for losses $ 3,215 $4,513
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Results of Operations Equipment Sales, continued As discussed below, to maintain profitable results of operations, the Company is selling more leased equipment during its initial lease term (shown in the preceding table as an increase in margin of $963,000 for the six months ended November 30, 1993) to offset the decrease in sales margins from transactions subsequent to initial lease termination (shown in preceding table as a decrease in margin of $2,701,000 for the six months ended November 30, 1993). In the ordinary course of business, the Company will (i) sell new lease originations to its PIFs (to the extent the PIFs have funds available for such purpose) or private investors, and (ii) sell seasoned lease transactions (previously originated leases held in the Company's portfolio) to private investors when the profit is desirable or to reduce perceived residual exposure. The Company expects to continue to sell leased equipment during the initial lease term to maintain profitable results of operations during fiscal 1994. To the extent such sales involve seasoned lease transactions, it will increase the effect of portfolio run-off. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Result of Operations, continued Equipment Sales, continued The table below demonstrates that the decline in the Company's lease portfolio during the six months ended November 30, 1993 is attributable primarily to equipment sales: Equipment Sales to:(1) As of Private Sale of Net Portfolio As of May 31, 1993 Investors(2) Lease Rentals(3) PIFs Run-off(1) November 30, 1993 Direct finance leases and operating leases, net $ 91,623 $ (12,546) $ (2,946) $ (4,049) $ (10,471) $ 61,611 Non-recourse debt (54,538) 9,418 2,933 1,362 8,978 (31,847) Net investment in leases $ 37,085 $ (3,128) $ 13 $ (2,687) $ (1,493) $ 29,764 (1) Equipment sales and portfolio run-off amounts above are net of new leases originated during factoringthe six months ended November 30, 1993. (2) In connection with one sale to a private investor, the Company retained its existing interest in the residual value of the equipment of approximately $974,000 and, accordingly, such retained residual values have been recorded in the accompanying balance sheet as residual values and other receivables arising from sales to private investors. (3) The Company recorded a gain of $189,000 on the sale of the underlying lease rentals.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Result of Operations, continued Equipment Sales, continued A significant portion of the Company's net assets consists of aircraft. The following table summarizes the Company's investment in aircraft as of November 30, 1993 and May 31, 1993 (in thousands): November 30, May 31, 1993 1993 Lease equipment, net of $ 18,518 $ 23,836 accumulated depreciation Associated non-recourse debt (8,396) (12,425) 10,122 11,411 Residual values and other receivable arising from equipment under lease sold to private investors 1,008 1,008 Net investment in aircraft $ 11,130 $ 12,419 To reduce the concentration of aircraft in it's portfolio, during the first fiscal quarter 1994 the Company sold three aircraft under lease. The sale of the Company's investment in these three aircraft represented approximately one-half of the total net investment of $3,128,000 sold to private investors during the six months ended November 30, 1993. Approximately $8.3 million (net of non-recourse debt of $7.4 million) of the Company's current $11.1 million of net investment in aircraft is represented by three jet aircraft. Leases on these aircraft expire between December 31, 1993 and December 31, 1994. The existing lessee has signed a commitment to extend the leases on two of the aircraft through December 31, 1996. The existing lessee notified the Company that it would not renew the lease on the third aircraft after its expiration on December 31, 1993. During the first fiscal quarter 1994, a provision for loss of $180,000 was recorded to reduce the carrying value of that aircraft to its expected net sales value. The Company is continuing to remarket the third aircraft through re-lease or sale to other third party users. Due to the long remaining useful life of this type of asset, the Company prefers to renew or re-lease, rather than sell, the assets, in order to maximize their value. However, to reduce the concentration of its investment in this type of equipment, the Company will consider a sale of one or more of the aircraft. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Result of Operations, continued Equipment Sales, continued The Company's investment in the third aircraft discussed above is subject to non-recourse "balloon" debt of approximately $2.3 million which was payable in full upon expiration of the lease and, accordingly, the Company funded such payment using the availability under the Revolving Credit Facility on January 3, 1994. Equipment Sales to PIFs Equipment sales to PIFs increased during both the second fiscal quarter 1994 and the six months ended November 30, 1993, as compared to the similar periods in fiscal 1993, principally because more leases that satisfied the Company's Underwriting Standards were identified, in part as a result of the opening of new sales offices. Under applicable regulatory guidelines, the Company is entitled to receive various fees and distributions in connection with its activities related to its sponsored PIFs. One such fee, an acquisition fee payable upon sale of equipment under lease to a PIF, is, in general, subject to a regulatory maximum amount over the term of a PIF. Acquisition fees earned by the Company from equipment sales to one of its PIFs reached the regulatory maximum during fiscal 1992 and, during first fiscal quarter 1994, the maximum was reached for another PIF. These circumstances will have an impact on reported equipment sales margins in future periods, but are not expected to impact total PIF-related income (after costs of equipment sales) in future periods because other allowable fees and distributions are expected to increase during such periods. Equipment Sales to Private Investors The Company re-opened its private investor sales department during the second fiscal quarter 1993 and has hired two experienced private equity salespersons. The Company sold $7.9 million and $21 million of equipment under lease to private investors during the three and six month periods ended November 30, 1993, respectively. This compares to $5.2 million of sales of equipment to private investors during the three and six month periods ended November 30, 1992. The development of a customer base of private investors is a principal operating goal for the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Result of Operations, continued Remarketing Sales 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, as the size of the Company's lease portfolio declines, fewer leases mature and less equipment is available for remarketing each quarter. As a result, remarketing revenue has declined during the three and six months ended November 30, 1993 compared to similar periods in fiscal 1993. The Company's ability to remarket additional amounts of equipment and realize a greater amount of remarketing revenue in future periods is dependent on adding additional leases to its portfolio. Accordingly, the Company is pursuing financing possibilities to obtain funds to add to its own portfolio, such as lease securitization and other financing possibilities. See the discussion of financing possibilities under "Business Plan" below. Provision for Losses Residual values are established equal to the estimated value to be received from the equipment following termination of the lease. In estimating such values, the Company considers all relevant facts regarding the equipment and the lessee, including, for example, the likelihood that the lessee will re-lease the equipment. The Company performs ongoing quarterly assessments of its assets to identify other than temporary losses in value. At the time the first fiscal quarter 1994 interim financial statements were prepared, the Company identified a greater than expected amount of equipment under lease that the Company had expected to be released, which instead, would be terminated and returned to the Company. The amounts recovered (and expected to be recovered) from the sale of such equipment was less than the previously estimated residual value, and accordingly, an appropriate provision for loss was recorded. Because the first quarter's provision considered known second quarter activity, the Company recorded a correspondingly smaller provision for loss in the second fiscal quarter 1994. Provision for losses result from the realization of less than the carrying value of equipment (which is typically not known until remarketing subsequent to the initial lease termination has occurred). The remarketing of equipment for an amount greater than its book value is reported as equipment sales margin or as leasing margin. As shown on pages 8 and 9 of 19, the "net" realizations from portfolio sales during the second fiscal quarter 1994 exceeded the aggregate carrying value of the assets sold, even without considering realizations from remarketing activities recorded as leasing margin (see discussion below). Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Result of Operations, continued Leasing Margin Leasing margin consists of the following (in thousands): Three Months Ended Six Months Ended November 30, November 30, 1993 1992 1993 1992 Leasing revenue $ 3,609 $ 7,580 $ 7,838 $ 15,138 Leasing costs and expenses (1,288) (3,563) (2,996) (7,569) Net interest expense on associated discounted lease rentals (879) (1,721) (2,110) (3,513) Leasing margin $ 1,442 $ 2,296 $ 2,732 $ 4,056 Leasing margin ratio 40% 30% 35% 27% Leasing margin has declined as a result of portfolio run-off. See the discussion under "Business Plan" below. The leasing margin ratio has increased as a result of remarketing activities, which include the rental proceeds related to renewing, extending or re-leasing equipment before or after the end of the initial lease term. Other Income During the first fiscal quarter 1994, the Company received a $2 million income tax refund, consisting of $1.6 million that was previously recorded as "Income tax refunds receivable", and an additional $.4 million of interest that was recorded in first fiscal quarter 1994 as "Other income". Operating and Other Expenses Operating and other expenses decreased $464,000 (13%) and $779,000 (11%) for the three and six months ended November 30, 1993, as compared to fiscal 1993. The decrease principally reflects a reduction in salaries and wages. As of November 30, 1993, the Company had 119 full-time employees compared to 149 full-time employees at November 30, 1992. As the portfolio has run-off, the Company has decreased the size of its back office staff while adding revenue producing sales personnel. The Company has eleven field sales offices open as of November 30, 1993. Interest Income and Expense Interest income on discounted lease rentals arises when equipment financed with non-recourse debt is sold to investors. The Consolidated Statements of Operations reflect an equal amount of interest expense. The decline in interest income and non-recourse debt interest expense is due to portfolio run-off. The decrease in recourse debt interest expense principally reflects the decline in the outstanding balance of the Working Capital Facility. Income Taxes Effective June 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". See Note 3 to Notes to Consolidated Interim Financial Statements. II. Liquidity and Capital Resources The Company's activities are principally funded by the Revolving Credit Facility, rents, proceeds from sales of on-lease equipment, non-recourse debt, fees and distributions from its PIFs, and sales or re-leases of equipment after the expiration of the initial lease terms. Cash held by the PIFs available for purchase of equipment from the Company is: As of November 30, 1993 1992 Available cash $ 11,238 $ 14,802 Cash committed for equipment purchases 9,122 5,695 Uncommitted cash $ 2,116 $ 9,107 Currently, one PIF, Capital Preferred Yield Fund-II, ("CPYF-II") is actively selling units to the public. Three other PIFs have ceased offering units, however, they generate cash for purchase of equipment from operating activities. The Company anticipates that $19 million of additional cash available for purchase of equipment will be generated by the four PIFs during third fiscal quarter 1994. During the fourth fiscal quarter 1994, CPYF-II will cease offering units for sale to the public. The Company has commenced the process of registering for sale to the public up to $50 million of units in a new PIF, Capital Preferred Yield Fund-III, ("CPYF-III"). The Company anticipates commencing the offering of unit sales in CPYF-III following the termination of the offering for sale to the public of units in CPYF-II. Management believes the Company's ability to generate cash from operations is sufficient to fund operations, particularly when operations are viewed as including investing and financing activities. In this context, it should be noted that the Company reduced its recourse debt by $9.8 million since May 31, 1993 and improved it's recourse debt-to-equity ratio as follows: As of November 30, May 31, 1993 1993 Recourse debt $ 28,105 $ 37,857 Stockholders equity $ 20,756 $ 20,303 Recourse debt/stockholder's equity 1.35 to 1 1.86 to 1 III. Business Plan As discussed in the 1993 Form 10-K, during fiscal year 1991, the Company agreed with its Lenders to begin repaying its Credit Facility. Accordingly, during the last four months of fiscal year 1991, fiscal years 1992 and 1993 and during the six months ended November 30, 1993, the Company used substantially all of its cash flow after payment of operating expenses to pay down its Credit Facility. As a result of making these repayments, the Company did not have the funds necessary to significantly add to its leasing portfolio. Because a leasing portfolio declines in size as it matures, the Company's leasing portfolio and related revenue have declined since 1991. The Revolving Credit Facility provides a limited amount of funds to the Company to invest in new leases. However, this level of funds is not sufficient to maintain the current portfolio and, accordingly, the current level of remarketing profits may not be achievable in the future. Therefore, maintaining the current level of profitability is dependent principally upon equipment sales margins from new lease originations and from seasoned lease transactions (see the discussion on page 9 of 19) or development of new sources of revenue related to the Company's core business. The Company's current business plan is designed to maintain profitable operations. The amount of longer-term future profits, if any, will largely depend on the amount of new capital available to the Company. Such capital may be in a variety of forms including new recourse debt, additional equity (which could include a sale of the Company, possibly coupled with an infusion of new funds into the Company from the purchaser), securitized financing vehicles or equity provided from private purchases of equipment originated by the Company. The Company is actively pursuing financing possibilities. No assurance can be given, however, that the Company will be successful in operating profitably, developing new sources of revenue or in obtaining access to new financing. CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 1. Legal Proceedings There have been no material developments during second fiscal quarter 1994 with respect to the legal proceedings described in the Company's fiscal 1993 Form 10-K. Item 4. Submission of Matters to a Vote of Security Holders The 1993 Annual Meeting of Stockholders of the Company (the "Annual Meeting") was held on October 15, 1993. At the Annual Meeting, James D. Edwards, Richard Kazan, Dennis J. Lacey, William B. Patton, Jr., and Peter F. Schabarum were re-elected as directors of the Company. Item 6. Exhibits and Reports on Form 8-K a. Included as exhibits are the items listed in the Exhibit Index. The Company will furnish to its shareholders a copy of any of the exhibits listed therein upon payment of $.25 per page to cover the costs to the Company of furnishing the exhibits. b. There were no reports on Form 8-K filed during the three months ended November 30, 1993. Item No. Exhibit Index 11A Computation of Primary Earnings Per Share. A computation of fully diluted earnings per share is not presented as it is the same as the computation of primary earnings per share. Exhibit 11A CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER SHARE Three Months Ended Six Months Ended November 30, November 30, November 30, November 30, 1993 1992 1993 1992 Shares outstanding at 9,654,000 9,273,000 9,654,000 8,948,000 beginning of period Shares issued during - - - 162,000 the period (weighted average) Shares earned but not 50,000 - 50,000 - issued under the CEO Bonus Plan Dilutive shares 2,286,000 1,103,000 2,286,000 1,092,000 contingently issuable upon exercise of options (weighted average) Less shares assumed to (961,000) (663,000) (947,000) (685,000) have been purchased for treasury with assumed proceeds from exercise of stock options (weighted average) Total shares, primary 11,029,000 9,713,000 11,043,000 9,517,000 Net income $ 173,000 $ 380,000 $ 455,000 $ 766,000 Net income per share, $ 0.02 $ 0.04 $ 0.04 $ 0.08
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 7, 1994 By: /s/Anthony M. DiPaolo Anthony M. DiPaolo, Vice-President and Controller (Principal Accounting Officer) 19 of 19 -----END PRIVACY-ENHANCED MESSAGE-----