SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ---------------------
Commission file number 0-21382
---------------------------------------------------
Capital Preferred Yield Fund-II, L.P.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1184628
- ----------------------- ------------------------------------
(State of organization) (I.R.S. Employer Identification No.)
7175 West Jefferson Avenue, Suite 4000
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 .
--- ---
Exhibit Index appears on Page 17
Page 1 of 18 Pages
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Quarterly Report on Form 10-Q
for the Quarter Ended
September 30, 1996
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1996 and December 31, 1995 3
Statements of Income - Three and Nine months ended
September 30, 1996 and 1995 4
Statements of Cash Flows - Nine months ended
September 30, 1996 and 1995 5
Notes to Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
2
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Cash and cash equivalents $ 3,413,662 $ 2,092,691
Accounts receivable, net 234,049 126,773
Receivable from affiliate - 14,100
Equipment held for sale or re-lease 889,486 60,000
Net investment in direct finance leases 5,147,635 5,156,688
Leased equipment, net 25,606,832 24,356,282
----------- -----------
Total assets $35,291,664 $31,806,534
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities $ 302,367 $ 401,889
Payable to affiliates 22,269 25,552
Rents received in advance 106,392 159,484
Distributions payable to partners 341,586 343,712
Discounted lease rentals 13,049,334 10,009,561
Financed operating lease rentals 3,438,111 -
----------- -----------
Total liabilities 17,260,059 10,940,198
----------- -----------
PARTNERS' CAPITAL:
General partner - -
Limited Partners:
Class A 17,790,889 20,601,723
Class B 240,716 264,613
----------- -----------
Total partners' capital 18,031,605 20,866,336
----------- -----------
Total liabilities and partners' capital $35,291,664 $31,806,534
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine months Ended
September 30, September 30,
1996 1995 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Operating lease rentals $2,596,100 $2,880,686 $7,245,223 $9,199,831
Direct finance lease income 119,973 138,527 338,493 445,409
Equipment sales margin 103,519 37,672 189,435 117,536
Interest income 44,542 14,085 172,366 40,175
---------- ---------- ---------- -----------
Total revenue 2,864,134 3,070,970 7,945,517 9,802,951
---------- ---------- ---------- -----------
EXPENSES:
Depreciation and amortization 2,030,847 2,305,507 5,696,866 7,521,269
Interest on discounted lease rentals 260,289 229,759 637,467 765,148
Interest on financed operating lease rentals 64,129 - 220,483 -
Management fees paid to general partner 49,285 64,906 230,734 212,543
Direct services from general partner 16,958 17,617 90,397 62,555
General and administrative 74,443 49,489 211,491 122,687
Provision for losses 75,000 360,000 500,000 510,000
---------- ---------- ---------- -----------
Total expenses 2,570,951 3,027,278 7,587,438 9,194,202
---------- ---------- ---------- -----------
NET INCOME $ 293,183 $ 43,692 $ 358,079 $ 608,749
========== ========== ========== ==========
NET INCOME ALLOCATED:
To the general partner $ 10,254 $ 10,419 $ 30,774 $ 31,100
To the Class A limited partners 280,067 32,928 323,977 571,797
To the Class B limited partner 2,862 345 3,328 5,852
---------- ---------- ---------- ----------
$ 293,183 $ 43,692 $ 358,079 $ 608,749
========== ========== ========== ==========
Net income per weighted average
Class A limited partner unit outstanding $ 2.08 $ .24 $ 2.41 $ 4.23
========== ========== ========== ==========
Weighted average Class A
limited partner units outstanding 134,418 135,010 134,504 135,173
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
------------------------------------
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 9,284,363 $ 10,254,160
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases from affiliate of equipment on operating leases (5,128,171) (2,137,312)
Investment in direct financing leases, acquired from affiliate (115,445) (301,386)
------------- -------------
Net cash used in investing activities (5,243,616) (2,438,698)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on discounted lease rentals (2,974,374) (4,573,877)
Principal payments on financed operating lease rentals (834,547) -
Proceeds from discounting of lease rentals 11,425 273,727
Proceeds from financing of operating lease rentals 4,272,657 -
Distributions to partners (3,079,379) (3,101,318)
Redemptions of Class A limited partner units (115,558) (115,076)
------------- -------------
Net cash used in financing activities (2,719,776) (7,516,544)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,320,971 (298,918)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,092,691 1,063,700
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,413,662 $ 1,362,618
============= =============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 637,467 $ 765,148
Interest paid on financed operating lease rentals 220,483 -
Supplemental disclosure of noncash investing and financing activities:
Discounted lease rentals assumed in equipment
acquisitions 6,002,723 592,862
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited 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 the general partner, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. The balance sheet at
December 31, 1995 has been derived from the audited financial statements
included in the Partnership's 1995 Form 10-K. For further information,
refer to the financial statements of Capital Preferred Yield Fund-II, L.P.
(the "Partnership"), and the related notes, included in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1995, (the "1995
Form 10-K") previously filed with the Securities and Exchange Commission.
2. Equipment Purchases
-------------------
During the nine months ended September 30, 1996, the Partnership purchased
from Capital Associates International, Inc. ("CAII"), an affiliate of the
general partner and the Class B limited partner, the equipment listed
below. The Partnership purchased the equipment at cost to CAII, including
reimbursement of other acquisition costs and acquisition fees, as provided
for in the Partnership Agreement.
<TABLE>
<CAPTION>
Equipment Cost of Acquisition Fees Total Equipment
Lessee Description Equipment and Reimbursements Purchase Price
-------------------- ------------------------------ ------------- ------------------ ----------------
<S> <C> <C> <C>
Stone Container Machine tools $ 334,837 $ 13,393 $ 348,230
General Motors Forklifts 84,207 3,368 87,575
General Motors Forklifts 3,470 139 3,609
Consolidated Diesel Communication equipment 3,240 130 3,370
Atlantic Steel Manufacturing equipment 971,059 38,843 1,009,902
Alliant Techsystems Research equipment 7,878 315 8,193
Consolidated Diesel Peripheral printers 20,260 810 21,070
Cerplex Printed circuit board 51,582 2,063 53,645
Cerplex Printed circuit board 477,330 19,093 496,423
Consolidated Diesel Forklift 22,763 911 23,674
Consolidated Diesel Office automation equipment 11,100 444 11,544
Forum Corporation Desktop personal computers 2,794 112 2,906
Forum Corporation Desktop personal computers 70,487 2,819 73,306
Forum Corporation Desktop personal computers 1,511 60 1,571
Forum Corporation Desktop personal computers 3,705 148 3,853
Forum Corporation Desktop personal computers 29,861 1,194 31,055
Forum Corporation Desktop personal computers 3,028 121 3,149
6
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited), continued
2. Equipment Purchases, continued
-------------------
Equipment Cost of Acquisition Fees Total Equipment
Lessee Description Equipment and Reimbursements Purchase Price
-------------------- ------------------------------ ------------- ------------------ ----------------
Forum Corporation Desktop personal computers $ 101,156 $ 4,046 $ 105,202
Forum Corporation Desktop personal computers 3,761 150 3,911
Forum Corporation Desktop personal computers 12,378 495 12,873
Forum Corporation Desktop personal computers 158,879 6,355 165,234
Forum Corporation Desktop personal computers 35,984 1,439 37,423
Forum Corporation Desktop personal computers 14,892 596 15,488
Forum Corporation Desktop personal computers 26,473 1,059 27,532
Forum Corporation Desktop personal computers 1,640 66 1,706
Forum Corporation Desktop personal computers 1,428 57 1,485
Forum Corporation Desktop personal computers 4,366 175 4,541
Forum Corporation Desktop personal computers 1,428 57 1,485
Forum Corporation Desktop personal computers 4,448 178 4,626
Forum Corporation Desktop personal computers 8,015 321 8,336
Forum Corporation Desktop personal computers 65,174 2,607 67,781
Forum Corporation Desktop personal computers 11,607 464 12,071
Forum Corporation Peripheral-printers 1,536 61 1,597
Forum Corporation Peripheral-printers 1,536 61 1,597
Forum Corporation Portable personal computers 20,592 824 21,416
Forum Corporation Portable personal computers 6,826 273 7,099
Ina Bearing Machine tools 443,265 17,731 460,996
Ina Bearing Machine tools 229,351 9,174 238,525
Kaman Corporation Machine tools 749,265 29,971 779,236
Kaman Corporation Machine tools 66,358 2,654 69,012
Kaman Corporation Machine tools 41,289 1,652 42,941
Kaman Corporation Manufacturing equipment 16,616 665 17,281
Kaman Corporation PBX systems 58,729 2,349 61,078
Robertshaw Controls CPU's - IBM 215,123 8,605 223,728
Robertshaw Controls Desktop personal computers 20,811 832 21,643
Robertshaw Controls Manufacturing equipment 40,801 1,632 42,433
Robertshaw Controls Manufacturing equipment 187,377 7,495 194,872
Robertshaw Controls Manufacturing equipment 24,031 961 24,992
Robertshaw Controls Network equipment 15,087 603 15,690
Robertshaw Controls Network equipment 51,778 2,071 53,849
Robertshaw Controls Printed circuit board 89,030 3,561 92,591
Robertshaw Controls Printed circuit board 828,001 33,120 861,121
Robertshaw Controls Printing equipment 155,844 6,234 162,078
Robertshaw Controls Printing equipment 15,142 606 15,748
Robertshaw Controls Printing equipment 46,693 1,868 48,561
Robertshaw Controls Printing equipment 138,631 5,545 144,176
Robertshaw Controls Printing equipment 24,605 984 25,589
7
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited), continued
2. Equipment Purchases, continued
-------------------
Equipment Cost of Acquisition Fees Total Equipment
Lessee Description Equipment and Reimbursements Purchase Price
-------------------- ------------------------------ ------------- ------------------ ----------------
Robertshaw Controls Printing equipment $ 33,554 $ 1,342 $ 34,896
Stop & Shop Banking equipment 58,531 2,341 60,872
Stop & Shop Desktop personal computers 10,386 415 10,801
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 10,692 428 11,120
Stop & Shop Desktop personal computers 5,874 235 6,109
Stop & Shop Desktop personal computers 8,320 333 8,653
Stop & Shop Desktop personal computers 8,320 333 8,653
Stop & Shop Desktop personal computers 6,371 255 6,626
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 6,371 255 6,626
Stop & Shop Desktop personal computers 8,320 333 8,653
Stop & Shop Desktop personal computers 6,381 255 6,636
Stop & Shop Desktop personal computers 16,997 680 17,677
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
8
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited), continued
2. Equipment Purchases, continued
-------------------
Equipment Cost of Acquisition Fees Total Equipment
Lessee Description Equipment and Reimbursements Purchase Price
-------------------- ------------------------------ ------------- ------------------ ----------------
Stop & Shop Desktop personal computers $ 6,544 $ 262 $ 6,806
Stop & Shop Desktop personal computers 6,544 262 6,806
Stop & Shop Desktop personal computers 3,428 137 3,565
Stop & Shop Grocery furniture and fixtures 18,706 748 19,454
Stop & Shop Grocery furniture and fixtures 33,661 1,346 35,007
Stop & Shop Grocery furniture and fixtures 66,812 2,672 69,484
Stop & Shop Grocery furniture and fixtures 19,191 768 19,959
Stop & Shop Grocery furniture and fixtures 32,691 1,308 33,999
Stop & Shop Grocery furniture and fixtures 29,607 1,184 30,791
Stop & Shop Grocery furniture and fixtures 31,909 1,276 33,185
Stop & Shop Grocery furniture and fixtures 17,985 719 18,704
Stop & Shop Grocery furniture and fixtures 15,430 617 16,047
Stop & Shop Grocery furniture and fixtures 15,430 617 16,047
Stop & Shop Grocery furniture and fixtures 36,466 1,459 37,925
Stop & Shop Grocery furniture and fixtures 25,338 1,014 26,352
Stop & Shop Grocery furniture and fixtures 29,451 1,178 30,629
Stop & Shop Grocery furniture and fixtures 32,869 1,315 34,184
Stop & Shop Grocery furniture and fixtures 25,321 1,013 26,334
Stop & Shop Grocery furniture and fixtures 14,275 571 14,846
Stop & Shop Grocery furniture and fixtures 25,321 1,013 26,334
Stop & Shop Grocery furniture and fixtures 14,625 585 15,210
Stop & Shop Grocery furniture and fixtures 14,710 588 15,298
Stop & Shop Grocery furniture and fixtures 27,347 1,094 28,441
Stop & Shop Grocery furniture and fixtures 24,031 961 24,992
Stop & Shop Grocery furniture and fixtures 26,773 1,071 27,844
Stop & Shop Grocery furniture and fixtures 32,876 1,315 34,191
Stop & Shop Network equipment 10,173 407 10,580
Stop & Shop Network equipment 171,454 6,858 178,312
Stop & Shop Network equipment 10,173 407 10,580
Stop & Shop Network equipment 338,738 13,550 352,288
Stop & Shop Network equipment 10,173 407 10,580
Stop & Shop Network equipment 10,173 407 10,580
Stop & Shop Network equipment 10,173 407 10,580
Stop & Shop Network equipment 10,173 407 10,580
Stop & Shop Network equipment 12,238 490 12,728
Stop & Shop Network equipment 7,918 317 8,235
Sybron Chemical Furniture and fixtures 48,532 1,941 50,473
Sybron Chemical Furniture and fixtures 14,162 566 14,728
Sybron Chemical Furniture and fixtures 14,930 597 15,527
Sybron Chemical Manufacturing equipment 152,837 6,113 158,950
Sybron Chemical Manufacturing equipment 151,453 6,058 157,511
Sybron Chemical Manufacturing equipment 371,437 14,857 386,294
9
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited), continued
2. Equipment Purchases, continued
-------------------
Equipment Cost of Acquisition Fees Total Equipment
Lessee Description Equipment and Reimbursements Purchase Price
-------------------- ------------------------------ ------------- ------------------ ----------------
System One Banking equipment $ 354,510 $ 14,180 $ 368,690
Staples Office automation 222,077 8,883 230,960
Staples Office automation 18,588 744 19,332
Staples Office automation 35,951 1,438 37,389
Staples Office automation 88,759 3,550 92,309
Staples Office automation 51,525 2,061 53,586
Staples Office automation 82,059 3,282 85,341
Staples Office automation 171,105 6,845 177,950
Staples Office automation 105,674 4,227 109,901
Staples Office automation 43,566 1,743 45,309
Staples Office automation 123,235 4,929 128,164
Staples Office automation 103,625 4,145 107,770
Staples Office automation 98,298 3,932 102,230
Lever Brothers Printing equipment 9,577 383 9,960
Consolidated Diesel Forklifts 296,707 11,868 308,575
Westchester County Medical equipment 80,050 3,202 83,252
Mascotech Forklifts 39,105 1,564 40,669
General Motors Forklifts 119,382 4,775 124,157
System One Network equipment 432,280 17,291 449,571
------------ --------- ------------
$ 10,813,788 $ 432,551 $ 11,246,339
============ ========= ============
</TABLE>
At September 30, 1996, the general partner had identified approximately
$1,750,000 of additional equipment that satisfied the Partnership's
acquisition criteria. The Partnership expects to acquire this equipment
during the remainder of 1996.
3. Non-recourse Financing of Operating Lease Rentals
-------------------------------------------------
The Partnership may assign substantially all of its rights under certain
operating leases to a purchaser and subsequently the purchaser may assign
the rentals from such leases to a financial institution at fixed interest
rates on a non-recourse basis. The Partnership receives the discounted
value of the rentals in cash from the financial institution. As with
discounted lease rentals, in the event of default by a lessee, the
financial institution has a first lien on the underlying leased equipment,
with no further recourse against the Partnership or the Partnership's
assets. The purchaser cannot be the owner of the equipment for financial
reporting purposes because the purchaser has not made a sufficient
investment in the equipment and does not have significant risks of
ownership. Therefore, the transaction cannot be recorded as a sale.
Accordingly, cash proceeds from financings related to such transactions
are recorded on the balance sheet as financed operating lease rentals. As
lessees make payments to financial institutions, leasing revenue and
interest expense are recorded.
10
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited), continued
4. Equipment Held for Sale or Re-lease
-----------------------------------
Equipment held for sale or re-lease, recorded at the lower of cost or
market value expected to be realized, consists of equipment previously
leased to end users which has been returned to the Partnership following
lease expiration.
5. Bankrupt Lessees
----------------
Barney's Inc., one of the Partnership's lessees, filed for protection
under Chapter 11 of the bankruptcy code on January 10, 1996. The
Partnership is a member of an unofficial committee of equipment lessors
which negotiated an interim agreement with the debtor pursuant to which
the debtor made four partial payments of postpetition rent of
approximately 38% of the amount due under the lease and agreed to enter
into further negotiations to extend the interim agreements. The committee
then entered into negotiations with an investor interested in purchasing
all of the lessors' claims which would include taking title to the
equipment and accepting an assignment of all rights as lessor under each
lease. In July 1996, negotiations were finalized and the Partnership
received a payment of $872,700, representing $0.735 on the dollar for the
Partnership's claim against Barney's. Based on this recovery a provision
for losses of $245,000 was recorded for the period ended June 30, 1996.
Norcross Footwear, one of the Partnership's lessees, filed for protection
under Chapter 11 of the bankruptcy code on February 9, 1996. During second
quarter 1996, the lessee rejected the lease and the equipment was sold or
returned to the Partnership. The fair market value of the equipment
re-leased or sold to a third party was considerably less than anticipated.
Based on this information, a provision for losses of $180,000 was recorded
for the period ended June 30, 1996.
Anchor Glass filed for protection under Chapter 11 of the bankruptcy code
on September 13, 1996. The aggregate net book value under three leases
with this lessee was $218,999 at September 30, 1996. Potential outcomes
are (i) the lessee affirms its leases and the Partnership collects all
rents due under the leases or (ii) the lessee rejects the leases and
returns the underlying equipment to the Partnership. If the leases are
rejected and the equipment is returned to the Partnership or sold to a
third party, it is possible that remarketing proceeds will be less than
the net book value of the equipment. However, if the lessee affirms the
leases, the Partnership would not be subject to a loss. The lessee has not
made its intentions known at this time and, accordingly, the amount of
loss, if any, cannot be determined as of September 30, 1996. Regardless of
the lessee's decision to accept or reject the leases, the general partner
believes that the ultimate outcome will not have a material adverse impact
on the Partnership's financial position or results of operations.
11
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Presented below are schedules (prepared solely to facilitate the discussion of
results of operations that follows) showing condensed statements of income
categories and analyses of changes in those condensed categories derived from
the Statements of Income:
<TABLE>
<CAPTION>
Condensed Statements of Condensed Statements of
Income for the three months The effect on Income for the nine months The effect on
ended September 30, net income of ended September 30, net income of
---------------------------- changes between ---------------------------- changes between
1996 1995 periods 1996 1995 periods
------------ ------------- ---------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 360,808 $ 483,947 $ (123,139) $ 1,028,900 $ 1,358,823 $ (329,923)
Equipment sales margin 103,519 37,672 65,847 189,435 117,536 71,899
Interest income 44,542 14,085 30,457 172,366 40,175 132,191
Management fees paid to
general partner (49,285) (64,906) 15,621 (230,734) (212,543) (18,191)
Direct services from general
partner (16,958) (17,617) 659 (90,397) (62,555) (27,842)
General and administrative (74,443) (49,489) (24,954) (211,491) (122,687) (88,804)
Provision for losses (75,000) (360,000) 285,000 (500,000) (510,000) 10,000
---------- ---------- ----------- ----------- ----------- ----------
Net income $ 293,183 $ 43,692 $ 249,491 $ 358,079 $ 608,749 $ (250,670)
========== ========== =========== =========== =========== ==========
</TABLE>
The Partnership is in the latter stages of its reinvestment period (scheduled to
end in June 1997, as defined in the Partnership Agreement). As the reinvestment
period progresses, purchases of equipment under lease are decreasing, initial
leases are expiring and the amount of equipment being remarketed (i.e.,
re-leased, renewed, or sold) is increasing. Because a leasing portfolio declines
in size as it matures, these circumstances have resulted in a decline in the
Partnership's leasing portfolio (referred to in further discussions as
"portfolio run-off").
LEASING MARGIN
Leasing margin consists of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating lease rentals $ 2,596,100 $ 2,880,686 $ 7,245,223 $ 9,199,831
Direct finance lease income 119,973 138,527 338,493 445,409
Leasing costs and expenses (2,030,847) (2,305,507) (5,696,866) (7,521,269)
Interest expense on discounted lease rentals (260,289) (229,759) (637,467) (765,148)
Interest expense on financed operating lease rentals (64,129) - (220,483) -
----------- ----------- ----------- -----------
Leasing margin $ 360,808 $ 483,947 $ 1,028,900 $ 1,358,823
=========== =========== =========== ===========
Leasing margin ratio 13% 16% 14% 14%
=========== =========== =========== ===========
</TABLE>
12
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations, continued
- ---------------------
All components of leasing margin, except interest expense, decreased for the
three and nine months ended September 30, 1996 compared to the corresponding
periods in 1995 due to portfolio runoff. Interest expense increased due to the
increase in non-recourse financing.
The ultimate rate of return on leases depends, in part, on the general level of
interest rates at the time the leases are originated. Because leasing is an
alternative to financing equipment purchases with debt, lease rates tend to rise
and fall with interest rates (although lease rate movements generally lag
interest rate changes in the capital markets). Interest rates have fluctuated
over the past several years as follows: (i) rates decreased from 1990 until the
early part of 1994, (ii) rates then increased through the early part of 1995 and
(iii) rates have decreased to the present time. It is unclear whether interest
rates will continue to decrease, and what effect, if any, such interest rate
decreases will have on lease rates.
EQUIPMENT SALES MARGIN
Equipment sales margin consists of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Equipment sales revenue $ 1,474,128 $ 376,434 $ 2,462,307 $ 777,518
Cost of equipment sales (1,370,609) (338,762) (2,272,872) (659,982)
----------- ----------- ----------- -----------
Equipment sales margin $ 103,519 $ 37,672 $ 189,435 $ 117,536
=========== =========== =========== ===========
</TABLE>
INTEREST INCOME
Interest income increased due to an increase in invested cash pending the
purchase of additional equipment by the Partnership.
EXPENSES
Management fees decreased during the three months ended September 30, 1996,
compared to the corresponding period in 1995 primarily due to portfolio runoff.
13
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations, continued
- ---------------------
EXPENSES, continued
Management fees increased during the nine months ended September 30, 1996,
compared to the corresponding period in 1995, due to the financing of operating
lease rentals that occurred during first quarter of 1996. Under generally
accepted accounting principles the transaction was accounted for as a financing.
However, per the Partnership Agreement, proceeds received from the transaction
were defined as prepaid rents and, accordingly, management fees of $85,453 were
paid on the prepaid rents.
General and administrative expenses increased primarily due to higher legal
costs associated with bankrupt lessee litigation and increased storage costs for
warehoused inventory.
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 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.
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
Partnership 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 Partnership'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 Partnership
performs ongoing quarterly assessments of its assets to identify
other-than-temporary losses in value.
The provision for losses recorded during the nine months ended September 30,
1996 related to the following three items:
* $245,000 to record the Partnership's loss exposure related to Barney's,
Inc., a lessee that filed for Chapter 11 bankruptcy protection on January
10, 1996. In July 1996, negotiations were finalized and a settlement was
received for the Partnership's claim. See Note 5 to Notes to Financial
Statements for further discussion of this matter.
* $180,000 related to Norcross Footwear, a lessee that filed for Chapter 11
bankruptcy protection on February 9, 1996. The lease was rejected during
second quarter 1996 and the equipment has been sold or returned to the
Partnership. The fair market value of the equipment re-leased or sold to a
third party was considerably less than anticipated. See Note 5 to Notes to
Financial Statements for further discussion of this matter.
14
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations, continued
- ---------------------
PROVISION FOR LOSSES, continued
* $75,000 related to a lessee returning an MRI system to the Partnership. The
Partnership 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 returned or sold
to a third party is considerably less than was anticipated.
The provision for losses recorded during the nine months ended September 30,
1995 was related to certain lessees returning modular buildings and computers to
the Partnership. The Partnership had previously expected to realized the
carrying value of that equipment through lease renewals and proceeds from sale
of the equipment to the original lessees. The fair market value of the equipment
re-leased or sold to a third party was considerably less than was anticipated.
Liquidity and Capital Resources
- -------------------------------
The Partnership funds its operating activities principally with cash from rents,
non-recourse debt, interest income, and sales of off-lease equipment. Available
cash and cash reserves of the Partnership are invested in interest bearing
accounts and short-term U.S. Government securities pending additional equipment
acquisitions and distributions to the partners.
During the nine months ended September 30, 1996, the Partnership purchased
equipment under lease having a total purchase price of $11,246,339 (including
$6,002,723 of discounted lease rentals). All such equipment was purchased from
Capital Associates International, Inc. ("CAII"), the Class B limited partner and
an affiliate of the general partner. At September 30, 1996, the general partner
had identified approximately $1,750,000 of additional equipment that satisfied
the Partnership's acquisition criteria. The Partnership expects to acquire this
equipment during the remainder of 1996.
During December 1995, the Partnership assigned certain of its rights to a group
of its operating leases to an unaffiliated third-party (the "Purchaser"). Rights
assigned included rental payments due under the initial leases as well as
anticipated rental payments from renewals or re-leases of the equipment. Rights
retained primarily included a formula-based portion of any proceeds from sales
of equipment. Also, during December 1995, the Purchaser assigned the rentals to
a financial institution in January 1996 and the financial institution paid the
discounted value of the rentals to the Partnership. The underlying leases were
originally purchased by the Partnership for $5,293,522 (including acquisition
fees) and had a net book value of $3,768,228 at December 31, 1995. Financing
received by the Partnership during January 1996 totaled $4,272,658. As with
non-recourse debt financing of lease rentals, this transaction was also
collateralized by the leased equipment and related rentals, and in the event of
a lessee default the Partnership has no recourse liability for repayment of the
related obligation.
15
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources, continued
- -------------------------------
During the nine months ended September 30, 1996, the Partnership declared
distributions to the partners of $3,077,253, ($341,586 of which was paid in July
1996). A substantial portion of such distributions constituted a return of
capital. Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or both. The portion of
each cash distribution by a Partnership which exceeds its net income for the
fiscal period may be deemed a return of capital for accounting purposes.
However, the total return on capital over a leasing partnership's life can only
be determined after all residual cash flows (which include proceeds from the
re-leasing and sale of equipment after initial lease terms expire) have been
realized at the termination of the Partnership.
The general partner believes that the Partnership will generate sufficient cash
flow from operations during the remainder of 1996 to (1) meet current operating
requirements, (2) enable it to fund cash distributions to the Class A and Class
B limited partners at annualized rates of 12% and 11% (substantial portions of
which are expected to constitute returns of capital), respectively, on their
capital contributions and (3) reinvest in additional equipment under leases,
provided that suitable equipment can be identified and acquired.
16
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is involved in routine legal proceedings
incidental to the conduct of its business. The general partner
believes none of these legal proceedings will have a material
adverse effect on the financial condition or operations of the
Partnership.
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) The Partnership did not file any reports on Form 8-K during
the quarter ended September 30, 1996.
17
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL PREFERRED YIELD FUND-II, L.P.
By: CAI Equipment Leasing III Corp.
Dated: October 30, 1996 By: /s/John E. Christensen
----------------------
John E. Christensen
Senior Vice President,
Chief Administrative Officer and Director
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheets and statements of income and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,413,662
<SECURITIES> 0
<RECEIVABLES> 234,049
<ALLOWANCES> 0
<INVENTORY> 889,486
<CURRENT-ASSETS> 0
<PP&E> 25,606,832
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,291,664
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,031,605
<TOTAL-LIABILITY-AND-EQUITY> 35,291,664
<SALES> 189,435
<TOTAL-REVENUES> 7,945,517
<CGS> 0
<TOTAL-COSTS> 7,587,438
<OTHER-EXPENSES> 321,131
<LOSS-PROVISION> 500,000
<INTEREST-EXPENSE> 857,950
<INCOME-PRETAX> 358,079
<INCOME-TAX> 0
<INCOME-CONTINUING> 358,079
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358,079
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.41
</TABLE>
