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 March 31, 1997
-------------------------------------------------
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 12
Page 1 of 13 Pages
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Quarterly Report on Form 10-Q
for the Quarter Ended
March 31, 1997
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1997 and December 31, 1996 3
Statements of Income - Three months ended
March 31, 1997 and 1996 4
Statements of Cash Flows - Three months ended
March 31, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
2
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
1997 1996
----------- -----------
Cash and cash equivalents $ 1,525,951 $ 1,768,824
Accounts receivable, net 155,410 149,316
Equipment held for sale or re-lease 398,614 448,552
Net investment in direct finance leases 4,484,981 4,978,823
Leased equipment, net 24,356,991 26,171,270
----------- -----------
Total assets $30,921,947 $33,516,785
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 388,691 $ 611,147
Payable to affiliates 36,203 26,033
Rents received in advance 154,765 110,946
Distributions payable to partners 341,384 341,384
Discounted lease rentals 11,141,493 12,397,890
Financed operating lease rentals 2,918,948 3,161,139
----------- -----------
Total liabilities 14,981,484 16,648,539
----------- -----------
Partners' capital:
General partner - -
Limited partners:
Class A 15,718,392 16,637,978
Class B 222,071 230,268
----------- -----------
Total partners' capital 15,940,463 16,868,246
----------- -----------
Total liabilities and partners' capital $30,921,947 $33,516,785
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
Revenue:
Operating lease rentals $2,476,879 $2,292,694
Direct finance lease income 106,587 108,353
Equipment sales margin 7,076 58,662
Interest income 17,996 75,961
---------- ----------
Total revenue 2,608,538 2,535,670
---------- ----------
Expenses:
Depreciation and amortization 1,971,032 1,838,658
Interest on discounted lease rentals 216,510 184,031
Interest on financed operating lease rentals 71,124 87,357
Management fees paid to general partner 53,974 131,258
Direct services from general partner 28,267 24,159
General and administrative 71,262 52,925
Provision for losses 100,000 -
---------- ----------
Total expenses 2,512,169 2,318,388
---------- ----------
Net income $ 96,369 $ 217,282
========== ==========
Net income allocated:
To the general partner $ 10,242 $ 10,262
To the Class A limited partners 85,249 204,923
To the Class B limited partner 878 2,097
---------- ----------
$ 96,369 $ 217,282
========== ==========
Net income per weighted average
Class A limited partner unit outstanding $ 0.63 $ 1.52
========== ==========
Weighted average Class A
limited partner units outstanding 134,298 134,582
========== ==========
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>
Three Months Ended
March 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 2,324,118 $ 2,498,805
----------- -----------
Cash flows from investing activities:
Purchases from affiliate of equipment on operating leases (226,696) (1,452,685)
Investment in direct financing leases, acquired from affiliate (22,469) (29,264)
----------- -----------
Net cash used in investing activities (249,165) (1,481,949)
----------- -----------
Cash flows from financing activities:
Principal payments on discounted lease rentals (1,051,483) (950,138)
Principal payments on financed operating lease rentals (242,191) (292,601)
Proceeds from financing of operating lease rentals - 4,272,658
Distributions to partners (1,024,152) (1,027,914)
Redemptions of Class A limited partner units - (95,156)
----------- -----------
Net cash provided by (used in) financing activities (2,317,826) 1,906,849
----------- -----------
Net increase (decrease) in cash and cash equivalents (242,873) 2,923,705
Cash and cash equivalents at beginning of period 1,768,824 2,092,691
----------- -----------
Cash and cash equivalents at end of period $ 1,525,951 $ 5,016,396
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 216,510 $ 184,031
Interest paid on financed operating lease rentals 71,124 87,357
</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), continued
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, 1996 has been derived from the audited financial statements
included in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1996, (the "1996 Form 10-K") previously filed with the
Securities and Exchange Commission.
2. Equipment Purchases
-------------------
During the three months ended March 31, 1997, the Partnership acquired the
equipment described below from Capital Associates International, Inc.
("CAII").
<TABLE>
<CAPTION>
Equipment Cost of Acquisition Fees Total Equipment
Lessee Description Equipment and Reimbursements Purchase Price
------------------- ------------------ --------- ------------------ ---------------
<S> <C> <C> <C> <C>
System One Network equipment $ 126,250 $ 5,050 $ 131,300
Consolidated Diesel Furniture 23,035 921 23,956
Owens Corning Desktop PC 163 0 163
General Motors Transport - Trucks 20,947 838 21,785
General Motors FF & E 32,425 1,297 33,722
General Motors FF & E 15,163 607 15,770
Consolidated Diesel Office Automation 21,605 864 22,469
--------- ------- ---------
Total $ 239,588 $ 9,576 $ 249,165
========= ======= =========
</TABLE>
At March 31, 1997, the general partner had identified $1.2 million of
additional equipment that satisfied the Partnership's acquisition
criteria. The Partnership expects to acquire this equipment during the
remainder of 1997.
6
<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:
Condensed
Statements of Income
for the three months The effect on
ended March 31, net income of
----------------------- changes between
1997 1996 periods
---------- ---------- ---------------
Leasing margin $ 324,800 $ 291,001 $ 33,799
Equipment sales margin 7,076 58,662 (51,586)
Interest income 17,996 75,961 (57,965)
Management fees paid to general partner (53,974) (131,258) 77,284
Direct services from general partner (28,267) (24,159) (4,108)
General and administrative expenses (71,262) (52,925) (18,337)
Provision for losses (100,000) - (100,000)
--------- ---------- ----------
Net income $ 96,369 $ 217,282 $ (120,913)
========= ========== ==========
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.
LEASING MARGIN
Leasing margin consists of the following:
Three months ended
March 31,
-------------------------
1997 1996
----------- -----------
Operating lease rentals $ 2,476,879 $ 2,292,694
Direct finance lease income 106,587 108,353
Leasing costs and expenses (1,971,032) (1,838,658)
Interest expense on discounted lease rentals (216,510) (184,031)
Interest expense on financed operating lease rentals (71,124) (87,357)
----------- -----------
Leasing margin $ 324,800 $ 291,001
=========== ===========
Leasing margin ratio 13% 12%
== ==
7
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Results of Operations, continued
- ---------------------
LEASING MARGIN, continued
Leasing margin ratio increased and is expected to increase further primarily
because a portion of the Partnership's portfolio consists of operating leases
financed with non-recourse debt. Leasing margin and the related leasing margin
ratio for an operating lease financed with non-recourse debt increases during
the term of the lease since rents and depreciation are typically fixed while
interest expense declines as the related non-recourse debt is repaid.
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. Annual average 5-year U.S.
Treasury yields for the past seven years were as follows:
Annual average 5-year U.S. Treasury Yield
Year Yield
---- -----
1990 8.37
1991 7.37
1992 6.19
1993 5.14
1994 6.69
1995 6.53
1996 6.18
EQUIPMENT SALES MARGIN
Equipment sales margin consists of the following:
Three months ended
March 31,
-------------------------
1997 1996
--------- ----------
Equipment sales revenue $ 110,179 $ 374,211
Cost of equipment sales (103,103) (315,549)
--------- ---------
Equipment sales margin $ 7,076 $ 58,662
========= =========
8
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Results of Operations, continued
- ---------------------
INTEREST INCOME
Interest income varies due to (i) the amount of cash available for investment
(pending distribution or equipment purchases) and (ii) the interest rate on such
invested cash.
EXPENSES
Management fees decreased during the three months ended March 31, 1997, compared
to the corresponding period in 1996, 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. Per the
Partnership Agreement, proceeds received from the transaction are defined as
prepaid rents and, accordingly, management fees of $85,453 were paid on the
prepaid rents.
General and administrative expenses and direct services from the general partner
increased primarily due to costs associated with warehousing and selling
equipment returned to the Partnership.
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 three months ended March 31, 1997
related to the following two items:
* $80,000 for a deficiency related to a lease with Ernst Home Center, a
lessee that filed for Chapter 11 bankruptcy protection on July 12, 1996.
The lease was funded with non-recourse debt and the lending institution
repossessed and liquidated the equipment during March 1997 resulting in a
deficiency to the Partnership. Accordingly, the Partnership recorded the
provision for losses during the first quarter of 1997.
9
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Results of Operations, continued
- ---------------------
PROVISION FOR LOSSES, continued
* $20,000 related to equipment which has been returned to the Partnership.
The Partnership had previously expected to realize the carrying value of
this equipment through lease renewals and proceeds from the sale of the
equipment to the original lessees. The fair market value of the equipment
re-leased or sold to a third party was less than anticipated.
No provision for losses were recorded for the three months ended March 31, 1996
because no other-than- temporary losses in the value of equipment were
identified the quarterly assessments of the Partnership's assets.
Liquidity and Capital Resources
- -------------------------------
The Partnership funds its operating activities principally with cash from rents,
discounted lease rentals (non-recourse debt), interest income, and sales of
off-lease equipment. Available cash and cash reserves of the Partnership are
invested in short-term government securities pending the acquisition of
equipment or distributions to the partners.
During the three months ended March 31, 1997, the Partnership acquired equipment
subject to leases with a total equipment purchase price of $249,165. At March
31, 1997, the general partner had identified $1.2 million of additional
equipment that satisfied the Partnership's acquisition criteria. The Partnership
expects to acquire this equipment during the remainder of 1997.
During the three months ended March 31, 1997, the Partnership declared
distributions to the partners of $1,024,152, ($341,384 of which was paid in
April 1997). 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 percentage of a partnership's return on capital over its life
will 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 the Partnership's reinvestment
period (as defined in the Partnership Agreement) during 1997 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.
10
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Liquidity and Capital Resources, continued
- -------------------------------
The Partnership will enter its liquidation period (as defined in the Partnership
Agreement) in June 1997. During the liquidation period, available cash will be
distributed per items (2) and (3) described in the preceding paragraph. However,
reinvestment will cease and the excess cash, if any, will be distributed to the
partners in accordance with the Partnership Agreement. Therefore, it is
anticipated that during the liquidation period, cash distributions to the Class
A limited partners will be based upon cash availability and will vary and all
distributions are expected to be a return of capital for economic purposes.
11
<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 March 31, 1997.
12
<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: May 5, 1997 By: /s/Anthony M. DiPaolo
---------------------
Anthony M. DiPaolo
Senior Vice President
13
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,525,951
<SECURITIES> 0
<RECEIVABLES> 155,410
<ALLOWANCES> 0
<INVENTORY> 398,614
<CURRENT-ASSETS> 0
<PP&E> 24,356,991
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,921,947
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,940,463
<TOTAL-LIABILITY-AND-EQUITY> 30,921,947
<SALES> 7,076
<TOTAL-REVENUES> 2,608,538
<CGS> 0
<TOTAL-COSTS> 2,512,169
<OTHER-EXPENSES> 82,241
<LOSS-PROVISION> 100,000
<INTEREST-EXPENSE> 287,634
<INCOME-PRETAX> 96,369
<INCOME-TAX> 0
<INCOME-CONTINUING> 96,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,369
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.63
</TABLE>
