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 June 30, 1997
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 11
Page 1 of 12 Pages
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Quarterly Report on Form 10-Q
for the Quarter Ended
June 30, 1997
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1997 and December 31, 1996 3
Statements of Income - Three and Six months ended
June 30, 1997 and 1996 4
Statements of Cash Flows - Six months ended
June 30, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
2
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
1997 1996
----------- ------------
Cash and cash equivalents $ 1,723,878 $ 1,768,824
Accounts receivable, net 141,786 149,316
Equipment held for sale or re-lease 215,815 448,552
Net investment in direct finance leases 4,259,101 4,978,823
Leased equipment, net 22,712,041 26,171,270
----------- -----------
Total assets $29,052,621 $33,516,785
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities $ 705,760 $ 611,147
Payable to affiliates 25,847 26,033
Rents received in advance 128,188 110,946
Distributions payable to partners 341,384 341,384
Discounted lease rentals 10,073,267 12,397,890
Financed operating lease rentals 2,631,666 3,161,139
----------- -----------
Total liabilities 13,906,112 16,648,539
----------- -----------
PARTNERS' CAPITAL:
General partner - -
Limited partners:
Class A 14,931,286 16,637,978
Class B 215,223 230,268
----------- -----------
Total partners' capital 15,146,509 16,868,246
----------- -----------
Total liabilities and partners' capital $29,052,621 $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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Operating lease rentals $ 2,382,057 $ 2,356,429 $ 4,858,936 $ 4,649,123
Direct finance lease income 104,365 110,167 210,952 218,520
Equipment sales margin 87,544 27,254 94,620 85,916
Interest income 21,165 51,863 39,161 127,824
----------- ----------- ----------- -----------
Total revenue 2,595,131 2,545,713 5,203,669 5,081,383
----------- ----------- ----------- -----------
EXPENSES:
Depreciation and amortization 1,898,596 1,827,361 3,869,628 3,666,019
Interest on discounted lease rentals 195,743 193,147 412,253 377,178
Interest on financed operating lease rentals 29,289 68,997 100,413 156,354
Management fees paid to general partner 53,255 50,191 107,229 181,449
Direct services from general partner 26,461 49,280 54,728 73,439
General and administrative 61,589 84,123 132,851 137,048
Provision for losses 100,000 425,000 200,000 425,000
----------- ----------- ----------- -----------
Total expenses 2,364,933 2,698,099 4,877,102 5,016,487
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 230,198 $ (152,386) $ 326,567 $ 64,896
=========== =========== =========== ===========
NET INCOME (LOSS) ALLOCATED:
To the general partner $ 10,242 $ 10,258 $ 20,484 $ 20,520
To the Class A limited partners 217,729 (161,013) 302,978 43,910
To the Class B limited partner 2,227 (1,631) 3,105 466
----------- ----------- ----------- -----------
$ 230,198 $ (152,386) $ 326,567 $ 64,896
=========== =========== =========== ===========
Net income (loss) per weighted average
Class A limited partner unit outstanding $ 1.62 $ (1.20) $ 2.26 $ .33
=========== =========== =========== ===========
Weighted average Class A
limited partner units outstanding 134,298 134,513 134,298 134,548
=========== =========== =========== ===========
</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>
Six months ended
----------------------------------
June 30, June 30,
1997 1996
----------- ------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,336,015 $ 5,503,990
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases from affiliate of equipment on operating leases (749,703) (2,921,746)
Investment in direct financing leases, acquired from affiliate (22,469) (115,445)
----------- -----------
Net cash used in investing activities (772,172) (3,037,191)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on discounted lease rentals (2,119,709) (1,873,004)
Principal payments on financed operating lease rentals (440,777) (561,139)
Proceeds from financing of operating lease rentals - 4,272,657
Distributions to partners (2,048,303) (2,053,813)
Redemptions of Class A limited partner units - (101,346)
----------- -----------
Net cash used in financing activities (4,608,789) (316,645)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (44,946) 2,150,154
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,768,824 2,092,691
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,723,878 $ 4,242,845
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 412,253 $ 377,178
Interest paid on financed operating lease rentals 154,413 156,354
</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 six months ended June 30, 1997, the Partnership acquired the
equipment described below from Capital Associates International, Inc.
("CAII").
<TABLE>
<CAPTION>
Acquisition Total
Equipment Cost of Fees and Equipment
Lessee Description Equipment 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
E Trade Desktop PC 496,279 16,712 512,991
General Motors FF & E 9,631 385 10,016
Consolidated Diesel Office automation 21,605 864 22,469
-------- -------- --------
$745,498 $ 26,674 $772,172
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Condensed Statements Condensed Statements
of Income for The effect on of Income for The effect on
the three months net income the six months net income
ended June 30, of changes ended June 30, of changes
-------------------------- between -------------------------- between
1997 1996 periods 1997 1996 periods
------------ ------------ ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 362,794 $ 377,091 $ (14,297) $ 687,594 $ 668,092 $ 19,502
Equipment sales margin 87,544 27,254 60,290 94,620 85,916 8,704
Interest income 21,165 51,863 (30,698) 39,161 127,824 (88,663)
Management fees paid to general partner (53,255) (50,191) (3,064) (107,229) (181,449) 74,220
Direct services from general partner (26,461) (49,280) 22,819 (54,728) (73,439) 18,711
General and administrative (61,589) (84,123) 22,534 (132,851) (137,048) 4,197
Provision for losses (100,000) (425,000) 325,000 (200,000) (425,000) 225,000
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 230,198 $(152,386) $ 382,584 $ 326,567 $ 64,896 $ 261,671
========= ========= ========= ========= ========= =========
</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.
LEASING MARGIN
Leasing margin consists of the following:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating lease rentals $ 2,382,057 $ 2,356,429 $ 4,858,936 $ 4,649,123
Direct finance lease income 104,365 110,167 210,952 218,520
Leasing costs and expenses (1,898,596) (1,827,361) (3,869,628) (3,666,019)
Interest expense on discounted lease rentals (195,743) (193,147) (412,253) (377,178)
Interest expense on financed operating
lease rentals (29,289) (68,997) (100,413) (156,354)
----------- ----------- ----------- -----------
Leasing margin $ 362,794 $ 377,091 $ 687,594 $ 668,092
=========== =========== =========== ===========
Leasing margin ratio 15% 15% 14% 14%
=========== =========== =========== ===========
</TABLE>
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
The ultimate rate of return on leases depends, in part, on the general level of
interest rates at the time the leases are originated, as well as future
equipment values and on-going lessee creditworthiness. 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:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Equipment sales revenue $ 379,243 $ 613,968 $ 489,422 $ 988,179
Cost of equipment sales (291,699) (586,714) (394,802) (902,263)
--------- --------- --------- ---------
Equipment sales margin $ 87,544 $ 27,254 $ 94,620 $ 85,916
========= ========= ========= =========
</TABLE>
INTEREST INCOME
Interest income decreased due to a decrease in the amount of cash available for
investment.
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
- ---------------------
EXPENSES
Management fees decreased during the six months ended June 30, 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
decreased primarily due to a reduction in 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 six months ended June 30, 1997
related to the following:
* $100,000 related to lessees returning equipment to the Partnership. The
Partnership had previously expected to realize the carrying value of that
equipment through lease renewals and proceeds from the sale of the
equipment to the original lessee. The fair market value of the equipment
re-leased or sold to a third party is considerably less than was
anticipated.
The provision for losses recorded during the six months ended June 30, 1996
related to the following items:
* $245,000 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.
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
* $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.
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 six months ended June 30, 1997, the Partnership acquired equipment
subject to leases with a total equipment purchase price of $772,172. At June 30,
1997, the general partner had identified $300,000 of additional equipment that
satisfied the Partnership's acquisition criteria. The Partnership expects to
acquire this equipment during the remainder of 1997.
During the six months ended June 30, 1997, the Partnership declared
distributions to the partners of $2,048,303, ($341,384 of which was paid in July
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 partners currently anticipate that the Partnership will generate
cash flow from operations and equipment sales during the remainder of 1997
which, when added to cash and cash equivalents on hand, should provide
sufficient cash to enable the Partnership to meet its current operating
requirements.
The Partnership anticipates that it will fund the remaining 1997 distributions
to the limited partners (a substantial portion of which is expected to
constitute returns of capital for accounting purposes) out of cash from
operations and cash from sales during the remainder of 1997. The Partnership
entered its liquidation period (as defined in the Partnership Agreement) during
June 1997, and distributions during the liquidation period will be based upon
cash availability and will vary and all distributions are expected to be a
return of capital for economic purposes.
10
<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 June 30, 1997.
11
<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: August 8, 1997 By: /s/Anthony M. DiPaolo
---------------------
Anthony M. DiPaolo
Senior Vice President
12
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,723,878
<SECURITIES> 0
<RECEIVABLES> 141,786
<ALLOWANCES> 0
<INVENTORY> 215,815
<CURRENT-ASSETS> 0
<PP&E> 22,712,041
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,052,621
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,146,509
<TOTAL-LIABILITY-AND-EQUITY> 29,052,621
<SALES> 94,620
<TOTAL-REVENUES> 5,203,669
<CGS> 0
<TOTAL-COSTS> 4,877,102
<OTHER-EXPENSES> 161,957
<LOSS-PROVISION> 200,000
<INTEREST-EXPENSE> 512,666
<INCOME-PRETAX> 326,567
<INCOME-TAX> 0
<INCOME-CONTINUING> 326,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 326,567
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.26
</TABLE>
