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, 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
September 30, 1997
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1997 and December 31, 1996 3
Statements of Income - Three and Nine months ended
September 30, 1997 and 1996 4
Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
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
September 30, December 31,
1997 1996
------------ -----------
Cash and cash equivalents $ 1,531,717 $ 1,768,824
Accounts receivable, net 396,465 149,316
Equipment held for sale or re-lease 534,921 448,552
Net investment in direct finance leases 4,018,368 4,978,823
Leased equipment, net 20,750,579 26,171,270
----------- -----------
Total assets $27,232,050 $33,516,785
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 851,710 $ 611,147
Payable to affiliates 21,508 26,033
Rents received in advance 108,642 110,946
Distributions payable to partners 508,106 341,384
Discounted lease rentals 9,093,120 12,397,890
Financed operating lease rentals 2,445,971 3,161,139
----------- -----------
Total liabilities 13,029,057 16,648,539
----------- -----------
Partners' capital:
General partner - -
Limited partners:
Class A 13,991,999 16,637,978
Class B 210,994 230,268
----------- -----------
Total partners' capital 14,202,993 16,868,246
----------- -----------
Total liabilities and partners' capital $27,232,050 $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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUE:
Operating lease rentals $ 2,324,022 $ 2,596,100 $ 7,182,958 $ 7,245,223
Direct finance lease income 98,048 119,973 309,000 338,493
Equipment sales margin 118,458 103,519 213,078 189,435
Interest income 19,443 44,542 58,604 172,366
----------- ----------- ----------- -----------
Total revenue 2,559,971 2,864,134 7,763,640 7,945,517
----------- ----------- ----------- -----------
EXPENSES:
Depreciation and amortization 1,704,436 2,030,847 5,574,064 5,696,866
Interest on discounted lease rentals 176,326 260,289 588,579 637,467
Interest on financed operating lease rentals 42,262 64,129 142,675 220,483
Management fees paid to general partner 48,464 49,285 155,693 230,734
Direct services from general partner 24,022 16,958 78,750 90,397
General and administrative 45,997 74,443 178,848 211,491
Provision for losses 25,000 75,000 225,000 500,000
----------- ----------- ----------- -----------
Total expenses 2,066,507 2,570,951 6,943,609 7,587,438
----------- ----------- ----------- -----------
NET INCOME $ 493,464 $ 293,183 $ 820,031 $ 358,079
=========== =========== =========== ===========
NET INCOME ALLOCATED:
To the general partner $ 14,233 $ 10,254 $ 34,717 $ 30,774
To the Class A limited partners 474,386 280,067 777,364 323,977
To the Class B limited partner 4,845 2,862 7,950 3,328
----------- ----------- ----------- -----------
$ 493,464 $ 293,183 $ 820,031 $ 358,079
=========== =========== =========== ===========
Net income per weighted average
Class A limited partner unit outstanding $ 3.54 $ 2.08 $ 5.79 $ 2.41
========== =========== =========== ===========
Weighted average Class A
limited partner units outstanding 134,178 134,418 134,258 134,504
========== =========== =========== ===========
</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,
1997 1996
----------- -------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 8,186,146 $ 9,284,363
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases from affiliate of equipment on operating leases (1,062,284) (5,128,171)
Investment in direct financing leases, acquired from affiliate (22,469) (115,445)
----------- -----------
Net cash used in investing activities (1,084,753) (5,243,616)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on discounted lease rentals (3,304,770) (2,974,374)
Principal payments on financed operating lease rentals (715,168) (834,547)
Proceeds from discounting of lease rentals - 11,425
Proceeds from financing of operating lease rentals - 4,272,657
Distributions to partners (3,304,889) (3,079,379)
Redemptions of Class A limited partner units (13,673) (115,558)
----------- -----------
Net cash used in financing activities (7,338,500) (2,719,776)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (237,107) 1,320,971
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,768,824 2,092,691
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,531,717 $ 3,413,662
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 588,579 $ 637,467
Interest paid on financed operating lease rentals 142,675 220,483
Supplemental disclosure of noncash investing and financing activities:
Discounted lease rentals assumed in equipment acquisitions - 6,002,723
</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 nine months ended September 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>
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 Corp. Transport - trucks 20,947 838 21,785
General Motors Corp. FF & E 32,425 1,297 33,722
General Motors Corp. FF & E 15,163 607 15,770
E Trade Desktop PC 496,279 16,712 512,991
General Motors Corp. FF & E 9,631 385 10,016
Consolidated Diesel Office automation 21,605 864 22,469
Texas Instruments Manufacturing-semiconductor 300,558 12,023 312,581
----------- -------- -----------
$ 1,046,056 $ 38,697 $ 1,084,753
=========== ======== ===========
</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 nine months net income
ended September 30, of changes ended September 30, of changes
------------------------- between ------------------------- between
1997 1996 periods 1997 1996 periods
---------- ----------- ------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 499,046 $ 360,808 $ 138,238 $ 1,186,640 $ 1,028,900 $ 157,740
Equipment sales margin 118,458 103,519 14,939 213,078 189,435 23,643
Interest income 19,443 44,542 (25,099) 58,604 172,366 (113,762)
Management fees paid to
general partner (48,464) (49,285) 821 (155,693) (230,734) 75,041
Direct services from
general partner (24,022) (16,958) (7,064) (78,750) (90,397) 11,647
General and administrative (45,997) (74,443) 28,446 (178,848) (211,491) 32,643
Provision for losses (25,000) (75,000) 50,000 (225,000) (500,000) 275,000
--------- ---------- --------- ----------- ----------- -----------
Net income (loss) $ 493,464 $ 293,183 $ 200,281 $ 820,031 $ 358,079 $ 461,952
========= ========== ========= =========== =========== ===========
</TABLE>
The Partnership entered its liquidation period (as set forth in the Partnership
Agreement) in July 1997. As the liquidation period continues, purchases of
equipment under lease will cease (other than for prior commitments and equipment
upgrades), initial leases will expire and the amount of equipment being
remarketed (i.e., re-leased, renewed or sold) will increase. 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,
---------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating lease rentals $ 2,324,022 $ 2,596,100 $ 7,182,958 $ 7,245,223
Direct finance lease income 98,048 119,973 309,000 338,493
Leasing costs and expenses (1,704,436) (2,030,847) (5,574,064) (5,696,866)
Interest expense on discounted lease rentals (176,326) (260,289) (588,579) (637,467)
Interest expense on financed operating
lease rentals (42,262) (64,129) (142,675) (220,483)
------------ ------------ ----------- ------------
Leasing margin $ 499,046 $ 360,808 $ 1,186,640 $ 1,028,900
============ ============ ============ ============
Leasing margin ratio 21% 13% 16% 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 components of leasing margin have declined and are expected to decline
further due to portfolio run-off. Leasing margin ratio increased primarily
because a portion of the Partnership's portfolio consists of operating leases
financed with non-recourse debt (including discounted lease rentals and financed
operating lease rentals). 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, 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:
Three months ended Nine months ended
September 30, September 30,
-------------------------- -------------------------
1997 1996 1997 1996
----------- ------------ ---------- ------------
Equipment sales revenue $ 407,449 $ 1,474,128 $ 896,871 $ 2,462,307
Cost of equipment sales (288,991) (1,370,609) (683,793) (2,272,872)
---------- ------------ ---------- ------------
Equipment sales margin $ 118,458 $ 103,519 $ 213,078 $ 189,435
========== ============ ========== ============
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 decreased due to a decrease in the amount of cash available for
investment.
EXPENSES
Management fees decreased during the nine months ended September 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 nine months ended September 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.
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
* $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.
* $45,000 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.
The provision for losses recorded during the nine months ended September 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.
* $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.
* $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.
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.
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
- -------------------------------
During the nine months ended September 30, 1997, the Partnership acquired
equipment subject to leases with a total equipment purchase price of $1,084,753.
The Partnership entered its liquidation period (as defined in the Partnership
Agreement) in July 1997. During the liquidation period, purchases of equipment
under lease will cease (other than for prior commitments and equipment
upgrades).
During the nine months ended September 30, 1997, the Partnership declared
distributions to the partners of $3,471,611, ($508,106 of which was paid in
October 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 1997 to (1) meet current operating
requirements and (2) fund cash distributions to the Class A limited partners in
accordance with the Partnership Agreement. 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.
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 September 30, 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: November 13, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,531,717
<SECURITIES> 0
<RECEIVABLES> 396,465
<ALLOWANCES> 0
<INVENTORY> 534,921
<CURRENT-ASSETS> 0
<PP&E> 20,750,579
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,232,050
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 14,202,993
<TOTAL-LIABILITY-AND-EQUITY> 27,232,050
<SALES> 213,078
<TOTAL-REVENUES> 7,763,640
<CGS> 0
<TOTAL-COSTS> 6,943,609
<OTHER-EXPENSES> 234,443
<LOSS-PROVISION> 225,000
<INTEREST-EXPENSE> 731,254
<INCOME-PRETAX> 820,031
<INCOME-TAX> 0
<INCOME-CONTINUING> 820,031
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 820,031
<EPS-PRIMARY> 5.79
<EPS-DILUTED> 5.79
</TABLE>
