Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 1996 |_| 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 000-17631 ATEL Cash Distribution Fund II, a California Limited Partnership (Exact name of registrant as specified in its charter) California 94-3051991 State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 235 Pine Street, 6th Floor, San Francisco, California 94104 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 989-8800 Indicate by a 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 |_| DOCUMENTS INCORPORATED BY REFERENCE None Part I. FINANCIAL INFORMATION Item 1. Financial Statements. ATEL CASH DISTRIBUTION FUND II (A CALIFORNIA LIMITED PARTNERSHIP) BALANCE SHEETS MARCH 31, 1996 AND DECEMBER 31, 1995 (Unaudited) ASSETS 1996 1995 ---- ---- Cash and cash equivalents $639,088 $874,714 Accounts receivable, net of allowance for doubtful accounts of $15,551 in 1995 and 1996 90,250 69,558 Investment in equipment and leases 6,815,427 7,459,980 -------------------- ---------------- Total assets $7,544,765 $8,404,252 ==================== ================ LIABILITIES AND PARTNERS' CAPITAL Non-recourse debt $2,645,269 $2,965,946 Accrued interest 46,870 53,047 Accounts payable: General Partners 40,220 61,192 Other 105,549 79,398 Customer deposit 77,409 77,409 Unearned income 16,561 36,385 -------------------- ---------------- Total liabilities 2,931,878 3,273,377 Partners' capital: General Partners 74,942 73,539 Limited partners 4,537,945 5,057,336 -------------------- ---------------- Total partners' capital 4,612,887 5,130,875 -------------------- ---------------- Total liabilities and partners' capital $7,544,765 $8,404,252 ==================== ================ See accompanying notes. ATEL CASH DISTRIBUTION FUND II (A CALIFORNIA LIMITED PARTNERSHIP) INCOME STATEMENTS THREE MONTH PERIODS ENDED MARCH 31, 1996 and 1995 (Unaudited) Revenues: 1996 1995 ---- ---- Lease income: Operating $431,672 $701,717 Direct financing 93,004 124,595 Leveraged 4,823 3,832 Gain(loss) on sale of lease assets 1,927 45,194 Gain on sale of marketable securities - 124,879 Interest income 2,997 9,292 Other 79,466 19,571 -------------------- ---------------- 613,889 1,029,080 -------------------- ---------------- Expenses: Depreciation and amortization 323,465 486,074 Interest expense 71,185 102,640 Equipment and partnership management fees to General Partners 40,220 59,345 Administrative cost reimbursements to General Partners 23,541 31,308 Other 9,303 40,445 Provision for losses 5,874 10,290 -------------------- ---------------- 473,588 730,102 -------------------- ---------------- Net Income $140,301 $298,978 ==================== ================ Net income: General Partners $1,403 $2,990 Limited Partners 138,898 295,988 -------------------- ---------------- $140,301 $298,978 ==================== ================ Net income per Limited Partnership unit $1.98 $4.23 Weighted average number of units outstanding 69,979 69,979 STATEMENTS OF CHANGES IN PARTNERS' CAPITAL THREE MONTHS ENDED MARCH 31, 1996 Limited Partners General Units Amount Partners Total Balance December 31, 1995 69,979 $5,057,336 $73,539 $5,130,875 Net income 138,898 1,403 140,301 Distributions (658,289) (658,289) ================= ================ ==================== ================ Balance March 31, 1996 69,979 $4,537,945 $74,942 $4,612,887 ================= ================ ==================== ================ See accompanying notes. ATEL CASH DISTRIBUTION FUND II (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS THREE MONTH PERIODS ENDED MARCH 31, 1996 and 1995 (Unaudited) 1996 1995 ---- ---- Operating activities: Net income $140,301 $298,978 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 323,465 486,074 Leveraged lease income (4,823) (3,832) Loss (gain) on sale of lease assets (1,927) (45,194) Gain on sale of marketable securities - (124,879) Provision for losses 5,874 10,290 Changes in operating assets and liabilities: Accounts receivable (20,692) 586,730 Accounts payable, general partner (20,972) (50,505) Accounts payable, other 26,151 57,232 Accrued interest (6,177) (6,124) Unearned income (19,824) (3,409) -------------------- ---------------- Net cash provided by operations 421,376 1,205,361 -------------------- ---------------- Investing activities: Reductions of net investment in direct financing leases 220,195 218,202 Proceeds from sales of lease assets 101,769 1,268,818 Proceeds from sales of marketable securities - 124,879 -------------------- ---------------- Net cash provided by investing activities 321,964 1,611,899 -------------------- ---------------- Financing activities: Repayment of non-recourse debt (320,677) (367,449) Distributions to limited partners (658,289) (1,545,707) -------------------- ---------------- Net cash used in financing activities (978,966) (1,913,156) -------------------- ---------------- Net (decrease) increase in cash and cash equivalents (235,626) 904,104 Cash and cash equivalents at beginning of period 874,714 924,041 -------------------- ---------------- Cash and cash equivalents at end of period $639,088 $1,828,145 ==================== ================ Supplemental disclosures of cash flow information: Cash paid during the period for interest $77,362 $108,764 ==================== ================ Supplemental schedule of non-cash transaction: Operating Lease assets reclassified to assets held for sale or lease $389,211 Less accumulated depreciation (286,178) -------------------- $103,033 ==================== See accompanying notes. ATEL CASH DISTRIBUTION FUND II (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (Unaudited) 1. Summary of significant accounting policies: Interim financial statements: The unaudited interim financial statements reflect all adjustments which are, in the opinion of the general partners, necessary to a fair statement of financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim financial statements should be read in conjunction with the most recent report on Form 10K. 2. Organization and partnership matters: ATEL Cash Distribution Fund II, a California Limited Partnership (the Partnership), was formed under the laws of the State of California on September 30, 1987, for the purpose of acquiring equipment to engage in equipment leasing and sales activities. Contributions in the amount of $600 were received as of September 30, 1987, $100 of which represented the General Partners' continuing interest, and $500 of which represented the Initial Limited Partner's capital investment. Upon the sale of the minimum amount of Units of Limited Partnership interest (Units) of $1,200,000 and the receipt of the proceeds thereof on March 23, 1988, the Partnership commenced operations. 3. Investment in equipment and leases: The Partnership's investment in leases consists of the following: Depreciation Expense or Reclass- December 31, Amortization ifications & March 31, 1995 Additions of Leases Dispositions 1996 ---- --------- --------- ------------- ---- Net investment in operating leases $4,278,094 ($252,319) ($142,865) $3,882,910 Net investment in direct financing leases 2,940,554 (220,195) - 2,720,359 Net investment in leveraged leases 74,635 4,823 - 79,458 Equipment held for sale or lease 199,474 (70,680) 43,023 171,817 Reserve for losses (37,588) ($5,874) - - (43,462) Initial direct costs 4,811 - (466) - 4,345 ================ ================= ================ ==================== ================ $7,459,980 ($5,874) ($538,837) ($99,842) $6,815,427 ================ ================= ================ ==================== ================ ATEL CASH DISTRIBUTION FUND II (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (Unaudited) 3. Investment in equipment and leases (continued): Operating leases: The following schedule provides an analysis of the Partnership's investment in equipment on operating leases by major classifications as of December 31, 1995, additions and dispositions during the three months ended March 31, 1996 and as of March 31, 1996: Balance Reclass- Balance December 31, ifications & March 31, Equipment type 1995 Additions Dispositions 1996 -------------- ---- --------- ------------ ---- Aircraft $3,164,533 $3,164,533 Mining 2,104,643 2,104,643 Materials handling 1,918,334 ($187,555) 1,730,779 Manufacturing 835,681 835,681 Data processing 527,739 527,739 Communications 481,738 481,738 Food processing 344,799 344,799 Transportation 697,722 (511,041) 186,681 Motor vehicles 95,277 95,277 Furniture, fixtures and equipment 22,967 22,967 ----------------- ---------------- -------------------- ---------------- 10,193,433 (698,596) 9,494,837 Less accumulated depreciation (5,915,339) ($252,319) 555,731 (5,611,927) ----------------- ---------------- -------------------- ---------------- $4,278,094 ($252,319) ($142,865) $3,882,910 ================= ================ ==================== ================ Equipment on operating leases was acquired in 1988, 1989, 1990, 1992, 1993 and 1994. At March 31, 1996, the aggregate amounts of future minimum lease payments are as follows: Year ending Direct December 31, Financing Operating Total 1996 $920,161 $975,573 $1,895,734 1997 1,126,523 546,571 1,673,094 1998 220,075 272,090 492,165 1999 4,248 269,732 273,980 2000 - 202,299 202,299 ----------------- ---------------- -------------------- $2,271,007 $2,266,265 $4,537,272 ================= ================ ==================== ATEL CASH DISTRIBUTION FUND II (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (Unaudited) 4. Non-recourse debt: Notes payable to financial institutions are due in varying monthly, quarterly and semi-annual installments of principal and interest. The notes are secured by assignments of lease payments and pledges of the assets which were purchased with the proceeds of the particular notes. Interest rates on the notes vary from 7.69% to 12.86%. Future minimum principal payments of non-recourse debt are as follows: Year ending December 31, Principal Interest Total 1996 $951,404 $215,583 $1,166,987 1997 1,037,153 137,795 1,174,948 1998 230,049 61,609 291,658 1999 233,530 36,202 269,732 2000 193,133 9,166 202,299 ----------------- ---------------- -------------------- $2,645,269 $460,355 $3,105,624 ================= ================ ==================== 5. Related party transactions: The terms of the Limited Partnership Agreement provide that the General Partners and/or their Affiliates are entitled to receive certain fees for equipment acquisition, management and resale and for management of the Partnership. The General Partners earned partnership management fees equal to 5% of cash distributed from operations and equipment management fees equal to 2% of full payout lease rentals and 5% of operating lease rentals pursuant to the Limited Partnership Agreement. The amounts earned in 1996 and 1995 were $40,220 and $59,345 respectively. The Limited Partnership Agreement allows for the reimbursement of costs incurred by ATEL in providing administrative services to the Partnership. Administrative services provided include partnership accounting, investor relations, legal counsel and lease and equipment documentation. ATEL is not reimbursed for services where it is entitled to receive a separate fee as compensation for such services, such as acquisition and disposition of equipment. Reimbursable costs incurred by ATEL are allocated to the Partnership based upon actual time incurred by employees working on partnership business and an allocation of rent and other costs based on utilization studies. In 1996 and 1995, the Partnership reimbursed ATEL Financial Corporation $23,541 and $31,308, respectively, for costs incurred in the administration of Partnership business. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Capital Resources and Liquidity Funds which have been received, but which have not yet been invested in leased equipment, are invested in interest-bearing accounts or high-quality/short-term commercial paper. The Partnership's primary source of liquidity is cash received from lease rentals and the sales of assets upon lease terminations. The liquidity of the Partnership will vary in the future, increasing to the extent cash flows from leases exceed expenses, and decreasing as lease assets are acquired, as distributions are made to the Limited Partners and to the extent expenses exceed cash flows from leases. As another source of liquidity, the Partnership has contractual obligations with a diversified group of lessees for fixed lease terms at fixed rental amounts. As the initial lease terms expire the Partnership will re-lease or sell the equipment. The future liquidity beyond the contractual minimum rentals will depend on the General Partner's success in re-leasing or selling the equipment as it comes off lease. The Partnership's objective is to reinvest a portion of lease payments from assets owned in new leasing transactions. Such reinvestment will occur only after the payment of all obligations, including debt service (both principal and interest), the payment of management and acquisition fees to the General Partner and providing for cash distributions to the Limited Partners. The Partnership currently has available adequate reserves to meet contingencies, but in the event those reserves were found to be inadequate, the Partnership would likely be in a position to borrow against its current portfolio to meet such requirements. The General Partners envision no such requirements for operating purposes, nor have they explored with lenders the possibility of obtaining loans. There can be no assurance as to the terms of any such financing or that the Partnership will be able to obtain such loans. All of the Partnership's non-recourse debt is paid by lease payments assigned to the lenders. The assigned lease payments match the required payments on the debt and such payments fully amortize the debt. As of March 31, 1996, the Partnership had borrowed approximately $21,700,000. The remaining unpaid balance on those borrowings was approximately $2,645,000. The borrowings are generally non-recourse to the Partnership, that is, the only recourse of the lender for a default by the lessee on the underlying lease will be to the equipment or corresponding lease acquired with the loan proceeds. The General Partners expect that aggregate borrowings in the future will not exceed 40% of aggregate equipment cost. In any event, the Agreement of Limited Partnership limits such borrowings to 40% of the total cost of equipment, in aggregate. No commitments of capital have been or are expected to be made other than for the acquisition of additional equipment. There were no such commitments at March 31, 1996 The Partnership made a distribution of cash from operations in April 1996. The amount of the distribution was $6.50 per Unit (which is equal to an annualized rate of 5.2%). If inflation in the general economy becomes significant, it may affect the Partnership inasmuch as the residual (resale) values and rates on re-leases of the Partnership's leased assets may increase as the costs of similar assets increase. However, the Partnership's revenues from existing leases would not increase, as such rates are generally fixed for the terms of the leases without adjustment for inflation. If interest rates increase significantly, the lease rates that the Partnership can obtain on future leases will be expected to increase as the cost of capital is a significant factor in the pricing of lease financing. Leases already in place, for the most part, would not be affected by changes in interest rates. Cash flows, 1996 vs. 1995 For the first three months of 1996, lease rents and proceeds from the sales of lease assets were the Partnership's primary sources of cash flows. Operating cash flows from lease revenues decreased from $830,144 in 1995 to $529,499 in 1996, a decrease of $300,645. The decrease is mainly due to the effects of terminated leases. The cost of assets on operating leases has decreased from $13,666,706 in 1995 to $9,494,837 in 1996. Cash flows from investing activities decreased by $1,289,936 compared to 1995. The decrease was the result of substantial reduction in proceeds from sale of lease assets. The book value of the assets coming off operating leases was $1,250,622 in 1995 and only $173,789 in 1996. The other factor was that there were no proceeds from sale of marketable securities in 1996 as all the common stock received as a part of the 1992 Financial News Network bankruptcy was sold by March 1995. There were no financing sources of cash in either 1995 and 1996. The net cash used in financing activities decreased by $934,190. Distribution to limited partners was reduced as a result of decreased cash flows in the fourth quarter of 1995. Results of Operations The results of operations in future periods may vary significantly from those of the first quarter of 1996 as the Partnership's lease portfolio of capital equipment matures. Revenues from leases are expected to decline over the long term as leased assets come off lease and are sold or re-leased at lower lease rates. The effect on net income is not determinable as it will depend to a large degree on the amounts received from the sales of assets or from re-leases to either the same or new lessees once the initial lease terms expire. Operations, 1996 vs. 1995 Compared to 1995, operating lease revenues decreased by $270,045. The revenues decreased (and are expected to decrease in future periods) as a result of scheduled lease terminations and asset sales. Direct financing lease revenues decreased due to these same factors. Interest Income decreased by $ 6,295 from 1995 as the averaged cash balance for first quarter of 1996 decreased about $600,000 from first quarter of 1995. Other income increased by $59,895 from 1995. The increase is due to the cash payment from the bankruptcy of Rocky Mountain Helicopters, Inc.. The partnership continues to have an unsecured claim against Rocky Mountain Helicopters, Inc. (RMH), a former lessee of the partnership. RMH filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in 1993. In addition to the amounts previously received from the RMH bankruptcy, the partnership received $77,654 in March 1996 and may receive an additional 5% to 10% of its unsecured claim of $776,654. Depreciation expense relates to operating lease assets and has declined in relation to the total amounts of such assets owned by the Partnership. The original cost of such assets owned by the Partnership decreased from $13,666,706 to $9,494,836 from March 31, 1995 to March 31, 1996. Interest expense decreased by $31,455 compared to 1995. This is a direct result of decreased debt balances compared to 1995. These reductions of debt balances resulted from scheduled debt payments. Management fees decreased from $59,345 in 1995 to $40,220 in 1996. This decrease was composed of a decrease of equipment management fees of $5,271 and a decrease of partnership management fees of $13,854. Equipment management fees are related to lease revenues and are expected to decline over time as those revenues decrease. Partnership management fees are related to the amounts of distributions of cash from operations to Limited Partners and are expected to decline in future periods as those distributions decrease as a result of asset sales. PART II. OTHER INFORMATION Item 1. Legal Proceedings. No material legal proceedings are currently pending against the Partnership or against any of its assets except for the bankruptcy of Rocky Mountain Helicopters, Inc. noted above in Part I, Item 2 under the caption "Results of Operations" where the Partnership has undertaken legal action in pursuit of its unsecured claim. Item 2. Changes in Securities. Inapplicable. Item 3. Defaults upon Senior Securities. Inapplicable. Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable. Item 5. Other Information. Inapplicable. Item 6. Exhibits And Reports on Form 8-K. (a) Documents filed as a part of this report 1. Financial Statements Included in Part I of this report: Balance Sheets, March 31, 1996 and December 31, 1995 Income statements for the three month periods ended March 31, 1996 and 1995 Statement of changes in partners' capital for the three months ended March 31, 1996 Statements of cash flows for the three month periods ended March 31, 1996 and 1995 Notes to the Financial Statements 2. Financial Statement Schedules All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) Report on Fork 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 10, 1996 ATEL Cash Distribution Fund II, a California Limited Partnership (Registrant) By: /s/ A. J. Batt A. J. Batt General Partner of registrant By: /s/ Dean L. Cash Dean L. Cash General Partner of registrant By: /s/ F. Randall Bigony F. Randall Bigony Principal financial officer of registrant By: /s/ Donald E. Carpenter Donald E. Carpenter Principal accounting officer of registrant