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, 1998
--------------------------------------------------
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
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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
March 31, 1998
Table of Contents
-----------------
PAGE
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1998 and December 31, 1997 3
Statements of Income - Three Months Ended
March 31, 1998 and 1997 4
Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 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
ASSETS
(Unaudited)
March 31, December 31,
1998 1997
----------- ------------
Cash and cash equivalents $ 2,264,707 $ 1,897,763
Accounts receivable, net 181,400 620,453
Equipment held for sale or re-lease 432,116 646,787
Net investment in direct finance leases 3,600,856 3,839,687
Leased equipment, net 16,001,233 18,028,040
----------- -----------
Total assets $22,480,312 $25,032,730
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 671,283 $ 882,678
Payable to affiliates 21,221 20,257
Rents received in advance 116,399 102,410
Distributions payable to partners 760,631 508,106
Discounted lease rentals 7,116,115 7,961,882
Financed operating lease rentals 2,115,661 2,257,035
----------- -----------
Total liabilities 10,801,310 11,732,368
----------- -----------
Partners' capital:
General partner - -
Limited partners:
Class A 11,476,405 13,092,164
Class B 202,597 208,198
----------- -----------
Total partners' capital 11,679,002 13,300,362
----------- -----------
Total liabilities and partners' capital $22,480,312 $25,032,730
=========== ===========
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,
-----------------------
1998 1997
---------- ----------
REVENUE:
Operating lease rentals $1,810,806 $2,476,879
Direct finance lease income 96,266 106,587
Equipment sales margin 179,867 7,076
Interest income 29,548 17,996
---------- ----------
Total revenue 2,116,487 2,608,538
---------- ----------
EXPENSES:
Depreciation and amortization 1,431,584 1,971,032
Interest on discounted lease rentals 138,907 216,510
Interest on financed operating lease rentals 35,606 71,124
Management fees paid to general partner 39,360 53,974
Direct services from general partner 31,421 28,267
General and administrative 52,001 71,262
Provision for losses 25,000 100,000
---------- ----------
Total expenses 1,753,879 2,512,169
---------- ----------
NET INCOME $ 362,608 $ 96,369
========== ==========
NET INCOME ALLOCATED:
To the general partner $ 19,789 $ 10,242
To the Class A limited partners 339,345 85,249
To the Class B limited partner 3,474 878
---------- ----------
$ 362,608 $ 96,369
========== ==========
Net income per weighted average
Class A limited partner unit outstanding $ 2.54 $ 0.63
========== ==========
Weighted average Class A
limited partner units outstanding 133,694 134,298
========== ==========
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, March 31,
1998 1997
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,085,527 $ 2,324,118
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment on operating leases from affiliate - (226,696)
Investment in direct financing leases, acquired from affiliate - (22,469)
----------- -----------
Net cash used in investing activities - (249,165)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on discounted lease rentals (845,767) (1,051,483)
Principal payments on financed operating lease rentals (141,374) (242,191)
Distributions to partners (1,726,338) (1,024,152)
Redemptions of Class A limited partner units (5,104) -
----------- -----------
Net cash used in financing activities (2,718,583) (2,317,826)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 366,944 (242,873)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,897,763 1,768,824
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,264,707 $ 1,525,951
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 138,907 $ 216,510
Interest paid on financed operating lease rentals 35,606 71,124
</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 of normal recurring adjustments) considered
necessary for a fair presentation have been included. The balance sheet at
December 31, 1997 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, 1997, (the "1997 Form 10-K") previously filed with the
Securities and Exchange Commission.
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 The Effect
for the Three Months on Net Income
Ended March 31, of Changes
----------------------- Between
1998 1997 Periods
---------- ----------- -------------
Leasing margin $ 300,975 $ 324,800 $ (23,825)
Equipment sales margin 179,867 7,076 172,791
Interest income 29,548 17,996 11,552
Management fees paid to general partner (39,360) (53,974) 14,614
Direct services from general partner (31,421) (28,267) (3,154)
General and administrative expenses (52,001) (71,262) 19,261
Provision for losses (25,000) (100,000) 75,000
--------- --------- ---------
Net income $ 362,608 $ 96,369 $ 266,239
========= ========= =========
The Partnership is in its liquidation period, as defined in the Partnership
Agreement and, as expected, the Partnership is not purchasing additional
equipment, initial leases are expiring and the amount of equipment being
remarketed (i.e., re-leased, renewed, or sold) is increasing. As a result, both
the size of the Partnership's leasing portfolio and the amount of leasing
revenue are declining.
LEASING MARGIN
Leasing margin consists of the following:
Three Months Ended
March 31,
-----------------------------
1998 1997
----------- -------------
Operating lease rentals $ 1,810,806 $ 2,476,879
Direct finance lease income 96,266 106,587
Depreciation (1,431,584) (1,971,032)
Interest expense on discounted lease rentals (138,907) (216,510)
Interest expense on financed operating
lease rentals (35,606) (71,124)
----------- -----------
Leasing margin $ 300,975 $ 324,800
=========== ===========
Leasing margin ratio 16% 13%
=========== ===========
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
All components of leasing margin decreased due to portfolio runoff. 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 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).
EQUIPMENT SALES MARGIN
Equipment sales margin consists of the following:
Three Months Ended
March 31,
-------------------------
1998 1997
--------- ----------
Equipment sales revenue $ 931,395 $ 110,179
Cost of equipment sales (751,528) (103,103)
--------- ---------
Equipment sales margin $ 179,867 $ 7,076
========= =========
Equipment sales margin has increased as a result of increasing amounts of
equipment available for sale because the Partnership is in its liquidation
period (as defined in the Partnership Agreement). Currently, a portion of the
Partnership's initial leases are expiring and equipment is being remarketed
(i.e., re-leased or sold to the original lessee or third parties).
INTEREST INCOME
Interest income varies based on the amount of cash available for investment
(pending distribution) and the interest rate on such invested cash.
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 and general and administrative expenses decreased during the
three months ended March 31, 1998, compared to the corresponding period in 1997,
due to portfolio run-off.
Direct services from the general partner increased primarily due to an increase
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 with 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 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, 1998
related primarily 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 less than was anticipated.
The provision for losses recorded during the three months ended March 31, 1997
related to the following items:
* $80,000 for a deficiency related to 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.
* $20,000 related to equipment which was 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.
9
<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
- -------------------------------
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 distributions to the
partners.
During the three months ended March 31, 1998, the Partnership declared
distributions to the partners of $1,978,864, ($760,631 of which was paid in
April 1998). 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 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 1998 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 vary based upon cash availability. 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 March 31, 1998.
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: May 14, 1998 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,264,707
<SECURITIES> 0
<RECEIVABLES> 181,400
<ALLOWANCES> 0
<INVENTORY> 432,116
<CURRENT-ASSETS> 0
<PP&E> 16,001,233
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,480,312
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 11,679,002
<TOTAL-LIABILITY-AND-EQUITY> 22,480,312
<SALES> 179,867
<TOTAL-REVENUES> 2,116,487
<CGS> 0
<TOTAL-COSTS> 1,753,879
<OTHER-EXPENSES> 70,781
<LOSS-PROVISION> 25,000
<INTEREST-EXPENSE> 174,513
<INCOME-PRETAX> 362,608
<INCOME-TAX> 0
<INCOME-CONTINUING> 362,608
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 362,608
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.54
</TABLE>
