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, 1998
-------------------------------------------------
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 14
Page 1 of 15 Pages
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Quarterly Report on Form 10-Q
for the Quarter Ended
September 30, 1998
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1998 and December 31, 1997 3
Statements of Income - Three and Nine Months Ended
September 30, 1998 and 1997 4
Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Exhibit Index 14
Signature 15
2
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
BALANCE SHEETS
ASSETS
September 30, December 31,
1998 1997
----------- ------------
(Unaudited)
Cash and cash equivalents $ 1,110,941 $ 1,897,763
Accounts receivable, net 403,497 620,453
Equipment held for sale or re-lease 437,409 646,787
Net investment in direct finance leases 3,114,092 3,839,687
Leased equipment, net 11,348,541 18,028,040
----------- -----------
Total assets $16,414,480 $25,032,730
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 943,307 $ 882,678
Payables to affiliates 48,276 20,257
Rents received in advance 120,373 102,410
Distributions payable to partners 609,116 508,106
Discounted lease rentals 5,462,591 7,961,882
Financed operating lease rentals - 2,257,035
----------- -----------
Total liabilities 7,183,663 11,732,368
----------- -----------
Partners' capital:
General partner - -
Limited partners:
Class A 9,037,963 13,092,164
Class B 192,854 208,198
----------- -----------
Total partners' capital 9,230,817 13,300,362
----------- -----------
Total liabilities and partners' capital $16,414,480 $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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Operating lease rentals $1,723,946 $2,324,022 $5,221,617 $7,182,958
Direct finance lease income 86,926 98,048 282,120 309,000
Equipment sales margin 444,344 118,458 679,714 213,078
Interest income 13,939 19,443 62,996 58,604
---------- ---------- ---------- ----------
Total revenue 2,269,155 2,559,971 6,246,447 7,763,640
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 1,249,768 1,704,436 4,001,604 5,574,064
Interest on discounted lease rentals 109,600 176,326 372,514 588,579
Interest on financed operating lease rentals 29,167 42,262 98,976 142,675
Management fees to general partner 37,988 48,464 115,646 155,693
Direct services from general partner 59,438 24,022 121,986 78,750
General and administrative 44,943 45,997 159,244 178,848
Provision for losses 25,000 25,000 150,000 225,000
---------- ---------- ---------- ----------
Total expenses 1,555,904 2,066,507 5,019,970 6,943,609
---------- ---------- ---------- ----------
NET INCOME $ 713,251 $ 493,464 $1,226,477 $ 820,031
========== ========== ========== ==========
NET INCOME ALLOCATED:
To the general partner $ 15,244 $ 14,233 $ 52,801 $ 34,717
To the Class A limited partners 690,956 474,386 1,161,795 777,364
To the Class B limited partner 7,051 4,845 11,881 7,950
---------- ---------- ---------- ----------
$ 713,251 $ 493,464 $1,226,477 $ 820,031
========== ========== ========== ==========
Net income per weighted average
Class A limited partner unit outstanding $ 5.17 $ 3.54 $ 8.70 $ 5.79
========== ========== ========== ==========
Weighted average Class A
limited partner units outstanding 133,528 134,178 133,600 134,258
========== ========== ========== ==========
</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,
1998 1997
------------- -------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 9,164,516 $ 8,186,146
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment on operating leases from affiliate - (1,062,284)
Investment in direct financing leases, acquired from affiliate - (22,469)
----------- -----------
Net cash used in investing activities - (1,084,753)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on discounted lease rentals (2,499,291) (3,304,770)
Principal payments on financed operating lease rentals (2,257,035) (715,168)
Distributions to partners (5,179,015) (3,304,889)
Redemptions of Class A limited partner units (15,997) (13,673)
----------- -----------
Net cash used in financing activities (9,951,338) (7,338,500)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (786,822) (237,107)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,897,763 1,768,824
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,110,941 $ 1,531,717
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 372,514 $ 588,579
Interest paid on financed operating lease rentals 98,976 142,675
</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 was 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"), which requires comprehensive income to be displayed
prominently within the financial statements. Comprehensive income is
defined as all recognized changes in equity during a period from
transactions and other events and circumstances except those resulting from
investments by owners and distributions to owners. Net income and items
that previously have been recorded directly in equity are included in
comprehensive income. Statement 130 affects only the reporting and
disclosure of comprehensive income but does not affect recognition or
measurement of income. Statement 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Partnership adopted Statement 130 in the first quarter of 1998. The
adoption did not have an impact on its financial reporting.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131
provides guidance for reporting information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial reports of public companies.
An operating segment is defined as a component of a business that engages
in business activities from which it may earn revenue and incur expenses, a
component whose operating results are regularly reviewed by the company's
chief operating decision maker, and a component for which discrete
financial information is available. Statement 131 establishes quantitative
thresholds for determining operating segments of a company. Statement 131
is effective for fiscal years beginning after December 15, 1997, with
earlier application permitted. The Partnership adopted Statement 131 in the
first quarter of 1998. The adoption did not have an impact on its financial
reporting.
6
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited), continued
2. Transactions With the General Partner and Affiliates
----------------------------------------------------
MANAGEMENT FEES TO GENERAL PARTNER
In accordance with the Partnership Agreement, the General Partner earns a
management fee in connection with its management of the equipment,
calculated as a percentage of the monthly gross rentals received, and paid
monthly in arrears. At September 30, 1998, management fees of $9,028 are
included in payables to affiliates.
DIRECT SERVICES FROM GENERAL PARTNER
The General Partner and an affiliate provide accounting, investor
relations, billing, collecting, asset management, and other administrative
services to the Partnership. The Partnership reimburses the General Partner
for these services performed on its behalf as permitted under the terms of
the Partnership Agreement. At September 30, 1998, direct services from
General Partner in the amount of $39,247 are included in payables to
affiliates.
GENERAL AND ADMINISTRATIVE EXPENSES
The General Partner and an affiliate are reimbursed for the actual cost of
administrative expenses paid on behalf of Partnership per the terms of the
Partnership Agreement.
7
<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
1998 1997 Periods 1998 1997 Periods
------------ ------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 422,337 $ 499,046 $ (76,709) $ 1,030,643 $ 1,186,640 $ (155,997)
Equipment sales margin 444,344 118,458 325,886 679,714 213,078 466,636
Interest income 13,939 19,443 (5,504) 62,996 58,604 4,392
Management fees to general partner (37,988) (48,464) 10,476 (115,646) (155,693) 40,047
Direct services from general partner (59,438) (24,022) (35,416) (121,986) (78,750) (43,236)
General and administrative (44,943) (45,997) 1,054 (159,244) (178,848) 19,604
Provision for losses (25,000) (25,000) - (150,000) (225,000) 75,000
---------- --------- ---------- ----------- ----------- ----------
Net income $ 713,251 $ 493,464 $ 219,787 $ 1,226,477 $ 820,031 $ 406,446
========== ========= ========== =========== =========== ==========
</TABLE>
The Partnership is in its liquidation stage, 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating lease rentals $ 1,723,946 $ 2,324,022 $ 5,221,617 $ 7,182,958
Direct finance lease income 86,926 98,048 282,120 309,000
Depreciation (1,249,768) (1,704,436) (4,001,604) (5,574,064)
Interest expense (138,767) (218,588) (471,490) (731,254)
----------- ----------- ----------- -----------
Leasing margin $ 422,337 $ 499,046 $ 1,030,643 $ 1,186,640
=========== =========== =========== ===========
Leasing margin ratio 23% 21% 19% 16%
=========== =========== =========== ===========
</TABLE>
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
- ---------------------
LEASING MARGIN, continued
All components of leasing margin decreased for the three and nine months ended
September 30, 1998 compared to the three and nine months ended September 30,
1997 due to portfolio runoff. Leasing margin ratio increased and is expected to
increase further until all non-recourse debt is repaid. Leasing margin ratio
will vary due to changes in the portfolio, including, among other things, the
mix of operating leases versus direct finance leases, the average maturity of
leases comprising the portfolio, the average residual value of leases in the
portfolio, and the amount of discounted lease rentals financing the portfolio.
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 Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
------------ ----------- ----------- ------------
Equipment sales revenue $ 2,031,273 $ 407,449 $ 3,356,042 $ 896,871
Cost of equipment sales (1,586,929) (288,991) (2,676,328) (683,793)
----------- ---------- ----------- -----------
Equipment sales margin $ 444,344 $ 118,458 $ 679,714 $ 213,078
=========== ========== =========== ===========
Equipment sales margin increased for the three and nine months ended September
30, 1998 compared to the three and nine months ended September 30, 1997 as a
result of increasing amounts of equipment available for sale because the
Partnership is in its liquidation phase (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).
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
- ---------------------
INTEREST INCOME
Interest income varies based on the amount of cash available for investment
(pending distribution) and the interest rate on such invested cash.
EXPENSES
Management fees paid to the General Partner and general and administrative
expenses decreased for the three and nine months ended September 30, 1998,
compared to the corresponding periods in 1997, due to portfolio run-off.
Direct services from the General Partner increased compared to the corresponding
periods in 1997 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 nine months ended September 30,
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.
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
- -------------------------------
The Partnership is in its liquidation stage, 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.
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 nine months ended September 30, 1998, the Partnership declared
distributions to the partners of $5,280,025, ($609,116 of which was paid in
October 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
phase will vary based upon cash availability. All distributions are expected to
be a return of capital for economic purposes.
YEAR 2000 ISSUES
An affiliate provides accounting and other administrative services, including
data processing services to the Partnership. The affiliate has conducted a
comprehensive review of its computer systems to identify systems that could be
affected by the Year 2000 issue. The Year 2000 issue results from computer
programs being written using two digits rather than four to define the
applicable year. Certain computer programs which have time-sensitive software
could recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in major system failures or miscalculations. Certain of the
affiliate's software has already been updated to correctly account for the Year
2000 issue. In addition, the affiliate is engaged in a system conversion,
whereby the affiliate's primary lease tracking and accounting software is being
replaced with new systems which will account for the Year 2000 correctly. The
affiliate expects that the new system will be fully operational by December 31,
1999, and therefore will be fully Year 2000 compliant. The affiliate does not
expect any other changes required for the Year 2000 to have a material effect on
its financial position or results of operations. As such, the affiliate has not
developed any specific contingency plans in the event it fails to complete the
conversion to a new system by December 31, 1999. In addition, the affiliate does
not expect any Year 2000 issues relating to its customers and vendors to have a
material effect on its financial position or results of operations.
11
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement 133").
Statement 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Statement 133 is effective
for fiscal years beginning after June 15, 1999, with earlier application
permitted.
The Partnership will adopt Statement 133 in the first quarter of 1999. The
General Partner does not expect the adoption to have an impact on its financial
reporting.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
- --------------------------------------------------------------------------------
1995
- ----
The statements contained in this report which are not historical facts may be
deemed to contain forward- looking statements with respect to events, the
occurrence of which involve risks and uncertainties, and are subject to factors
that could cause actual future results to differ both adversely and materially
from currently anticipated results, including, without limitation, the level of
lease originations, realization of residual values, the availability and cost of
financing sources and the ultimate outcome of any contract disputes. Certain
specific risks associated with particular aspects of the Partnership's business
are discussed under Results of Operations in this report and under Results of
Operations in the 1997 Form 10-K when and where applicable.
12
<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) Exhibits
(b) The Partnership did not file any reports on Form 8-K during the
quarter ended September 30, 1998.
13
<PAGE>
Item No. Exhibit Index
- -------- -------------
27 Financial Data Schedule
14
<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, 1998 By: /s/Anthony M. DiPaolo
---------------------------------
Anthony M. DiPaolo
Senior Vice President
15
<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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,110,941
<SECURITIES> 0
<RECEIVABLES> 403,497
<ALLOWANCES> 0
<INVENTORY> 437,409
<CURRENT-ASSETS> 0
<PP&E> 11,348,541
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,414,480
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 9,230,817
<TOTAL-LIABILITY-AND-EQUITY> 16,414,480
<SALES> 679,714
<TOTAL-REVENUES> 6,246,447
<CGS> 0
<TOTAL-COSTS> 5,019,970
<OTHER-EXPENSES> 237,632
<LOSS-PROVISION> 150,000
<INTEREST-EXPENSE> 471,490
<INCOME-PRETAX> 1,226,477
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,226,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,226,477
<EPS-PRIMARY> 8.70
<EPS-DILUTED> 8.70
</TABLE>
