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, 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 12
Page 1 of 13 Pages
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Quarterly Report on Form 10-Q
for the Quarter Ended
June 30, 1998
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1998 and December 31, 1997 3
Statements of Income - Three and Six Months Ended
June 30, 1998 and 1997 4
Statements of Cash Flows - Six Months Ended
June 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 8-11
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
ASSETS
June 30, December 31,
1998 1997
------------ -------------
(Unaudited)
Cash and cash equivalents $ 1,128,999 $ 1,897,763
Accounts receivable, net 278,382 620,453
Receivable from related party 30,296 -
Equipment held for sale or re-lease 312,421 646,787
Net investment in direct finance leases 3,370,142 3,839,687
Leased equipment, net 14,319,392 18,028,040
------------ ------------
Total assets $ 19,439,632 $ 25,032,730
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 901,568 $ 882,678
Payables to affiliates 69,299 20,257
Rents received in advance 36,328 102,410
Distributions payable to partners 316,717 508,106
Discounted lease rentals 6,196,307 7,961,882
Financed operating lease rentals 1,874,628 2,257,035
------------ ------------
Total liabilities 9,394,847 11,732,368
------------ ------------
Partners' capital:
General partner - -
Limited partners:
Class A 9,849,908 13,092,164
Class B 194,877 208,198
------------ ------------
Total partners' capital 10,044,785 13,300,362
----------- ------------
Total liabilities and partners' capital $ 19,439,632 $ 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 Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue:
Operating lease rentals $ 1,686,865 $ 2,382,057 $ 3,497,671 $ 4,858,936
Direct finance lease income 98,928 104,365 195,194 210,952
Equipment sales margin 55,503 87,544 235,370 94,620
Interest income 19,509 21,165 49,057 39,161
----------- ----------- ----------- -----------
Total revenue 1,860,805 2,595,131 3,977,292 5,203,669
----------- ------------ ----------- -----------
Expenses:
Depreciation 1,320,252 1,898,596 2,751,836 3,869,628
Interest on discounted lease rentals 124,007 195,743 262,914 412,253
Interest on financed operating lease rentals 34,203 29,289 69,809 100,413
Management fees paid to general partner 38,298 53,255 77,658 107,229
Direct services from general partner 31,127 26,461 62,548 54,728
General and administrative 62,300 61,589 114,301 132,851
Provision for losses 100,000 100,000 125,000 200,000
----------- ----------- ----------- -----------
Total expenses 1,710,187 2,364,933 3,464,066 4,877,102
----------- ------------ ----------- -----------
Net income $ 150,618 $ 230,198 $ 513,226 $ 326,567
=========== =========== =========== ===========
Net income allocated:
To the general partner $ 17,768 $ 10,242 $ 37,557 $ 20,484
To the Class A limited partners 131,494 217,729 470,839 302,978
To the Class B limited partner 1,356 2,227 4,830 3,105
----------- ----------- ----------- -----------
$ 150,618 $ 230,198 $ 513,226 $ 326,567
=========== =========== =========== ===========
Net income per weighted average
Class A limited partner unit outstanding $ 0.98 $ 1.62 $ 3.52 $ 2.26
=========== =========== =========== ===========
Weighted average Class A
limited partner units outstanding 133,579 134,298 133,636 134,298
=========== ============= =========== ===========
</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,
-------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Net cash provided by operating activities $ 5,339,410 $ 5,336,015
------------ -------------
Cash flows from investing activities:
Purchases of equipment on operating leases from affiliate - (749,703)
Investment in direct financing leases, acquired from affiliate - (22,469)
------------ -------------
Net cash used in investing activities - (772,172)
------------ -------------
Cash flows from financing activities:
Principal payments on discounted lease rentals (1,765,575) (2,119,709)
Principal payments on financed operating lease rentals (382,407) (440,777)
Distributions to partners (3,947,067) (2,048,303)
Redemptions of Class A limited partner units (13,095) -
------------ -------------
Net cash used in financing activities (6,108,174) (4,608,789)
------------ -------------
Net decrease in cash and cash equivalents (768,764) (44,946)
Cash and cash equivalents at beginning of period 1,897,763 1,768,824
------------ -------------
Cash and cash equivalents at end of period 1,128,999 $ 1,723,878
============ =============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals 262,914 $ 412,253
Interest paid on financed operating lease rentals 69,809 100,413
</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.
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.
2. Transactions With the General Partner and Affiliates
----------------------------------------------------
MANAGEMENT FEES PAID 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. The Partnership recorded a management fee of $77,658
for the six months ended June 30, 1998. Of that amount $21,547 is 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. The Partnership recorded $62,548 of direct
services from the general partner for the six months ended June 30, 1998.
Of that amount $22,458 is included in payables to affiliates.
6
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited), continued
2. Transactions With the General Partner and Affiliates, continued
----------------------------------------------------
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. At June 30, 1998, $25,294 of reimbursable expenses
are included in payables to affiliates.
RECEIVABLE FROM RELATED PARTY:
The general partner collects and applies rental payments to lessees'
accounts with the Partnership for those lessees who remit directly to the
general partner. The rental payments are then transferred to the
Partnership, eliminating the receivable from related party balance. At the
end of June 1998, $30,296 in rents were applied by the general partner that
were transferred to the Partnership in July 1998.
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 Six Months Net Income
Ended June 30, of Changes Ended June 30, of Changes
--------------------------- Between -------------------------- Between
1998 1997 Periods 1998 1997 Periods
------------ ------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 307,331 $ 362,794 $ (55,463) $ 608,306 $ 687,594 $ (79,288)
Equipment sales margin 55,503 87,544 (32,041 235,370 94,620 140,750
Interest income 19,509 21,165 (1,656) 49,057 39,161 9,896
Management fees paid to general partner (38,298) (53,255) 14,957 (77,658) (107,229) 29,571
Direct services from general partner (31,127) (26,461) (4,666) (62,548) (54,728) (7,820)
General and administrative (62,300) (61,589) (711) (114,301) (132,851) 18,550
Provision for losses (100,000) (100,000) - (125,000) (200,000) 75,000
----------- ---------- --------- ----------- ---------- ---------
Net income $ 150,618 $ 230,198 $ (79,580) $ 513,226 $ 326,567 $ 186,659
=========== ========== ========= ========== ========== =========
</TABLE>
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating lease rentals $ 1,686,865 $ 2,382,057 $ 3,497,671 $ 4,858,936
Direct finance lease income 98,928 104,365 195,194 210,952
Depreciation (1,320,252) (1,898,596) (2,751,836) (3,869,628)
Interest expense on discounted lease rentals (124,007) (195,743) (262,914) (412,253)
Interest expense on financed operating
lease rentals (34,203) (29,289) (69,809) (100,413)
------------- ------------- ------------ ------------
Leasing margin $ 307,331 $ 362,794 $ 608,306 $ 687,594
============= ============= ============ ============
Leasing margin ratio 17% 15% 16% 14%
== == == ==
</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 six months ended June 30,
1998 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 Six Months Ended
June 30, June 30,
----------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
Equipment sales revenue $ 393,374 $ 379,243 $ 1,324,769 $ 489,422
Cost of equipment sales (337,871) (291,699) (1,089,399) (394,802)
---------- ---------- ----------- ----------
Equipment sales margin $ 55,503 $ 87,544 $ 235,370 $ 94,620
========== ========== =========== ==========
Equipment sales margin has increased for the six months ended June 30, 1998 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.
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
- ---------------------
EXPENSES
Management fees paid to general partner and general and administrative expenses
decreased during the six months ended June 30, 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 six months ended June 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.
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.
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 six months ended June 30, 1998, the Partnership declared
distributions to the partners of $3,755,707, ($316,717 of which was paid in July
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.
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
affiliates's software have already been updated to software which correctly
accounts for the Year 2000. In addition, the affiliate is engaged in a system
conversion, whereby the affiliates's main lease tracking and accounting software
is being replaced with new systems which will account for the Year 2000
correctly. The general partner does not expect any other changes required for
the Year 2000 to have a material effect on the financial position or results of
operations of the Partnership. In addition, the general partner does not expect
any Year 2000 issues relating to customers and vendors will have a material
effect on its financial position or results of operations of the Partnership.
Costs incurred by the Partnership to address the Year 2000 issue have been
immaterial.
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 June 30, 1998.
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: August 12, 1998 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,128,999
<SECURITIES> 0
<RECEIVABLES> 308,678
<ALLOWANCES> 0
<INVENTORY> 312,421
<CURRENT-ASSETS> 0
<PP&E> 14,319,392
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,439,632
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 10,044,785
<TOTAL-LIABILITY-AND-EQUITY> 19,439,632
<SALES> 235,370
<TOTAL-REVENUES> 3,977,292
<CGS> 0
<TOTAL-COSTS> 3,464,066
<OTHER-EXPENSES> 140,206
<LOSS-PROVISION> 125,000
<INTEREST-EXPENSE> 332,723
<INCOME-PRETAX> 513,226
<INCOME-TAX> 0
<INCOME-CONTINUING> 513,226
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 513,226
<EPS-PRIMARY> 3.52
<EPS-DILUTED> 3.52
</TABLE>
