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, 1999
--------------------------------------------------
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
March 31, 1999
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1999 and December 31, 1998 3
Statements of Income - Three Months Ended
March 31, 1999 and 1998 4
Statements of Cash Flows - Three Months Ended
March 31, 1999 and 1998 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 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
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
Cash and cash equivalents $ 1,101,749 $ 784,867
Accounts receivable, net 722,372 771,076
Receivable from affiliates 141,213 -
Equipment held for sale or re-lease 313,000 285,299
Net investment in direct finance leases 2,606,564 2,865,887
Leased equipment, net 8,050,524 9,637,771
----------- -----------
Total assets $12,935,422 $14,344,900
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 1,168,702 $ 1,334,422
Payables to affiliates 48,919 2,142
Rents received in advance 132,376 105,332
Distributions payable to partners 683,675 508,106
Discounted lease rentals 3,882,919 4,612,151
----------- -----------
Total liabilities 5,916,591 6,562,153
----------- -----------
Partners' capital:
General partner - -
Limited partners:
Class A 6,833,838 7,601,001
Class B 184,993 181,746
----------- -----------
Total partners' capital 7,018,831 7,782,747
----------- -----------
Total liabilities and partners' capital $12,935,422 $14,344,900
=========== ===========
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,
--------------------------
1999 1998
---------- ----------
REVENUE:
Operating lease rentals $1,138,466 $1,810,806
Direct finance lease income 68,394 96,266
Equipment sales margin 276,324 179,867
Interest income 5,552 29,548
---------- ----------
Total revenue 1,488,736 2,116,487
---------- ----------
EXPENSES:
Depreciation 906,688 1,431,584
Management fees to general partner 36,053 39,360
Direct services from general partner 30,714 31,421
General and administrative 54,155 52,001
Interest on discounted lease rentals 79,178 138,907
Interest on financed operating lease rentals - 35,606
Provision for losses 50,000 25,000
---------- ----------
Total expenses 1,156,788 1,753,879
---------- ----------
NET INCOME $ 331,948 $ 362,608
========== ==========
NET INCOME ALLOCATED:
To the general partner $ 10,878 $ 19,789
To the Class A limited partners 317,823 339,345
To the Class B limited partner 3,247 3,474
---------- ----------
$ 331,948 $ 362,608
========== ==========
Net income per weighted average
Class A limited partner unit outstanding $ 2.38 $ 2.54
========== ==========
Weighted average Class A
limited partner units outstanding 133,447 133,694
========== ==========
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,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,969,774 $ 3,085,527
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment on operating leases from affiliate (3,364) -
Investment in direct financing leases, acquired from affiliate - -
----------- -----------
Net cash used in investing activities (3,364) -
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on discounted lease rentals (729,232) (845,767)
Principal payments on financed operating lease rentals - (141,374)
Distributions to partners (912,146) (1,726,338)
Redemptions of Class A limited partner units (8,150) (5,104)
----------- -----------
Net cash used in financing activities (1,649,528) (2,718,583)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 316,882 366,944
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 784,867 1,897,763
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,101,749 $ 2,264,707
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 79,178 $ 138,907
Interest paid on financed operating lease rentals - 35,606
</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, 1998 was derived from the audited financial statements
included in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1998, (the "1998 Form 10-K") previously filed with the
Securities and Exchange Commission.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
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 adopted Statement
133 in the first quarter of 1999. The General Partner does not expect the
adoption to have an impact on its financial reporting.
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 March 31, 1999, management fees of $11,929 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 March 31, 1999, direct services from the
General Partner in the amount of $6,044 are 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
----------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
The General Partner and an affiliate are reimbursed for the actual cost of
administrative expenses incurred on behalf of Partnership per the terms of
the Partnership Agreement. At March 31, 1999, administrative expenses in
the amount of $30,946 are included in payables to affiliates.
3. Year 2000
---------
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
date-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
upgraded to correctly account for the Year 2000 issue. The affiliate is
implementing additional upgrades whereby the affiliate's primary lease
tracking and accounting software will account for the Year 2000 correctly.
The affiliate expects that the new upgrades will be fully operational by
December 31, 1999, and therefore expects that it 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 upgrades by
December 31, 1999. However, should the affiliate be unsuccessful in
completing the necessary upgrades by December 31, 1999, it does not expect
there will be a material adverse effect on the Partnership's financial
position or results of operations. There could be a negative impact on the
Partnership's ability to realize expected cash flows from leased equipment
on a timely basis. While it is expected that the Partnership's ability to
ultimately realize all expected cash flows will not be impacted, delays in
collecting cash flows would have a negative impact on the timing of
distributions to partners. 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.
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 items of income and expense and
changes in those items derived from the Statements of Income:
Three Months
Ended March 31,
-----------------------
1999 1998 Change
--------- --------- ---------
Leasing margin $ 220,994 $ 300,975 $ (79,981)
Equipment sales margin 276,324 179,867 96,457
Interest income 5,552 29,548 (23,996)
Management fees to general partner (36,053) (39,360) 3,307
Direct services from general partner (30,714) (31,421) 707
General and administrative expenses (54,155) (52,001) (2,154)
Provision for losses (50,000) (25,000) (25,000)
--------- --------- ---------
Net income $ 331,948 $ 362,608 $ (30,660)
========= ========= =========
The Partnership is in its liquidation stage, as defined in the Partnership
Agreement. 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 lease portfolio and the amount of leasing revenue are declining.
LEASING MARGIN
Leasing margin consists of the following:
Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
Operating lease rentals $ 1,138,466 $ 1,810,806
Direct finance lease income 68,394 96,266
Depreciation (906,688) (1,431,584)
Interest expense on discounted lease rentals (79,178) (138,907)
Interest expense on financed operating
lease rentals - (35,606)
----------- -----------
Leasing margin $ 220,994 $ 300,975
=========== ===========
Leasing margin ratio 18% 16%
=========== ===========
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 months ended March 31,
1999 compared to the three months ended March 31, 1998 due to portfolio runoff.
Leasing margin ratio varies 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 principal is repaid.
The ultimate rate of return on leases depends, in part, on interest rates at the
time the leases are originated, 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,
------------------------
1999 1998
--------- ---------
Equipment sales revenue $ 893,850 $ 931,395
Cost of equipment sales (617,526) (751,528)
--------- ---------
Equipment sales margin $ 276,324 $ 179,867
========= =========
Equipment sales margin fluctuates based on the composition of equipment
available for sale. Currently, the Partnership is in its liquidation phase (as
defined in the Partnership Agreement). Initial leases are expiring and equipment
is being remarketed (i.e., re-leased or sold to the original lessee or to third
parties). Equipment sold during the three months ended March 31, 1999 included
locomotives with a gain of $154,500, machine tools with a gain of $35,484, and
manufacturing equipment with a gain of $74,470. Equipment sold during the three
months ended March 31, 1998 included tractors with a gain of $59,159, glass
packaging equipment with a gain of $49,138, and manufacturing equipment with a
gain of $60,830.
INTEREST INCOME
Interest income varies based on the amount of cash available for investment,
pending distribution to partners, 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 the General Partner decreased for the three months ended
March 31, 1999 as compared to the corresponding period in 1998 primarily due to
portfolio run-off. Management fees are calculated as a percentage of rents
collected.
General and administrative expenses and direct services from the General Partner
were comparable to 1998. The primary components of general and administrative
expenses for the three months ended March 31, 1999 and March 31, 1998 were data
processing, advertising, audit and tax fees, bank charges, legal and state
income taxes.
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 occurs when the equipment is remarketed
subsequent to initial lease termination) 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 such that it
has credit and residual value exposure and will incur losses from those
exposures in the ordinary course of business. The Partnership performs quarterly
assessments of the estimated residual values of its assets to identify
other-than-temporary losses in value.
The provision for losses recorded during the three months ended March 31, 1999
related primarily to lessees returning equipment to the Partnership.
Liquidity and Capital Resources
- -------------------------------
The Partnership is in its liquidation stage, as defined in the Partnership
Agreement. 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 lease portfolio and the amount of leasing revenue are declining.
The Partnership funds its operating activities principally with cash from rents,
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 three months ended March 31, 1999, the Partnership declared
distributions to the partners of $1,087,715, ($683,675 of which was paid in
April 1999). 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 partners' 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 the partnership's return on capital over its life can 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 1999 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.
The Class B limited partner distributions of cash from operations are
subordinated to the Class A limited partners receiving distributions of cash
from operations, as scheduled in the Partnership Agreement (i.e., 12%).
Therefore, because of the decrease in distributions to the Class A limited
partners during the three months ended March 31, 1999, CAII, the sole Class B
limited partner, did not receive any distributions of cash from operations.
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 date-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 upgraded to correctly account for the Year
2000 issue. The affiliate is implementing additional upgrades whereby the
affiliate's primary lease tracking and accounting software will account for the
Year 2000 correctly. The affiliate expects that the new upgrades will be fully
operational by December 31, 1999, and therefore expects that it 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 upgrades by December 31, 1999.
However, should the affiliate be unsuccessful in completing the necessary
upgrades by December 31, 1999, it does not expect there will be a material
adverse effect on the Partnership's financial position or results of operations.
There could be a negative impact on the Partnership's ability to realize
11
<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
- -------------------------------
YEAR 2000 ISSUES, continued
expected cash flows from leased equipment on a timely basis. While it is
expected that the Partnership's ability to ultimately realize all expected cash
flows will not be impacted, delays in collecting cash flows would have a
negative impact on the timing of distributions to partners. 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.
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 adopted 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 1998 Form 10-K when and where applicable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The partnership is in the liquidation stage (as defined in the Partnership
Agreement). Consequently, the partnership is no longer originating new leases.
The partnership's existing leases are non-cancelable, have fixed rates and are
financed with fixed rate debt. Therefore, the partnership has no exposure to
fluctuations in interest rates or other market risk exposure.
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 March 31, 1999.
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: May 17, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,101,749
<SECURITIES> 0
<RECEIVABLES> 863,585
<ALLOWANCES> 0
<INVENTORY> 313,000
<CURRENT-ASSETS> 0
<PP&E> 10,657,088
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,935,422
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 7,018,831
<TOTAL-LIABILITY-AND-EQUITY> 12,935,422
<SALES> 276,324
<TOTAL-REVENUES> 1,488,736
<CGS> 0
<TOTAL-COSTS> 1,156,788
<OTHER-EXPENSES> 66,767
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 79,178
<INCOME-PRETAX> 331,948
<INCOME-TAX> 0
<INCOME-CONTINUING> 331,948
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 331,948
<EPS-PRIMARY> 2.38
<EPS-DILUTED> 2.38
</TABLE>
