<PAGE>
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, 2000
-------------------------------------------------
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
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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 14
Page 1 of 15 Pages
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
Quarterly Report on Form 10-Q
for the Quarter Ended
June 30, 2000
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 2000 and December 31, 1999 3
Statements of Income - Three Months Ended
June 30, 2000 and 1999 4
Statements of Cash Flows - Three Months Ended
June 30, 2000 and 1999 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
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ----------
<S> <C> <C>
(Unaudited)
Cash and cash equivalents $1,063,609 $1,345,288
Accounts receivable, net 137,817 332,475
Receivable from affiliates - 243,586
Equipment held for sale or re-lease 572,995 566,714
Net investment in direct finance leases 1,667,554 1,946,226
Leased equipment, net 2,936,020 4,158,824
---------- ----------
Total assets $6,377,995 $8,593,113
========== ==========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities $ 998,337 $1,171,040
Payables to affiliates 93,639 12,655
Rents received in advance 74,979 1,303
Distributions payable to partners 451,000 2,000
Discounted lease rentals 1,445,863 2,321,818
---------- ----------
Total liabilities 3,063,818 3,508,816
---------- ----------
Partners' capital:
General partner - -
Limited partners:
Class A 3,128,605 4,901,714
Class B 185,572 182,583
---------- ----------
Total partners' capital 3,314,177 5,084,297
---------- ----------
Total liabilities and partners' capital $6,377,995 $8,593,113
========== ==========
</TABLE>
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,
--------------------- ----------------------
2000 1999 2000 1999
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Operating lease rentals $373,945 $1,141,089 $ 897,712 $2,279,555
Direct finance lease income 36,989 61,685 70,284 130,079
Equipment sales margin 124,752 103,196 258,858 379,520
Interest income 13,893 8,347 29,988 13,899
-------- ---------- ---------- ----------
Total revenue 549,579 1,314,317 1,256,842 2,803,053
-------- ---------- ---------- ----------
Expenses:
Depreciation 252,218 861,871 625,873 1,768,559
Management fees to general partner 4,277 29,447 29,824 65,500
Direct services from general partner 13,020 35,187 41,478 65,901
General and administrative 57,045 54,333 100,820 108,488
Interest on discounted lease rentals 30,289 67,019 68,467 146,197
Provision for losses 25,000 25,000 75,000 75,000
-------- ---------- ---------- ----------
Total expenses 381,849 1,072,857 941,462 2,229,645
-------- ---------- ---------- ----------
Net income $167,730 $ 241,460 $ 315,380 $ 573,408
======== ========== ========== ==========
Net income allocated:
To the general partner $ 8,100 $ 10,111 $ 20,855 $ 20,989
To the Class A limited partners 158,013 229,007 291,537 546,830
To the Class B limited partner 1,617 2,342 2,988 5,589
-------- ---------- ---------- ----------
$167,730 $ 241,460 $ 315,380 $ 573,408
======== ========== ========== ==========
Net income per weighted average
Class A limited partner unit outstanding $ 1.18 $ 1.72 $ 2.19 $ 4.10
======== ========== ========== ==========
Weighted average Class A
limited partner units outstanding 133,418 133,418 133,418 133,432
======== ========== ========== ==========
</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, June 30,
2000 1999
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 2,230,776 $ 3,810,187
----------- -----------
Cash flows from investing activities:
Upgrade of equipment on operating lease from affiliate - (4,864)
----------- -----------
Net cash used in investing activities - (4,864)
----------- -----------
Cash flows from financing activities:
Principal payments on discounted lease rentals (875,955) (1,337,599)
Distributions to partners (1,636,500) (2,434,521)
Redemptions of Class A limited partner units - (8,150)
----------- -----------
Net cash used in financing activities (2,512,455) (3,780,270)
----------- -----------
Net increase/(decrease) in cash and cash equivalents (281,679) 25,053
Cash and cash equivalents at beginning of period 1,345,288 784,867
----------- -----------
Cash and cash equivalents at end of period 1,063,609 809,920
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 68,467 $ 146,197
Interest paid on financed operating lease rentals - -
</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, 1999 was
derived from the audited financial statements included in the Partnership's
Annual Report on Form 10-KA for the year ended December 31, 1999, (the "1999
Form 10-KA") previously filed with the Securities and Exchange Commission.
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.
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. In June 1999,
the Financial Accounting Standards Board issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement 133, an Amendment of FASB Statement 133. Statement 137
effectively extends the required application of Statement 133 to fiscal years
beginning after June 15, 2000, with earlier application permitted. The
Partnership adopted Statement 133 in the first quarter of 1999. The General
Partner does not expect the adoption of Statement 133 or Statement 137 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 June 30, 2000, management fees of $4,030 are included in payables
to affiliates.
6
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited), continued
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 June 30, 2000, direct services from the General
Partner in the amount of $3,320 are included in payables to affiliates.
General Partner Matters
CAII, an affiliate of the general partner, owed the Partnership amounts for
rents, remarketing proceeds and other amounts (collectively, the "Prior
Rents") collected by CAII on behalf of the Partnership during periods prior to
February 1, 2000 (the "Prior Periods"). According to the Partnership records,
CAII has paid these amounts. However, according to its own records, CAII owes
approximately $3.0 million as of July 31, 2000 to other investors and
creditors (who, along with the Partnership, are referred to herein as the
"Payees"), for Prior Rents collected by CAII on their behalf during the Prior
Periods. CAII, which presently does not have the funds to repay all of the
Prior Rents, is in negotiations with the Payees to develop a plan for
repayment of the Prior Rents. At June 30,2000, CAII has repaid the Prior
Rents to the Partnership. Included in payable to affiliates is $86,289 of
administrative expenses that are reimbursable to the General Partner.
The Partnership relies upon the services of CAII for origination of leases,
administrative and accounting services and remarketing of leases and
equipment, among other services. Should CAII be unable to develop a plan for
repayment with it's Payees, the Partnership may be required to contract with
another party for these services. In such event, there is no assurance that
another provider of these services can be identified.
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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2000 1999 Change 2000 1999 Change
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $128,427 $273,884 $(145,457) $ 273,656 $ 494,878 $(221,222)
Equipment sales margin 124,752 103,196 21,556 258,858 379,520 (120,662)
Interest income 13,893 8,347 5,546 29,988 13,899 16,089
Management fees paid to general partner (4,277) (29,447) 25,170 (29,824) (65,500) 35,676
Direct services from general partner (13,020) (35,187) 22,167 (41,478) (65,901) 24,423
General and administrative expenses (57,045) (54,333) (2,712) (100,820) (108,488) 7,668
Provision for losses (25,000) (25,000) - (75,000) (75,000) -
-------- -------- --------- --------- --------- ---------
Net income $167,730 $241,460 $ (73,730) $ 315,380 $ 573,408 $(258,028)
======== ======== ========= ========= ========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Operating lease rentals $ 373,945 $1,141,089 $ 897,712 $ 2,279,555
Direct finance lease income 36,989 61,685 70,284 130,079
Depreciation (252,218) (861,871) (625,873) (1,768,559)
Interest expense on discounted lease rentals (30,289) (67,019) (68,467) (146,197)
--------- ---------- --------- -----------
Leasing margin $ 128,427 $ 273,884 $ 273,656 $ 494,878
========= ========== ========= ===========
Leasing margin ratio 31% 23% 28% 21%
========= ========== ========= ===========
</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,
2000 compared to the six months ended June 30, 1999 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 leasing
margin ratio increased for the three and six months ended June 30, 2000
primarily due to an increase in the mix of direct finance leases versus
operating leases.
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Equipment sales revenue $ 384,060 $ 261,607 $ 698,171 $1,155,457
Cost of equipment sales (259,308) (158,411) (439,313) (775,937)
--------- --------- --------- ----------
Equipment sales margin $ 124,752 $ 103,196 $ 258,858 $ 379,520
========= ========= ========= ==========
</TABLE>
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 six months ended June 30, 2000
included material handling and manufacturing equipment with a gain of $162,750
and computer equipment with a gain of $75,500. Equipment sold during the six
months ended June 30, 1999 included manufacturing equipment with a gain of
$79,470, locomotives with a margin of $154,400 and machine tools with a margin
of $125,889.
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 six months ended
June 30, 2000 as compared to the corresponding period in 1999 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
decreased for the three and six months ended June 30, 2000 compared to the three
and six months ended June 30, 1999. The primary components of general and
administrative expenses for the six months ended June 30, 2000 and June 30, 1999
were data processing, advertising, audit and tax fees, bank charges and legal
fees.
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
assessments of the estimated residual values of its assets to identify other-
than-temporary losses in value.
The provision for losses recorded during the six months ended June 30, 2000
related primarily to lessees returning equipment to the Partnership and the
associated decrease in the estimated value to be received from the equipment.
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 six months ended June 30, 2000, the Partnership declared
distributions to the partners of $2,085,500, ($451,000 of which was paid in July
2000). 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 2000 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 cumulative preferred distribution
of 12% per annum per the Partnership Agreement. Therefore, because of the
decrease in distributions to the Class A limited partners during the six months
ended June 30, 2000, CAII, the sole Class B limited partner, did not receive any
distributions of cash from operations.
CAII, an affiliate of the general partner, owed the Partnership amounts for
rents, remarketing proceeds and other amounts (collectively, the "Prior Rents")
collected by CAII on behalf of the Partnership during periods prior to February
1, 2000 (the "Prior Periods"). According to the Partnership records, CAII has
paid these amounts. However, according to its own records, CAII owes
approximately $3.0 million to other investors and creditors as of July 31, 2000
(who, along with the Partnership, are referred to herein as the "Payees"), for
Prior Rents collected by CAII on their behalf during the Prior Periods. CAII,
which presently does not have the funds to repay all of the Prior Rents, is in
negotiations with the Payees to develop a plan for repayment of the Prior Rents.
The Partnership relies upon the services of CAII for origination of leases,
administrative and accounting services and remarketing of leases and equipment,
among other services. Should CAII be unable to develop a plan for repayment with
it's Payees, the Partnership may be required to contract with another party for
these services. In such event, there is no assurance that another provider of
these services can be identified.
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
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, continued
-----------------------------
at fair value. In June 1999, the Financial Accounting Standards Board issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement 133, an Amendment of FASB
Statement 133. Statement 137 effectively extends the required application of
Statement 133 to fiscal years beginning after June 15, 2000, with earlier
application permitted. The Partnership adopted Statement 133 in the first
quarter of 1999. The General Partner does not expect the adoption of Statement
133 or Statement 137 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 1999 Form 10-KA 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 significant
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 June 30, 2000.
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: August 14, 2000 By: /s/Susan M. Landi
------------------------
Susan M. Landi
Chief Accounting Officer
15
