<PAGE> 1
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, 2000
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-21382
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Capital Preferred Yield Fund-II, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 84-1184628
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(State of organization) (I.R.S. Employer
Identification No.)
7175 West Jefferson Avenue, Suite 4000
Lakewood, Colorado 80235
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(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 .
--- ---
Page 1 of 14 Pages
Exhibit Index appears on Page 15
<PAGE> 2
CAPITAL PREFERRED YIELD FUND-II, L.P.
Quarterly Report on Form 10-Q
for the Quarter Ended
September 30, 2000
Table of Contents
<TABLE>
<CAPTION>
PART I. FINANCIAL
INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 2000 and December 31, 1999 3
Statements of Income - Three and Nine Months Ended
September 30, 2000 and 1999 4
Statements of Cash Flows - Nine Months Ended
September 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
Exhibit Index 15
</TABLE>
2
<PAGE> 3
CAPITAL PREFERRED YIELD FUND-II, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 799,568 $ 1,345,288
Accounts receivable, net 152,946 332,475
Receivable from affiliates -- 243,586
Equipment held for sale or re-lease 385,024 566,714
Net investment in direct finance leases 1,493,173 1,946,226
Leased equipment, net 2,279,274 4,158,824
------------ ------------
Total assets $ 5,109,985 $ 8,593,113
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 770,015 $ 1,171,040
Payables to affiliates 35,909 12,655
Rents received in advance 57,169 1,303
Distributions payable to partners 167,000 2,000
Discounted lease rentals 1,109,460 2,321,818
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Total liabilities 2,139,553 3,508,816
------------ ------------
Partners' capital:
General partner -- --
Limited partners:
Class A 2,784,155 4,901,714
Class B 186,277 182,583
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Total partners' capital 2,970,432 5,084,297
------------ ------------
Total liabilities and partners' capital $ 5,109,985 $ 8,593,113
============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE> 4
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Operating lease rentals $ 548,211 $ 908,153 $1,445,923 $3,187,708
Direct finance lease income 33,920 55,576 104,204 185,655
Equipment sales margin 34,570 8,841 293,428 388,360
Interest income 10,690 7,144 40,678 21,043
---------- ---------- ---------- ----------
Total revenue 627,391 979,714 1,884,233 3,782,766
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 320,096 659,248 945,969 2,427,807
Management fees paid to general partner 16,369 21,238 46,193 86,738
Direct services from general partner 5,675 7,887 47,153 73,788
General and administrative 37,712 34,492 138,532 142,980
Interest on discounted lease rentals 23,784 56,935 92,251 203,131
Provision for losses 150,000 25,000 225,000 100,000
---------- ---------- ---------- ----------
Total expenses 553,636 804,800 1,495,098 3,034,444
---------- ---------- ---------- ----------
NET INCOME $ 73,755 $ 174,914 $ 389,135 $ 748,322
========== ========== ========== ==========
NET INCOME ALLOCATED:
To the general partner $ 4,175 $ 5,004 $ 25,030 $ 25,993
To the Class A limited partners 68,875 168,192 360,412 715,022
To the Class B limited partner 705 1,718 3,693 7,307
---------- ---------- ---------- ----------
$ 73,755 $ 174,914 $ 389,135 $ 748,322
========== ========== ========== ==========
Net income per weighted average
Class A limited partner unit outstanding $ .52 $ 1.26 $ 2.70 $ 5.36
========== ========== ========== ==========
Weighted average Class A
limited partner units outstanding 133,418 133,418 133,418 133,428
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
4
<PAGE> 5
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
September 30, September 30,
2000 1999
-------------- --------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,004,638 $ 4,861,198
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Upgrade of equipment on operating lease from affiliate -- (4,864)
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Net cash used in investing activities -- (4,864)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on discounted lease rentals (1,212,358) (1,849,440)
Distributions to partners (2,338,000) (3,007,321)
Redemptions of Class A limited partner units -- (8,150)
-------------- --------------
Net cash used in financing activities (3,550,358) (4,864,911)
-------------- --------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (545,720) (8,577)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,345,288 784,867
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 799,568 776,290
============== ==============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 92,251 $ 203,131
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
<PAGE> 6
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 all fiscal quarters of all fiscal years beginning after
June 15, 2000, with earlier application permitted. The Partnership adopted
Statement 133 in the first quarter of 1999.
6
<PAGE> 7
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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, 2000, management fees of $4,502 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, 2000, there were no direct
services from the General Partner included in payables to 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.
GENERAL PARTNER MATTERS
Until September 2000, the Partnership relied upon the services of Capital
Associates International, Inc. ("CAII"), its affiliate, for origination of
leases, administrative and accounting services and remarketing of leases
and equipment, among other services. The General Partner has terminated its
relationship with CAII and has contracted with Stellar Financial, Inc. to
provide billing, accounting and property tax repayment services and
Mishawaka Leasing Company, Inc. ("Mishawaka") to provide all other lease
accounting, administrative and remarketing services. Many of the management
and administrative personnel of Mishawaka formerly worked for CAII and
serviced the Partnership leases.
CAII owed the Partnership for rents, remarketing proceeds and other amounts
(the "Prior Rents") collected by CAII on behalf of the Partnership during
the periods prior to February 1, 2000. On September 8, 2000, as part of the
sale of the General Partnership interest owned by CAII to Mishawaka,
Mishawaka repaid the Prior Rents owed by CAII to the Partnership. Included
in payables to affiliates is $31,407.00 of administrative expenses that are
reimbursable to the General Partner.
7
<PAGE> 8
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 Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2000 1999 Change 2000 1999 Change
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 238,251 $ 247,546 $ (9,295) $ 511,907 $ 742,425 $(230,518)
Equipment sales margin 34,570 8,841 25,729 293,428 388,360 (94,932)
Interest income 10,690 7,144 3,546 40,678 21,043 19,635
Management fees paid to general partner (16,369) (21,238) 4,869 (46,193) (86,738) 40,545
Direct services from general partner (5,675) (7,887) 2,212 (47,153) (73,788) 26,635
General and administrative expenses (37,712) (34,492) (3,220) (138,532) (142,980) 4,448
Provision for losses (150,000) (25,000) (125,000) (225,000) (100,000) (125,000)
--------- --------- --------- --------- --------- ---------
Net income $ 73,755 $ 174,914 $(101,159) $ 389,135 $ 748,322 $(359,187)
========= ========= ========= ========= ========= =========
</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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating lease rentals $ 548,211 $ 908,153 $ 1,445,923 $ 3,187,708
Direct finance lease income 33,920 55,576 104,204 185,655
Depreciation (320,096) (659,248) (945,969) (2,427,807)
Interest expense on discounted lease rentals (23,784) (56,935) (92,251) (203,131)
------------ ------------ ------------ ------------
Leasing margin $ 238,251 $ 247,546 $ 511,907 $ 742,425
============ ============ ============ ============
Leasing margin ratio 41% 26% 33% 22%
============ ============ ============ ============
</TABLE>
8
<PAGE> 9
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, 2000 compared to the nine months ended September 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 nine months ended September 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 Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Equipment sales revenue $ 413,995 $ 128,805 $ 1,112,165 $ 1,284,262
Cost of equipment sales (379,425) (119,964) (818,737) (895,902)
----------- ----------- ----------- -----------
Equipment sales margin $ 34,570 $ 8,841 $ 293,428 $ 388,360
=========== =========== =========== ===========
</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 nine months ended September 30, 2000
included material handling and manufacturing equipment with a gain of $38,300
and computer equipment with a gain of $212,000. Equipment sold during the nine
months ended September 30, 1999 included manufacturing equipment with a gain of
$79,470, locomotives with a margin of $154,500 and machine tools with a margin
of $131,195.
9
<PAGE> 10
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 to partners, and the interest rate on such invested cash.
EXPENSES
Management fees paid to the General Partner decreased for the three and nine
months ended September 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
remained relatively unchanged for the three and nine months ended September 30,
2000 compared to the three and nine months ended September 30, 1999. The primary
components of general and administrative expenses for the nine months ended
September 30, 2000 were data processing, printing, 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 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 nine months ended September 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.
10
<PAGE> 11
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. The Partnership is not purchasing additional equipment, initial
leases are expiring, and equipment is being remarketed (i.e., re-leased,
renewed, or sold). 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.
During the nine months ended September 30, 2000, the Partnership declared
distributions to the partners of $2,503,000, ($167,000 of which was paid in
October 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 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 nine months
ended September 30, 2000, CAII, the sole Class B limited partner, did not
receive any distributions of cash from operations.
Until September 2000, the Partnership relied upon the services of Capital
Associates International, Inc. ("CAII"), its affiliate, for origination of
leases, administrative and accounting services and remarketing of leases and
equipment, among other services. The General Partner has terminated its
relationship with CAII and has contracted with Stellar Financial, Inc. to
provide billing, accounting and property tax repayment services and Mishawaka
Leasing Company, Inc. ("Mishawaka") to provide all other lease accounting,
administrative and remarketing services. Many of the management and
administrative personnel of Mishawaka formerly worked for CAII and serviced the
Partnership leases.
11
<PAGE> 12
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
CAII owed the Partnership for rents, remarketing proceeds and other amounts (the
"Prior Rents") collected by CAII on behalf of the Partnership during the periods
prior to February 1, 2000. On September 8, 2000, as part of the sale of the
General Partnership interest owned by CAII to Mishawaka, Mishawaka repaid the
Prior Rents owed by CAII to the Partnership. Included in payables to affiliates
is $31,407.00 of administrative expenses that are reimbursable to the General
Partner.
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. 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 all fiscal
quarters of all fiscal years beginning after June 15, 2000, with earlier
application permitted. The Partnership adopted Statement 133 in the first
quarter of 1999.
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> 13
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
27 Financial Data Schedule
(b) The Partnership did not file any reports on Form 8-K during the
quarter ended September 30, 2000.
13
<PAGE> 14
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 14, 2000 By: /s/ Susan M. Landi
---------------------------------
Susan M. Landi
Chief Accounting Officer
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
15
