SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 0-21382
CAPITAL PREFERRED YIELD FUND-II
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1184628
(State of organization) (I.R.S. Employer Identification Number)
7175 W. JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Class A
Limited Partner
Interest
(Title of Class)
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
----- -----.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K [ ].
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
Exhibit Index Appears on Pages 35
Page 1 of 36 Pages
<PAGE>
Item 1. Business
--------
Capital Preferred Yield Fund-II, L.P., a Delaware limited partnership (the
"Partnership"), was organized on November 19, 1991 and is engaged in the
business of owning and leasing equipment. CAI Equipment Leasing III Corp., a
Colorado corporation and a wholly owned subsidiary of Capital Associates, Inc.
("CAI"), is the general partner of the Partnership.
Capital Associates International, Inc. ("CAII"), an affiliate of the general
partner, is the sole Class B limited partner of the Partnership. In exchange for
its Class B limited partner interest, CAII contributed $330,000 (i.e., $10,000
for each $1,000,000 contribution to the Partnership made by the Class A limited
partners) to the Partnership making it the largest single investor in the
Partnership. CAII's interest in Distributable Cash is subordinated to the Class
A limited partners' interest. The contributions of CAII were made simultaneously
with the purchase of equipment by the Partnership.
The Partnership's overall investment objectives are to (i) raise the maximum
allowable capital from investors for investment in accordance with the
Partnership's investment objectives described in the Prospectus; (ii) invest
such capital and related indebtedness in a diversified portfolio of equipment
subject to leases with creditworthy businesses with terms ranging from two to
seven years; (iii) if funds are available for distribution, make monthly cash
distributions to the Class A and Class B Limited Partners during the
reinvestment period (a period that ended June 30, 1997); (iv) re-invest all
available undistributed cash from operations and cash from sales in additional
equipment during the reinvestment period to increase the Partnership's portfolio
of revenue-generating equipment, provided that suitable equipment can be
identified and acquired; and (v) sell or otherwise dispose of the Partnership's
equipment and other assets in an orderly manner and promptly distribute cash
from sales thereof to the Partners within four years of the end of the
reinvestment period.
Through June 30, 1997, the Partnership acquired equipment of various types under
lease to third parties on short-term leases (generally less than five years).
All of the equipment was purchased by CAII directly from manufacturers or from
other independent third parties and sold to the Partnership. The equipment
generally consisted of point of sale equipment, transportation equipment,
computer equipment, above ground mining equipment and printed circuit board
manufacturing equipment, among others (the "equipment"). See Item 13 of this
report, "Certain Relationships and Related Transactions" for the listing of
equipment purchased during 1997.
The Partnership may assign the rentals from leases to financial institutions, or
acquire leases subject to such assignments, at fixed interest rates on a
non-recourse basis. In the event of default by a lessee, the financial
institution has a first lien on the underlying leased equipment, with no further
recourse against the Partnership. Cash proceeds from such financings, or
financings assumed in the acquisition of leases, are recorded on the balance
sheet as discounted lease rentals. As lessees make payments to financial
institutions, leasing revenue and interest expense are recorded.
-2-
<PAGE>
Item 1. Business, continued
--------
During 1997, the Partnership leased equipment to investment grade lessees in
financial services, transportation services and manufacturing. Since the
Partnership's formation, approximately 72% of the Partnership's equipment under
lease was leased to investment grade lessees. Pursuant to the Partnership
Agreement, an investment grade lessee is a company (i) with a net worth in
excess of $100 million (and no debt issues that are rated); or (ii) with a
credit rating of not less than Baa as determined by Moody's Investor Service,
Inc., or comparable credit rating, as determined by another recognized credit
rating service; or (iii) a lessee, all of whose lease payments have been
unconditionally guaranteed or supported by a letter of credit issued by a
company meeting one of the above requirements. The Partnership limits its credit
risk through selective use of non-recourse debt financing of future lease
rentals, as described above.
The Partnership only acquires equipment that is on lease at the time of
acquisition. After the initial term of its lease, each item of equipment will be
expected to produce additional investment income from its re-lease or sale. Upon
expiration of the initial lease, the Partnership attempts to re-lease or sell
the equipment to the existing lessee. If a re-lease or sale to the lessee cannot
be negotiated, the Partnership will attempt to lease or sell the equipment to a
third party.
The Partnership's business is not subject to seasonal variations.
The ultimate rate of return on leases depends, in part, on the general level of
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).
The Partnership has no employees. The officers, directors and employees of the
general partner and its affiliates perform services on behalf of the
Partnership. The general partner is entitled to receive certain fees and expense
reimbursements in connection with the performance of these services. See Item 10
of this Report, "Directors and Executive Officers of the Partnership" and Item
13 of this Report, "Certain Relationships and Related Transactions".
The Partnership competes in the leasing marketplace as a lessor with a
significant number of other companies, including equipment manufacturers,
leasing companies and financial institutions. The Partnership competes mainly on
the basis of the expertise of its general partner in remarketing equipment,
terms offered in its transactions, pricing and service. Although the Partnership
does not account for a significant percentage of the leasing market, the general
partner believes that the Partnership's marketing strategies and financing
capabilities will enable it to continue to compete effectively in the equipment
leasing and remarketing markets.
The Partnership leases equipment to a significant number of lessees. No single
lessee and its affiliates accounted for more than 10% of total revenue of the
Partnership during 1997.
-3-
<PAGE>
Item 1. Business, continued
--------
The Partnership entered its liquidation period (as defined in the Partnership
Agreement) in July 1997. During the liquidation period, purchases of equipment
have ceased (other than for prior commitments and equipment upgrades).
The Partnership is required to dissolve and distribute all of its assets no
later than December 31, 2009. However, the general partner anticipates that all
equipment will be sold prior to that date and that the Partnership will be
liquidated between 1998 and 2001.
Item 2. Properties
----------
Per the Partnership Agreement, the Partnership does not own or lease any
physical properties other than the equipment discussed in Item 1 "Business", of
this report, which is incorporated herein by reference.
Item 3. Legal Proceedings
-----------------
Neither the Partnership nor any of the Partnership's equipment is the subject of
any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of the limited partners of the Partnership,
through the solicitation of proxies or otherwise, during the fourth quarter
ended December 31, 1997.
Item 5. Market for the Partnership's Common Equity and Related Stockholder
-----------------------------------------------------------------------
Matters
-------
(a) The Partnership's Class A limited partner units, Class B interest and
general partner interest are not publicly traded. There is no
established public trading market for such units and interests and
none is expected to develop.
(b) As of December 31, 1997, the number of Class A limited partners was
1,774.
(c) Distributions
-------------
During 1997, the Partnership made twelve (12) distributions (a portion
of which constituted a return of capital) to Class A limited partners,
as follows:
-4-
<PAGE>
Item 5. Market for the Partnership's Common Equity and Related Stockholder
-----------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
Distributions Per
$250 Class A
Limited Partner
For the Payment Unit (computed on Total
Month Ended Made During weighted average) Distributions
----------- ----------- ----------------- -------------
December 31, 1996 January 1997 $ 2.50 $ 334,945
January 31, 1997 February 1997 2.50 334,945
February 28, 1997 March 1997 2.50 334,945
March 31, 1997 April 1997 2.50 334,945
April 30, 1997 May 1997 2.50 334,945
May 31, 1997 June 1997 2.50 334,945
June 30, 1997 July 1997 2.50 334,945
July 31, 1997 August 1997 2.99 400,000
August 31, 1997 September 1997 3.74 500,000
September 30, 1997 October 1997 3.74 500,000
October 31, 1997 November 1997 3.74 500,000
November 30, 1997 December 1997 3.74 500,000
------- -----------
$ 35.45 $ 4,744,615
======= ===========
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 by a partnership 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 can only be determined after all
residual cash flows (which include proceeds from the re-leasing and
sale of equipment) have been realized at the termination of the
Partnership.
The distribution for the month ended December 31, 1997, totaling
$500,000, was paid to the Class A limited partners during January 1998.
Distributions to the general partner and Class B limited partner during
1997 are discussed in Item 13 of this Report, "Certain Relationships
and Related Transactions."
The general partner believes that the Partnership will generate
sufficient cash flow from operations during 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 be based upon cash
availability and will vary. All distributions are expected to be a
return of capital for economic purposes.
-5-
<PAGE>
Item 5. Market for the Partnership's Common Equity and Related Stockholder
-----------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
During 1996, the Partnership made twelve (12) distributions (a portion
of which constituted a return of capital) to Class A limited partners,
as follows:
Distributions Per
$250 Class A
Limited Partner
For the Payment Unit (computed on Total
Month Ended Made During weighted average) Distributions
----------- ----------- ----------------- -------------
December 31, 1995 January 1996 $ 2.50 $ 337,250
January 31, 1996 February 1996 2.50 335,750
February 28, 1996 March 1996 2.50 335,560
March 31, 1996 April 1996 2.50 335,560
April 30, 1996 May 1996 2.50 335,560
May 31, 1996 June 1996 2.50 335,445
June 30, 1996 July 1996 2.50 335,445
July 31, 1996 August 1996 2.50 335,445
August 31, 1996 September 1996 2.50 335,345
September 30, 1996 October 1996 2.50 335,145
October 31, 1996 November 1996 2.50 335,145
November 30, 1996 December 1996 2.50 335,145
------- -----------
$ 30.00 $ 4,026,795
======= ===========
The following represents annual and cumulative distributions per Class
A limited partner unit, as described in Footnote 1 to Notes to
Consolidated Financial Statement.
Distributions per
$ Per Class A Limited
Class A Partner Unit
Payment Limited Partner (computed on
Made During Unit Invested weighted average) % (1)
----------- --------------- ----------------- -----
1992 $ 250 $ 15.00 12%
1993 30.00 12%
1994 30.00 12%
1995 30.00 12%
1996 30.00 12%
1997 35.45 14%
--------
$ 170.45
========
(1) Cumulative distributions, as described in Footnote 1 to Notes to
Consolidated Financial Statements began July 1992.
-6-
<PAGE>
Item 6. Selected Financial Data
-----------------------
The following selected financial data relates to 1993 through 1997. The data
should be read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenue $ 10,309,337 $ 10,870,083 $ 12,719,445 $ 11,967,912 $ 6,434,945
Net income 1,456,778 231,258 1,009,230 502,147 133,229
Net income per weighted average Class A
limited partner unit outstanding 10.40 1.40 7.09 3.52 1.43
Total assets 25,032,730 33,516,785 31,806,534 39,962,561 34,740,737
Discounted and financed operating
lease rentals 10,218,917 15,559,029 10,009,561 15,037,678 17,287,511
Distributions declared to partners 4,995,930 4,101,808 4,131,126 3,847,041 1,735,555
Distributions declared per monthly weighted
average Class A limited partner unit 36.69 30.00 30.00 30.00 30.00
</TABLE>
Item 7. 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 income statement
categories and analyses of changes in those condensed categories derived from
the Statements of Income:
<TABLE>
<CAPTION>
Condensed Condensed
Statements of Income The effect on Statements of Income The effect on
for the years net income for the years net income
ended December 31, of changes ended December 31, of changes
-------------------------- between --------------------------- between
1997 1996 years 1996 1995 years
----------- ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 1,662,250 $ 1,470,270 $ 191,980 $ 1,470,270 $ 1,815,691 $ (345,421)
Equipment sales margin 572,363 189,435 382,928 189,435 248,350 (58,915)
Interest income 80,642 201,719 (121,077) 201,719 65,426 136,293
Management fees paid to
general partner (200,538) (286,973) 86,435 (286,973) (275,888) (11,085)
Direct services from general partner (107,779) (158,770) 50,991 (158,770) (81,229) (77,541)
General and administrative expenses (225,160) (284,423) 59,263 (284,423) (153,120) (131,303)
Provision for losses (325,000) (900,000) 575,000 (900,000) (610,000) (290,000)
----------- ------------ ----------- ----------- ----------- ------------
Net income $ 1,456,778 $ 231,258 $ 1,225,520 $ 231,258 $ 1,009,230 $ (777,972)
=========== ============ =========== =========== =========== ============
</TABLE>
The Partnership is in the 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.
-7-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
LEASING MARGIN
Leasing margin consists of the following:
Years Ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
Operating lease rentals $ 9,251,501 $ 10,028,052 $ 11,843,447
Direct finance lease income 404,831 450,877 562,222
Depreciation (7,066,062) (7,856,952) (9,618,860)
Interest expense on discounted
lease rentals (745,295) (873,433) (971,118)
Interest expense on financed
operating lease rentals (182,725) (278,274) -
------------ ------------ ------------
Leasing margin $ 1,662,250 $ 1,470,270 $ 1,815,691
============ ============ ============
Leasing margin ratio 17% 14% 15%
== == ==
All components of leasing margin decreased due to portfolio runoff. Leasing
margin ratio fluctuates based upon remarketing activities. Remarketing revenue
will vary as initial lease terms expire.
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:
Years Ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
Equipment sales revenue $ 2,217,177 $ 2,865,442 $ 993,317
Cost of equipment sales (1,644,814) (2,676,007) (744,967)
------------ ------------ ----------
Equipment sales margin $ 572,363 $ 189,435 $ 248,350
============ ============ ==========
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 either
the original lessee or a third party) and, accordingly, the timing and amount of
equipment sales cannot be projected accurately. However equipment sales margin
is expected to increase during the liquidation period.
-8-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
INTEREST INCOME
Interest income varies due to (i) the amount of cash available for investment
(pending distribution or equipment purchases) and (ii) the interest rate on such
invested cash.
PROVISION FOR LOSSES
The remarketing of equipment for an amount greater than its book value is
reported as 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 year ended December 31, 1997
related to the following:
* $245,000 related 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 considerably less than was
anticipated.
* $80,000 for a deficiency related to a lease with Ernst Home Center, a
lessee that filed for Chapter 11 bankruptcy protection on July 12, 1996.
The lease was funded with non-recourse debt and the lending institution
repossessed and liquidated the equipment during March 1997 resulting in a
deficiency to the Partnership.
The provision for losses recorded during 1996 related to the following items:
* $245,000 to record the Partnership's loss exposure related to Barney's,
Inc., a lessee that filed for Chapter 11 bankruptcy protection on January
10, 1996. In July 1996, negotiations were finalized and a settlement was
received for the Partnership's claim.
* $180,000 related to Norcross Footwear, a lessee that filed for Chapter 11
bankruptcy protection on February 9, 1996. The lease was rejected during
second quarter 1996 and the equipment has been sold or returned to the
Partnership. The fair market value of the equipment re-leased or sold to a
third party was considerably less than anticipated.
-9-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
PROVISION FOR LOSSES, continued
* $400,000 and $75,000 related to lessees returning computer equipment and an
MRI system, respectively, to the Partnership. The Partnership had
previously expected to realize the carrying value of that equipment through
lease renewals and proceeds from sale of the equipment to the original
lessee. The fair market value of the equipment re-leased or sold to a third
party is considerably less than was anticipated.
The provision for losses recorded during 1995 related to the following items:
* $360,000 due to a lease of mass storage computer equipment that terminated
during 1995.
* $150,000 due to lessees returning modular buildings and computer equipment
to the Partnership.
* $100,000 due to a settlement agreement reached with a lessee that filed for
protection under Chapter 11 of the bankruptcy code.
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 the acquisition of
equipment or distributions to the partners.
During 1997, 1996 and 1995, the Partnership acquired equipment subject to leases
with a total equipment purchase price of approximately $1,085,000, $14,395,000
and $3,032,000, respectively.
During 1997, 1996 and 1995, the Partnership declared distributions to the
partners of $4,995,930, $4,101,808 and $4,131,126, respectively. 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 by a
partnership 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 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 be
based upon cash availability and will vary. All distributions are expected to be
a return of capital for economic purposes.
-10-
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements and
Financial Statement Schedule
Page
Number
Financial Statements ------
--------------------
Independent Auditors' Report 12
Balance Sheets as of December 31, 1997 and 1996 13
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 14
Statements of Partners' Capital for the years ended
December 31, 1997, 1996 and 1995 15
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 16
Notes to Financial Statements 17-27
Financial Statement Schedule
----------------------------
Independent Auditors' Report 28
Schedule II - Valuation and Qualifying Accounts 29
-11-
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE PARTNERS
CAPITAL PREFERRED YIELD FUND-II, L.P.:
We have audited the accompanying balance sheets of Capital Preferred Yield
Fund-II, L.P. as of December 31, 1997 and 1996, and the related statements of
income, partners' capital, and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Preferred Yield
Fund-II, L.P. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
------------------------
KPMG PEAT MARWICK LLP
Denver, Colorado
February 6, 1998
-12-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---- ----
Cash and cash equivalents $ 1,897,763 $ 1,768,824
Accounts receivable, net of allowance for
doubtful accounts of $25,000 in 1997 and 1996 620,453 149,316
Equipment held for sale or re-lease 646,787 448,552
Net investment in direct finance leases 3,839,687 4,978,823
Leased equipment, net 18,028,040 26,171,270
------------ ------------
Total assets $ 25,032,730 $ 33,516,785
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 882,678 $ 611,147
Payables to affiliates 20,257 26,033
Rents received in advance 102,410 110,946
Distributions payable to partners 508,106 341,384
Discounted lease rentals 7,961,882 12,397,890
Financed operating lease rentals 2,257,035 3,161,139
------------ ------------
Total liabilities 11,732,368 16,648,539
------------ ------------
Partners' capital:
General partner - -
Limited partners:
Class A 260,000 units authorized; 133,718 and
134,978 units issued and outstanding in 1997
and 1996, respectively 13,092,164 16,637,978
Class B 208,198 230,268
------------ ------------
Total partners' capital 13,300,362 16,868,246
------------ ------------
Total liabilities and partners' capital $ 25,032,730 $ 33,516,785
============ ============
See accompanying notes to financial statements.
-13-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Operating lease rentals $ 9,251,501 $ 10,028,052 $ 11,843,447
Direct finance lease income 404,831 450,877 562,222
Equipment sales margin 572,363 189,435 248,350
Interest income 80,642 201,719 65,426
----------- ------------ ------------
Total revenue 10,309,337 10,870,083 12,719,445
----------- ------------ ------------
EXPENSES:
Depreciation 7,066,062 7,856,952 9,618,860
Interest on discounted lease rentals 745,295 873,433 971,118
Interest on financed operating lease rentals 182,725 278,274 -
Management fees paid to general partner 200,538 286,973 275,888
Direct services from general partner 107,779 158,770 81,229
General and administrative 225,160 284,423 153,120
Provision for losses 325,000 900,000 610,000
----------- ------------ ------------
Total expenses 8,852,559 10,638,825 11,710,215
----------- ------------ ------------
NET INCOME $ 1,456,778 $ 231,258 $ 1,009,230
=========== ============ ============
NET INCOME ALLOCATED:
To the general partner $ 49,960 $ 41,018 $ 41,312
To the Class A limited partners 1,392,588 188,286 958,122
To the Class B limited partner 14,230 1,954 9,796
----------- ------------ ------------
$ 1,456,778 $ 231,258 $ 1,009,230
=========== ============ ============
Net income per weighted average Class
A limited partner unit outstanding $ 10.40 $ 1.40 $ 7.09
=========== ============ ============
Weighted average Class A limited partner
units outstanding 133,886 134,388 135,108
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
-14-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF PARTNERS' CAPITAL
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Class A
Limited Class A Class B
General Partner Limited Limited
Partner Units Partners Partner Total
------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Partners' capital at January 1, 1995 $ - 135,490 $ 23,816,621 $ 291,117 $ 24,107,738
Redemptions - (590) (119,506) - (119,506)
Net income 41,312 - 958,122 9,796 1,009,230
Distributions declared to partners (41,312) - (4,053,515) (36,299) (4,131,126)
--------- ------- ------------ --------- ------------
Partners' capital at December 31, 1995 - 134,900 20,601,722 264,614 20,866,336
Redemptions - (922) (127,540) - (127,540)
Net income 41,018 - 188,286 1,954 231,258
Distributions declared to partners (41,018) - (4,024,490) (36,300) (4,101,808)
--------- ------- ------------- ---------- -------------
Partners' capital, December 31, 1996 - 133,978 16,637,978 230,268 16,868,246
Redemptions - (260) (28,732) - (28,732)
Net income 49,960 - 1,392,588 14,230 1,456,778
Distributions declared to partners (49,960) - (4,909,670) (36,300) (4,995,930)
--------- ------- ------------ --------- -------------
Partners' capital, December 31, 1997 $ - 133,718 $ 13,092,164 $ 208,198 $ 13,300,362
========= ======= ============ ========= ============
</TABLE>
See accompanying notes to financial statements.
-15-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,456,778 $ 231,258 $ 1,009,230
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 7,066,062 7,856,952 9,618,860
Provision for losses 325,000 900,000 610,000
Cost of equipment sales 1,644,814 2,676,007 740,547
Recovery of investment in direct finance leases 943,666 948,323 1,254,448
Other - - 13,200
Changes in assets and liabilities:
Increase in accounts receivable (281,795) (20,567) (20,105)
Increase (decrease) in payables to affiliates (5,776) 481 (2,907)
Increase in accounts payable and accrued
liabilities 271,531 209,258 94,479
Increase (decrease) in rents received in advance (8,536) (48,538) 23,410
------------- ------------ ------------
Net cash provided by operating activities 11,411,744 12,753,174 13,341,162
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment on operating leases from affiliate (1,062,284) (7,887,705) (2,137,312)
Investment in direct finance leases, acquired from affiliate (22,469) (115,445) (301,386)
------------- ------------ ------------
Net cash used in investing activities (1,084,753) (8,003,150) (2,438,698)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on discounted lease rentals (4,436,008) (4,014,778) (5,895,078)
Principal payments on financed operating lease rentals (904,104) (1,111,518) -
Proceeds from discounting of lease rentals - 11,425 273,727
Proceeds from financing of operating lease receivables - 4,272,657 -
Distributions to partners (4,829,208) (4,104,137) (4,132,616)
Redemptions of Class A limited partner units (28,732) (127,540) (119,506)
------------- ------------ ------------
Net cash used in financing activities (10,198,052) (5,073,891) (9,873,473)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 128,939 (323,867) 1,028,991
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,768,824 2,092,691 1,063,700
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,897,763 $ 1,768,824 $ 2,092,691
============= ============ ============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 745,295 $ 873,433 $ 971,118
Interest paid on financed lease rentals 182,725 278,274 -
Supplemental disclosure of noncash investing and
financing activities:
Discounted lease rentals assumed in equipment
acquisitions - 6,403,107 592,862
</TABLE>
See accompanying notes to financial statements.
-16-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Organization
Capital Preferred Yield Fund-II, L.P. (the "Partnership"), was organized
on November 19, 1991 as a limited partnership under the laws of the State
of Delaware pursuant to an Agreement of Limited Partnership (the
"Partnership Agreement"). The Partnership was formed for the purpose of
acquiring and leasing a diversified portfolio of equipment to
unaffiliated third parties. The Partnership will continue until December
31, 2009 unless terminated earlier in accordance with the terms of the
Partnership Agreement. All Partnership equipment is expected to be sold
and the Partnership liquidated prior to 2009. The general partner of the
Partnership is CAI Equipment Leasing III Corp., a wholly owned subsidiary
of Capital Associates, Inc. ("CAI").
The general partner manages the Partnership, including investment of
funds, purchase and sale of equipment, lease negotiation and other
administrative duties. The Partnership initially sold 135,774 Class A
limited partner units to 1,796 investors at a price of $250 per Class A
limited partner unit.
Capital Associates International, Inc. ("CAII"), a wholly owned
subsidiary of CAI, is the Class B limited partner. The Class B limited
partner was required to contribute cash, upon acquisition of equipment,
in an amount equal to 1% of gross offering proceeds received from the
sale of Class A limited partner units. The Class B limited partner
contributed $330,000 to the Partnership. The Class B limited partner has
no remaining obligation to contribute cash to the Partnership.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. For leasing entities, this includes the
estimate of residual values, as discussed below. Actual results could
differ from those estimates.
Partnership Cash Distributions and Allocations of Profit and Loss
Cash Distributions
------------------
During the Reinvestment Period (as defined in the Partnership Agreement),
available cash was distributed to the partners as follows:
First, 1.0% to the general partner and 99.0% to the Class A limited
partners until the Class A limited partners received annual,
non-compounded cumulative distributions equal to 12% of their
contributed capital.
-17-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Partnership Cash Distributions and Allocations of Profit and Loss,
continued
Cash Distributions, continued
------------------
Second, 1.0% to the general partner and 99.0% to the Class B limited
partner until the Class B limited partner received annual
non-compounded cumulative distributions equal to 11% of its contributed
capital.
Third, any remaining available cash was reinvested or distributed to
the partners as specified in the Partnership Agreement.
After the Reinvestment Period (as defined in the Partnership Agreement),
available cash will be distributed to the partners as follows:
First, in accordance with the first and second allocations during the
Reinvestment Period as described above.
Second, 99.0% to the Class A limited partners and 1.0% to the general
partner, until the Class A limited partners achieve Payout (as defined
in the Partnership Agreement).
Third, 99.0% to the Class B limited partner and 1.0% to the general
partner, until the Class B limited partner achieves Payout (as defined
in the Partnership Agreement).
Fourth, 99.0% to the Class A and Class B limited partners (as a class)
and 1.0% to the general partner, until the Class A and Class B limited
partners receive cash distributions equal to 170% of their capital
contributions.
Thereafter, 90% to the Class A and Class B limited partners (as a class)
and 10% to the general partner.
Profits and Losses
------------------
There are several special allocations that precede the general
allocations of profits and losses to the partners. The most significant
special allocations are as follows:
First, commissions and expenses paid in connection with the sale of
Class A limited partner units are allocated 1.0% to the general partner
and 99.0% to the Class A limited partners.
Second, depreciation relating to Partnership equipment and any losses
resulting from the sale of equipment are generally allocated 1.0% to
the general partner and 99.0% to the limited partners (shared
99.0%/1.0% by the Class A and Class B limited partners, respectively)
-18-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Profits and Losses, continued
------------------
until the cumulative amount of such depreciation and such losses
allocated to each limited partner equals such limited partner's
contributed capital reduced by commissions and other expenses paid in
connection with the sale of Class A limited partner units allocated to
such partner. Thereafter, gain on sale of equipment, if any, will be
allocated to the general partner in an amount equal to the sum of
depreciation and loss on sale of equipment previously allocated to the
general partner.
Third, notwithstanding anything in the Partnership Agreement to the
contrary, and before any other allocation is made, items of income and
gain for the current year (or period) shall be allocated, as quickly as
possible, to the general partner to the extent of any deficit balance
existing in the general partner's capital account as of the close of
the immediately preceding year, in order to restore the balance in the
general partner's capital account to zero.
After giving effect to special allocations, profits (as defined in the
Partnership Agreement) are first allocated in proportion to, and to the
extent of, any previous losses, in reverse chronological order and
priority. Any remaining profits are allocated in the same order and
priority as cash distributions.
After giving effect to special allocations, losses (as defined in the
Partnership Agreement) are allocated in proportion to, and to the extent
of, any previous profits, in reverse chronological order and priority.
Any remaining losses are allocated 1.0% to the general partner and 99.0%
to the limited partners (shared 99.0%/1.0% by the Class A and Class B
limited partners, respectively).
Financial Reporting
-------------------
For financial reporting purposes, net income is allocated to the partners
in a manner consistent with the allocation of cash distributions.
Recently Issued Financial Accounting Standards
During 1997, the Partnership adopted SFAS No. 125, Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities ("SFAS No. 125"). SFAS No. 125 provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS No. 125 did
not have a material impact on the Partnership's financial position or
results of operations.
-19-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Long-lived Assets
The Partnership accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of ("SFAS No. 121"). SFAS No. 121 requires that long-lived assets,
including operating leases, and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the
entity should estimate the future cash flows expected to result from the
use of the asset and its eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss for long-lived assets, including
operating leases, and identifiable intangibles held by the Partnership is
based on the fair value of the asset calculated by discounting the
expected future cash flows at an appropriate interest rate.
Lease Accounting
Statement of Financial Accounting Standards No. 13, Accounting for
Leases, requires that a lessor account for each lease by the direct
finance, sales-type or operating lease method. The Partnership currently
utilizes the direct financing and operating methods for all of the
Partnership's equipment under lease. Direct finance leases are defined as
those leases which transfer substantially all of the benefits and risks
of ownership of the equipment to the lessee. For all types of leases, the
determination of profit considers the estimated value of the equipment at
lease termination, referred to as the residual value. After the inception
of a lease, the Partnership may engage in financing of lease receivables
on a nonrecourse basis (i.e., "non-recourse debt" or "discounted lease
rentals") and/or equipment sale transactions to reduce or recover its
investment in the equipment.
The Partnership's accounting methods and their financial reporting effects
are described below.
Net Investment in Direct Financing Leases ("DFLs")
The cost of the equipment, including acquisition fees paid to the general
partner, is recorded as net investment in DFLs on the accompanying
balance sheet. Leasing revenue, which is recognized over the term of the
lease, consists of the excess of lease payments plus the estimated
residual value over the equipment's cost. Earned income is recognized
monthly to provide a constant yield and is recorded as direct finance
lease income on the accompanying income statements. Residual values are
established at lease inception equal to the estimated value to be
received from the equipment following termination of the initial lease
(which in certain circumstances includes anticipated re-lease proceeds),
as determined by the general partner. In estimating such values, the
general partner considers all relevant information regarding the
equipment and the lessee.
-20-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Equipment on Operating Leases ("OLs")
The cost of equipment, including acquisition fees paid to the general
partner, is recorded as leased equipment in the accompanying balance
sheets and is depreciated on a straight-line basis over the lease term to
an amount equal to the estimated residual value at the lease termination
date. Leasing revenue consists principally of monthly rents and is
recognized as operating lease rentals in the accompanying income
statements. Residual values are established at lease inception equal to
the estimated value to be received from the equipment following
termination of the initial lease (which in certain circumstances includes
anticipated re-lease proceeds), as determined by the general partner. In
estimating such values, the general partner considers all relevant
information and circumstances regarding the equipment and the lessee.
Because revenue, depreciation expense and the resultant profit margin
before interest expense are recorded on a straight-line basis, and
interest expense on discounted lease rentals (discussed below) is
recorded on the interest method, lower returns are realized in the early
years of the term of an OL and higher returns in later years.
Non-recourse Discounting of Rentals
The Partnership may assign the future rentals from leases to financial
institutions, or acquire leases subject to such assignments, at fixed
interest rates on a non-recourse basis. In return for such assigned
future rentals, the Partnership receives the discounted value of the
rentals in cash. In the event of default by a lessee, the financial
institution has a first lien on the underlying leased equipment, with no
further recourse against the Partnership. Cash proceeds from such
financings, or the assumption of such financings, are recorded on the
balance sheet as discounted lease rentals. As lessees make payments to
financial institutions, leasing revenue and interest expense are
recorded.
Non-recourse Financing of Operating Lease Rentals
The Partnership may assign substantially all of its rights under certain
operating leases to a purchaser and subsequently the purchaser may assign
the rentals from such leases to a financial institution at fixed interest
rates on a non-recourse basis. The Partnership receives the discounted
value of the rentals in cash from the financial institution. As with
discounted lease rentals discussed above, in the event of default by a
lessee, the financial institution has a first lien on the underlying
leased equipment, with no further recourse against the Partnership or the
Partnership's assets. The purchaser cannot be the owner of the equipment
for financial reporting purposes because the purchaser has not made a
sufficient investment in the equipment and does not have significant
risks of ownership. Therefore, the transaction cannot be recorded as a
sale. Accordingly, cash proceeds from financings related to such
transactions are recorded on the balance sheet as financed operating
lease rentals. As lessees make payments to financial institutions,
leasing revenue and interest expense are recorded.
-21-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Allowance for Losses
An allowance for losses is maintained at levels determined by the general
partner to adequately provide for any other-than-temporary declines in
asset values. In determining losses, economic conditions, the activity in
the used equipment markets, the effect of actions by equipment
manufacturers, the financial condition of lessees, the expected courses
of action by lessees with regard to leased equipment at termination of
the initial lease term, and other factors which the general partner
believes are relevant, are considered. Asset chargeoffs are recorded upon
the termination or remarketing of the underlying assets. The lease
portfolio is reviewed quarterly to determine the adequacy of the
allowance for losses.
Transactions Subsequent to Initial Lease Termination
After the initial term of equipment under lease expires, the equipment is
either sold or re-leased to the existing lessee or another third party.
The remaining net book value of equipment sold is removed and gain or
loss recorded when equipment is sold. The accounting for re-leased
equipment is consistent with the accounting described under "Net
Investment in Direct Financing Leases" and "Equipment on Operating
Leases" above.
Income Taxes
No provision for income taxes has been made in the financial statements
since taxable income or loss is recorded in the tax returns of the
individual partners.
Cash Equivalents
The Partnership considers short-term, highly liquid investments that are
readily convertible to known amounts of cash to be cash equivalents. Cash
equivalents of approximately $1,853,000 and $1,718,000 at December 31,
1997 and 1996, respectively, are comprised of investments in a money
market fund which invests solely in U.S. Government securities having
maturities of 90 days or less.
Equipment Held for Sale or Re-lease
Equipment held for sale or re-lease, recorded at the lower of cost or
market value expected to be realized, consists of equipment previously
leased to end users which has been returned to the Partnership following
lease expiration.
-22-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Net Income Per Class A Limited Partner Unit
Net income per Class A limited partner unit is computed by dividing the
net income allocated to the Class A limited partners by the weighted
average number of Class A limited partner units outstanding during the
period.
2. Net Investment in Direct Finance Leases
---------------------------------------
The components of the net investment in direct finance leases as of
December 31, 1997 and 1996 were:
1997 1996
---- ----
Minimum lease payments receivable $ 3,587,896 $ 4,989,455
Estimated residual values 1,012,105 1,091,813
Less unearned income (760,314) (1,102,445)
----------- -------------
$ 3,839,687 $ 4,978,823
=========== =============
3. Leased Equipment
----------------
The Partnership's investments in equipment on operating leases by major
classes as of December 31, 1997 and 1996 were:
1997 1996
---- ----
Transportation and industrial equipment $ 24,733,957 $ 26,364,473
Computers and peripherals 5,594,147 11,145,021
Office furniture and equipment 3,475,088 3,784,347
Other 1,025,171 2,269,502
------------- ------------
34,828,363 43,563,343
Less:
Accumulated depreciation (16,649,369) (17,136,117)
Allowance for losses (150,954) (255,956)
------------- ------------
$ 18,028,040 $ 26,171,270
============= ============
Depreciation expense for 1997, 1996 and 1995 was $7,066,062, $7,856,952 and
$9,618,860, respectively.
-23-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
4. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from non-cancelable leases at
December 31, 1997 are as follows:
Year Ending December 31, DFLs OLs
------------------------ ---- ---
1998 $ 1,303,503 $ 6,205,073
1999 1,095,244 3,910,746
2000 795,939 1,491,996
2001 393,210 389,664
2000 - 12,674
Thereafter - 7,392
----------- ------------
Total $ 3,587,896 $ 12,017,545
=========== ============
5. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at December 31, 1997 bear interest at
rates primarily ranging between 6% and 11%. Aggregate maturities of such
nonrecourse obligations are as follows:
Year Ending December 31,
------------------------
1998 $ 3,453,519
1999 2,364,966
2000 1,529,599
2001 613,798
-----------
Total $ 7,961,882
===========
6. Financed Operating Lease Rentals
--------------------------------
Financed operating lease rentals outstanding at December 31, 1997 bear
interest at 8.25%. Aggregate maturities of such non-recourse financings are
as follows:
Year Ending December 31,
------------------------
1998 $ 1,583,571
1999 621,307
2000 52,157
-----------
Total $ 2,257,035
===========
-24-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
7. Transactions With the General Partner and Affiliates
----------------------------------------------------
Origination Fee and Evaluation Fee
----------------------------------
The general partner receives a fee equal to 4% of the sales price of
equipment sold to the Partnership (up to a maximum cumulative amount as
specified in the Partnership Agreement), 2%, of which, represents
compensation for selecting, negotiating and consummating the acquisition of
the equipment and another 2%, of which, represents reimbursement for
services rendered in connection with evaluating the suitability of the
equipment and the creditworthiness of the lessees. Origination and
evaluation fees totaled approximately $39,000, $550,000 and $117,000 in
1997, 1996 and 1995, respectively, all of which were capitalized by the
Partnership as part of the cost of equipment on operating leases and net
investment in direct finance leases.
Management Fees
---------------
The general partner earns management fees as compensation for services
performed in connection with managing the Partnership's equipment equal to
2% of gross rentals received as permitted under terms of the Partnership
Agreement. The general partner earned approximately $201,000, $287,000 and
$276,000 of management fees during 1997, 1996 and 1995, respectively.
Direct Services
---------------
The general partner and its affiliates 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 approximately $108,000,
$159,000 and $81,000 of direct services from the general partner during
1997, 1996 and 1995, respectively.
Equipment Purchases
-------------------
The Partnership purchased equipment from CAII with a total purchase price
of approximately $1,085,000, $14,395,000 and $3,032,000 (including $0,
$6,403,000 and $593,000 of discounted lease rentals) during 1997, 1996 and
1995, respectively. The Partnership purchased the equipment at CAII's
historical cost plus reimbursement of other net acquisition costs, as
provided for in the Partnership Agreement.
Payables to Affiliates
----------------------
Payables to affiliates consists of management fees, direct services and
expenses payable to the general partner and its affiliates.
-25-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
8. Tax Information, (unaudited)
---------------
The following reconciles net income for financial reporting purposes to the
income (loss) for federal income tax purposes for the years ended December
31,:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income per financial statements $ 1,456,778 $ 231,258 $ 1,009,230
Differences due to:
Direct finance leases 947,137 877,055 1,260,841
Depreciation (1,511,510) (2,053,702) (1,533,457)
Provision for losses 325,000 900,000 610,000
Gain/loss on sale of assets (468,349) (385,166) (1,123,258)
Other (1,028,690) 1,073,866 63,067
------------ ----------- ------------
Partnership income (loss) for
federal income tax purposes $ (279,634) $ 643,311 $ 286,423
============ =========== ============
</TABLE>
The following reconciles partners' capital for financial reporting purposes
to partners' capital for federal income tax purposes for the years ended
December 31,:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Partners' capital per financial statements $ 13,300,362 $ 16,868,246 $ 20,866,336
Differences due to:
Commissions and offering costs 4,868,944 4,868,944 4,868,944
Direct finance leases 4,780,803 3,833,666 2,956,611
Depreciation (11,988,943) (10,477,433) (8,423,731)
Provision for losses 325,000 900,000 610,000
Gain/loss on sale of assets (468,349) (385,166) (1,123,258)
Other 670,811 1,190,636 606,406
------------- ------------- ------------
Partners' capital for federal income tax purposes $ 11,488,628 $ 16,798,893 $ 20,361,308
============= ============= ============
</TABLE>
9. Concentration of Credit Risk
----------------------------
Approximately 72% of the Partnership's equipment under lease was leased to
investment grade lessees. Pursuant to the Partnership Agreement, an
investment grade lessee is a company (i) with net worth in excess of $100
million (and no debt issues that are rated), or (ii) with a credit rating
of not less than Baa as determined by Moody's Investor Service, Inc., or
comparable credit rating as determined by another recognized credit rating
service; or (iii) a lessee, all of whose lease payments have been
unconditionally guaranteed or supported by a letter of credit issued by a
company meeting one of the above requirements.
-26-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
9. Concentration of Credit Risk, continued
----------------------------
The Partnership's cash balance is maintained with a high credit quality
financial institution. At times such balances may exceed the FDIC insurance
limit due to receipt of lockbox amounts that have not cleared the
presentment bank (generally for less than two days). As the funds become
available, they are invested in a money market mutual fund.
10. Disclosures about Fair Value of Financial Instruments
-----------------------------------------------------
Statement of Financial Standards No. 107, Disclosures about Fair Value of
Financial Instruments specifically excludes certain items from its
disclosure requirements such as the Partnership's investment in leased
assets. The carrying amounts at December 31, 1997 for cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
payable to affiliates, rents and sale proceeds received in advance and
distributions payable to partners approximate their fair values due to the
short maturity of these instruments.
As of December 31, 1997, discounted lease rentals and financed operating
lease rentals of approximately $7,962,000 and $2,257,000, respectively, had
fair values of $7,082,000 and $2,031,000. The fair values were estimated
utilizing market rates of comparable debt having similar maturities and
credit quality as of December 31, 1997.
-27-
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE PARTNERS
CAPITAL PREFERRED YIELD FUND-II, L.P.:
Under date of February 6, 1998, we reported on the balance sheets of Capital
Preferred Yield Fund-II, L.P. as of December 31, 1997 and 1996, and the related
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 1997, as contained in the Partnership's
annual report on Form 10-K for the year 1997. In connection with our audits of
the aforementioned financial statements, we also audited the related financial
statement Schedule II, as listed in the accompanying index. This financial
statement schedule is the responsibility of the Partnership's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
------------------------
KPMG PEAT MARWICK LLP
Denver, Colorado
February 6, 1998
-28-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- ---------- --------
Balance at Additions Balance
beginning charged to at end
Classification of period expenses Deductions (1) of period
- -------------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
1997
- -------------------------------
Allowance for losses:
Accounts receivable $ 25,000 $ - $ - $ 25,000
Equipment on operating leases 255,956 325,000 (430,002) 150,954
---------- --------- ---------- ---------
$ 280,956 $ 325,000 $ (430,002) $ 175,954
========== ========= ========== =========
1996
- -------------------------------
Allowance for losses:
Accounts receivable $ 25,000 $ - $ - $ 25,000
Equipment on operating leases 291,488 900,000 (935,532) 255,956
---------- --------- --------- ---------
$ 316,488 $ 900,000 $(935,532) $ 280,956
========== ========= ========== =========
1995
- -------------------------------
Allowance for losses:
Accounts receivable $ 25,000 $ - $ - $ 25,000
Equipment on operating leases 380,537 610,000 (699,049) 291,488
---------- ---------- ---------- ---------
$ 405,537 $ 610,000 $ (699,049) $ 316,488
========== ========== ========== =========
</TABLE>
1) Principally charge-offs of assets against the established allowances.
See accompanying independent auditors' report
-29-
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosures
-----------------------------------------------------
None
Item 10. Directors and Executive Officers of the Partnership
---------------------------------------------------
The Partnership has no officers and directors. The general partner manages and
controls the affairs of the Partnership and has general responsibility and
authority in all matters affecting its business. Information concerning the
directors and executive officers of the general partner is as follows:
CAI Equipment Leasing III Corporation
Name Positions Held
---- --------------
John F. Olmstead President and Director
Dennis J. Lacey Senior Vice President and Director
Anthony M. DiPaolo Senior Vice President, Principle Financial and
Chief Administrative Officer and Director
Richard H. Abernethy Vice President and Director
John A. Reed Vice President, Assistant Secretary and Director
Joseph F. Bukofski Vice President, Assistant Secretary and Director
Robert A. Golden Director
Mick Myers Director
Ann Danielson Assistant Vice President
David J. Anderson Chief Accounting Officer and Secretary
JOHN F. OLMSTEAD, age 53, joined CAII as Vice President in December, 1988, is a
Senior Vice President of CAI and CAII and is head of CAII's Public Equity
division. He has served as Chairman of the Board for Neo-kam Industries, Inc.,
Matchless Metal Polish Company, Inc. and ACL, Inc. for more than 5 years. He has
over 20 years of experience holding various positions of responsibility in the
leasing industry. Mr. Olmstead holds a Bachelor of Science degree from Indiana
University and a Juris Doctorate degree from Indiana Law School.
DENNIS J. LACEY, age 44, joined CAI as Vice President, Operations, in October
1989. Mr. Lacey was appointed Treasurer on January 1, 1991, Chief Financial
Officer on April 11, 1991, a director on July 19, 1991, and President and Chief
Executive Officer on September 6, 1991. Prior to joining CAI, Mr. Lacey was an
audit partner for the public accounting firm of Coopers & Lybrand. Mr. Lacey is
also a director and senior officer of CAII, CAI Equipment Leasing I Corp., CAI
Equipment Leasing II Corp., CAI Equipment Leasing III Corp., CAI Equipment
Leasing IV Corp., CAI Equipment Leasing V Corp., CAI Leasing Canada, Ltd., CAI
Partners Management Company, CAI Securities Corporation, CAI Lease
Securitization I Corp. and Capital Equipment Corporation (collectively referred
to herein as the "CAI Affiliates"), all of which are first- or second-tier
wholly-owned subsidiaries of CAI.
-30-
<PAGE>
Item 10. Directors and Executive Officers of the Partnership, continued
---------------------------------------------------
ANTHONY M. DIPAOLO, age 39, joined CAII in July 1990 as Assistant Treasurer and
is currently Senior Vice President-Chief Financial Officer. He also held the
positions of Senior Vice President-Controller and Assistant Vice
President-Credit Administration for the Company. Mr. DiPaolo has held similar
senior financial management positions with two public companies between 1986 and
June 1990, and prior to then was an audit manager for the public accounting firm
of Coopers & Lybrand. Mr. DiPaolo holds a Bachelor of Science degree in
Accounting from the University of Denver.
RICHARD H. ABERNETHY, age 44, joined CAII in April 1992 as Equipment Valuation
Manager and currently serves as Vice President of Asset Management. Mr.
Abernethy has thirteen years experience in the leasing industry, including prior
positions with Barclays Leasing Inc., from November 1986 to February 1992, and
Budd Leasing Corporation, from January 1981 to November 1986. Mr. Abernethy
holds a Bachelor of Arts in Business Administration from the University of North
Carolina at Charlotte.
JOHN A. REED, age 42, joined CAII in January 1990 as the Tax Director and
Assistant Secretary. Mr. Reed is currently the Vice President-Manager, Capital
Markets Group and is responsible for obtaining off balance sheet financing,
syndications and private programs. Prior to joining the Capital Markets Group,
Mr. Reed was Vice President of both Marketing Administration and Credit and Debt
Administration. He spent seven and one half years with Coopers & Lybrand in the
Tax Department and served on CAII's tax consulting engagement during that time.
Mr. Reed holds a Bachelor of Arts degree in Social Sciences and Masters of
Science in Accounting, from Colorado State University.
JOSEPH F. BUKOFSKI, age 43, joined CAII in June 1990 as a Financial Analyst. Mr.
Bukofski is currently the Vice President of Marketing and is responsible for all
lease documentation and management of transaction structuring and processing.
Prior to joining the Marketing Department, Mr. Bukofski was Assistant Vice
President and Controller. Prior to joining the Company, he was a geologist with
Barringer Geoservices, Inc. for eleven years. Mr. Bukofski holds a Bachelor of
Science degree in Secondary Education - Earth Science from Bloomsburg University
and a Masters of Science in Accounting from the University of Colorado.
ROBERT A. GOLDEN, age 52, is Vice President and the National Sales Manager of
the Company. Mr. Golden joined the Company in 1993 as a Branch Manager. He was
promoted to his current position in September 1994. Prior to joining the
Company, he was an Executive Vice President with the U.S. Funds Group, President
of BoCon Capital Group and Vice President with Ellco/GE Capital for fifteen
years. Mr. Golden is an officer, but not a director, of CAII.
MICK MYERS, age 40, joined CAI in February 1992 as a Senior Portfolio Manager.
Currently he is Assistant Vice President of Asset Management. Mr. Myers has nine
years experience in the leasing industry. Previously, he has held the position
of Senior End of Lease Negotiator with ELLCO/GE Capital. Mr. Myers holds a
Bachelor of Science degree from the University of Wyoming.
-31-
<PAGE>
Item 10. Directors and Executive Officers of the Partnership, continued
---------------------------------------------------
ANN DANIELSON, age 34, joined CAII in February 1990 and is currently Assistant
Vice President, Assistant Treasurer and is responsible for the Company's cash
management and collections functions. Prior to joining the Company, she was with
U.S. West financial Services and Coopers & Lybrand. Ms. Danielson holds a
Bachelor of Arts Degree from the University of Northern Iowa.
DAVID J. ANDERSON, age 45, joined CAII in August 1990 as Manager of Billing &
Collections and currently serves as Assistant Vice-President/Chief Accounting
Officer. Prior to joining CAII, Mr. Anderson was Vice- President/Controller for
Systems Marketing, Inc., from 1985 to 1990, and previous to that worked in
several senior staff positions at the Los Alamos National Laboratory and with
Ernst & Whinney. Mr. Anderson holds a Bachelor of Business Administration degree
in Accounting from the University of Wisconsin.
Item 11. Executive Compensation
----------------------
No compensation was paid by the Partnership to the officers and directors of the
general partner. See Item 13 of this Report, "Certain Relationships and Related
Transactions", for a description of the compensation and fees paid to the
general partner and its affiliates by the Partnership during 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) As of the date hereof, no person is known by the Partnership to be
the beneficial owner of more than 5% of the Class A limited partner
units of the Partnership. The Partnership has no directors or
officers, and neither the general partner nor the Class B limited
partner of the Partnership own any Class A limited partner units.
CAII, an affiliate of the general partner is the sole Class B
limited partner.
CAI Equipment Leasing III Corp. is the general partner.
The names and addresses of the general partner and the Class B
limited partner are as follows:
General Partner
---------------
CAI Equipment Leasing III Corp.
7175 West Jefferson Avenue
Suite 4000
Lakewood, Colorado 80235
-32-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management,
-----------------------------------------------------------------------
continued
Class B Limited Partner
-----------------------
Capital Associates International, Inc.
7175 West Jefferson Avenue
Suite 4000
Lakewood, Colorado 80235
(b) No directors or officers of the general partner or the Class B
limited partner owned any Class A limited partner units as of
December 31, 1997.
(c) The Partnership knows of no arrangements, the operation of which may
at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The general partner and its affiliates receive certain types of compensation,
fees or other distributions in connection with the operations of the
Partnership.
Following is a summary of the amounts paid or payable to the general partner and
its affiliates during 1997:
Origination Fee and Evaluation Fee
- ----------------------------------
The general partner earns a fee equal to 4% of the sales price of equipment sold
to the Partnership, 2% of which represents compensation for selecting,
negotiating and consummating the acquisition of the equipment and 2% of which
represents reimbursement for services rendered in connection with evaluating the
suitability of the equipment and the credit worthiness of the lessee.
Origination and evaluation fees totaled approximately $39,000 in 1997, all of
which were capitalized by the Partnership as part of the cost of equipment on
operating leases and net investment in direct finance leases.
Management Fees
- ---------------
The general partner earns management fees as compensation for services rendered
in connection with managing the Partnership's equipment equal to 2% of gross
rentals received. Such fees totaled approximately $201,000 for 1997.
Accountable General and Administrative Expenses
- -----------------------------------------------
The general partner is entitled to reimbursement of certain expenses paid on
behalf of the Partnership which are incurred in connection with the
Partnership's operations. Such reimbursable expenses amounted to approximately
$225,000 during 1997.
-33-
<PAGE>
Item 13. Certain Relationships and Related Transactions, continued
----------------------------------------------
Additionally, the general partner is allocated 1% of Partnership cash
distributions and net income relating to its general partner interest in the
Partnership. Distributions and net income allocated to the general partner
totaled approximately $50,000 and $50,000, respectively, for 1997. Distributions
and net income allocated to the Class B limited partner totaled approximately
$36,000 and $14,000, respectively, for 1997.
During 1997, the Partnership acquired the equipment as described below from
CAII:
<TABLE>
<CAPTION>
Cost to
Partnership
Including
Date Cost to Acquisition Debt Annual
Purchased Lessee Term Equipment Description CAII Fees* Assumed Rents
- --------- ------ ---- --------------------- ----------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
01/97 System One 36 Network equipment $ 126,250 $ 131,300 $ 0 $ 44,775
01/97 Consolidated Diesel 36 Furniture 23,035 23,956 0 7,448
02/97 General Motors Corp. 36 Transport - trucks 20,947 21,785 0 6,605
02/97 General Motors Corp. 36 FF & E 32,425 33,722 0 9,412
03/97 General Motors Corp. 36 FF & E 15,163 15,770 0 5,076
05/97 E Trade 31 Desktop PC 496,447 512,991 0 188,319
06/97 General Motors Corp. 36 FF & E 9,631 10,016 0 3,224
07/97 Texas Instruments 36 Manufacturing-semiconductor 300,558 312,581 0 83,675
----------- ----------- ------ ---------
Total operating leases sold to Partnership 1,024,451 1,062,284 0 348,534
----------- ----------- ------ ---------
03/97 Consolidated Diesel 36 Office automation 21,605 22,469 0 7,805
----------- ----------- ------ ---------
Total direct finance leases sold to Partnership 21,605 22,469 0 7,805
----------- ----------- ------ ---------
Total sold to Partnership $ 1,046,056 $ 1,084,753 $ 0 $ 356,339
=========== =========== ====== =========
</TABLE>
* The lower of (a) the price for the equipment plus all costs incurred in
maintaining the equipment (including, without limitation, the reasonable,
necessary and actual expenses, as determined in accordance with generally
accepted accounting principles, of storage, carrying, warehousing, repair,
marketing, financing and taxes) from the date of acquisition thereof,
provided that any proceeds accrued from the first basic rent date thereof
and retained by the general partner or an affiliate thereof from leasing
the equipment or any other arrangement with respect to the equipment shall
be deemed a credit towards the purchase price paid by the Partnership, or
(b) the fair market value of such equipment, as determined by an
independent nationally recognized appraiser selected by the general
partner.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) and (d) The following documents are filed as part of this Report:
1. Financial Statements: (Incorporated by reference to Item 8 of this
Report, "Financial Statements and Supplementary Data").
2. Financial Statement Schedule: (Incorporated by reference to Item 8
of this Report, "Financial Statements and Supplementary Data").
(b) The Partnership did not file any reports on Form 8-K
during the quarter ended December 31, 1997.
-34-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K,
-----------------------------------------------------------------------
continued
(c) Exhibits required to be filed.
Exhibit Exhibit
Number Name
------ ----
4.1* Capital Preferred Yield Fund-II Limited Partnership
Agreement
4.2* First Amendment to Limited Partnership Agreement dated
June 12, 1992
4.3* Amended and Restated Agreement of Limited Partnership
of Capital Preferred Yield Fund-II, L.P.
* Not filed herewith. In accordance with Rule 12b-32 of
the General Rules and Regulations under the
Securities Exchange Act of 1934, reference is made to
the document previously filed with the Commission.
-35-
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 25, 1998 Capital Preferred Yield Fund-II, L.P.
By: CAI Equipment Leasing III Corporation
By: /s/John F. Olmstead
-------------------------------------
John F. Olmstead
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the general partner
of the Partnership and in the capacities indicated on March 25, 1998.
Signature Title
- --------- -----
/s/John F. Olmstead
- -------------------------
John F. Olmstead President and Director
/s/Dennis J. Lacey
- -------------------------
Dennis J. Lacey Senior Vice President and Director
/s/Anthony M. DiPaolo
- ------------------------- Senior Vice President, Principle Financial and Chief
Anthony M. DiPaolo Administrative Officer and Director
/s/Richard H. Abernethy
- -------------------------
Richard H. Abernethy Vice President and Director
/s/John A. Reed
- -------------------------
John A. Reed Vice President, Assistant Secretary and Director
/s/Joseph F. Bukofski
- -------------------------
Joseph F. Bukofski Vice President, Assistant Secretary and Director
/s/Robert A. Golden
- -------------------------
Robert A. Golden Director
/s/Mick Myers
- -------------------------
Mick Myers Director
/s/Ann Danielson
- -------------------------
Ann Danielson Assistant Vice President
/s/David J. Anderson
- -------------------------
David J. Anderson Chief Accounting Officer and Secretary
-39-
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,897,763
<SECURITIES> 0
<RECEIVABLES> 620,453
<ALLOWANCES> 0
<INVENTORY> 646,787
<CURRENT-ASSETS> 0
<PP&E> 18,028,040
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,032,730
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 13,300,362
<TOTAL-LIABILITY-AND-EQUITY> 25,032,730
<SALES> 572,363
<TOTAL-REVENUES> 10,309,337
<CGS> 0
<TOTAL-COSTS> 8,852,559
<OTHER-EXPENSES> 308,317
<LOSS-PROVISION> 325,000
<INTEREST-EXPENSE> 928,020
<INCOME-PRETAX> 1,456,778
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,456,778
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,456,778
<EPS-PRIMARY> 10.40
<EPS-DILUTED> 10.40
</TABLE>
