<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KA
(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, 1999
[_] 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, L.P.
-------------------------------------
(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: None
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 Page 36
Page 1 of 37 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.
The Partnership entered its liquidation stage, as defined in the Partnership
Agreement, in July 1997. During the liquidation stage, 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 2000 and 2001.
Capital Associates International, Inc. ("CAII"), an affiliate of the general
partner, is the 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. The contributions of CAII were made simultaneously with the
purchase of equipment by the Partnership. CAII's interest in Distributable Cash,
as defined in the Partnership Agreement, is subordinated to the Class A limited
partners' interest.
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.
The Partnership has assigned certain rentals from leases to financial
institutions, or acquired leases subject to such assignments, at fixed interest
rates on a non-recourse basis. In the event of a 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.
During 1999, the Partnership had equipment on lease to investment grade lessees
in the financial services, transportation services and manufacturing industries,
among others. Since the Partnership's formation, approximately 71% 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
-2-
<PAGE>
Item 1. Business, continued
--------
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.
During the reinvestment stage, as defined in the Partnership Agreement, the
Partnership acquired equipment that was on lease at the time of acquisition.
After the initial term of each lease, each item of equipment is 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 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.
Although the Partnership does not account for a significant percentage of the
leasing market, the general partner believes that the Partnership's remarketing
capabilities will enable it to continue to compete effectively in the equipment
remarketing markets.
The Partnership leased equipment to a significant number of lessees. Two
lessees and their affiliates accounted for 12% ($726,300) and 11% ($693,153) of
total leasing and remarketing revenue of the Partnership during 1999.
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.
-3-
<PAGE>
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, 1999.
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters
- -------
(a) The Partnership's Class A limited partner units, Class B limited partner
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, 1999, the number of Class A limited partners was 1,719.
(c) Distributions
-------------
During 1999, the Partnership made thirteen (13) distributions (a portion of
which constituted a return of capital) to Class A limited partners, as
follows:
<TABLE>
<CAPTION>
Distributions Per
$250 Class A
Limited Partner Unit
For the Payment (computed on Total
Month Ended Made During weighted average) Distributions
------------- -------------- ----------------- -------------
<S> <C> <C> <C>
December 31, 1998 January 1999 $3.75 $ 500,000
January 31, 1999 February 1999 1.50 200,000
February 28, 1999 March 1999 1.50 200,000
March 31, 1999 April 1999 5.07 676,838
April 30, 1999 May 1999 2.08 277,497
May 31, 1999 June 1999 4.12 549,791
June 30, 1999 July 1999 1.28 170,676
July 31, 1999 August 1999 2.23 297,396
August 31, 1999 September 1999 0.74 99,000
September 30, 1999 October 1999 0.74 99,000
October 31, 1999 November 1999 1.48 198,000
November 30, 1999 December 1999 1.48 198,000
December 31, 1999 December 1999 0.74 99,000
------ ----------
$26.71 $3,565,198
====== ==========
</TABLE>
-4-
<PAGE>
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters, continued
- ------------------
(c) Distributions, continued
-------------
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.
Distributions to the general partner and Class B limited partner during
1999 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 2000 to (1) meet current operating
requirements and (2) fund cash distributions to the Class A limited
partners in accordance with the Partnership Agreement. Distributions
during the liquidation period will be based upon cash availability and may
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 1998, the Partnership made twelve (12) distributions (a portion of
which constituted a return of capital) to Class A limited partners, as
follows:
<TABLE>
<CAPTION>
Distributions Per
$250 Class A
Limited Partner Unit
For the Payment (computed on Total
Month Ended Made During weighted average) Distributions
------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
December 31, 1997 January 1998 $3.74 $ 500,000
January 31, 1998 February 1998 3.74 500,000
February 28, 1998 March 1998 5.24 700,000
March 31, 1998 April 1998 5.61 750,000
April 30, 1998 May 1998 5.24 700,000
May 31, 1998 June 1998 5.61 750,000
June 30, 1998 July 1998 2.25 300,000
July 31, 1998 August 1998 2.99 400,000
August 31, 1998 September 1998 3.74 500,000
September 30, 1998 October 1998 4.49 600,000
October 31, 1998 November 1998 2.51 335,700
November 30, 1998 December 1998 2.99 400,000
------ ----------
$48.15 $6,435,700
====== ==========
</TABLE>
The following represents annual and cumulative distributions per Class A
limited partner unit, as described in note 1 to Notes to Consolidated
Financial Statement.
<TABLE>
<CAPTION>
Distribution Amount Distribution % per
per $250 Class A $250 Class A
Limited Partner Unit Limited Partner Unit
Payment (computed on (computed on
Made During weighted average) weighted average) (1)
----------- --------------------- ----------------------
<S> <C> <C>
1992 $ 15.00 12%
1993 30.00 12%
1994 30.00 12%
1995 30.00 12%
1996 30.00 12%
1997 35.45 14%
1998 48.15 19%
1999 26.71 11%
-------
$245.31
=======
</TABLE>
(1) Cumulative distributions, as described in note 1 to Notes to
Consolidated Financial Statements began July 1992.
-6-
<PAGE>
Item 6. Selected Financial Data
-----------------------
The following selected financial data relates to the years ended December 31,
1995 through 1999 and 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 with Item 8 herein.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue $4,668,842 $ 7,578,793 $10,309,337 $10,870,083 $12,719,445
Net income 408,915 1,035,755 1,456,778 231,258 1,009,230
Net income per weighted average Class A
limited partner unit outstanding 2.80 7.19 10.40 1.40 7.09
Total assets 8,593,113 14,344,900 25,032,730 33,516,785 31,806,534
Discounted and financed operating
lease rentals 2,321,818 4,612,151 10,218,917 15,559,029 10,009,561
Distributions declared to partners 3,099,217 6,537,374 4,995,930 4,101,808 4,131,126
Distributions declared per monthly weighted
average Class A limited partner unit 22.97 48.18 36.69 30.00 30.00
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
I. Results of Operations
---------------------
Presented below are schedules (prepared solely to facilitate the discussion of
results of operations that follows) showing condensed income statements
categories and analyses of changes in those condensed categories derived from
the Statements of Income:
<TABLE>
<CAPTION>
Years Ended December 31, Years Ended December 31,
------------------------------------- ---------------------------------------
1999 1998 Change 1998 1997 Change
---------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 986,528 $1,311,823 $(325,295) $1,311,823 $1,662,250 $(350,427)
Equipment sales margin 480,241 686,049 (205,808) 686,049 572,363 113,686
Interest income 30,932 73,671 (42,739) 73,671 80,642 (6,971)
Management fees paid to
general partner (103,977) (156,307) 52,330 (156,307) (200,538) 44,231
Direct services from general partner (90,393) (137,348) 46,955 (137,348) (107,779) (29,569)
General and administrative (183,548) (232,133) 48,585 (232,133) (225,160) (6,973)
Provision for losses (710,868) (510,000) (200,868) (510,000) (325,000) (185,000)
--------- ---------- --------- ---------- ---------- ---------
Net income $ 408,915 $1,035,755 $(626,840) $1,035,755 $1,456,778 $(421,023)
========= ========== ========= ========== ========== =========
</TABLE>
The Partnership is in its liquidation stage, as defined in the Partnership
Agreement, and is not purchasing additional equipment. Initial leases are
expiring, and the equipment is being remarketed (i.e., re-leased, renewed, or
sold),and accordingly, the timing and amount of equipment sales cannot be
projected accurately. 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
- -------------
I. Results of Operations, continued
---------------------
Leasing Margin
Leasing margin consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating lease rentals $ 3,924,612 $ 6,457,667 $ 9,251,501
Direct finance lease income 233,057 361,406 404,831
Depreciation (2,919,980) (4,942,188) (7,066,062)
Interest expense on discounted lease rentals (251,161) (466,086) (745,295)
Interest expense on financed operating lease rentals - (98,976) (182,725)
----------- ----------- -----------
Leasing margin $ 986,528 $ 1,311,823 $ 1,662,250
=========== =========== ===========
Leasing margin ratio 24% 19% 17%
=========== =========== ===========
</TABLE>
All components of leasing margin decreased for the year ended December 31, 1999
compared to the years ended December 31, 1998 and December 31, 1997, and is
expected to decline further due to portfolio runoff. Leasing margin ratio
increased and is expected to increase further as non-recourse debt is repaid.
Leasing margin and the related leasing margin ratio for an operating lease
financed with non-recourse debt increases during the term of the lease since
rents and depreciation are typically fixed while interest expense declines as
the related non-recourse debt is repaid. Leasing margin ratio generally 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.
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:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Equipment sales revenue $ 2,114,523 $ 3,936,815 $ 2,217,177
Cost of equipment sales (1,634,282) (3,250,766) (1,644,814)
----------- ----------- -----------
Equipment sales margin $ 480,241 $ 686,049 $ 572,363
=========== =========== ===========
</TABLE>
-8-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
I. Results of Operations, continued
---------------------
Equipment Sales Margin, continued
The Partnership is in its liquidation stage (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). Equipment sales margin varies with the
number and dollar amount of equipment leases that mature in a particular period
and the current market for specific equipment.
Interest Income
Interest income varies based on the amount of cash available for investment
(pending distribution) and the interest rate on such invested cash.
Expenses
Management fees and general and administrative expenses paid to General Partner
decreased due to portfolio run-off.
The decrease in direct services from the General Partner from 1998 to 1999 is
due to a change in the methodology used to determine the amount to be reimbursed
to the affiliate for asset management services. The affiliate now charges the
Partnership a fixed fee for asset management services. This fee is equal to an
estimated cost to refurbish a piece of equipment returned to the affiliates'
warehouse. The fee is charged to the Partnership when the equipment is returned,
and is recorded as an expense for the period. Direct services from the General
Partner were higher in 1998 compared to 1997 due to additional costs associated
with warehousing and selling equipment returned to the Partnership.
Provision for losses
The remarketing of equipment for an amount greater than its book value is
reported 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 occurs) 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.
-9-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
I. Results of Operations, continued
---------------------
Provision for losses, continued
The provision for losses recorded during 1999 related to the following:
* $79,000 related to declines in the net realizable value of off-lease
forklifts.
* $367,085 related primarily to lessees returning certain manufacturing and
mining 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 lessees. The fair
market value of the equipment re-leased or sold to third parties was less than
anticipated.
* $89,783 related to semiconductor equipment returned to the Partnership. The
fair market value of this equipment is lower than anticipated.
* $175,000 related to declines in the realizable value of on-lease computer and
manufacturing equipment.
The provision for losses recorded during 1998 related to the following:
* $285,000 related primarily to lessees returning certain computer and
manufacturing 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 lessees.
The fair market value of the equipment re-leased or sold to third parties was
less than was anticipated.
* $125,000 related to anticipated declines in the realizable value of on-lease
mining equipment.
* $100,000 related to a lessee that filed for Chapter 11 bankruptcy protection
in April 1998. The general partner has received information that the lessee
liquidated the equipment and has filed a claim as an unsecured creditor.
The provision for losses recorded during 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 lessees. The fair market value of the equipment re-leased or
sold to third parties was less than anticipated.
* $80,000 for a deficiency related to a lease with 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.
-10-
<PAGE>
II. Liquidity and Capital Resources
-------------------------------
The Partnership is in its liquidation stage, as defined in the Partnership
Agreement and, as expected, 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
leasing portfolio and the amount of 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.
The equipment purchased of $3,364 in 1999 represents an upgrade to an existing
lease. No equipment was purchased during 1998. During 1997, the Partnership
acquired equipment subject to leases with a total equipment purchase price of
approximately $1,085,000.
During 1999, 1998 and 1997, the Partnership declared distributions to the
partners of $3,099,215, $6,537,374, and $4,995,930, 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 2000 to (1) meet current operating requirements and
(2) fund cash distributions to the Class A limited partners in accordance with
the Partnership Agreement. Distributions during the liquidation stage are based
upon cash availability and may vary. All distributions are expected to be a
return of capital for economic purposes.
As of March 31, 2000, CAII, an affiliate of the general partner, owes the
Partnership $70,547 for rents, remarketing proceeds and other amounts
(collectively, the "Prior Rents") collected by CAII on behalf of the Partnership
during periods prior to February 1, 2000 (the "Prior Periods"). According to
its own records, as of March 31, 2000, CAII owes approximately $3.9 million to
other investors and creditors (who, along with the Partnership, are referred to
herein as the "Payees"), for Prior Rents collected by CAII on their behalf
during the Prior Periods. CAII, which presently does not have the funds to
repay all of the Prior Rents, is in negotiations with the Payees to develop a
plan for repayment of the Prior Rents owed to all Payees over time. The
Partnership is withholding acquisition fees and managements fees otherwise
payable to the general partner and crediting such withheld fees (the "Fees")
against the Prior Rents owing from CAII. The Partnership intends to continue to
withhold future Fees until such time as it recovers all Prior Rents.
The Partnership relies upon the services of CAII for origination of leases,
administrative and accounting services and remarketing of leases and equipment,
among other services. Should CAII be unable to develop a plan for repayment with
it's Payees, the Partnership may be required to contract with another party for
these services. In such event, there is no assurance that another provider of
these services can be identified.
-11-
<PAGE>
III. 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 No. 133, an Amendment of FASB Statement 133. Statement 137 effectively
extends the required application of Statement 133 to fiscal years beginning
after June 15, 2000, with earlier application permitted. The Partnership adopted
Statement 133 in the first quarter of 1999. The General Partner does not expect
the adoption of Statement 133 or Statement 137 to have an impact on its
financial reporting.
IV. "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; customer credit risk;
competition from other lessors, specialty finance lenders or banks; and the
availability and cost of financing sources. Certain specific risks associated
with particular aspects of the Partnership's business are discussed in detail
throughout Parts I and II when and where applicable.
Item 7A. 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>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements and
Financial Statement Schedule
Page
Number
------
Financial Statements
--------------------
Independent Auditors' Report 14
Balance Sheets as of December 31, 1999 and 1998 15
Statements of Income for the years ended
December 31, 1999, 1998 and 1997 16
Statements of Partners' Capital for the years ended
December 31, 1999, 1998 and 1997 17
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 18
Notes to Financial Statements 19-29
Financial Statement Schedule
----------------------------
Independent Auditors' Report 30
Schedule II - Valuation and Qualifying Accounts 31
-13-
<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, 1999 and 1998, and the related statements of income,
partners' capital, and cash flows for each of the years in the three-year period
ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
---------------------------------
KPMG LLP
Denver, Colorado
March 31, 2000
-14-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Cash and cash equivalents $ 1,345,288 $ 784,867
Accounts receivable, net 332,475 771,076
Receivable from affiliates 243,586 -
Equipment held for sale or re-lease 566,714 285,299
Net investment in direct finance leases 1,946,226 2,865,887
Leased equipment, net 4,158,824 9,637,771
----------- -----------
Total assets $ 8,593,113 $14,344,900
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 1,171,040 $ 1,334,422
Payables to affiliates 12,655 2,142
Rents received in advance 1,303 105,332
Distributions payable to partners 2,000 508,106
Discounted lease rentals 2,321,818 4,612,151
----------- -----------
Total liabilities 3,508,816 6,562,153
----------- -----------
Commitments and contingencies (Note 10)
Partners' capital:
General partner - -
Limited partners:
Class A 260,000 units authorized; 133,418 and 133,518 units
issued and outstanding in 1999 and 1998, respectively 4,901,714 7,601,001
Class B 182,583 181,746
----------- -----------
Total partners' capital 5,084,297 7,782,747
----------- -----------
Total liabilities and partners' capital $ 8,593,113 $14,344,900
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-15-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF INCOME
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Operating lease rentals $3,924,612 $6,457,667 $ 9,251,501
Direct finance lease income 233,057 361,406 404,831
Equipment sales margin 480,241 686,049 572,363
Interest income 30,932 73,671 80,642
---------- ---------- -----------
Total revenue 4,668,842 7,578,793 10,309,337
---------- ---------- -----------
Expenses:
Depreciation 2,919,980 4,942,188 7,066,062
Interest on discounted lease rentals 251,161 466,086 745,295
Interest on financed operating lease rentals - 98,976 182,725
Management fees paid to general partner 103,977 156,307 200,538
Direct services from general partner 90,393 137,348 107,779
General and administrative 183,548 232,133 225,160
Provision for losses 710,868 510,000 325,000
---------- ---------- -----------
Total expenses 4,259,927 6,543,038 8,852,559
---------- ---------- -----------
Net income $ 408,915 $1,035,755 $ 1,456,778
========== ========== ===========
Net income allocated:
To the general partner $ 30,994 $ 65,374 $ 49,960
To the Class A limited partners 374,059 960,533 1,392,588
To the Class B limited partner 3,862 9,848 14,230
---------- ---------- -----------
$ 408,915 $1,035,755 $ 1,456,778
========== ========== ===========
Net income per weighted average Class
A limited partner unit outstanding $ 2.80 $ 7.19 $ 10.40
========== ========== ===========
Weighted average Class A limited partner
units outstanding 133,425 133,582 133,886
========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
-16-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF PARTNERS' CAPITAL
Years ended December 31, 1999, 1998 and 1996
<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, January 1, 1997 $ - $ 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
Redemptions - (200) (15,996) - (15,996)
Net income 65,374 - 960,533 9,848 1,035,755
Distributions declared to partners (65,374) - (6,435,700) (36,300) (6,537,374)
-------- --------- ------------ --------- -----------
Partners' capital, December 31, 1998 - 133,518 7,601,001 181,746 7,782,747
Redemptions (100) (8,148) - (8,148)
Net income 30,994 - 374,059 3,862 408,915
Distributions declared to partners (30,994) - (3,065,198) (3,025) (3,099,217)
-------- --------- ------------ --------- -----------
Partners' capital, December 31, 1999 $ - $ 133,418 $ 4,901,714 $ 182,583 $ 5,084,297
======== ========= ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
-17-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 408,915 $ 1,035,755 $ 1,456,778
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,919,980 4,942,188 7,066,062
Provision for losses 710,868 510,000 325,000
Cost of equipment sales 1,634,282 3,250,766 1,644,814
Recovery of investment in direct finance leases 874,706 964,247 943,666
Changes in assets and liabilities:
Increase in accounts receivable, net 419,322 (92,267) (281,795)
Increase (decrease) in payables to affiliates (233,073) (18,115) (5,776)
Increase (decrease) in accounts payable and accrued
liabilities (163,384) 451,744 271,531
Increase (decrease) in rents received in advance (104,029) 2,922 (8,536)
----------- ------------ ------------
Net cash provided by operating activities 6,467,587 11,047,240 11,411,744
----------- ------------ ------------
Cash flows from investing activities:
Purchases of equipment on operating leases from affiliate (3,364) - (1,062,284)
Investment in direct finance leases, acquired from affiliate - - (22,469)
----------- ------------ ------------
Net cash used in investing activities (3,364) - (1,084,753)
----------- ------------ ------------
Cash flows from financing activities:
Principal payments on discounted lease rentals (2,290,333) (3,349,731) (4,436,008)
Principal payments on financed operating lease rentals - (2,257,035) (904,104)
Proceeds from discounting of lease rentals - - -
Distributions to partners (3,605,321) (6,537,374) (4,829,208)
Redemptions of Class A limited partner units (8,148) (15,996) (28,732)
----------- ------------ ------------
Net cash used in financing activities (5,903,802) (12,160,136) (10,198,052)
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 560,421 (1,112,896) 128,939
Cash and cash equivalents at beginning of year 784,867 1,897,763 1,768,824
----------- ------------ ------------
Cash and cash equivalents at end of year $ 1,345,288 $ 784,867 $ 1,897,763
=========== ============ ============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 251,161 $ 466,086 $ 745,295
Interest paid on financed lease rentals - 98,976 182,725
</TABLE>
See accompanying notes to financial statements.
-18-
<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. The
Partnership entered its liquidation stage, as defined in the Partnership
Agreement, in July 1997. All equipment owned by the Partnership 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, collectibility of accounts receivable and valuation of
investing, 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:
-19-
<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
------------------
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.
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 is 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.
Federal Income Tax Basis 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.
-20-
<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
Federal Income Tax Basis Profits and Losses, continued
-------------------------------------------
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) 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 - Profits and Losses
----------------------------------------
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
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 No. 133,
an Amendment of FASB Statement 133. Statement 137 effectively extends the
required application of
-21-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Recently Issued Financial Accounting Standards, continued
Statement 133 to fiscal years beginning after June 15, 2000, with earlier
application permitted. The Partnership adopted Statement 133 in the first
quarter of 1999. The General Partner does not expect the adoption of
Statement 133 or Statement 137 to have an impact on its financial reporting.
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
equipment subject to 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 net cash flows expected to result from the
use of the asset and its eventual disposition. If the sum of the expected
future net 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 equipment
subject to operating leases and identifiable intangibles held by the
Partnership, is based on the fair value of the asset. The fair value of the
asset may be calculated by discounting the expected future net cash flows at
an appropriate interest rate.
-22-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
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 Finance 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.
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.
-23-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
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.
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.
-24-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
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 $786,000 and $730,000 at December 31, 1999 and
1998, 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.
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 net investment in direct finance leases as of December 31,
1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Minimum lease payments receivable $1,171,361 $2,284,333
Estimated residual values 961,661 997,342
Less unearned income (186,796) (415,788)
---------- ----------
$1,946,226 $2,865,887
========== ==========
</TABLE>
-25-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
3. Leased Equipment
----------------
The Partnership's investments in equipment on operating leases by major
classes as of December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Transportation and industrial equipment $ 8,755,266 $ 16,628,291
Computers and peripherals 1,786,631 3,271,704
Office furniture and equipment 1,481,627 2,918,088
Other - 264,567
----------- ------------
12,023,524 23,082,650
Less:
Accumulated depreciation (7,800,289) (13,134,092)
Allowance for losses (64,411) (310,787)
----------- -----------
$ 4,158,824 $ 9,637,771
=========== ===========
</TABLE>
Depreciation expense for 1999, 1998 and 1997 was $2,919,980, $4,942,188 and
$7,066,062, respectively.
4. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from non-cancelable leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, DFLs OLs
------------------------ ---- ---
<S> <C> <C>
2000 $ 778,157 $ 1,451,370
2001 393,204 386,337
2002 - 16,596
2003 - 9,027
----------- ------------
Total $ 1,171,361 $ 1,863,330
=========== ============
</TABLE>
5. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at December 31, 1999 bear interest at
rates primarily ranging between 6% and 9.5%. Aggregate maturities of such
non-recourse obligations are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000 $1,553,522
2001 768,296
----------
Total $2,321,818
==========
</TABLE>
-26-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
6. Transactions With the General Partner and Affiliates
----------------------------------------------------
Origination Fee and Evaluation Fee
----------------------------------
The general partner received 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, represented
compensation for selecting, negotiating and consummating the acquisition of
the equipment and another 2%, of which, represented 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 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. The Partnership did not
pay any fees during 1999 as the acquisition represented an upgrade to an
existing lease and there were no equipment purchases for 1998.
Management Fees Paid to General Partner
---------------------------------------
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 $104,000, $156,000 and
$201,000 of management fees during 1999, 1998 and 1997, respectively.
Direct Services from General Partner
------------------------------------
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 $90,000,
$137,000 and $108,000 of direct services from the general partner during
1999, 1998 and 1997, respectively.
Equipment Purchases
-------------------
The equipment purchase in 1999 represents an upgrade to an existing lease
and the Partnership did not acquire any new equipment in 1998. The
Partnership purchased equipment from CAII with a total purchase price of
approximately $1,085,000 during 1997. The Partnership purchased the
equipment at CAII's historical cost plus reimbursement of other net
acquisition costs, as provided for in the Partnership Agreement.
-27-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
Payable to Affiliates
---------------------
Payables to affiliates for 1999 consists of $6,116 and $6,539 for direct
services from general partner and management fees paid to the general
partner.
Receivable from Affiliates
--------------------------
The General Partner collects rents from lessees and applies there rental
payments to the lessee's account with the Partnership. The General Partner
then transfers the collected rental payments to the Partnership, eliminating
the receivable from affiliate balance.
7. 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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income per financial statements $ 408,915 $1,035,755 $ 1,456,778
Differences due to:
Direct finance leases 871,084 969,049 947,137
Depreciation (72,828) (325,966) (1,511,510)
Provision for losses 710,868 510,000 325,000
Gain/loss on sale of assets (6,743) 1,242,693 (468,349)
Other (64,350) (9,033) (1,028,690)
---------- ---------- -----------
Partnership income (loss) for federal income tax purposes $1,846,946 $3,422,498 $ (279,634)
========== ========== ===========
</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>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Partners' capital per financial statements $ 5,084,297 $ 7,782,747 $ 13,300,362
Differences due to:
Commissions and offering costs 4,868,944 4,868,944 4,868,944
Direct finance leases 6,620,936 5,749,852 4,780,803
Depreciation (12,387,737) (12,314,909) (11,988,943)
Provision for losses 1,220,868 510,000 325,000
Gain/loss on sale of assets (6,743) 1,242,693 (468,349)
Other 1,694,567 516,313 670,811
------------ ------------ ------------
Partners' capital for federal income tax purposes $ 7,095,132 $ 8,355,640 $ 11,488,628
============ ============ ============
</TABLE>
-28-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
8. Concentration of Credit Risk
----------------------------
Approximately 71% 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.
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.
The Partnership leased equipment to a significant number of lessees. Two
lessees and their affiliates accounted for 12% ($726,300) and 11% ($693,153)
of total leasing and remarketing revenue of the Partnership during 1999.
9. 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, 1999 for cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
payable to affiliates, receivable from 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, 1999, discounted lease rentals of approximately
$2,322,000 had fair values of $2,028,000. The fair values were estimated
utilizing market rates of comparable debt having similar maturities and
credit quality as of December 31, 1999.
-29-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
NOTES TO FINANCIAL STATEMENTS, Continued
10. General Partner Matters (unaudited)
As of March 31, 2000, CAII, an affiliate of the general partner, owes the
Partnership $70,547 for rents, remarketing proceeds and other amounts
(collectively, the "Prior Rents") collected by CAII on behalf of the
Partnership during periods prior to February 1, 2000 (the "Prior Periods").
According to its own records, as of March 31, 2000, CAII owes approximately
$3.9 million to other investors and creditors (who, along with the
Partnership, are referred to herein as the "Payees"), for Prior Rents
collected by CAII on their behalf during the Prior Periods. CAII, which
presently does not have the funds to repay all of the Prior Rents, is in
negotiations with the Payees to develop a plan for repayment of the Prior
Rents owed to all Payees over time. The Partnership is withholding
acquisition fees and managements fees otherwise payable to the general
partner and crediting such withheld fees (the "Fees") against the Prior
Rents owing from CAII. The Partnership intends to continue to withhold
future Fees until such time as it recovers all Prior Rents.
The Partnership relies upon the services of CAII for origination of leases,
administrative and accounting services and remarketing of leases and
equipment, among other services. Should CAII be unable to develop a plan for
repayment with it's Payees, the Partnership may be required to contract with
another party for these services. In such event, there is no assurance that
another provider of these services can be identified.
-30-
<PAGE>
Independent Auditors' Report
----------------------------
The Partners
Capital Preferred Yield Fund-II, L.P.:
Under date of March 31, 2000, we reported on the balance sheets of Capital
Preferred Yield Fund-II, L.P. as of December 31, 1999 and 1998, and the related
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 1999, as contained in the Partnership's
annual report on Form 10-K for the year 1999. 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, such 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 LLP
--------------------
KPMG LLP
Denver, Colorado
March 31, 2000
-31-
<PAGE>
CAPITAL PREFERRED YIELD FUND-II, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------- -------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance at Additions Balance
Beginning Charged to at End
Classification of Year Expenses Deductions (1) of Year
- -------------- -------- ----------- -------------- ---------
1999
- --------------------------------
Allowance for losses:
Accounts receivable $ 25,000 $ - $ - $ 25,000
Equipment on operating leases 185,787 710,868 (832,244) 64,411
--------- --------- ----------- ---------
$ 210,787 $ 710,868 $ (832,244) $ 89,411
========= ========= =========== =========
1998
- --------------------------------
Allowance for losses:
Accounts receivable $ 25,000 $ - $ - $ 25,000
Equipment on operating leases 150,954 510,000 (475,167) 185,787
--------- --------- ----------- ---------
$ 175,954 $ 510,000 $ (475,167) $ 210,787
========= ========= =========== =========
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
========= ========= =========== =========
</TABLE>
1) Principally charge-offs of assets against the established allowances.
See accompanying independent auditors' report
-32-
<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
Richard H. Abernethy Vice President and Director
Joseph F. Bukofski Chief Accounting Officer, Vice President and
Director
Mick Myers Director
John F. Olmstead, age 56, 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.
Richard H. Abernethy, age 46, joined CAII in April 1992 as Equipment Valuation
Manager and currently serves as Vice President of Portfolio Management. Mr.
Abernethy has fourteen 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.
-33-
<PAGE>
Item 10. Directors and Executive Officers of the Partnership, continued
---------------------------------------------------
Joseph F. Bukofski, age 44, joined CAII in June 1990 as a Financial Analyst.
Mr. Bukofski is currently the Vice President and Treasurer. Prior to becoming
Treasurer, 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.
Mick Myers, age 42, joined CAII in February 1992 as a Senior Portfolio Manager.
Currently he is 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.
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 1998.
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 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
-34-
<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,
1999.
(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 1999:
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 $104,000 for 1999.
-35-
<PAGE>
Item 13. Certain Relationships and Related Transactions, continued
----------------------------------------------
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
$90,000 during 1999.
General Partner Distributions
- -----------------------------
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 $31,000 and $31,000, respectively, for 1999. Distributions and
net income allocated to the Class B limited partner totaled approximately $3,000
and $5,000, respectively, for 1999.
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, 1999.
(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.
-36-
<PAGE>
SIGNATURES
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: ____________, 2000 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 30, 1999.
Signature Title
- --------- -----
/s/ John F. Olmstead
- ------------------------------------
John F. Olmstead President and Director
/s/ Richard H. Abernethy
- ------------------------------------
Richard H. Abernethy Vice President and Director
/s/ Joseph F. Bukofski
- ------------------------------------
Joseph F. Bukofski Chief Accounting Officer,
Vice President and Director
/s/ Mick Myers
- ------------------------------------
Mick Myers Director
-37-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,345,288
<SECURITIES> 0
<RECEIVABLES> 576,061
<ALLOWANCES> 0
<INVENTORY> 566,714
<CURRENT-ASSETS> 0
<PP&E> 6,105,050
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,593,113
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,084,297
<TOTAL-LIABILITY-AND-EQUITY> 8,593,113
<SALES> 480,241
<TOTAL-REVENUES> 4,668,842
<CGS> 0
<TOTAL-COSTS> 4,259,927
<OTHER-EXPENSES> 194,370
<LOSS-PROVISION> 710,868
<INTEREST-EXPENSE> 251,161
<INCOME-PRETAX> 408,915
<INCOME-TAX> 0
<INCOME-CONTINUING> 408,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 408,915
<EPS-BASIC> 2.80
<EPS-DILUTED> 2.80
</TABLE>
