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 an affiliate 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, the Class B limited partner 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 CAII the largest single investor in the Partnership. In addition, the Class B limited partner's interest in Distributable Cash is subordinated to the Class A limited partners' interest. The contributions of the Class B limited partner 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 Limited Partners during the reinvestment period (a period that ends approximately 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 one to four years of the end of the reinvestment period.
During 1996, 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, but was not limited to, point of sale equipment, transportation equipment, computer equipment, above ground mining equipment and printed circuit board manufacturing equipment. See Item 13 of this report, "Certain Relationships and Related Transactions" for the listing of equipment purchased during 1996. The Partnership expects that a majority of the equipment purchased during 1997 will be similar in nature to that mentioned above.
The Partnership may assign the rentals from leases to financial institutions, or acquire leases subject to such assignments, at fixed interest rates on a nonrecourse basis. This non-recourse debt financing will be utilized to finance the purchase of equipment under lease, or to invest the proceeds therefrom in additional equipment under lease. 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.
Item 1. Business, continued --------
During 1996, the Partnership leased equipment to investment grade lessees in the automobile manufacturing and servicing, manufacturing, and other industries. 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 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 may limit 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 ultimate 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. 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). Interest rates have fluctuated over the past several years as follows: (i) rates decreased from 1993 until the early part of 1994, (ii) rates then increased through the early part of 1995 and (iii) rates have decreased to the present time. It is unclear whether interest rates will continue to decrease, and what effect, if any, such interest rate decreases will have on lease rates.
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 1996.
Item 1. Business, continued --------
Currently the Partnership is in its reinvestment period (as set forth in the Prospectus). The Partnership will enter its liquidation period (as set forth in the Prospectus) beginning in April 1997.
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 1997 and 2001.
Item 2.
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.
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.
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, 1996.
Item 5.
Item 5. Market for the Partnership's Common Equity and Related Stockholder ---------------------------------------------------------------------- Matters -------
(a) The Partnership's limited partner units and general partner units are not publicly traded. There is no established public trading market for such units and none is expected to develop.
(b) As of December 31, 1996, the number of Class A limited partners was 2,375.
Item 5. Market for the Partnership's Common Equity and Related Stockholder ---------------------------------------------------------------------- Matters, continued -------
(c) Distributions -------------
During 1996, the Partnership made twelve (12) distributions (a substantial portion of which constituted a return of capital) to Class A limited partners, as follows:
A substantial portion of such distributions is expected to constitute 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 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, 1996, totaling $334,945, was paid to the Class A limited partners during January 1997. Distributions to the general partner and Class B limited partner during 1996 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 1997 to (1) meet current operating requirements, (2) enable it to fund cash distributions to the Class A and Class B limited partners at annualized rates of 12% and 11% (substantial portions of which are expected to constitute returns of capital), respectively, on their capital contributions and (3) reinvest in additional equipment under leases, provided that suitable equipment can be identified and acquired.
Item 5. Market for the Partnership's Common Equity and Related Stockholder ---------------------------------------------------------------------- Matters, continued -------
(c) Distributions, continued -------------
The Partnership is currently in its reinvestment period and will enter its liquidation period (as defined in the Partnership Agreement) in April 1997. During the reinvestment period, available cash will be distributed or reinvested per items (2) and (3) described in the preceding paragraph. However, during the liquidation period, reinvestment will cease and the excess cash, if any, will be distributed to the partners in accordance with the Partnership Agreement. Therefore, it is anticipated that during the liquidation period in 1997, cash distributions to the Class A limited partners will be in excess of 12% of their contributed capital. Distributions during the liquidation period will be based upon cash availability and will vary and all distributions are expected to be a return of capital for economic purposes.
During 1995, the Partnership made twelve (12) distributions (a substantial portion of which constituted a return of capital) to Class A limited partners, as follows:
Item 6.
Item 6. Selected Financial Data -----------------------
The following selected financial data relates to 1996 through 1992. 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.
Item 7.
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.
The Partnership is in the latter stages of its reinvestment period (scheduled to end in March 1997, as defined in the Partnership Agreement). As the reinvestment period progresses, purchases of equipment under lease are decreasing, initial leases are expiring and the amount of equipment being remarketed (i.e., re-leased, renewed, or sold) is increasing. Because a leasing portfolio declines in size as it matures, these circumstances have resulted in a decline in the Partnership's leasing portfolio (referred to in further discussions as "portfolio run-off").
Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued ---------------------
LEASING MARGIN
Leasing margin consists of the following:
All components of leasing margin, except interest expense, decreased due to portfolio runoff. Total interest expense increased due to the increase in non-recourse financing.
The ultimate rate of return on leases depends, in part, on the general level of interest rates at the time the leases are originated. 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). Interest rates have fluctuated over the past several years as follows: (i) rates decreased from 1993 until the early part of 1994, (ii) rates then increased through the early part of 1995 and (iii) rates have decreased to the present time. It is unclear whether interest rates will continue to decrease, and what effect, if any, such interest rate decreases will have on lease rates.
EQUIPMENT SALES MARGIN
Equipment sales margin consists of the following:
The Partnership is in the final year of its five-year reinvestment period. 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.
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 exposure 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 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.
* $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.
Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued ---------------------
PROVISION FOR LOSSES, continued
The provisions for losses recorded in 1994 related to estimates of "other-than-temporary" losses in value of off- lease equipment, principally to RISC workstations and computer disk drives returned to the Partnership. The Partnership had previously expected to realize the carrying value of this equipment through month-to-month rentals, renewals or proceeds from the sale of this equipment to the lessee. The value recovered from sale was less than initially expected.
EXPENSES
Direct services from the general partners increased in 1996 compared to 1995 primarily due to warehouse labor costs associated with off-lease equipment.
General and administrative expenses increased in 1996 compared to 1995 primarily due to (i) legal costs associated with bankrupt lessee litigation (ii) reimbursement to the CAI general partner for insurance costs related to prior years and (iii) storage costs for warehoused off-lease equipment.
General and administrative expenses decreased in 1995 compared to 1994, due to higher third-party professional fees incurred for remarketing the Partnership's equipment in 1994.
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 1996, 1995 and 1994, the Partnership acquired equipment subject to leases with a total equipment purchase price of $14,304,831, $3,031,560 and $16,595,752, respectively.
During December 1995, the Partnership assigned certain of its rights to a group of its operating leases to an unaffiliated third-party (the "Purchaser"). Rights assigned included rental payments due under the initial leases as well as anticipated rental payments from renewals or re-leases of the equipment. Rights retained primarily included a formula-based portion of any proceeds from sales of equipment. During January 1996, the Purchaser assigned the rentals to a financial institution and the financial institution paid the discounted value of the rentals to the Partnership. The underlying leases were originally purchased by the Partnership for $5,293,523 (including acquisition fees) and had a net book value of $3,768,228 at December 31, 1995. Financing received by the Partnership during January 1996 totaled $4,272,657. As with non-recourse debt financing of lease rentals, this transaction was also collateralized by the leased equipment and related rentals, and in the event of a lessee default the Partnership has no recourse liability for repayment of the related obligation.
Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------------- Results of Operations, continued ---------------------
During 1996, 1995 and 1994, the Partnership declared distributions to the partners of $4,101,808, $4,131,126 and $3,847,041, respectively. A substantial portion of such distributions is expected to constitute 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 1996 to (1) meet current operating requirements, (2) enable it to fund cash distributions to the Class A and Class B limited partners at annualized rates of 12% and 11% (substantial portions of which are expected to constitute returns of capital), respectively, on their capital contributions and (3) reinvest in additional equipment under leases, provided that suitable equipment can be identified and acquired.
The Partnership is currently in its reinvestment period and will enter its liquidation period (as defined in the Partnership Agreement) in April 1997. During the reinvestment period, available cash will be distributed or reinvested per items (2) and (3) described in the preceding paragraph. However, during the liquidation period, reinvestment will cease and the excess cash, if any, will be distributed to the partners in accordance with the Partnership Agreement. Therefore, it is anticipated that during the liquidation period in 1997, cash distributions to the Class A limited partners will be in excess of 12% of their contributed capital. Distributions during the liquidation period will be based upon cash availability and will vary and all distributions are expected to be a return of capital for economic purposes.
Item 8.
Item 8. Financial Statements and Supplementary Data -------------------------------------------
Index to Financial Statements and Financial Statement Schedule
Page Number ------ Financial Statements --------------------
Independent Auditors' Report 13
Balance Sheets at December 31, 1996 and 1995 14
Statements of Income for the years ended December 31, 1996, 1995 and 1994 15
Statements of Partners' Capital for the years ended December 31, 1996, 1995 and 1994 16
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 17-18
Notes to Financial Statements 19-31
Financial Statement Schedule ----------------------------
Independent Auditors' Report 32
Schedule II - Valuation and Qualifying Accounts 33
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, 1996 and 1995, and the related statements of income, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP -------------------------- KPMG PEAT MARWICK LLP
Denver, Colorado January 31, 1997
CAPITAL PREFERRED YIELD FUND-II, L.P.
BALANCE SHEETS
ASSETS
See accompanying notes to financial statements.
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF INCOME
See accompanying notes to financial statements.
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF PARTNERS' CAPITAL Years ended December 31, 1996, 1995 and 1994
See accompanying notes to financial statements.
CAPITAL PREFERRED YIELD FUND-II, L.P. STATEMENTS OF CASH FLOWS
CAPITAL PREFERRED YIELD FUND-II, L.P.
STATEMENTS OF CASH FLOWS (continued)
See accompanying notes to financial statements.
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 commenced business operations on June 12, 1992, and from the date of commencement of operations through April 15, 1994, 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 has 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 is distributed to the partners as follows:
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 receive 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 receives annual non-compounded cumulative distributions equal to 11% of its contributed capital.
Third, any remaining available cash will be 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.
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 ------------------
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 -------------------
For financial reporting purposes, net income is allocated to the partners in a manner consistent with the allocation of cash distributions.
Reclassifications
Certain reclassifications have been made to prior years' financial statements to conform to the current year's presentation.
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
The Partnership adopted 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"), effective January 1, 1996. 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. Otherwise, an impairment loss is not 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. The adoption of this statement did not have a material effect on the Partnership's financial condition or results of operations.
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
CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued -----------------------------------------------------------
Net Investment in Direct Financing Leases ("DFLs"), continued
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.
Nonrecourse 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 nonrecourse 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 institu tions, 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
CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued
Non-recourse Financing of Operating Lease Rentals, continued
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.
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.
CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies, continued -----------------------------------------------------------
Cash Equivalents, continued
Cash equivalents of $1,718,000 and $2,054,000 at December 31, 1996 and 1995, respectively, are comprised of an investment 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 the net investment in direct finance leases as of December 31, 1996 and 1995 were:
1996 1995 ---- ----
Minimum lease payments receivable $ 4,989,455 $ 5,508,541 Estimated residual values 1,091,813 1,014,466 Less unearned income (1,102,445) (1,366,319) ----------- -----------
$ 4,978,823 $ 5,156,688 =========== ===========
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, 1996 and 1995 were: 1996 1995 ---- ----
Transportation and industrial equipment $ 26,364,473 $ 19,927,731 Computers and peripherals 11,145,021 14,999,856 Office furniture and equipment 3,784,347 4,628,787 Other 2,269,502 2,007,266 ------------ ------------ 43,563,343 41,563,640 Less: Accumulated depreciation (17,136,117) (16,915,870) Allowance for losses (255,956) (291,488) ------------ ------------
$ 26,171,270 $ 24,356,282 ============ ============
Depreciation expense for 1996, 1995 and 1994 was $7,856,952, $9,618,860 and $9,301,693, respectively.
4. Future Minimum Lease Payments -----------------------------
Future minimum lease payments receivable from noncancelable leases at December 31, 1996 are as follows:
Year Ending December 31 DFLs OLs ----------------------- ---- ---
1997 $ 1,493,052 $ 8,787,931 1998 1,283,458 5,832,826 1999 1,042,885 3,656,682 2000 753,213 1,475,368 2001 416,847 407,542 Thereafter - 20,064 ----------- -------------
Total $ 4,989,455 $ 20,180,413 =========== ============
CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued
5. Discounted Lease Rentals ------------------------
Discounted lease rentals outstanding at December 31, 1996 bear interest at rates primarily ranging between 6% and 11%. Aggregate maturities of such nonrecourse obligations are as follows:
Year Ending December 31 -----------------------
1997 $ 4,820,742 1998 3,359,012 1999 2,206,268 2000 1,438,741 2001 573,127 -------------
Total $ 12,397,890 =============
6. Financed Operating Lease Rentals --------------------------------
Financed operating lease rentals outstanding at December 31, 1996 bear interest at 8.25%. Aggregate maturities of such non-recourse financings are as follows:
Year Ending December 31,
1997 $ 1,742,544 1998 493,423 1999 792,475 2000 114,893 2001 5,211 Thereafter 12,593 ----------- Total $ 3,161,139 ===========
7. Transactions With the General Partner and Affiliates ----------------------------------------------------
Sales Commissions and Offering Costs ------------------------------------
Under the terms of the Partnership Agreement, CAI Securities Corporation, an affiliate of the general partner, is entitled to receive sales commissions and wholesaling fees equal to 10% of the Class A limited partners' capital contributions, of which up to 9% is paid to participating broker-dealers. Under the terms of the Partnership Agreement, the Partnership ceased offering Class A limited partner units for sale in 1994. During 1994, CAI Securities Corporation earned commissions and fees in the amount of $1,221,575 including $1,057,443 of which was paid to participating broker-dealers.
CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued
7. Transactions With the General Partner and Affiliates, continued ----------------------------------------------------
Sales Commissions and Offering Costs, continued ------------------------------------
As provided in the Partnership Agreement, the general partner received $488,630 as reimbursement for expenses incurred during 1994, in connection with the organization of the Partnership and the offering of Class A limited partner units. The general partner also received $17,615 as reimbursement for due diligence expenses incurred during 1994.
Capital Contributions ---------------------
Under terms of the Partnership Agreement, the Class B limited partner made capital contributions to the Partnership of $120,000 during 1994.
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 $550,185, $116,599 and $615,770 in 1996, 1995 and 1994, 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 receives 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. Management fees totaled $286,973, $275,888 and $260,429 for 1996, 1995 and 1994, 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. Such reimbursements totaled $158,770, $81,229 and $81,024 for 1996, 1995 and 1994, respectively.
CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued
7. Transactions With the General Partner and Affiliates, continued ----------------------------------------------------
Equipment Purchases -------------------
The Partnership purchased equipment from CAII with a total purchase price of $14,304,831, $3,031,560 and $16,595,752 (including $6,403,107, $592,862 and $2,552,446 of discounted lease rentals) during 1996, 1995 and 1994, 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.
Payable to Affiliates ---------------------
Payable to affiliates consists of management fees, direct services and expenses payable to the general partner and its affiliates.
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,:
CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued
8. Tax Information, (unaudited), continued ---------------
The following reconciles partners' capital for financial reporting purposes to partners' capital for federal income tax purposes for the years ended December 31,:
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 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.
10. Bankrupt Lessees ----------------
Barney's Inc., one of the Partnership's lessees, filed for protection under Chapter 11 of the bankruptcy code on January 10, 1996. The Partnership is a member of an unofficial committee of equipment lessors which negotiated an interim agreement with the debtor pursuant to which the debtor made four partial payments of postpetition rent of approximately 38% of the amount due under the lease and agreed to enter into further
CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued
10. Bankrupt Lessees, continued ----------------
negotiations to extend the interim agreements. The committee then entered into negotiations with an investor interested in purchasing all of the lessors' claims which would include taking title to the equipment and accepting an assignment of all rights as lessor under each lease. In July 1996, negotiations were finalized and the Partnership received a payment of $872,700, representing $0.735 on the dollar for the Partnership's claim against Barney's. Based on this recovery a provision for losses of $245,000 was recorded for the period ended June 30, 1996.
Norcross Footwear, one of the Partnership's lessees, filed for protection under Chapter 11 of the bankruptcy code on February 9, 1996. During second quarter 1996, the lessee rejected the lease and the equipment was 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. Based on this information, a provision for losses of $180,000 was recorded for the period ended June 30, 1996.
Anchor Glass filed for protection under Chapter 11 of the bankruptcy code on September 13, 1996. The aggregate net book value with this lessee was $221,845 at December 31, 1996. Potential outcomes are (i) the lessee affirms its leases and the Partnership collects all rents due under the leases or (ii) the lessee rejects the leases and returns the underlying equipment to the Partnership. If the leases are rejected and the equipment is returned to the Partnership or sold to a third party, it is possible that remarketing proceeds will be less than the net book value of the equipment. However, if the lessee affirms the leases, the Partnership would not be subject to a loss. The lessee has not made its intentions known at this time and, accordingly, the amount of loss, if any, cannot be determined as of December 31, 1996. Regardless of the lessee's decision to accept or reject the leases, the general partner believes that the ultimate outcome will not have a material adverse impact on the Partnership's financial position or results of operations.
11. Disclosures about Fair Value of Financial Instruments -----------------------------------------------------
Statement of Financial Standards No. 107 ("SFAS 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, 1996 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, 1996, discounted lease rentals and financed operating lease rentals of $12,397,890 and $3,161,139, respectively, had fair values of $11,797,818 and $2,913,249. The fair values were estimated utilizing market rates of comparable debt having similar maturities and credit quality as of December 31, 1996.
INDEPENDENT AUDITORS' REPORT ----------------------------
THE PARTNERS CAPITAL PREFERRED YIELD FUND-II, L.P.:
Under date of January 31, 1997, we reported on the balance sheets of Capital Preferred Yield Fund-II, L.P. as of December 31, 1996 and 1995, and the related statements of income, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the Partnership's annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned financial statements, we have 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 January 31, 1997
CAPITAL PREFERRED YIELD FUND-II, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS for the years ended December 31, 1996, 1995 and 1994
1) Principally charge-offs of assets against the established allowances.
See accompanying independent auditors' report
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosures -----------------------------------------------------
None
Item 10.
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
John E. Christensen Senior Vice President, Principal Financial and Chief Administrative Officer and Director
Anthony M. DiPaolo Senior Vice President, Assistant Secretary and Director
Daniel J. Waller Vice President and Director
Richard H. Abernethy Vice President and Director
John A. Reed Vice President, Assistant Secretary and Director
Robert A. Golden Vice President and Director
David J. Anderson Chief Accounting Officer and Secretary
JOHN F. OLMSTEAD, age 52, 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.
Item 10. Directors and Executive Officers of the Partnership, continued ---------------------------------------------------
DENNIS J. LACEY, age 43, 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.
JOHN E. CHRISTENSEN, age 49, joined CAII as Vice President and Treasurer in November 1988. He now serves as Senior Vice President, Finance and Chief Financial Officer of CAI and CAII. Mr. Christensen previously held senior management positions at Maxicare Health Plans, Inc., Global Marine, Inc. and Santa Fe International, Inc. Mr. Christensen obtained his MBA in Finance from the University of Michigan and his Bachelor of Arts degree from Michigan State University.
ANTHONY M. DIPAOLO, age 37, joined CAII in July 1990 as an Assistant Treasurer and is currently Senior Vice President-Business Development. He has also held the positions of Senior Vice President-Controller and Assistant Vice President-Credit Administration for the Company. Mr. DiPaolo has held financial management positions as Chief Financial Officer for Mile High Kennel Club, Inc. from 1988 to 1990 and was Vice President/Controller for VICORP Restaurants, Inc. from 1986 through 1988. Mr. DiPaolo holds a Bachelor of Science degree in Accounting from the University of Denver.
DANIEL J. WALLER, age 38, joined CAII in July 1990, as a manager of Investor Relations. Mr. Waller assumed the responsibility for the asset management department a short time later, and is currently Vice President, Capital Markets Group. Prior to joining CAII, Mr. Waller was an audit manager with Coopers & Lybrand for over three years and gained considerable experience in the leasing industry. While at Coopers & Lybrand, Mr. Waller held positions with the International Accounting and Auditing Committee as well as the national Auditing Directorate. Mr. Waller holds a Bachelor of Arts degree in accounting from the University of Northern Iowa.
RICHARD H. ABERNETHY, age 42, 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 41, joined CAII in January 1990 as the Tax Director and Assistant Secretary. Mr. Reed 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. Reed was Vice President of 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.
Item 10. Directors and Executive Officers of the Partnership, continued ---------------------------------------------------
ROBERT A. GOLDEN, age 51, 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.
DAVID J. ANDERSON, age 43, 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 working 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.
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 1996.
Item 12.
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, owns 100% of the Partnership's Class B limited partner interest.
CAI Equipment Leasing III Corp. owns 100% of the Partnership's general partner interest.
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
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 limited partner units as of December 31, 1996.
(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.
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 1996:
Origination Fee and Evaluation Fee - ----------------------------------
The general partner receives 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 $550,185 in 1996, 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 receives 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 $286,973 for 1996, $19,958 of which was paid during January 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 $284,423 during 1996.
Item 13. Certain Relationships and Related Transactions, continued ----------------------------------------------
Accountable General and Administrative Expenses, 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 $41,018 and $41,018, respectively, for 1996. Distributions and net income allocated to the Class B limited partner totaled $36,300 and $1,954, respectively, for 1996.
During 1996, the Partnership acquired the equipment as described below from CAII:
* 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.
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, 1996.
(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.
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 11, 1997 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 11, 1997.
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/John E. Christensen - ------------------------ John E. Christensen Senior Vice President, Principal Financial and Chief Administrative Officer and Director
/s/Anthony M. DiPaolo - ------------------------ Anthony M. DiPaolo Senior Vice President, Assistant Secretary and Director
/s/Daniel J. Waller - ------------------------ Daniel J. Waller Vice President 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/Robert A. Golden - ------------------------ Robert A. Golden Vice President and Director
/s/David J. Anderson - ------------------------ David J. Anderson Chief Accounting Officer and Secretary