10-K 1 cappref2_10k-2001.txt DECEMBER 31, 2001 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001 [ ] 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) 2750 South Wadsworth C-200, Denver, Colorado 80227 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (720) 963-9600 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 30 Page 1 of 31 Pages Item 1. Business -------- Capital Preferred Yield Fund-II, L.P., a Delaware limited partnership (the "Partnership"), was organized on November 19, 1991 for the purpose of owning and leasing equipment. CAI Equipment Leasing III Corp. ("CAIEL-III"), a Colorado corporation, is the general partner of the Partnership. CAIEL-III was a wholly owned subsidiary of Capital Associates, Inc. ("CAI") until September 12, 2000, the date it was purchased in its entirety by Mishawaka Leasing Company, Inc. ("MLC"). CAI discontinued its operations on December 15, 2000 and filed Chapter 11 Bankruptcy on October 15, 2001. Capital Associates International, Inc. ("CAII") was the Class B limited partner of the Partnership prior to September 12, 2000. 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. MLC became the Class B limited partner as of September 12, 2000. The Partnership has no employees. Prior to September 12, 2000, the Partnership relied upon the services of CAII for origination of leases, administrative and accounting services, and remarketing of leases and equipment, among other services. Since September 12, 2000, the general partner has contracted with MLC to provide the above services. Many of the management and administrative personnel of MLC formerly worked for CAII and serviced the Partnership leases. 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". Since its formation, the Partnership acquired equipment of various types under lease to third parties on short-term leases (generally five years or less). 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 transportation and industrial equipment, computer equipment, office furniture and medical equipment, among others. The Partnership entered its liquidation stage, as defined in the Partnership Agreement, in July 1997. During the liquidation stage, purchases of equipment ceased (other than for prior commitments and equipment upgrades). The Partnership was required to dissolve and distribute all of its assets no later than December 31, 2009. During 2001, the Partnership liquidated all of its net assets and distributed the related proceeds to the partners. In December 2001, the Partnership made a final distribution to its Class A limited partners and distributed assets equal to the estimated settlement value of all remaining liabilities to the general partner. It is the intent of the general partner to settle all such liabilities. Excess cash remaining after such settlement, if any, or additional cash necessary for such settlement, if any, will be for the account of the general partner or the general partner's obligation, respectively. The Partnership ceased operations December 31, 2001. Item 2. Properties ---------- Per the Partnership Agreement, the Partnership does not own or lease any physical properties other than the equipment discussed in Item 1 "Business", of this report, which is incorporated herein by reference. 2 Item 3. Legal Proceedings ----------------- Neither the Partnership nor any of the Partnership's equipment is the subject of any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- No matters were submitted to a vote of the limited partners of the Partnership, through the solicitation of proxies or otherwise, during the fourth quarter ended December 31, 2001. 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, 2001, the date the Partnership ceased operations, the number of Class A limited partners was 1722. (c) Distributions ------------- During 2001, the Partnership made four (4) distributions (a portion of which constituted a return of capital) to Class A limited partners, as follows:

3 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 that 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 the Class B limited partner during 2001 are discussed in Item 13 of this Report, "Certain Relationships and Related Transactions." The Partnership declared a final distribution in December 2001. In calculating the amount of such distribution, the general partner considered the current as well as contingent liabilities incidental to the liquidation of the Partnership. During 2000, the Partnership made eleven (11) distributions (a portion of which constituted a return of capital) to Class A limited partners, as follows:

The following represents annual and cumulative distributions per Class A limited partner unit, as described in note 1 to Notes to Consolidated Financial Statement. 4 Item 5. Market for the Partnership's Common Equity and Related Stockholder ------------------------------------------------------------------ Matters, continued -------- (c) Distributions, continued -------------- 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) ----------- ----------------- --------------------- 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% 2000 20.66 8% 2001 15.13 6% ------- $281.10 ======= (1) Cumulative distributions, as described in note 1 to Notes to Consolidated Financial Statements began July 1992. Item 6. Selected Financial Data ----------------------- The following selected financial data relates to the years ended December 31, 1997 through 2001 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.

5 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:

The Partnership has liquidated, as defined in the Partnership Agreement. Initial leases have expired and all remaining equipment has been sold. As a result, both the size of the Partnership's leasing portfolio and the amount of leasing revenue declined. Leasing Margin Leasing margin consists of the following:

As previously stated, the Partnership has liquidated, as defined in the Partnership Agreement. Initial leases have expired and all remaining equipment has been sold. As a result, both the size of the Partnership's leasing portfolio and the amount of leasing revenue declined. 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations, continued -------------- I. Results of Operations, continued --------------------- Equipment Sales Margin Equipment sales margin consists of the following: Years Ended December 31, ------------------------------------------ 2001 2000 1999 ---- ---- ---- Equipment sales revenue $ 3,037,912 $ 1,112,166 $ 2,114,523 Cost of equipment sales (2,564,450) (818,738) (1,634,282) ----------- ----------- ----------- Equipment sales margin $ 473,462 $ 293,428 $ 480,241 =========== =========== =========== The Partnership ceased operations as of December 31, 2001. All remaining equipment was sold to the original lessee or to third parties. Liquidation The Partnership liquidated (as defined in the Partnership Agreement) and a final distribution was issued in December 2001. When calculating the amount of the final distribution, the Partnership distributed assets to the general partner representing the estimated settlement value of all remaining Partnership liabilities. Since the general partner assumed the obligation for these liabilities, the Liquidation amount in the accompanying Statements of Income represents the net liabilities assumed by the general partner that were accrued on the Partnership's books prior to its liquidation. 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 paid to general partner decreased due to portfolio run-off. Direct services from the general partner increased in 2001 compared to 2000 primarily due to activities related to converting the Partnership's assets from the CAI computer systems to the MLC computer systems. Direct services from the general partner decreased in 2000 compared to 1999 primarily due to portfolio runoff. General and administrative expenses increased in 2001 compared to 2000 primarily due to insurance and audit costs, and consulting costs related to converting the Partnership's assets from the CAII computer systems to the MLC computer systems. 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations, continued -------------- I. Results of Operations, continued --------------------- 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 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 will incur losses from those exposures in the ordinary course of business. The Partnership performs assessments of the estimated residual values of its assets to identify other-than-temporary losses in value. The provision for losses recorded during 2001 related to declines in the net realizable value of equipment either sold to lessees or returned to the Partnership, and subsequently sold. The fair market value of this equipment was lower than anticipated. The provision for losses recorded during 2000 related to the following: * $299,600 related to declines in the net realizable value of off-lease computer and industrial equipment. * $171,700 related primarily to lessees returning certain industrial and medical 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. * $126,000 related to computer equipment returned to the Partnership. The fair market value of this equipment was lower than anticipated. * $53,000 related to declines in the realizable value of on-lease transportation and industrial equipment. 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 o $456,868 related primarily to lessees returning certain semiconductor, 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-leases or sold to third parties was less than anticipated. o $175,000 related to declines in the realizable value of on-lease computer and manufacturing equipment. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations, continued -------------- II. Liquidity and Capital Resources ------------------------------- During 2001, 2000 and 1999, the Partnership declared distributions to the partners of $1,845,387, $2,960,500, and $3,099,217, 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 that 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 Partnership liquidated (as defined in the Partnership Agreement) and a final distribution was issued in December 2001. When calculating the amount of the final distribution, the Partnership distributed $577,397 to the general partner representing the estimated settlement value of all remaining Partnership liabilities. It is the intent of the general partner to settle all such liabilities. Excess cash remaining after such settlement, if any, or additional cash necessary for such settlement, if any, will be for the account of the general partner or the general partner's obligation, respectively. The Partnership ceased operations December 31, 2001. III. New Accounting Pronouncements ----------------------------- The Partnership ceased operations as of December 31, 2001. Therefore, new accounting pronouncements with an effective date subsequent to December 31, 2001 will not affect the Partnership. 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, the availability and cost of financing sources and the ultimate outcome of any contract disputes. Certain specific risks associated with particular aspects of the Partnership's business are discussed under Results of Operations in this report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- The Partnership ceased operations as of December 31, 2001. Consequently, the Partnership has no market risk exposure. 9 Item 8. Financial Statements and Supplementary Data ------------------------------------------- Index to Financial Statements and Financial Statement Schedule Page Financial Statements Number -------------------- ------ Independent Auditors' Report 11 Balance Sheets as of December 31, 2001 and 2000 12 Statements of Income for the years ended December 31, 2001, 2000 and 1999 13 Statements of Partners' Capital for the years ended December 31, 2001, 2000 and 1999 14 Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 15 Notes to Financial Statements 16-24 Financial Statement Schedule ---------------------------- Independent Auditors' Report 25 Schedule II - Valuation and Qualifying Accounts 26 10 Independent Auditor's 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, 2001 and 2000, and the related statements of income, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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. As discussed in Note 1, the Partnership has liquidated and ceased operations as of December 31, 2001, whereby all remaining cash has been distributed to both the Class A limited partners and the general partner. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/KPMG LLP ----------- KPMG LLP Denver, Colorado March 22, 2002 11 CAPITAL PREFERRED YIELD FUND-II, L.P. BALANCE SHEETS December 31, 2001 and 2000

See accompanying notes to financial statements. 12 CAPITAL PREFERRED YIELD FUND-II, L.P. STATEMENTS OF INCOME Years ended December 31, 2001, 2000 and 1999

See accompanying notes to financial statements. 13 CAPITAL PREFERRED YIELD FUND-II, L.P. STATEMENTS OF PARTNERS' CAPITAL Years ended December 31, 2001, 2000 and 1999

See accompanying notes to financial statements. 14 CAPITAL PREFERRED YIELD FUND-II, L.P. STATEMENTS OF CASH FLOWS Years ended December 31, 2001, 2000 and 1999

See accompanying notes to financial statements. 15 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 general partner of the Partnership is CAI Equipment Leasing III Corp., a wholly owned subsidiary of Mishawaka Leasing Company, Inc. ("MLC"). 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. Mishawaka Leasing Company, Inc. 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. During 2001, the Partnership liquidated and sold all remaining equipment. A final distribution was declared in accordance with the liquidation provisions of the Partnership Agreement. During December 2001, the Partnership made a final distribution to its Class A limited partners and distributed assets equal to the estimated settlement value of all remaining liabilities to the general partner. It is the intent of the general partner to settle all such liabilities. Excess cash remaining after such settlement, if any, or additional cash necessary for such settlement, if any, will be for the account of the general partner or the general partner's obligation, respectively. The Partnership ceased operation as of December 31, 2001. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 16 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 Cash Distributions ------------------ During the Reinvestment Period (as defined in the Partnership Agreement), available cash was distributed to the partners as follows: First, 1.0% to the general partner and 99.0% to the Class A limited partners until the Class A limited partners received annual, non-compounded cumulative distributions equal to 12% of their contributed capital. 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: 17 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 ------------------------------------------- First, commissions and expenses paid in connection with the sale of Class A limited partner units are allocated 1.0% to the general partner and 99.0% to the Class A limited partners. Second, depreciation relating to Partnership equipment and any losses resulting from the sale of equipment are generally allocated 1.0% to the general partner and 99.0% to the limited partners (shared 99.0%/1.0% by the Class A and Class B limited partners, respectively) 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 The Partnership ceased operations as of December 31, 2001. Therefore, new accounting pronouncements with an effective date subsequent to December 31, 2001 will not affect the Partnership. 18 CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued Long-Lived Assets The Partnership accounts for long-lived assets under the provisions of Statements of 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 lease 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 discount rate. Lease Accounting Statement of Financial Accounting Standards No. 13, Accounting for Leases, requires that a lessor account for each lease by the direct finance, sales-type or operating lease method. The Partnership currently utilizes the direct financing and operating methods for all of the Partnership's equipment under lease. Direct finance leases are defined as those leases that 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 non-recourse 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 as determined by the general partner. In estimating such values, the general partner considers all relevant information regarding the equipment and the lessee. 19 CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued 1. Organization and Summary of Significant Accounting Policies, continued ----------------------------------------------------------- Equipment on Operating Leases ("OLs") The cost of equipment, including acquisition fees paid to the general partner, is recorded as leased equipment in the accompanying balance sheets and is depreciated on a straight-line basis over the lease term to an amount equal to the estimated residual value at the lease termination date. Leasing revenue consists principally of monthly rents and is recognized as operating lease rentals in the accompanying income statements. Residual values are established at lease inception equal to the estimated value to be received from the equipment following termination of the initial lease 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 is recorded on the interest method, lower returns are realized in the early years of the term of an OL and higher returns in later years. Non-recourse Discounting of Rentals The Partnership may assign the future rentals from leases to financial institutions, or acquire leases subject to such assignments, at fixed interest rates on a non-recourse basis. In return for such assigned future rentals, the Partnership receives the discounted value of the rentals in cash. In the event of default by a lessee, the financial institution has a first lien on the underlying leased equipment, with no further recourse against the Partnership. Cash proceeds from such financings, or the assumption of such financings, are recorded on the balance sheet as discounted lease rentals. As lessees make payments to financial institutions, leasing revenue and interest expense are recorded. 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. 20 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 $754,000 at December 31, 2000 are comprised of investments in a money market fund that invests solely in U.S. Government securities having maturities of 90 days or less. Equipment Held for Sale Equipment held for sale, 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, 2000 were: 2000 ---- Minimum lease payments receivable $ 420,708 Estimated residual values 879,576 Less unearned income (53,308) ----------- $ 1,246,976 =========== 21 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, 2000 were: 2000 ---- Transportation and industrial equipment $ 6,322,388 Computers and peripherals 63,167 Office furniture and equipment 424,896 ------------- 6,810,451 Less: Accumulated depreciation (4,813,758) ------------- $ 1,996,693 ============= Depreciation expense for 2001, 2000 and 1999 was $556,217, $1,167,438 and $2,919,980, respectively. 4. Transactions With the General Partner and Affiliates ---------------------------------------------------- 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 $30,000, $62,000 and $104,000 of management fees during 2001, 2000 and 1999, 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 $69,000, $52,000 and $90,000 of direct services from the general partner during 2001, 2000 and 1999, respectively. Equipment Purchases ------------------- The equipment purchase in 1999 represented an upgrade to an existing lease Payables to Affiliates ---------------------- Payables to affiliates for December 31, 2000 consist of $5,094 for management fees to the general partner and $77,494 for general and administrative expenses. 22 CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued 5. 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,:

The following reconciles partners' capital for financial reporting purposes to partners' capital for federal income tax purposes for the years ended December 31,:

23 CAPITAL PREFERRED YIELD FUND-II, L.P. NOTES TO FINANCIAL STATEMENTS, Continued 6. 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. 24 Independent Auditors' Report ---------------------------- The Partners Capital Preferred Yield Fund-II, L.P.: Under date of March 22, 2002, we reported on the balance sheets of Capital Preferred Yield Fund-II, L.P. as of December 31, 2001 and 2000, and the related statements of income, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2001, as contained in the Partnership's annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement Schedule II. 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 22, 2002 25 CAPITAL PREFERRED YIELD FUND-II, L.P. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS for the years ended December 31, 2001, 2000 and 1999

1) Principally charge-offs of assets against the established allowances. See accompanying independent auditors' report 26 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 John F. Olmstead, age 58, is President of Mishawaka Leasing Co. since its formation in September 2000. He was Senior Vice President of CAI from December 1998 until June 2000. He has served as Chairman of the Board for Neo-kam Industries, Inc., Matchless Metal Polish Company, Inc. and ACL, Inc. since 1983. He has over 30 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 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 2001. 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. MLC is the Class B limited partner. 27 Item 12. Security Ownership of Certain Beneficial Owners and Management, -------------------------------------------------------------- continued 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. 2750 South Wadsworth C-200 Denver, Colorado 80227 Class B Limited Partner Mishawaka Leasing Company, Inc. 2750 South Wadsworth C-200 Denver, Colorado 80227 (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, 2001. (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 2001: 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 $30,000 for 2001. 28 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 that are incurred in connection with the Partnership's operations. Such reimbursable expenses amounted to approximately $69,000 during 2001. 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 $578,995 and $1,548, respectively, for 2001. Net income allocated to the Class B limited partner totaled $1,351 for 2001. The Partnership liquidated (as defined in the Partnership Agreement) and a final distribution was issued in December 2001. When calculating the amount of the final distribution, the Partnership distributed assets equal to the estimated settlement value of all remaining liabilities to the general partner. It is the intent of the general partner to settle all such liabilities. Excess cash remaining after such settlement, if any, or additional cash necessary for such settlement, if any, will be for the account of the general partner or the general partner's obligation, respectively. The Partnership ceased operations as of December 31, 2001. 29 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, 2001. (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. 30 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: April 1, 2002 Capital Preferred Yield Fund-II, L.P. By: CAI Equipment Leasing III Corporation By: Joseph F. Bukofski Chief Accounting Officer 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 April 1, 2002. Signature Title --------- ----- John F. Olmstead President and Director 31 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: April 1, 2002 Capital Preferred Yield Fund-II, L.P. By: CAI Equipment Leasing III Corporation By: /s/Joseph F. Bukofski --------------------- Joseph F. Bukofski Chief Accounting Officer 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 April 1 2002. Signature Title --------- ----- /s/John F. Olmstead ------------------- John F. Olmstead President and Director 31

CAPITAL PREFERRED YIELD FUND II L P 10-K