SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission file number 0-19164
---------------------------------------------------------
Capital Preferred Yield Fund, A California Limited Partnership
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0190817
- ----------------------- ------------------------------------
(State of organization) (I.R.S. Employer Identification No.)
7175 West Jefferson Avenue, Suite 4000
Lakewood, Colorado 80235
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 980-1000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 .
----- -----
Exhibit Index appears on Page 12
Page 1 of 13 Pages
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Quarterly Report on Form 10-Q
For the Quarter Ended
September 30, 1997
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Balance Sheets-September 30, 1997 and December 31, 1996 3
Statements of Income - Three and Nine months ended
September 30, 1997 and 1996 4
Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
2
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
1997 1996
----------- ------------
Cash and cash equivalents $ 937,563 $ 2,672,112
Accounts receivable, net 297,986 390,607
Equipment held for sale or re-lease 1,448,970 1,081,841
Net investment in direct finance leases 3,659,627 5,316,787
Leased equipment, net 8,593,160 13,519,836
----------- -----------
Total assets $14,937,306 $22,981,183
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Payable to affiliates $ 44,691 $ 65,370
Accounts payable and accrued liabilities 638,371 821,791
Rents received in advance 210,048 230,501
Distributions payable to partners 470,690 1,317,409
Discounted lease rentals 2,211,818 4,363,104
Financed operating lease rentals 1,198,980 1,329,087
----------- -----------
Total liabilities 4,774,598 8,127,262
----------- -----------
Partners' capital:
General partner - -
Limited partners:
Class A 7,865,615 12,199,688
Class B 2,297,093 2,654,233
----------- -----------
Total partners' capital 10,162,708 14,853,921
----------- -----------
Total liabilities and partners' capital $14,937,306 $22,981,183
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1997 1996 1997 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUE:
Operating lease rentals $ 1,301,572 $ 2,229,013 $ 4,470,059 $ 7,114,968
Direct finance lease income 237,433 335,366 751,812 891,456
Equipment sales margin 58,711 939,667 296,273 1,331,766
Interest income 11,474 52,125 53,644 154,165
----------- ----------- ----------- -----------
Total revenue 1,609,190 3,556,171 5,571,788 9,492,355
----------- ----------- ----------- -----------
EXPENSES:
Depreciation and amortization 805,863 1,457,668 2,750,630 4,937,904
Management fees paid to general partner 104,357 193,093 330,457 544,863
Direct services from general partner 31,220 17,647 115,369 73,971
Interest on discounted lease rentals 40,895 114,142 166,118 414,491
Interest on financed operating lease rentals 11,597 18,685 38,259 75,640
General and administrative 51,551 70,232 213,693 368,388
Provision for losses 25,000 - 250,000 805,000
----------- ----------- ----------- -----------
Total expenses 1,070,483 1,871,467 3,864,526 7,220,257
----------- ----------- ----------- -----------
NET INCOME $ 538,707 $ 1,684,704 $ 1,707,262 $ 2,272,098
=========== =========== =========== ===========
NET INCOME ALLOCATED:
To the general partner $ 68,905 $ 170,752 $ 286,858 $ 377,492
To the Class A limited partners 436,789 1,407,573 1,320,591 1,761,470
To the Class B limited partner 33,013 106,379 99,813 133,136
----------- ----------- ----------- -----------
$ 538,707 $ 1,684,704 $ 1,707,262 $ 2,272,098
=========== =========== =========== ===========
Net income per weighted average Class A
limited partner units outstanding $ 1.74 $ 5.57 $ 5.25 $ 6.97
=========== =========== =========== ===========
Weighted average Class A limited
partner unit outstanding 251,507 252,492 251,609 252,820
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------------
1997 1996
------------ -------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,791,920 $ 12,876,256
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases from affiliate of equipment on operating leases - (1,095,366)
Investment in direct finance leases, acquired from affiliate - (123,945)
------------ -------------
Net cash used in investing activities - (1,219,311)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on financed operating lease rentals (245,988) (130,841)
Principal payments on discounted lease rentals (2,035,405) (4,012,049)
Distributions to partners (7,221,208) (7,823,079)
Redemptions of limited partner units (23,868) (113,776)
------------ -------------
Net cash used in financing activities (9,526,469) (12,079,745)
------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,734,549) (422,800)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,672,112 4,492,487
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 937,563 $ 4,069,687
============ =============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals 166,118 $ 414,491
Interest paid on financed operating lease rentals 38,259 75,640
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for annual
financial statements. In the opinion of the general partner, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. The balance sheet at
December 31, 1996 has been derived from the audited financial statements
included in the Partnership's 10-K. For further information, refer to the
financial statements of Capital Preferred Yield Fund, A California Limited
Partnership (the "Partnership"), and the related notes, included in the
Partnership's Annual Report on Form 10-K for the year ended December 31,
1996, previously filed with the Securities and Exchange Commission.
6
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Presented below are schedules (prepared solely to facilitate the discussion of
results of operations that follows) showing condensed statements of income
categories and analyses of changes in those condensed categories derived from
the Statements of Income.
<TABLE>
<CAPTION>
Condensed Statements Condensed Statements
of Income for The effect on of Income for The effect on
the three months net income the nine months net income
ended September 30, of changes ended September 30, of changes
------------------------- between -------------------------- between
1997 1996 periods 1997 1996 periods
---------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 680,650 $ 973,884 $ (293,234) $ 2,266,864 $ 2,578,389 $ (311,525)
Equipment sales margin 58,711 939,667 (880,956) 296,273 1,331,766 (1,035,493)
Interest income 11,474 52,125 (40,651) 53,644 154,165 (100,521)
Management fees paid to
general partner (104,357) (193,093) 88,736 (330,457) (544,863) 214,406
Direct services from
general partner (31,220) (17,647) (13,573) (115,369) (73,971) (41,398)
General and administrative (51,551) (70,232) 18,681 (213,693) (368,388) 154,695
Provision for losses (25,000) - (25,000) (250,000) (805,000) 555,000
---------- ----------- ------------ ----------- ----------- -------------
Net income $ 538,707 $ 1,684,704 $ (1,145,997) $ 1,707,262 $ 2,272,098 $ (564,836)
========== =========== ============ =========== =========== =============
</TABLE>
The Partnership is in its liquidation period as defined in the Partnership
Agreement and, as expected, the Partnership is not purchasing additional
equipment, initial leases are expiring and the equipment is being remarketed
(i.e., re-leased, renewed, or sold). As a result, both the size of the
Partnership's leasing portfolio and the amount of leasing revenue are declining
(referred to in this discussion as "portfolio runoff").
LEASING MARGIN
Leasing margin consists of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating lease rentals $ 1,301,572 $ 2,229,013 $ 4,470,059 $ 7,114,968
Direct financing lease income 237,433 335,366 751,812 891,456
Depreciation and amortization (805,863) (1,457,668) (2,750,630) (4,937,904)
Interest expense on related financed
operating lease rentals (11,597) (18,685) (38,259) (75,640)
Interest expense on related discounted
lease rentals (40,895) (114,142) (166,118) (414,491)
----------- ------------ ------------ -------------
Leasing margin $ 680,650 $ 973,884 $ 2,266,864 $ 2,578,389
=========== ============ ============ ============
Leasing margin ratio 44% 38% 43% 32%
== == == ==
</TABLE>
7
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Results of Operations, continued
- ---------------------
LEASING MARGIN, continued
The components of leasing margin have declined and are expected to decline
further due to portfolio run-off. Leasing margin ratio increased primarily due
to (i) remarketing activities, and (ii) because a portion of the Partnership's
portfolio consists of operating leases financed with non-recourse debt
(including both discounted lease rentals and financed operating lease rentals).
Leasing margin and the related leasing margin ratio for an operating lease
financed with non-recourse debt increases during the term of the lease since
rents and depreciation are typically fixed while interest expense declines as
the related non-recourse debt is repaid.
The ultimate rate of return on leases depends, in part, on the general level of
interest rates at the time the leases are originated, as well as future
equipment values and on-going lessee creditworthiness. Because leasing is an
alternative to financing equipment purchases with debt, lease rates tend to rise
and fall with interest rates (although lease rate movements generally lag
interest rate changes in the capital markets). Interest rates declined from 1990
until the early part of 1994. The lease rates on equipment purchased by the
Partnership during this period reflect this low interest rate environment. This
will result in corresponding reductions in the ultimate overall yields to the
partners. Annual average 5-year U.S. Treasury yields for the past seven years
were as follows:
Annual average 5-year U.S. Treasury Yield
Year Yield
---- -----
1990 8.37
1991 7.37
1992 6.19
1993 5.14
1994 6.69
1995 6.53
1996 6.18
8
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Results of Operations, continued
- ---------------------
EQUIPMENT SALES MARGIN
Equipment sales margin consists of the following:
Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------------
1997 1996 1997 1996
--------- ----------- ------------ ------------
Equipment sales revenue $ 147,188 $ 1,916,434 $ 1,625,234 $ 3,814,203
Cost of equipment sales (88,477) (976,767) (1,328,961) (2,482,437)
--------- ----------- ------------ ------------
Equipment sales margin $ 58,711 $ 939,667 $ 296,273 $ 1,331,766
========= =========== ============ ============
The Partnership is in it's liquidation period. During the liquidation period, as
initial leases terminate, the 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.
INTEREST INCOME
Interest income decreased due to a decrease in cash available for investment as
the Partnership is in liquidation and therefore distributing excess cash to the
limited partners.
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.
9
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Results of Operations, continued
- ---------------------
PROVISION FOR LOSSES, continued
The provision for losses recorded for the nine months ended September 30, 1997
was primarily related to lessees returning equipment to the Partnership. The
Partnership had previously expected to realize the carrying value of this
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 a third party was less than anticipated.
The provision for losses recorded during the nine months ended September 30,
1996 was primarily related to the following:
- - $320,000 related to bankrupt lessees,
- - $150,000 related to a lessee returning an aircraft to the Partnership,
- - $130,000 related to equipment under lease returned to the Partnership by a
lessee experiencing severe financial difficulties,
- - $95,000 related to lessees returning modular buildings, computer equipment,
a telephone system and hospital equipment to the Partnership, and
- - $110,000 related to the sale of equipment having a lower fair market value
than originally anticipated.
The Partnership had previously expected to realize the carrying value of this
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 was considerably less than anticipated.
EXPENSES
Management fees paid to the general partner decreased primarily as a result of
portfolio run-off.
Direct services from the general partner increased primarily due to
administrative costs incurred by the general partner in the remarketing of
warehoused equipment. General and administrative expenses for the nine months
ended September 30, 1996 included $104,027 reimbursed to the general partner for
insurance costs related to prior years.
10
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Liquidity and Capital Resources
- -------------------------------
The Partnership funds its operating activities principally with cash from rents,
non-recourse debt, interest income and sales of off-lease equipment. Available
cash and cash reserves of the Partnership are invested in interest bearing cash
accounts and short-term U.S. Government securities pending distributions to the
partners.
During the three months ended September 30, 1997, the Partnership declared
distributions to the partners of $1,531,221 ($470,690 of which was paid during
October 1997). A substantial portion of such distributions constituted a return
of capital for accounting purposes. 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. However, the
total percentage of a partnership's return on capital over it's life can only be
determined after all residual cash flows (which include proceeds from the
re-leasing and sale of equipment after the initial lease terms expire) have been
realized at the termination of the Partnership.
The general partners currently anticipate that the Partnership will generate
cash flow from operations and equipment sales during the remainder of 1997
which, when added to cash and cash equivalents on hand, should provide
sufficient cash to enable the Partnership to meet its current operating
requirements.
The Partnership anticipates that it will fund the remaining 1997 distributions
to the limited partners (a substantial portion of which is expected to
constitute returns of capital for accounting purposes) out of cash from
operations and cash from sales during the remainder of 1997. Because of
portfolio runoff, it is anticipated that cash from operations in 1997 will
decrease relative to cash from operations in 1996. Therefore, the Partnership is
not expected to have sufficient cash available in 1997 to fully fund cash
distributions to the Class A limited partners at annualized rates of 13% (see
discussion below). The Partnership is in its liquidation period (as defined in
the Partnership Agreement) and distributions during the liquidation period will
be based upon cash availability and will vary and all distributions are expected
bo be a return of capital for economic purposes.
The Class B distributions of cash from operations are subordinated to the Class
A limited partners receiving distributions of cash from operations, as scheduled
in the Partnership Agreement (i.e., 13%). Therefore, because of the anticipated
decrease in distributions to the Class A limited partners, CAII, the sole Class
B limited partner, will cease receiving distributions of cash from operations at
some point during 1997. The general partners currently anticipate that CAII will
receive total future Class B distributions equal to approximately 25% of the
Class B limited partner's capital shown on the accompanying Balance Sheets.
11
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is involved in routine legal proceedings
incidental to the conduct of its business. The general partner
believes none of these legal proceedings will have a material
adverse effect on the financial condition or operations of the
Partnership.
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) The Partnership did not file any reports on Form 8-K during
the three months ended September 30, 1997
12
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
By: CAI Partners Management Company
Dated: November 13, 1997 By: /s/Anthony M. DiPaolo
---------------------
Anthony M. DiPaolo
Senior Vice President
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 937,563
<SECURITIES> 0
<RECEIVABLES> 297,986
<ALLOWANCES> 0
<INVENTORY> 1,448,970
<CURRENT-ASSETS> 0
<PP&E> 8,593,160
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,937,306
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 10,162,708
<TOTAL-LIABILITY-AND-EQUITY> 14,937,306
<SALES> 296,273
<TOTAL-REVENUES> 5,571,788
<CGS> 0
<TOTAL-COSTS> 3,864,526
<OTHER-EXPENSES> 445,826
<LOSS-PROVISION> 250,000
<INTEREST-EXPENSE> 204,377
<INCOME-PRETAX> 1,707,262
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,707,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,707,262
<EPS-PRIMARY> 5.25
<EPS-DILUTED> 5.25
</TABLE>
