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, 1998
-------------------------------------------------
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 14
Page 1 of 15 Pages
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Quarterly Report on Form 10-Q
For the Quarter Ended
September 30, 1998
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets-September 30, 1998 and December 31, 1997 3
Statements of Income - Three and Nine Months Ended
September 30, 1998 and 1997 4
Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Exhibit Index 14
Signature 15
2
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
BALANCE SHEETS
ASSETS
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
Cash and cash equivalents $ 3,162,768 $ 2,839,510
Accounts receivable, net 1,477,579 7,059,347
Equipment held for sale or re-lease 152,921 887,865
Net investment in direct finance leases 72,188 229,696
Leased equipment, net 6,386 1,074,600
----------- -----------
Total assets $ 4,871,842 $12,091,018
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Payables to affiliates $ 7,315 $ 44,916
Accounts payable and accrued liabilities 600,558 905,979
Rents received in advance 92,892 162,931
Distributions payable to partners 3,439,438 1,241,334
Financed operating lease rentals - 1,131,105
----------- -----------
Total liabilities 4,140,203 3,486,265
----------- -----------
Partners' capital:
General partner - -
Limited partners:
Class A - 6,439,272
Class B 731,639 2,165,481
----------- -----------
Total partners' capital 731,639 8,604,753
----------- -----------
Total liabilities and partners' capital $ 4,871,842 $12,091,018
=========== ===========
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,
------------------------------ --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Operating lease rentals $ 277,352 $ 1,301,572 $ 439,242 $ 4,470,059
Direct finance lease income 2,282 237,433 106,590 751,812
Equipment sales margin 212,652 58,711 770,658 296,273
Interest income 27,061 11,474 61,532 53,644
----------- ----------- ----------- -----------
Total revenue 519,347 1,609,190 1,378,022 5,571,788
----------- ----------- ----------- -----------
EXPENSES:
Depreciation 82,179 805,863 210,962 2,750,630
Management fees to general partner 13,362 104,357 31,876 330,457
Direct services from general partner 11,647 31,220 70,286 115,369
Interest on discounted lease rentals - 40,895 28 166,118
Interest on financed operating lease rentals 13,717 11,597 40,754 38,259
General and administrative 35,444 51,551 216,020 213,693
Provision for losses 25,000 25,000 500,000 250,000
----------- ----------- ----------- -----------
Total expenses 181,349 1,070,483 1,069,926 3,864,526
----------- ----------- ----------- -----------
NET INCOME $ 337,998 $ 538,707 $ 308,096 $ 1,707,262
=========== =========== =========== ===========
NET INCOME ALLOCATED:
To the general partner $ 190,190 $ 68,905 $ 368,124 $ 286,858
To the Class A limited partners 137,412 436,789 (55,832) 1,320,591
To the Class B limited partner 10,396 33,013 (4,196) 99,813
----------- ----------- ----------- -----------
$ 337,998 $ 538,707 $ 308,096 $ 1,707,262
=========== =========== =========== ===========
Net income (loss) per weighted average
Class A limited partner units outstanding $ .55 $ 1.74 $ (0.22) $ 5.25
=========== =========== =========== ===========
Weighted average Class A limited
partner unit outstanding 251,376 251,507 251,384 251,609
=========== ========== =========== ===========
</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,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,437,467 $ 7,791,920
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on financed operating lease rentals (1,123,270) (245,988)
Principal payments on discounted lease rentals (7,835) (2,035,405)
Distributions to partners (5,982,405) (7,221,208)
Redemptions of limited partner units (699) (23,868)
----------- -----------
Net cash used in financing activities (7,114,209) (9,526,469)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 323,258 (1,734,549)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,839,510 2,672,112
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,162,768 $ 937,563
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 28 $ 166,118
Interest paid on financed operating lease rentals 40,754 38,259
</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, 1997 was derived from the audited financial statements as
restated included in the Partnership's 10-K/A. 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, 1997, previously filed with the Securities and Exchange
Commission.
The Partnership is in its liquidation period as defined in the Partnership
Agreement. During the liquidation period, the Partnership no longer
acquires new leases and the existing lease portfolio is in the process of
running-off. As of September 30, 1998, the Partnership had sold a
substantial portion of its assets. The General Partner expects to sell the
remaining assets by December 31, 1998 and finalize the liquidation of the
Partnership.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"), which requires comprehensive income to be displayed
prominently within the financial statements. Comprehensive income is
defined as all recognized changes in equity during a period from
transactions and other events and circumstances except those resulting from
investments by owners and distributions to owners. Net income and items
that previously have been recorded directly in equity are included in
comprehensive income. Statement 130 affects only the reporting and
disclosure of comprehensive income but does not affect recognition or
measurement of income. Statement 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Partnership adopted Statement 130 in the first quarter of 1998. The
adoption did not have an impact on its financial reporting.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131
provides guidance for reporting information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial reports of public companies.
An operating segment is defined as a component of a business that engages
in business activities from which it may earn revenue and incur expenses, a
component
6
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation, continued
---------------------
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS, continued
whose operating results are regularly reviewed by the company's chief
operating decision maker, and a component for which discrete financial
information is available. Statement 131 establishes quantitative thresholds
for determining operating segments of a company. Statement 131 is effective
for fiscal years beginning after December 15, 1997, with earlier
application permitted. The Partnership adopted Statement 131 in the first
quarter of 1998. The adoption did not have an impact on its financial
reporting.
2. Transactions With the General Partner and Affiliate
---------------------------------------------------
DIRECT SERVICES FROM GENERAL PARTNER
The general partner and an affiliate 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. At September 30, 1998, direct services from the
General Partner of $6,277 are included in payable to affiliates.
MANAGEMENT FEES TO GENERAL PARTNER
In accordance with the Partnership Agreement, the General Partner earns a
management fee in connection with its management of the equipment,
calculated as a percentage of the monthly gross rentals received, and paid
monthly in arrears. At September 30, 1998, management fees of $1,038 are
included in payables to affiliates.
GENERAL AND ADMINISTRATIVE EXPENSES
The General Partner and an affiliate are reimbursed for the actual cost of
administrative expenses paid on behalf of the Partnership per the terms of
the Partnership Agreement.
7
<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
1998 1997 Periods 1998 1997 Periods
------------ ----------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 183,738 $ 680,650 $ (496,912) $ 294,088 $ 2,266,864 $ (1,972,776)
Equipment sales margin 212,652 58,711 153,941 770,658 296,273 474,385
Interest income 27,061 11,474 15,587 61,532 53,644 7,888
Management fees to general partner (13,362) (104,357) 90,995 (31,876) (330,457) 298,581
Direct services from general partner (11,647) (31,220) 19,573 (70,286) (115,369) 45,083
General and administrative (35,444) (51,551) 16,107 (216,020) (213,693) (2,327)
Provision for losses (25,000) (25,000) - (500,000) (250,000) (250,000)
--------- ---------- ---------- ---------- ----------- ------------
Net income (loss) $ 337,998 $ 538,707 $ (200,709) $ 308,096 $ 1,707,262 $ (1,399,166)
========= ========== ========== ========== =========== ============
</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 amount of equipment being
remarketed (i.e., re-leased, renewed, or sold) will increase. As a result, both
the size of the Partnership's leasing portfolio and the amount of leasing
revenue are declining.
LEASING MARGIN
Leasing margin consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------------
1998 1997 1998 1997
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating lease rentals $ 277,352 $ 1,301,572 $ 439,242 $ 4,470,059
Direct financing lease income 2,282 237,433 106,590 751,812
Depreciation (82,179) (805,863) (210,962) (2,750,630)
Interest expense (13,717) (52,492) (40,782) (204,377)
--------- ----------- ----------- -----------
Leasing margin $ 183,738 $ 680,650 $ 294,088 $ 2,266,864
========= =========== =========== ===========
Leasing margin ratio 66% 38% 54% 43%
========= =========== =========== ===========
</TABLE>
8
<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, continued
- ---------------------
LEASING MARGIN, continued
The components of leasing margin have declined and are expected to decline
further due to portfolio run- off, as the partnership is in the liquidation
stage.
The ultimate rate of return on leases depends, in part, on interest rates at the
time the leases are originated, as well as future equipment values and on-going
lessee creditworthiness. Because leasing is an alternative to financing
equipment purchases with debt, lease rates tend to rise and fall with interest
rates (although lease rate movements generally lag interest rate changes in the
capital markets).
EQUIPMENT SALES MARGIN
Equipment sales margin consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Equipment sales revenue $ 793,995 $ 147,188 $ 2,032,891 $ 1,625,234
Cost of equipment sales (581,343) (88,477) (1,262,233) (1,328,961)
----------- ---------- ----------- -----------
Equipment sales margin $ 212,652 $ 58,711 $ 770,658 $ 296,273
=========== ========== =========== ===========
Equipment sales margin increased for the three and ine months ended September
30, 1998 reflecting the efforts of the General Partner to finalize the
liquidation of the Partnership.
INTEREST INCOME
Interest income increased due to an increase in cash available for investment.
PROVISION FOR LOSSES
The remarketing of equipment for an amount greater than its book value is
reported with 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.
9
<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, continued
- ---------------------
PROVISION FOR LOSSES, continued
Residual values are established equal to the estimated value to be received from
the equipment following termination of the lease. In estimating such values, the
Partnership considers all relevant facts regarding the equipment and the lessee,
including, for example, the likelihood that the lessee will re-lease the
equipment. The nature of the Partnership's leasing activities is that it has
credit and residual value exposure and, accordingly, in the ordinary course of
business, it will incur losses from those exposures. The Partnership performs
ongoing quarterly assessments of its assets to identify other-than-temporary
losses.
The provision for losses recorded for the nine months ended September 30, 1998
and 1997 was primarily related to lessees returning equipment to the
Partnership. For the nine months ended September 30, 1998, the Partnership
recorded a loss of $425,000 on mining and transportation equipment and office
furniture and fixtures held for sale or re-lease. The Partnership had previously
expected to realize the carrying value of this equipment through proceeds from
the sales of equipment to the original lessees. The fair market value of the
equipment was less than anticipated.
EXPENSES
The increase in general and administrative expenses for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997 was
primarily due to an increase in non-resident withholding tax for 1997, paid and
expensed on behalf of the limited partners during the second quarter of 1998.
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, 1998, the Partnership declared
distributions to the partners of $4,226,443 ($2,814,544 of which was paid during
October 1998). A 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 its life can only be
determined after all residual cash flows (which include proceeds from the
re-leasing and sales of equipment after initial lease terms expire) have been
realized at the termination of the Partnership. The Partnership is in its
liquidation period (as defined in the Partnership Agreement) and distributions
during the liquidation period will vary based upon cash availability. All
distributions are expected to be a return of capital for economic purposes.
10
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources, continued
- -------------------------------
The General Partner currently anticipates that the Partnership will generate
cash flow from operations and equipment sales during the remainder of 1998
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 Class B limited partner 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%).
Cumulative Class B distributions accrued since August 1997, in the amount of
$710,813 were paid in October 1998 due to the receipt of proceeds on the sale of
certain equipment.
YEAR 2000 ISSUES
An affiliate provides accounting and other administrative services, including
data processing services to the Partnership. The affiliate has conducted a
comprehensive review of its computer systems to identify systems that could be
affected by the Year 2000 issue. The Year 2000 issue results from computer
programs being written using two digits rather than four to define the
applicable year. Certain computer programs which have time-sensitive software
could recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in major system failures or miscalculations. Certain of the
affiliate's software has already been updated to correctly account for the Year
2000 issue. In addition, the affiliate is engaged in a system conversion,
whereby the affiliate's primary lease tracking and accounting software is being
replaced with new systems which will account for the Year 2000 correctly. The
affiliate expects that the new system will be fully operational by December 31,
1999, and therefore will be fully Year 2000 compliant. The affiliate does not
expect any other changes required for the Year 2000 to have a material effect on
its financial position or results of operations. As such, the affiliate has not
developed any specific contingency plans in the event it fails to complete the
conversion to a new system by December 31, 1999. In addition, the affiliate does
not expect any Year 2000 issues relating to its customers and vendors to have a
material effect on its financial position or results of operations.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement 133").
Statement 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Statement 133 is effective
for fiscal years beginning after June 15, 1999, with earlier application
permitted.
The Partnership will adopt Statement 133 in the first quarter of 1999. The
General Partner does not expect the adoption to have an impact on its financial
reporting.
11
<PAGE>
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"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 and under Results of
Operations in the 1997 Form 10-K when and where applicable.
12
<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) Exhibits
(b) The Partnership did not file any reports on Form 8-K during the
three months ended September 30, 1998
13
<PAGE>
Item No. Exhibit Index
27 Financial Data Schedule
14
<PAGE>
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, 1998 By: /s/Anthony M. DiPaolo
--------------------------------
Anthony M. DiPaolo
Senior Vice President
15
<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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,162,768
<SECURITIES> 0
<RECEIVABLES> 1,477,579
<ALLOWANCES> 0
<INVENTORY> 152,921
<CURRENT-ASSETS> 0
<PP&E> 6,386
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,871,842
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 731,639
<TOTAL-LIABILITY-AND-EQUITY> 4,871,842
<SALES> 770,658
<TOTAL-REVENUES> 1,378,022
<CGS> 0
<TOTAL-COSTS> 1,069,926
<OTHER-EXPENSES> 102,162
<LOSS-PROVISION> 500,000
<INTEREST-EXPENSE> 40,782
<INCOME-PRETAX> 308,096
<INCOME-TAX> 0
<INCOME-CONTINUING> 308,096
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 308,096
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
