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 33-44158
---------------------------------------------------------
Capital Preferred Yield Fund-III, L.P.
--------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1248907
- ----------------------- ------------------------------------
(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-III, L.P.
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 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
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-III, L.P.
BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
1997 1996
------------- ------------
Cash and cash equivalents $ 2,534,936 $ 798,140
Accounts receivable 1,257,907 883,201
Receivable from affiliates - 42,691
Net investment in direct finance leases 3,959,098 5,479,265
Leased equipment, net 46,399,885 55,268,012
------------ ------------
Total assets $ 54,151,826 $ 62,471,309
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 1,049,778 $ 684,684
Payable to affiliates 42,760 54,351
Rents received in advance 495,733 461,450
Distributions payable to partners 443,222 444,611
Discounted lease rentals 15,248,332 23,437,868
------------ ------------
Total liabilities 17,279,825 25,082,964
------------ ------------
Partners' capital:
General partner - -
Limited partners:
Class A 36,423,653 36,936,407
Class B 448,348 451,938
------------ ------------
Total partners' capital 36,872,001 37,388,345
------------ ------------
Total liabilities and partners' capital $ 54,151,826 $ 62,471,309
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
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 $ 4,627,126 $ 4,747,128 $ 14,083,922 $ 11,281,147
Direct finance lease income 92,109 114,170 283,584 303,996
Equipment sales margin 567,588 - 1,476,487 110,831
Interest income 28,929 46,896 84,759 296,484
----------- ----------- ------------ ------------
Total revenue 5,315,752 4,908,194 15,928,752 11,992,458
----------- ----------- ------------ ------------
EXPENSES:
Depreciation and amortization 3,280,891 3,712,368 10,474,920 8,639,565
Management fees paid to general partner 100,199 109,378 318,145 262,126
Direct services from general partner 40,828 23,134 89,384 71,698
General and administrative 50,416 69,717 159,959 213,163
Interest on discounted lease rentals 324,429 537,780 1,151,115 1,257,052
Provision for losses 100,000 - 150,000 -
----------- ----------- ------------ ------------
Total expenses 3,896,763 4,452,377 12,343,523 10,443,604
----------- ----------- ------------ ------------
NET INCOME $ 1,418,989 $ 455,817 $ 3,585,229 $ 1,548,854
=========== =========== ============ ============
NET INCOME ALLOCATED:
To the general partner $ 13,265 $ 13,329 $ 39,847 $ 55,072
To the Class A limited partners 1,391,537 438,014 3,509,596 1,478,672
To the Class B limited partner 14,187 4,474 35,786 15,110
----------- ----------- ------------ ------------
$ 1,418,989 $ 455,817 $ 3,585,229 $ 1,548,854
=========== =========== ============ ============
Net income per weighted average Class A
limited partner unit outstanding $ 2.81 $ .88 $ 7.07 $ 3.12
=========== =========== ============ ============
Weighted average Class A limited
partner units outstanding 495,948 497,874 496,220 474,939
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30,
------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Net cash provided by operating activities $ 19,396,833 $ 13,242,641
------------ -------------
Cash flows from investing activities:
Purchases of equipment on operating leases from affiliate (5,219,336) (22,813,728)
Investment in direct finance leases, acquired from affiliate (50,602) (776,599)
------------ -------------
Net cash used in investing activities (5,269,938) (23,590,327)
------------ -------------
Cash flows from financing activities:
Proceeds from Class A capital contributions - 11,623,048
Proceeds from Class B capital contributions - 130,000
Proceeds from discounted lease rentals - 4,767,017
Principal payments on discounted lease rentals (8,287,137) (6,610,159)
Redemptions of Class A limited partner units (116,865) (74,386)
Commissions paid to affiliate in connection
with the sale of Class A limited partner units - (1,162,305)
Non-accountable organization and offering expenses
reimbursement paid to the general partner in connection
with the sale of Class A limited partner units - (526,615)
Distributions to partners (3,986,097) (3,693,153)
------------ -------------
Net cash (used in) provided by financing activities (12,390,099) 4,453,447
------------ -------------
Net increase (decrease) in cash and cash equivalents 1,736,796 (5,894,239)
Cash and cash equivalents at beginning of period 798,140 6,774,071
------------ -------------
Cash and cash equivalents at end of period $ 2,534,936 $ 879,832
============ =============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 1,151,115 $ 1,257,052
Supplemental disclosure of noncash investing and
financing activities:
Discounted rentals assumed in equipment acquisitions 97,600 11,373,696
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
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 1996 Form 10-K. For further information,
refer to the financial statements of Capital Preferred Yield Fund-III, L.P.
(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.
Certain reclassifications have been made to the prior periods' financial
statements to conform to the current periods' presentation.
2. Equipment Purchases
-------------------
During the nine months ended September 30, 1997, the Partnership acquired
the equipment described below from Capital Associates International, Inc.
("CAII"):
<TABLE>
<CAPTION>
Acquisition Total
Equipment Cost of Fees and Equipment
Lessee Description Equipment Reimbursements Purchase Price
--------------------------- --------------------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
HK Systems, Inc. Phone system $ 38,568 $ 1,336 $ 39,904
Maryland Casualty Mail sorter system upgrade 8,523 295 8,818
Texas Utilities Cisco routers 137,936 4,393 142,329
System One Computer network 670,650 22,516 693,166
General Motors Corp. Material handling equipment 6,320 219 6,539
General Motors Corp. Material handling equipment 38,079 1,319 39,398
General Motors Corp. Forklift 7,681 266 7,947
Thomson Industries Gear shaper 64,304 2,228 66,532
Owens Corning Computer equipment 1,074,472 37,230 1,111,702
William Sonoma POS equipment 237,154 8,218 245,372
General Motors Corp. Scrubbers 12,904 447 13,351
Paramount Printing equipment 96,442 3,342 99,784
Alliant Techsystems, Inc. Reflow oven 68,786 2,384 71,170
HK Systems Computer equipment 10,339 358 10,697
Diamond Shamrock Refining POS equipment 1,692,369 58,640 1,751,009
Analysis & Technology, Inc. Computer equipment 114,693 3,864 118,557
General Motors Corp. Material handling equipment 113,364 3,929 117,293
General Motors Corp. Material handling equipment 83,701 2,901 86,602
6
<PAGE>
2. Equipment Purchases
Acquisition Total
Equipment Cost of Fees and Equipment
Lessee Description Equipment Reimbursements Purchase Price
--------------------------- --------------------------- ------------ -------------- --------------
General Motors Corp. Material handling equipment 21,717 $ 753 $ 22,470
General Motors Corp. Material handling equipment 22,994 797 23,791
General Motors Corp. Material handling equipment 187,773 6,506 194,279
General Motors Corp. Material handling equipment 241,831 8,379 250,210
General Motors Corp. Material handling equipment 54,123 1,876 55,999
General Motors Corp. Material handling equipment 55,777 1,933 57,710
General Motors Corp. Material handling equipment 75,371 2,611 77,982
General Motors Corp. Material handling equipment 14,236 493 14,729
General Motors Corp. Material handling equipment 38,852 1,346 40,198
----------- --------- -----------
$ 5,188,959 $ 178,579 $ 5,367,538
=========== ========= ===========
</TABLE>
At September 30, 1997, the general partner had identified $4.7 million of
additional equipment that satisfied the Partnership's acquisition
criteria. The Partnership expects to acquire this equipment during the
remainder of 1997.
7
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
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 $ 1,113,915 $ 611,150 $ 502,765 $ 2,741,471 $ 1,688,526 $ 1,052,945
Equipment sales margin 567,588 - 567,588 1,476,487 110,831 1,365,656
Interest income 28,929 46,896 (17,967) 84,759 296,484 (211,725)
Management fees paid to
general partner (100,199) (109,378) 9,179 (318,145) (262,126) (56,019)
Direct services from
general partner (40,828) (23,134) (17,694) (89,384) (71,698) (17,686)
General and administrative (50,416) (69,717) 19,301 (159,959) (213,163) 53,204
Provision for losses (100,000) - (100,000) (150,000) - (150,000)
----------- ---------- ---------- ----------- ----------- -----------
Net income $ 1,418,989 $ 455,817 $ 963,172 $ 3,585,229 $ 1,548,854 $ 2,036,375
=========== ========== ========== =========== =========== ===========
</TABLE>
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 $ 4,627,126 $ 4,747,128 $ 14,083,922 $ 11,281,147
Direct finance lease income 92,109 114,170 283,584 303,996
Depreciation and amortization (3,280,891) (3,712,368) (10,474,920) (8,639,565)
Interest expense on discounted lease rentals (324,429) (537,780) (1,151,115) (1,257,052)
------------ ------------ ------------- ------------
Leasing margin $ 1,113,915 $ 611,150 $ 2,741,471 $ 1,688,526
============ ============ ============= ============
Leasing margin ratio 24% 14% 19% 16%
== == == ==
</TABLE>
All components of leasing margin decreased for the three months ended September
30, 1997 due to portfolio runoff. Operating lease rentals and depreciation
increased for the nine months ended September 30, 1997, compared to the
comparable period of 1996 due to a higher average operating lease portfolio. The
decrease in interest expense was directly related to a decrease in the average
outstanding non-recourse debt balance in the comparable periods.
8
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Results of Operations, continued
- ---------------------
LEASING MARGIN, continued
Leasing margin ratio increased, and is expected to increase further primarily
because a portion of the Partnership's portfolio consists of operating leases
financed with non-recourse debt. 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).
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 $ 1,817,339 $ - $ 5,046,749 $ 454,045
Cost of equipment sales (1,249,751) - (3,570,262) (343,214)
------------ --------- ------------ ----------
Equipment sales margin $ 567,588 $ - $ 1,476,487 $ 110,831
============ ========= ============ ==========
Equipment sales margin is affected by the number and dollar amount of equipment
leases that mature in a particular quarter. Revenue from equipment sales
increased primarily due to revenue from the sale of manufacturing, earth moving
and computer equipment.
INTEREST INCOME
Interest income decreased due to a decrease in invested cash. During a
significant portion of the nine months ended September 30, 1996, the Partnership
was in its offering period and as such, invested cash was generally higher
pending purchase of additional equipment.
EXPENSES
Management fees increased due to growth in the Partnership's lease portfolio.
General and administrative expenses decreased primarily due to lower legal fees
associated with bankrupt lessees.
9
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
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 (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 on-going quarterly assessments of its assets to identify any
other-than-temporary losses in value.
The provision of losses recorded for the nine months ended September 30, 1997
was primarily due to the Partnership's loss exposure related to a troubled
lessee. In addition, there were also losses related to the sale of equipment
having a lower fair market value than originally anticipated.
Liquidity & Capital Resources
- -----------------------------
The Partnership funds its operating activities principally with cash from rents,
discounted lease rentals (non-recourse debt), interest income, and sales of
off-lease equipment. Available cash and cash reserves of the Partnership are
invested in short-term government securities pending the acquisition of
equipment or distribution to the partners.
During the nine months ended September 30, 1997, the Partnership acquired
equipment subject to leases with a total equipment purchase price of $5,367,538.
At September 30, 1997, the general partner had identified $4.7 million of
additional equipment that satisfied the Partnership's acquisition criteria. The
Partnership expects to acquire this equipment during the remainder of 1997.
During the nine months ended September 30, 1997, the Partnership declared
distributions to the partners of $3,984,708 ($443,222 of which was paid during
October 1997). A substantial portion of such distributions is expected to
constitute a return of capital. Distributions may be characterized for tax,
accounting and economic purposes as a return of capital, a return on capital or
a portion of both. The portion of each cash distribution by a partnership which
exceeds its net income for the fiscal period may be deemed a return of capital
for accounting purposes. However, the total percentage of a partnership's return
on capital over its life will only be determined after all residual cash flows
(which include proceeds from the re-leasing and sale of equipment) have been
realized at the termination of the Partnership.
10
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Liquidity & Capital Resources, continued
- -----------------------------
The general partner believes that the Partnership will generate sufficient cash
flows from operations during the remainder of 1997, to (1) meet current
operating requirements, (2) enable it to fund cash distributions to both the
Class A and Class B limited partners at annualized rates of 10.5% (substantial
portions of which are expected to constitute returns of capital), on their
capital contributions, and (3) reinvest in additional equipment under leases,
provided that suitable equipment can be identified and acquired.
11
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
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
quarter ended September 30, 1997.
12
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
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-III, L.P.
By: CAI Equipment Leasing IV Corp.
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> 2,534,936
<SECURITIES> 0
<RECEIVABLES> 1,257,907
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 46,399,885
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,151,826
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 36,872,001
<TOTAL-LIABILITY-AND-EQUITY> 54,151,826
<SALES> 1,476,487
<TOTAL-REVENUES> 15,928,752
<CGS> 0
<TOTAL-COSTS> 12,343,523
<OTHER-EXPENSES> 407,529
<LOSS-PROVISION> 150,000
<INTEREST-EXPENSE> 1,151,115
<INCOME-PRETAX> 3,585,229
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,585,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,585,229
<EPS-PRIMARY> 7.07
<EPS-DILUTED> 7.07
</TABLE>
