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 June 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 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 13
Page 1 of 14 Pages
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
Quarterly Report on Form 10-Q
For the Quarter Ended
June 30, 1998
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1998 and December 31, 1997 3
Statements of Income - Three and Six Months Ended
June 30, 1998 and 1997 4
Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997 5
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
2
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
Cash and cash equivalents $ 2,506,351 $ 2,813,686
Accounts receivable 685,307 1,044,068
Receivable from related party 70,747 6,523
Equipment held for sale or re-lease 459,202 506,197
Net investment in direct finance leases 4,684,657 3,326,833
Leased equipment, net 43,510,099 46,193,567
----------- -----------
Total assets $51,916,363 $53,890,874
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 642,899 $ 687,727
Payables to affiliates 119,057 39,276
Rents received in advance 583,870 632,478
Distributions payable to partners 440,855 441,650
Discounted lease rentals 15,721,112 15,828,174
----------- -----------
Total liabilities 17,507,793 17,629,305
----------- -----------
Partners' capital:
General partner - -
Limited partners:
Class A 33,982,864 35,818,106
Class B 425,706 443,463
----------- -----------
Total partners' capital 34,408,570 36,261,569
----------- -----------
Total liabilities and partners' capital $51,916,363 $53,890,874
=========== ===========
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 Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Operating lease rentals $ 4,475,212 $ 4,534,292 $ 8,689,666 $ 9,456,796
Direct finance lease income 147,255 96,201 238,497 191,475
Equipment sales margin 42,786 465,943 215,873 908,899
Interest income 35,433 34,408 87,796 55,830
----------- ----------- ----------- -----------
Total revenue 4,700,686 5,130,844 9,231,832 10,613,000
----------- ----------- ----------- -----------
Expenses:
Depreciation 3,280,032 3,480,210 6,661,628 7,194,029
Management fees paid to general partner 106,596 101,630 211,483 217,946
Direct services from general partner 48,941 25,789 94,727 48,556
General and administrative 87,231 49,671 144,755 109,543
Interest on discounted lease rentals 273,486 380,024 552,974 826,686
Provision for losses 425,000 25,000 700,000 50,000
----------- ----------- ----------- -----------
Total expenses 4,221,286 4,062,324 8,365,567 8,446,760
----------- ----------- ----------- -----------
Net income $ 479,400 $ 1,068,520 $ 866,265 $ 2,166,240
=========== =========== =========== ===========
Net income allocated:
To the general partner $ 13,184 $ 13,285 $ 26,393 $ 26,582
To the Class A limited partners 461,503 1,044,583 831,379 2,118,059
To the Class B limited partner 4,713 10,652 8,493 21,599
----------- ----------- ----------- -----------
$ 479,400 $ 1,068,520 $ 866,265 $ 2,166,240
=========== =========== =========== ===========
Net income per weighted average Class A
limited partner unit outstanding $ .94 $ 2.11 $ 1.69 $ 4.27
=========== =========== =========== ===========
Weighted average Class A limited
partner units outstanding 492,384 496,157 492,846 496,358
=========== =========== =========== ===========
</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>
Six Months Ended
June 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 11,967,866 $ 13,109,723
------------ ------------
Cash flows from investing activities:
Purchases of equipment on operating leases from affiliate (4,443,818) (2,434,939)
Investment in direct finance leases, acquired from affiliate (2,294,355) (39,904)
------------ ------------
Net cash used in investing activities (6,738,173) (2,474,843)
------------ ------------
Cash flows from financing activities:
Proceeds from discounted lease rentals 1,728,059 -
Principal payments on discounted lease rentals (4,545,027) (5,915,533)
Redemptions of Class A limited partner units (79,971) (52,709)
Distributions to partners (2,640,089) (2,658,663)
------------ ------------
Net cash used in financing activities (5,537,028) (8,626,905)
------------ ------------
Net increase (decrease) in cash and cash equivalents (307,335) 2,007,975
Cash and cash equivalents at beginning of period 2,813,686 798,140
------------ ------------
Cash and cash equivalents at end of period $ 2,506,351 $ 2,806,115
============ ============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 552,974 $ 826,686
Supplemental disclosure of noncash investing and
financing activities:
Discounted rentals assumed in equipment acquisitions 2,709,906 -
</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 of normal recurring adjustments) considered
necessary for a fair presentation have been included. The balance sheet at
December 31, 1997 has been derived from the audited financial statements
included in the Partnership's 1997 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, 1997, previously
filed with the Securities and Exchange Commission.
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.
2. Transactions With the General Partner and Affiliates
----------------------------------------------------
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. The Partnership recorded $94,727 of direct
services from the general partner for the six months ended June 30, 1998.
Of that amount, $9,839 is included in payables to affiliates.
6
<PAGE>
2. Transactions With the General Partner and Affiliates, continued
----------------------------------------------------
MANAGEMENT FEES PAID 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. The Partnership recorded management fee expense of
$211,483 for the six months ended June 30, 1998. Of that amount, $35,048 is
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 Partnership per the terms of the
Partnership Agreement. At June 30, 1998, $74,170 of reimbursable expenses
are included in payables to affiliates.
RECEIVABLE FROM RELATED PARTY:
The general partner collects and applies rental payments to the lessee's
account with the Partnership, for those lessees who remit directly to the
general partner. The rental payments are then transferred to the
Partnership, eliminating the receivable from related party balance. At the
end of June 1998, $70,747 in rents were applied by the general partner that
were transferred to the Partnership in July 1998.
EQUIPMENT PURCHASES:
During the six months ended June 30, 1998, 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>
Thomson Industries, Inc. Personal computers $ 31,952 $ 1,107 $ 33,059
Lenmark International, Inc Conveyor system 113,132 3,920 117,052
General Motors Corporation Forklifts 1,482,785 51,379 1,534,164
New York State Electric Personal computers 1,682,926 58,903 1,741,829
Oakland University PBX systems 497,555 17,414 514,969
Polo Ralph Lauren Corporation Peripherals-printers 33,805 1,183 34,988
Polo Ralph Lauren Corporation Personal computers 347,186 12,150 359,336
Polo Ralph Lauren Corporation PBX systems 76,114 2,664 78,778
Lucent Technology Forklifts 127,401 4,414 131,815
Darigold Incorporated Forklifts 11,495 398 11,893
Collins Industry Office automation 118,920 4,121 123,041
Sony Electronics Forklifts 53,808 1,865 55,673
Parke-Davis Pharmaceuticals Research equipment 93,921 3,255 97,176
Digital Audio Disk Printing equipment 91,334 3,165 94,499
Xerox Office automation 34,290 1,188 35,478
Breckenridge Forklifts 99,157 3,436 102,593
7
<PAGE>
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Transactions With the General Partner and Affiliates, continued
Equipment Purchases, (continued):
Acquisition Total
Equipment Cost of Fees and Equipment
Lessee Description Equipment Reimbursements Purchase Price
----------------------------- ------------------ ----------- -------------- --------------
Parke-Davis Pharmaceuticals Medical equipment $ 101,730 $ 3,525 $ 105,255
Williams Sonoma Point-of-sale 191,210 6,625 197,835
Lenmark International, Inc Printed circuit board 567,600 19,667 587,267
HK System, Inc. Communication equipment 73,986 2,564 76,550
Metris Direct, Inc. Networking equipment 59,324 2,055 61,379
GM Powertrain Division Forklifts 165,929 5,750 171,679
Moog Incorporated Personal computers 1,693,170 58,668 1,751,838
Mitchell International Personal computers 1,382,045 47,888 1,429,933
----------- ----------- -----------
TOTALS $ 9,130,775 $ 317,304 $ 9,448,079
=========== =========== ===========
</TABLE>
At June 30, 1998, the general partner had identified approximately $1
million of additional equipment that satisfied the Partnership's
acquisition criteria. The Partnership expects to acquire this equipment
during the remainder of 1998.
8
<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 Six Months Net Income
Ended June 30, of Changes Ended June 30, of Changes
--------------------------- Between -------------------------- Between
1998 1997 Periods 1998 1997 Periods
------------ ------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leasing margin $ 1,068,949 $ 770,259 $ 298,690 $ 1,713,561 $ 1,627,556 $ 86,005
Equipment sales margin 42,786 465,943 (423,157) 215,873 908,899 (693,026)
Interest income 35,433 34,408 1,025 87,796 55,830 31,966
Management fees paid to general partner (106,596) (101,630) (4,966) (211,483) (217,946) 6,463
Direct services from general partner (48,941) (25,789) (23,152) (94,727) (48,556) (46,171)
General and administrative (87,231) (49,671) (37,560) (144,755) (109,543) (35,212)
Provision for losses (425,000) (25,000) (400,000) (700,000) (50,000) (650,000)
----------- ----------- ---------- ----------- ----------- -----------
Net income $ 479,400 $ 1,068,520 $ (589,120) $ 866,265 $ 2,166,240 $ 1,299,975
=========== =========== ========== =========== =========== ===========
</TABLE>
LEASING MARGIN
Leasing margin consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Operating lease rentals $ 4,475,212 $ 4,534,292 $ 8,689,666 $ 9,456,796
Direct finance lease income 147,255 96,201 238,497 191,475
Depreciation (3,280,032) (3,480,210) (6,661,628) (7,194,029)
Interest on discounted lease rentals (273,486) (380,024) (552,974) (826,686)
------------ ------------ ------------ ------------
Leasing margin $ 1,068,949 $ 770,259 $ 1,713,561 $ 1,627,556
============ ============ ============ ============
Leasing margin ratio 23% 17% 19% 17%
== == == ==
</TABLE>
All components of leasing margin except direct finance lease income decreased
for the six months ended June 30, 1998 because more equipment subject to
operating leases was sold than purchased during the period. Leasing margin ratio
fluctuates 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.
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
- ---------------------
LEASING MARGIN, continued
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 Six Months Ended
June 30, June 30,
------------------------ --------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
Equipment sales revenue $ 609,340 $ 1,450,144 $ 2,463,852 $ 3,229,410
Cost of equipment sales (566,554) (984,201) (2,247,979) (2,320,511)
---------- ----------- ----------- -----------
Equipment sales margin $ 42,786 $ 465,943 $ 215,873 $ 908,899
========== =========== =========== ===========
INTEREST INCOME
Interest income increased due to an increase in invested cash in the quarter
ended March 31, 1998. Interest income varies due to (1) the amount of cash
available for investment (pending distribution or equipment purchases) and (2)
the interest rate on such invested cash.
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.
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
on-going quarterly assessments of its assets to identify any
other-than-temporary losses in value.
10
<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, continued
Accordingly, a provision for loss of $700,000 was recorded for the six months
ended June 30, 1998. Of this amount, $160,000 is related to the estimated
decline in residual value on earth moving and warehouse automation equipment
returned to the partnership at lease maturity and $350,000 is primarily related
to losses realized on the sales of certain manufacturing and printing equipment
at a lower fair market value than originally anticipated. In addition, computer
equipment which has been held for sale or re-lease for over a year was written
down to recognize a decline in residual value.
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 six months ended June 30, 1998, the Partnership acquired equipment
subject to leases with a total equipment purchase price of $9,448,079. At June
30, 1998, the general partner had identified approximately $1 million of
additional equipment that satisfied the Partnership's acquisition criteria. The
Partnership expects to acquire this equipment during the remainder of 1998.
During the six months ended June 30, 1998, the Partnership declared
distributions to the partners of $2,639,293 ($440,855 of which was paid during
July 1998). 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 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.
The general partner believes that the Partnership will generate sufficient cash
flows from operations during the remainder of 1998, to (1) meet current
operating requirements, (2) fund cash distributions to Class A and Class B
limited partners at annualized rates of 10.5% (portions of which are expected to
constitute returns of capital), 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Liquidity & Capital Resources, continued
- -----------------------------
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
affiliates's software have already been updated to software which correctly
accounts for the Year 2000. In addition, the affiliate is engaged in a system
conversion, whereby the affiliates's main lease tracking and accounting software
is being replaced with new systems which will account for the Year 2000
correctly. The general partner does not expect any other changes required for
the Year 2000 to have a material effect on the financial position or results of
operations of the Partnership. In addition, the general partner does not expect
any Year 2000 issues relating to customers and vendors will have a material
effect on its financial position or results of operations of the Partnership.
Costs incurred by the Partnership to address the Year 2000 issue have been
immaterial.
12
<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 June 30, 1998.
13
<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: August 13, 1998 By: /s/Anthony M. DiPaolo
---------------------------------
Anthony M. DiPaolo
Senior Vice President
14
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,506,351
<SECURITIES> 0
<RECEIVABLES> 756,054
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,510,099
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,916,363
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 34,408,570
<TOTAL-LIABILITY-AND-EQUITY> 51,916,363
<SALES> 215,873
<TOTAL-REVENUES> 9,231,832
<CGS> 0
<TOTAL-COSTS> 8,365,567
<OTHER-EXPENSES> 306,210
<LOSS-PROVISION> 700,000
<INTEREST-EXPENSE> 552,974
<INCOME-PRETAX> 866,265
<INCOME-TAX> 0
<INCOME-CONTINUING> 866,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 866,265
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.69
</TABLE>
