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, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19164
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Capital Preferred Yield Fund, A California Limited Partnership
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(Exact name of registrant as specified in its charter)
California 68-0190817
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(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
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Quarterly Report on Form 10-Q
For the Quarter Ended
June 30, 1996
Table of Contents
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements (Unaudited)
Balance Sheets-June 30, 1996 and December 31, 1995 3
Statements of Income - Three and Six months ended
June 30, 1996 and 1995 4
Statements of Cash Flows - Six months ended
June 30, 1996 and 1995 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
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1996 1995
----------- ------------
Cash and cash equivalents $ 4,560,729 $ 4,492,487
Accounts receivable, net 541,121 435,466
Inventory held for sale or re-lease 2,246,586 -
Net investment in direct finance leases 6,579,840 8,730,002
Leased equipment, net 16,799,403 23,859,022
----------- -----------
Total assets $30,727,679 $37,516,977
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Payable to affiliates $ 56,527 $ 121,065
Accounts payable and accrued liabilities 1,045,454 587,399
Rents received in advance 203,478 260,394
Distributions payable to partners 927,040 955,382
Discounted lease rentals 6,297,456 9,146,266
Financed operating lease rentals 1,442,270 1,594,646
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Total liabilities 9,972,225 12,665,152
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PARTNERS' CAPITAL:
General partner - -
Limited partners:
Class A 17,893,077 21,715,744
Class B 2,862,377 3,136,081
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Total partners' capital 20,755,454 24,851,825
----------- -----------
Total liabilities and partners' capital $30,727,679 $37,516,977
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenue:
Operating lease rentals $ 2,339,550 $ 3,329,417 $ 4,885,955 $ 7,270,783
Direct finance lease income 301,665 485,394 556,090 894,422
Equipment sales margin 222,562 300,836 392,099 419,538
Interest income 49,853 40,561 102,040 64,828
------------ ------------ ------------ ------------
Total revenue 2,913,630 4,156,208 5,936,184 8,649,571
------------ ------------ ------------ ------------
Expenses:
Depreciation and amortization 1,591,957 2,525,080 3,480,236 5,470,964
Management fees paid to general partner 169,630 271,198 351,770 548,941
Direct services from general partner 30,601 24,223 56,324 50,674
Interest on discounted lease rentals 137,025 308,702 300,349 672,771
Interest on financed operating lease rentals 27,785 - 56,955 -
General and administrative 234,432 51,954 298,156 121,253
Provision for losses 430,000 125,000 805,000 125,000
------------ ------------ ------------ ------------
Total expenses 2,621,430 3,306,157 5,348,790 6,989,603
------------ ------------ ------------ ------------
Net income $ 292,200 $ 850,051 $ 587,394 $ 1,659,968
============ ============ ============ ============
Net income allocated:
To the general partner $ 103,324 $ 104,141 $ 206,740 $ 207,330
To the Class A limited partners 175,600 693,497 353,897 1,350,565
To the Class B limited partner 13,276 52,413 26,757 102,073
------------ ------------ ------------ ------------
$ 292,200 $ 850,051 $ 587,394 $ 1,659,968
============ ============ ============ ============
Net income per weighted average Class A
limited partner unit outstanding $ 0.69 $ 2.73 $ 1.40 $ 5.31
============ ============ ============ ============
Weighted average Class A limited partner
units outstanding 252,826 254,235 252,992 254,419
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
--------------------------
1996 1995
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 8,289,716 $ 11,064,080
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases from affiliate of equipment on
operating leases (496,235) (726,191)
Investment in direct finance leases, acquired
from affiliate (11,945) (194,897)
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Net cash used in investing activities (508,180) (921,088)
----------- ------------
Cash flows from financing activities:
Principal payments on financed operating lease
rentals (152,376) -
Principal payments on discounted lease rentals (2,848,810) (5,208,630)
Distributions to partners (4,622,570) (4,632,431)
Redemptions of limited partner units (89,538) (60,126)
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Net cash used in financing activities (7,713,294) (9,901,187)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 68,242 241,805
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,492,487 2,435,555
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,560,729 $ 2,677,360
=========== ============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 300,349 $ 672,771
Interest paid on financed operating lease rentals 56,955 -
The accompanying notes are an integral part of these financial statements.
5
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, 1995 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,
1995, previously filed with the Securities and Exchange Commission.
2. Equipment Purchases
-------------------
During the six months ended June 30, 1996, the Partnership purchased from
Capital Associates International, Inc. ("CAII"), the Class B limited
partner and an affiliate of the general partner, the equipment under lease
listed below. The Partnership purchased the equipment at cost to CAII. The
Partnership reached its front-end fee cap, as defined in the Partnership
Agreement, during a prior fiscal year. Accordingly, CAII did not receive
any acquisition fees on equipment sold to the Partnership during the six
months ended June 30, 1996.
Total
Equipment Equipment
Lessee Description Purchase Price
--------------------------- ------------------ --------------
Consolidated Diesel Company Copier $ 11,945
Consolidated Diesel Company Boring machine 28,500
Alliant Techsystems, Inc. Computer equipment 210,159
Wagner College Computer equipment 68,722
Henry General Hospital Medical equipment 112,000
Wagner College Computer equipment 76,854
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$ 508,180
==========
3. Equipment Held for Sale or Re-lease
Equipment held for sale or re-lease, recorded at the lower of cost or
market value expected to be realized, consists of equipment previously
leased to end users which has been returned to the Partnership following
lease expiration.
6
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.
Condensed Statements of Condensed Statements of
Income for the three months The effect on Income for the six months The effect on
ended June 30, net income of ended June 30, net income of
--------------------------- changes between ------------------------- changes between
1996 1995 periods 1996 1995 periods
------------ ------------ --------------- ------------ ----------- ---------------
Leasing margin $ 884,448 $ 981,029 $ (96,581) $ 1,604,505 $ 2,021,470 $ (416,965)
Equipment sales margin 222,562 300,836 (78,274) 392,099 419,538 (27,439)
Interest income 49,853 40,561 9,292 102,040 64,828 37,212
Management fees paid to
general partner (169,630) (271,198) 101,568 (351,770) (548,941) 197,171
Direct services from general
partner (30, 601) (24,223) (6,378) (56,324) (50,674) (5,650)
General and administrative (234,432) (51,954) (182,478) (298,156) (121,253) (176,903)
Provision for losses (430,000) (125,000) (305,000) (805,000) (125,000) (680,000)
---------- ----------- ------------- ------------ ------------ --------------
Net income $ 292,200 $ 850,051 $ (557,851) $ 587,394 $ 1,659,968 $ (1,072,574)
========== =========== =========== ============= =========== ============
The Partnership entered its liquidation period (as set forth in the Partnership
Agreement) in April 1996. As the liquidation period commences, purchases of
equipment under lease will cease (other than for prior commitments and equipment
upgrades), initial leases are expiring and the amount of equipment being
remarketed (i.e., re-leased, renewed, or sold) is increasing. Because a leasing
portfolio declines in size as it matures, these circumstances have resulted in a
decline in the Partnership's leasing portfolio (referred to in further
discussions as "portfolio run-off").
7
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
Leasing margin consists of the following:
Three months ended Six months ended
June 30, June 30,
------------------------------- ------------------------------
1996 1995 1996 1995
-------------- -------------- ------------- --------------
Operating lease rentals $ 2,339,550 $ 3,329,417 $ 4,885,955 $ 7,270,783
Direct financing lease income 301,665 485,394 556,090 894,422
Depreciation and amortization (1,591,957) (2,525,080) (3,480,236) (5,470,964)
Interest expense on related financed
operating lease rentals (27,785) - (56,955) -
Interest expense on related discounted
lease rentals (137,025) (308,702) (300,349) (672,771)
----------- ----------- ----------- -----------
Leasing margin $ 884,448 $ 981,029 $ 1,604,505 $ 2,021,470
=========== =========== =========== ===========
Leasing margin ratio 33% 26% 29% 25%
== == == ==
The components of leasing margin have declined and are expected to decline
further due to portfolio run-off. Leasing margin ratio increased primarily
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. 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 six years were
as follows:
8
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
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
EQUIPMENT SALES MARGIN
Equipment sales margin consists of the following:
Three months ended Six months ended
June 30, June 30,
------------------------------- ------------------------------
1996 1995 1996 1995
-------------- -------------- ------------- ------------
Equipment sales revenue $ 1,326,693 $ 1,037,303 $ 1,897,769 $ 1,501,833
Cost of equipment sales (1,104,131) (736,467) (1,505,670) (1,082,295)
------------ ----------- ------------ ------------
Equipment sales margin $ 222,562 $ 300,836 $ 392,099 $ 419,538
============ =========== ============ ============
The Partnership is in its liquidation period. Currently, a portion of the
Partnership's initial leases are expiring and 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 increased due to an increase in cash available for investment as
well as an increase in interest rates.
9
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
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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.
The provision for losses recorded for the six months ended June 30, 1996 was
primarily related to equipment which has been, or will be, returned 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 is less than anticipated as described below:
* $320,000 related to bankrupt lessees.
* $150,000 related to a lessee returning an aircraft, with a carrying value of
$1,250,000, to the Partnership.
* $130,000 related to a lessee experiencing severe financial difficulties.
The lessee has notified the Partnership that it will be returning the
equipment currently under lease.
* $95,000 related to lessees returning modular buildings, computer equipment,
a telephone system and hospital equipment to the Partnership.
In addition, there was $110,000 related to the sale of equipment having a lower
fair market value than originally anticipated.
The provision for losses recorded during the six months ended June 30, 1995 was
primarily related to a lessee returning medical equipment to the Partnership.
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.
10
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
- - ---------------------
EXPENSES
Management fees paid to the general partner decreased primarily as a result of
portfolio run-off. General and administrative expenses increased primarily due
to $104,027 reimbursed to the general partner for insurance costs related to
prior years and increased storage costs for warehoused inventory.
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 additional equipment
acquisitions and distributions to the partners.
During the six months ended June 30, 1996, the Partnership purchased equipment
under lease for a total equipment purchase price of $508,180. All such equipment
was purchased from Capital Associates International, Inc. ("CAII"), the Class B
limited partner and an affiliate of the general partner. The Partnership entered
its liquidation period (as defined in the Partnership Agreement) in April 1996.
During the liquidation period, purchases of equipment under lease will cease
(other than for prior commitments or for equipment upgrades). At June 30, 1996,
the Partnership had commitments to purchase $1.1 million of additional equipment
that satisfied the Partnership's acquisition criteria. The Partnership expects
to acquire this equipment during the remainder of 1996.
During the six months ended June 30, 1996, the Partnership declared
distributions to the partners of $4,594,228 ($927,040 of which was paid during
July 1996). A substantial portion of such distributions constituted a return of
capital. Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or both. The portion of
each cash distribution by the Partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. However, the total return on
capital over the Partnership's life can only be determined at the termination of
the Partnership 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 partner believes that the Partnership will generate sufficient cash
flow from operations during the remainder of 1996 to (1) meet current operating
requirements and (2) fund cash distributions to the Class A limited partners in
accordance with the Partnership Agreement. Distributions during the liquidation
period will be based upon cash availability and will vary and all distributions
are expected to be a return of capital for economic purposes.
11
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 June 30, 1996.
12
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: August 13, 1996 By: /s/ John E. Christensen
-----------------------
John E. Christensen
Senior Vice President,
Chief Administrative Officer and
Director
13