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, 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
- ----------------------- ------------------------------------
(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 .
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Exhibit Index appears on Page 13
Page 1 of 14 Pages
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Quarterly Report on Form 10-Q
For the Quarter Ended
September 30, 1996
Table of Contents
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PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets-September 30, 1996 and December 31, 1995 3
Statements of Income - Three and Nine months ended
September 30, 1996 and 1995 4
Statements of Cash Flows - Nine months ended
September 30, 1996 and 1995 5
Notes to Financial Statements 6
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
Signature 14
2
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS: 1996 1995
------------- ------------
Cash and cash equivalents $ 4,069,687 $ 4,492,487
Accounts receivable, net 519,004 435,466
Inventory held for sale or re-lease 1,261,236 -
Net investment in direct finance leases 5,850,320 8,730,002
Leased equipment, net 15,982,842 23,859,022
----------- -----------
Total assets $27,683,089 $37,516,977
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Payable to affiliates $ 73,713 $ 121,065
Accounts payable and accrued liabilities 549,111 587,399
Rents received in advance 319,794 260,394
Distributions payable to partners 1,521,012 955,382
Discounted lease rentals 5,227,216 9,146,266
Financed operating lease rentals 1,370,806 1,594,646
----------- -----------
Total liabilities 9,061,652 12,665,152
----------- -----------
PARTNERS' CAPITAL:
General partner - -
Limited partners:
Class A 15,802,913 21,715,744
Class B 2,818,524 3,136,081
----------- -----------
Total partners' capital 18,621,437 24,851,825
----------- -----------
Total liabilities and partners' capital $27,683,089 $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 Nine months Ended
September 30, September 30,
------------------------------ -----------------------------
1996 1995 1996 1995
-------------- ------------ ------------ ------------
REVENUE:
Operating lease rentals $ 2,229,013 $ 3,084,438 $ 7,114,968 $10,355,221
Direct finance lease income 335,366 380,296 891,456 1,274,718
Equipment sales margin 939,667 315,577 1,331,766 735,115
Interest income 52,125 39,781 154,165 104,609
----------- ----------- ----------- -----------
Total revenue 3,556,171 3,820,092 9,492,355 12,469,663
----------- ----------- ----------- -----------
EXPENSES:
Depreciation and amortization 1,457,668 2,311,822 4,937,904 7,782,786
Management fees paid to general partner 193,093 218,869 544,863 767,810
Direct services from general partner 17,647 20,098 73,971 70,772
Interest on discounted lease rentals 114,142 256,475 414,491 929,246
Interest on financed operating lease rentals 18,685 - 75,640 -
General and administrative 70,232 51,478 368,388 172,731
Provision for losses - - 805,000 125,000
----------- ----------- ----------- -----------
Total expenses 1,871,467 2,858,742 7,220,257 9,848,345
----------- ----------- ----------- -----------
NET INCOME $ 1,684,704 $ 961,350 $ 2,272,098 $ 2,621,318
=========== =========== =========== ===========
NET INCOME ALLOCATED:
To the general partner $ 170,752 $ 105,089 $ 377,492 $ 312,419
To the Class A limited partners 1,407,573 796,094 1,761,470 2,146,659
To the Class B limited partner 106,379 60,167 133,136 162,240
----------- ----------- ----------- -----------
$ 1,684,704 $ 961,350 $ 2,272,098 $ 2 621,318
=========== =========== =========== ===========
Net income per weighted average Class A
limited partner unit outstanding $ 5.57 $ 3.14 $ 6.97 $ 8.44
=========== =========== =========== ===========
Weighted average Class A limited partner
units outstanding 252,492 253,917 252,820 254,250
=========== =========== =========== ===========
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)
Nine months ended
September 30,
--------------------------------
1996 1995
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 12,876,256 $ 16,187,858
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases from affiliate of equipment on operating leases (1,095,366) (993,087)
Investment in direct finance leases, acquired from affiliate (123,945) (268,533)
------------ ------------
Net cash used in investing activities (1,219,311) (1,261,620)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on financed operating lease rentals (130,841) -
Principal payments on discounted lease rentals (4,012,049) (7,396,162)
Distributions to partners (7,823,079) (6,967,606)
Redemptions of limited partner units (113,776) (85,923)
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Net cash used in financing activities (12,079,745) (14,449,691)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (422,800) 476,547
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 $ 4,069,687 $ 2,912,102
============ ============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 414,491 $ 929,246
Interest paid on financed operating lease rentals 75,640 -
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 nine months ended September 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 nine
months ended September 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
Sarif Manufacturing equipment 610,000
Wagner College Computer equipment 33,604
Wagner College Computer equipment 67,527
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$ 1,219,311
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6
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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.
4. Bankrupt Lessee
---------------
Anchor Glass filed for protection under Chapter 11 of the bankruptcy code
on September 13, 1996. The aggregate net book value under four leases with
this lessee was $260,991 at September 30, 1996. Potential outcomes are (i)
the lessee affirms its leases and the Partnership collects all rents due
under the leases or (ii) the lessee rejects the leases and returns the
underlying equipment to the Partnership. If the leases are rejected and the
equipment is returned to the Partnership or sold to a third party, it is
possible that remarketing proceeds will be less than the net book value of
the equipment. However, if the lessee affirms the leases, the Partnership
would not be subject to a loss. The lessee has not made its intentions
known at this time and, accordingly, the amount of loss, if any, cannot be
determined as of September 30, 1996. Regardless of the lessee's decision to
accept or reject the leases, the general partner believes that the ultimate
outcome will not have a material adverse impact on the Partnership's
financial position or results of operations.
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
- ---------------------
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 nine months The effect on
ended September 30, net income of ended September 30, net income of
---------------------------- changes between ---------------------------- changes between
1996 1995 periods 1996 1995 periods
------------ ------------- ---------------- -------------- ------------ ---------------
Leasing margin $ 973,884 $ 896,437 $ 77,447 $ 2,578,389 $ 2,917,907 $ (339,518)
Equipment sales margin 939,667 315,577 624,090 1,331,766 735,115 596,651
Interest income 52,125 39,781 12,344 154,165 104,609 49,556
Management fees paid to
general partner (193,093) (218,869) 25,776 (544,863) (767,810) 222,947
Direct services from general
partner (17,647) (20,098) 2,451 (73,971) (70,772) (3,199)
General and administrative (70,232) (51,478) (18,754) (368,388) (172,731) (195,657)
Provision for losses - - - (805,000) (125,000) (680,000)
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 1,684,704 $ 961,350 $ 723,354 $ 2,272,098 $ 2,621,318 $ (349,220)
=========== =========== =========== =========== =========== ===========
The Partnership entered its liquidation period (as set forth in the Partnership
Agreement) in April 1996. As the liquidation period continues, purchases of
equipment under lease will cease (other than for prior commitments and equipment
upgrades), initial leases will expire and the amount of equipment being
remarketed (i.e., re-leased, renewed, or sold) will increase. 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").
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
Leasing margin consists of the following:
Three months ended Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
Operating lease rentals $ 2,229,013 $ 3,084,438 $ 7,114,968 $ 10,355,221
Direct financing lease income 335,366 380,296 891,456 1,274,718
Depreciation and amortization (1,457,668) (2,311,822) (4,937,904) (7,782,786)
Interest expense on related financed
operating lease rentals (18,685) - (75,640) -
Interest expense on related discounted
lease rentals (114,142) (256,475) (414,491) (929,246)
------------ ------------ ------------ ------------
Leasing margin $ 973,884 $ 896,437 $ 2,578,389 $ 2,917,907
============ ============ ============ ============
Leasing margin ratio 38% 26% 32% 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:
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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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 Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Equipment sales revenue $ 1,916,434 $ 1,014,312 $ 3,814,203 $ 2,516,145
Cost of equipment sales (976,767) (698,735) (2,482,437) (1,781,030)
----------- ----------- ----------- -----------
Equipment sales margin $ 939,667 $ 315,577 $ 1,331,766 $ 735,115
=========== =========== =========== ===========
The Partnership is in its liquidation period. During the liquidation period, as
initial leases terminate, the equipment is being remarketed (i.e., re-leased or
sold to either the original lessee or a third party) and, accordingly, the
timing and amount of equipment sales cannot be projected accurately.
INTEREST INCOME
Interest income increased due to an increase in cash available for investment as
well as an increase in interest rates.
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
- ---------------------
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 nine months ended September 30, 1996
was primarily related to the following:
* Certain equipment was 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 this 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.
* $110,000 related to the sale of equipment having a lower fair market value
than originally anticipated.
The provision for losses recorded during the nine months ended September 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.
11
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 (i) $104,027
reimbursed to the general partner during the second quarter of 1996 for
insurance costs related to prior years and (ii) 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 nine months ended September 30, 1996, the Partnership purchased
equipment under lease for a total equipment purchase price of $1,219,311. 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 September 30, 1996, the Partnership had commitments to purchase
$400,000 of additional equipment that satisfied the Partnership's acquisition
criteria. The Partnership expects to acquire this equipment during the remainder
of 1996.
During the nine months ended September 30, 1996, the Partnership declared
distributions to the partners of $8,388,199 ($1,520,501 of which was paid during
October 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.
12
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is involved in routine legal proceedings
incidental to the conduct of its business. The general partner
believes none of these legal proceedings will have a material
adverse effect on the financial condition or operations of the
Partnership.
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) The Partnership did not file any reports on Form 8-K during
the three months ended September 30, 1996.
13
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: October 30, 1996 By: /s/ John E. Christensen
-----------------------
John E. Christensen
Senior Vice President,
Chief Administrative Officer and Director
14