SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 0-19164
CAPITAL PREFERRED YIELD FUND, A CALIFORNIA LIMITED PARTNERSHIP
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0190817
(State of organization) (I.R.S. Employer Identification Number)
7175 W. JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Class A
Limited Partner
Interest
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 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
----- -----.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K [ ].
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
Exhibit Index Appears on Pages 35
Page 1 of 36 Pages
Item 1. Business
--------
Capital Preferred Yield Fund, a California limited partnership (the
"Partnership"), is engaged in the business of owning and leasing equipment. CAI
Partners Management Company, a Colorado corporation and a wholly owned
subsidiary of Capital Associates, Inc. ("CAI"), is the general partner of the
Partnership.
Capital Associates International, Inc. ("CAII"), an affiliate of the general
partner, is the sole Class B limited partner of the Partnership. In exchange for
its Class B limited partner interest, CAII contributed equipment totaling
$5,538,805 (i.e., 10% of the net offering proceeds) to the Partnership making it
the largest single investor in the Partnership.
Since its formation, the Partnership has acquired capital of various types under
lease to third parties on short-term leases (five years or less). All of the
capital was purchased by CAII directly from manufacturers or from other
independent third parties and sold to the Partnership. The capital generally
consists of transportation and industrial equipment, computer equipment, office
furniture and medical equipment, among others (the "equipment"). The Partnership
entered its liquidation period, as defined in the Partnership Agreement, in
April 1996. Accordingly, it is not anticipated that the Partnership will acquire
any material amount of equipment in future periods.
The Partnership may assign the rentals from leases to financial institutions, or
acquire leases subject to such assignments, at fixed interest rates on a
non-recourse basis. The financial institution has a first lien on the assigned
rents and the underlying leased equipment, with no recourse against the
Partnership or any other Partnership assets in the event of default by a lessee.
Cash proceeds from such financings, or the assumption of such assignments
incurred in connection with the acquisition of leases, are recorded on the
balance sheet as discounted lease rentals. As lessees make payments to financial
institutions, leasing revenue and interest expense are recorded.
Approximately 63% of the Partnership's equipment under lease was leased to
investment grade lessees as of December 31, 1997. Pursuant to the Partnership
Agreement, an investment grade lessee is a company (1) with a credit rating of
not less than Baa as determined by Moody's Investor Services, Inc.; or (2) that
has a comparable credit rating as determined by other recognized credit rating
services; or, (3) if the lessee is not rated, then a lessee whom the general
partner believes would have received a rating of Baa, or better, if the lessee
would have been rated. The Partnership limits its credit risk through selective
use of non-recourse debt financing of future lease rentals, as described above.
The Partnership only acquires equipment that is on lease at the time of
acquisition. After the initial term of its lease, each item of equipment will be
expected to produce additional investment income from its re-lease or sale. Upon
expiration of the initial lease, the Partnership attempts to re-lease or sell
the equipment to the existing lessee. If a re-lease or sale to the lessee cannot
be negotiated, the Partnership will attempt to lease or sell the equipment to a
third party.
The Partnership's business is not subject to seasonal variations.
-2-
Item 1. Business, continued
--------
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).
The Partnership has no employees. The officers, directors and employees of the
general partner and its affiliates perform services on behalf of the
Partnership. The general partner is entitled to receive certain fees and expense
reimbursements in connection with the performance of these services. See Item 10
of this Report, "Directors and Executive Officers of the Partnership" and Item
13 of this Report, "Certain Relationships and Related Transactions".
The Partnership competes in the leasing marketplace as a lessor with a
significant number of other companies including equipment manufacturers, leasing
companies and financial institutions. The Partnership is in its liquidation
period, as defined in the Partnership Agreement; therefore, the Partnership
currently competes mainly on the basis of the expertise of its general partner
in remarketing equipment. Although the Partnership does not account for a
significant percentage of the leasing market, the general partner believes the
Partnership's remarketing strategies enable it to compete effectively in the
remarketing markets.
The Partnership leases equipment to a significant number of lessees. No one
lessee and its affiliates accounted for more than 10% of total revenue of the
Partnership during 1997.
The Partnership is required to dissolve and distribute all of its assets no
later than December 31, 2010. However, the general partner anticipates that all
equipment will be sold and the Partnership will be liquidated during 1998.
Item 2. Properties
----------
The Partnership does not own or lease any physical properties other than the
equipment discussed in Item 1 of this Report, "Business".
Item 3. Legal Proceedings
-----------------
Neither the Partnership nor any of the Partnership's equipment is the subject of
any material pending legal proceedings.
-3-
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of the limited partners of the Partnership,
through the solicitation of proxies or otherwise, during the fourth quarter of
1997.
Item 5. Market for the Partnership's Common Equity and Related Stockholder
----------------------------------------------------------------------
Matters
-------
(a) The Partnership's Class A limited partner units, Class B limited
partner interest and general partners interest are not publicly
traded. There is no established public trading market for such units
and interests, and none is expected to develop.
(b) As of December 31, 1997 there were 3,515 Class A limited partners.
(c) Distributions
-------------
During 1997, the Partnership made twelve (12) monthly distributions (a
portion of which constituted a return of capital) to Class A limited
partners as follows:
Distributions Per
$250 Class A
Limited Partner
For the Payment Unit (computed on Total
Month Ended Made During weighted average) Distributions
------------------ ------------- ----------------- -------------
December 31, 1996 January 1997 $ 3.98 $ 1,000,571
January 31, 1997 February 1997 2.78 699,833
February 28, 1997 March 1997 2.38 599,857
March 31, 1997 April 1997 3.18 800,310
April 30, 1997 May 1997 3.18 799,707
May 31, 1997 June 1997 2.82 709,740
June 30, 1997 July 1997 2.82 710,552
July 31, 1997 August 1997 2.82 709,740
August 31, 1997 September 1997 1.19 300,018
September 30, 1997 October 1997 1.19 300,241
October 31, 1997 November 1997 1.19 299,928
November 30, 1997 December 1997 1.99 499,881
------- -----------
$ 29.52 $ 7,430,378
======= ===========
-4-
Item 5. Market for the Partnership's Common Equity and Related Stockholder
----------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or both. The
portion of each cash distribution by a partnership which exceeds its
net income for the fiscal period may be deemed a return of capital for
accounting purposes. However, the total percentage of a partnership's
return on capital over its life can only be determined after all
residual cash flows (which include proceeds from the re-leasing and
sales of equipment after initial lease terms expire) have been
realized at the termination of the Partnership. Total distributions
declared to Class A limited partners were $59,972,409 from the
inception of the Partnership through December 31, 1997.
The distribution for the month ended December 31, 1997, totaling
$900,191, was paid to the Class A limited partners during January
1998. Distributions to the general partner and Class B limited partner
during 1998 are discussed in Item 13 of this Report, "Certain
Relationships and Related Transactions".
The general partners currently anticipate that the Partnership will
generate cash flow from operations and equipment sales during 1998
which, when added to cash and cash equivalents on hand, should provide
sufficient cash to enable the Partnership to meet its current
operating requirements.
The Partnership is in its liquidation period (as defined in the
Partnership Agreement) and 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.
During 1996, the Partnership made twelve (12) monthly distributions (a
portion of which constituted a return of capital) to Class A limited
partners as follows:
Distributions Per
$250 Class A
Limited Partner
For the Payment Unit (computed on Total
Month Ended Made During weighted average) Distributions
------------------ ------------- ----------------- -------------
December 31, 1995 January 1996 $ 2.76 $ 700,127
January 31, 1996 February 1996 2.75 696,672
February 28, 1996 March 1996 2.58 651,654
March 31, 1996 April 1996 2.75 696,166
April 30, 1996 May 1996 2.66 673,549
May 31, 1996 June 1996 2.75 695,500
June 30, 1996 July 1996 2.66 673,485
July 31, 1996 August 1996 4.25 1,073,756
August 31, 1996 September 1996 4.75 1,199,715
September 30, 1996 October 1996 4.76 1,200,710
October 31, 1996 November 1996 4.75 1,199,715
November 30, 1996 December 1996 4.75 1,199,715
------- ------------
$ 42.17 $ 10,660,764
======= ============
-5-
Item 5. Market for the Partnership's Common Equity and Related Stockholder
----------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
The following represents annual cumulative distributions per Class A
limited partner unit, as described in Footnote 1 to Notes to
Consolidated Financial Statements.
Distributions per
$ Per Class A Limited
Class A Partner Unit
Payment Limited Partner (computed on
Made During Unit Invested weighted average) % (1)
----------- --------------- ----------------- -------
1990 $ 250 $ 27.50 12%
1991 30.00 12%
1992 30.00 12%
1993 32.10 13%
1994 32.46 13%
1995 32.46 13%
1996 42.17 17%
1997 29.52 12%
--------
$ 256.21
========
(1) Cumulative distributions, as described in Footnote 1 to Notes to
Consolidated Financial Statements, began February 1990.
Item 6. Selected Financial Data
-----------------------
The following selected financial data relates to the years ended December 31,
1993 through 1997. The data should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing elsewhere
herein.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total revenue $ 8,193,522 $ 11,319,825 $ 15,975,029 $ 20,833,137 $ 21,098,376
Net income 2,576,510 2,239,112 2,943,220 2,793,164 556,417
Net income per weighted average
Class A limited partner unit outstanding 8.26 6.23 9.24 8.67 0.51
Total assets 12,611,408 22,981,183 37,516,977 53,791,269 73,668,153
Discounted lease rentals 7,835 4,363,104 9,146,266 20,324,037 33,425,426
Financed operating lease rentals 1,123,270 1,329,087 1,594,646 - -
Distributions declared to partners 8,281,136 12,106,228 9,276,551 9,286,099 9,256,647
Distributions declared to Class A limited
partners per monthly weighted average
Class A limited partner unit outstanding 29.14 42.17 32.46 32.46 32.10
-6-
Item 7. 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 Condense
Statements of Income The effect on Statements of The effect of
for the years net income Income for the years net income
ended December 31, of changes ended December 31, of changes
-------------------------- between ------------------------- between
1997 1996 years 1996 1995 years
----------- ----------- ------------- ------------ ------------ -------------
Leasing margin $ 2,716,704 $ 3,064,878 $ (348,174) $ 3,064,878 $ 3,776,911 $ (712,033)
Equipment sales margin 1,391,527 1,350,258 41,269 1,350,258 976,149 374,109
Interest income 75,168 188,628 (113,460) 188,628 144,913 43,715
Provision for losses (740,000) (1,130,000) 390,000 (1,130,000) (605,000) (525,000)
Management fees paid to general partner (425,860) (702,219) 276,359 (702,219) (1,035,316) 333,097
Direct services from general partner (136,955) (101,145) (35,810) (101,145) (90,270) (10,875)
General and administrative (304,074) (431,288) 127,214 (431,288) (224,167) (207,121)
----------- ----------- ---------- ----------- ------------ ----------
Net income $ 2,576,510 $ 2,239,112 $ 337,398 $ 2,239,112 $ 2,943,220 $ (704,108)
=========== =========== ========== =========== ============ ==========
The Partnership is in its liquidation period as defined in the Partnership
Agreement and, as expected, the Partnership is not purchasing additional
equipment, initial leases are expiring and the amount of equipment being
remarketed (i.e., re-leased, renewed, or sold) will increase. As a result, both
the size of the Partnership's leasing portfolio and the amount of leasing
revenue are declining.
LEASING MARGIN
Leasing margin consists of the following:
Years ended December 31,
----------------------------------------
1997 1996 1995
---- ---- ----
Operating lease rentals $ 5,678,596 $ 8,584,425 $ 13,253,954
Direct finance lease income 1,048,231 1,196,514 1,600,013
Depreciation and amortization (3,760,718) (6,124,604) (9,944,160)
Interest on discounted lease rentals (193,516) (501,872) (1,132,896)
Interest on financed operating
lease receivables (55,889) (89,585) -
------------ ------------ ------------
Leasing margin $ 2,716,704 $ 3,064,878 $ 3,776,911
============ ============ ============
Leasing margin ratio 40% 31% 25%
== == ==
The components of leasing margin have declined and are expected to decline
further due to portfolio run-off. Leasing margin ratio increased primarily due
to (i) remarketing activities, and (ii) 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 increase 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.
-7-
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
Results of Operations, continued
- ---------------------
LEASING MARGIN, continued
The ultimate profitability of the Partnership's leasing transactions is
dependent, 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:
Years ended December 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
Equipment sales revenue $ 12,190,663 $ 4,868,827 $ 3,868,324
Cost of equipment sales (10,799,136) (3,518,569) (2,892,175)
------------- ----------- ------------
Equipment sales margin $ 1,391,527 $ 1,350,258 $ 976,149
============= =========== ============
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 decreased in 1997 compared to 1996 due to a decrease in cash
available for investment as the Partnership is in its liquidation period and
therefore, distributing excess cash to the partners.
Interest income increased in 1996 compared to 1995 due to an increase in cash
available for investment as well as an increase in interest rates.
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 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.
-8-
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
Results of Operations, continued
- ---------------------
PROVISION FOR LOSSES, continued
The provision for losses recorded during December 31, 1997 was primarily related
to lessees returning equipment 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 third
parties was less than anticipated.
The provision for losses recorded during 1996 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 third
parties was less than anticipated as described below:
- $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 notified the Partnership that it would be
returning the equipment currently under lease.
- $420,000 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.
* $320,000 related to bankrupt lessees.
The provision for losses recorded during 1995 was primarily related to the
following:
- $370,000 deficiency resulting from a lessee's default on a note.
- $125,000 related to a lessee returning medical equipment to the
Partnership.
- $110,000 due to a settlement with a bankrupt lessee.
MANAGEMENT FEES PAID TO GENERAL PARTNER
The general partner earns management fees as compensation for services performed
in connection with managing the Partnership's equipment equal to the lesser of
(a) 5% of gross rentals received (limited to 2% of gross rentals received in the
case of full payout leases) or (b) the fee which the general partner reasonably
believes to be competitive with that which would be charged by a non-affiliate
for rendering comparable services as permitted under the Partnership Agreement.
Management fees decreased in 1996 and 1997 due to portfolio runoff resulting in
lower gross rentals received by the Partnership.
-9-
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations, continued
---------------------
Results of Operations, continued
- ---------------------
DIRECT SERVICES FROM GENERAL PARTNER
The general partner and its affiliates 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. Direct services from general partner increased in 1997 primarily due
to activities associated with liquidating the Partnership's assets.
General and administrative expenses decreased in 1997 compared to 1996. General
and administrative expenses increased in 1996 compared to 1995 primarily due to
(i) $104,027 reimbursed to the general partner during the second quarter of 1997
for insurance costs related to prior years and (ii) 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 distributions to the
partners.
During 1997, 1996 and 1995, the Partnership declared distributions to the
partners of $8,281,136, $12,106,228 and $9,276,551, respectively. A portion of
such distributions constituted a return of capital for accounting purposes.
Distributions may be characterized for tax, accounting and economic purposes as
a return of capital, a return on capital or both. The portion of each cash
distribution by a Partnership which exceeds its net income for the fiscal period
may be deemed a return of capital. However, the total percentage of a
partnership's return on capital over its life can only be determined after all
residual cash flows (which include proceeds from the releasing and sales of
equipment after initial lease terms expire) have been realized at the
termination of the Partnership .
The general partners anticipate that the Partnership will generate cash flow
from operations and equipment sales during 1998 which, when added to cash and
cash equivalents on hand, should provide sufficient cash to enable the
Partnership to meet its current operating requirements.
The Partnership is in its liquidation period (as defined in the Partnership
Agreement) and distributions during the liquidation period will be based upon
cash availability and will vary and all distributions are expected bo be a
return of capital for economic purposes.
The Class B limited partner distributions of cash from operations are
subordinated to the Class A limited partners receiving distributions of cash
from operations, as scheduled in the Partnership Agreement (i.e., 13%).
Therefore, because of the anticipated decrease in distributions to the Class A
limited partners, CAII, the sole Class B limited partner, ceased receiving
distributions of cash from operations.
-10-
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements and
Financial Statement Schedule
Page
Financial Statements Number
-------------------- ------
Independent Auditors' Report 12
Balance Sheets as of December 31, 1997 and 1996 13
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 14
Statements of Partners' Capital for the years
ended December 31, 1997, 1996 and 1995 15
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 16
Notes to Financial Statements 17-28
Financial Statement Schedule
----------------------------
Independent Auditors' Report 29
Schedule II - Valuation and Qualifying Accounts 30
-11-
INDEPENDENT AUDITORS' REPORT
----------------------------
THE PARTNERS
CAPITAL PREFERRED YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP
We have audited the accompanying balance sheets of Capital Preferred Yield Fund,
a California limited partnership, as of December 31, 1997 and 1996, and the
related statements of income, partners' capital, and cash flows for each of the
years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Partnership is in the liquidation stage, whereby all
assets are expected to be liquidated during 1998 and all cash distributed to the
partners, after satisfaction of liabilities.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Preferred Yield Fund as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
------------------------
KPMG PEAT MARWICK LLP
Denver, Colorado
February 6, 1998
-12-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---- ----
Cash and cash equivalents $ 2,839,510 $ 2,672,112
Accounts receivable 7,579,737 390,607
Equipment held for sale or re-lease 887,865 1,081,841
Net investment in direct finance leases 229,696 5,316,787
Leased equipment, net 1,074,600 13,519,836
------------ ------------
Total assets $ 12,611,408 $ 22,981,183
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Payables to affiliate $ 44,916 $ 65,370
Accounts payable and accrued liabilities 905,979 821,791
Rents received in advance 162,931 230,501
Distributions payable to partners 1,241,334 1,317,409
Discounted lease rentals 7,835 4,363,104
Financed operating lease rentals 1,123,270 1,329,087
------------ ------------
Total liabilities 3,486,265 8,127,262
------------ ------------
Partners' capital:
General partner - -
Limited partners:
Class A 360,000 units authorized;
251,388 and 252,047 units issued
and outstanding in 1997 and 1996,
respectively 6,923,098 12,199,688
Class B 2,202,045 2,654,233
------------ -----------
Total partners' capital 9,125,143 14,853,921
------------ -----------
Total liabilities and partners' capital $ 12,611,408 22,981,183
============ ===========
See accompanying notes to financial statements.
-13-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
REVENUE:
Operating lease rentals $ 5,678,596 $ 8,584,425 $ 13,253,954
Direct finance lease income 1,048,231 1,196,514 1,600,013
Equipment sales margin 1,391,527 1,350,258 976,149
Interest income 75,168 188,628 144,913
----------- ----------- ------------
Total revenue 8,193,522 11,319,825 15,975,029
----------- ----------- ------------
EXPENSES:
Depreciation and amortization 3,760,718 6,124,604 9,944,160
Interest on discounted lease rentals 193,516 501,872 1,132,896
Interest on financed operating lease receivables 55,889 89,585 -
Management fees paid to general partner 425,860 702,219 1,035,316
Provision for losses 740,000 1,130,000 605,000
Direct services from general partner 136,955 101,145 90,270
General and administrative 304,074 431,288 224,167
----------- ----------- ------------
Total expenses 5,617,012 9,080,713 13,031,809
----------- ----------- ------------
NET INCOME $ 2,576,510 $ 2,239,112 $ 2,943,220
=========== =========== ============
NET INCOME ALLOCATED:
To the general partner $ 341,070 $ 544,780 $ 417,444
To the Class A limited partners 2,078,358 1,575,257 2,348,293
To the Class B limited partner 157,082 119,075 177,483
----------- ----------- ------------
$ 2,576,510 $ 2,239,112 $ 2,943,220
=========== =========== ============
Net income per weighted average Class A
limited partner unit outstanding $ 8.26 $ 6.23 $ 9.24
=========== =========== ============
Weighted average Class A limited
partner units outstanding 251,556 252,689 254,130
=========== =========== ============
See accompanying notes to financial statements.
-14-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF PARTNERS' CAPITAL
Years ended December 31, 1997, 1996 and 1995
Class A
Limited Class A Class B
General Partner Limited Limited
Partner Units Partners Partner Total
--------- ------- ------------- ----------- ------------
Partners' capital, January 1, 1995 $ - 254,643 $ 27,735,594 $ 3,559,521 $ 31,295,115
Redemptions - (979) (109,959) - (109,959)
Net income 417,444 - 2,348,293 177,483 2,943,220
Distributions declared to partners (417,444) - (8,258,184) (600,923) (9,276,551)
---------- ------- ------------- ----------- ------------
Partners' capital, December 31, 1995 - 253,664 21,715,744 3,136,081 24,851,825
Redemptions - (1,617) (130,788) - (130,788)
Net income 544,780 - 1,575,257 119,075 2,239,112
Distributions declared to partners (544,780) - (10,960,525) (600,923) (12,106,228)
---------- ------- ------------- ----------- ------------
Partners' capital, December 31, 1996 - 252,047 12,199,688 2,654,233 14,853,921
Redemptions - (659) (24,152) - (24,152)
Net income 341,070 - 2,078,358 157,082 2,576,510
Distributions declared to partners (341,070) - (7,330,796) (609,270) (8,281,136)
---------- ------- ------------- ----------- ------------
Partners' capital, December 31, 1997 $ - 251,388 $ 6,923,098 $ 2,202,045 $ 9,125,143
========== ======= ============= =========== ============
See accompanying notes to financial statements.
-15-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,576,510 $ 2,239,112 $ 2,943,220
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,760,718 6,124,604 9,944,160
Provision for losses 740,000 1,130,000 605,000
Cost of equipment sales 10,799,136 3,474,892 4,370,077
Recovery of investment in direct finance leases 2,095,063 2,955,733 5,306,706
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (6,608,339) 296,759 200,772
Increase (decrease) in payables to affiliate (20,454) (55,695) 14,289
Increase (decrease) in accounts payable
and accrued liabilities 84,188 234,392 (221,315)
Decrease in rents received in advance (67,570) (29,893) (37,747)
------------- ------------- -------------
Net cash provided by operating activities 13,359,252 16,369,904 23,125,162
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment on operating leases from affiliate - (1,142,624) (1,038,727)
Investment in direct finance leases, acquired from affiliate - (123,945) (1,056,764)
------------- ------------- -------------
Net cash used in investing activities - (1,266,569) (2,095,491)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing of operating lease receivables - - 1,594,646
Principal payments on discounted lease rentals (4,432,906) (4,876,162) (11,177,771)
Principal payments on financed operating lease rentals (377,585) (172,559) -
Distributions to partners (8,357,211) (11,744,201) (9,279,655)
Redemptions of Class A limited partner units (24,152) (130,788) (109,959)
------------- ------------- -------------
Net cash used in financing activities (13,191,854) (16,923,710) (18,972,739)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 167,398 (1,820,375) 2,056,932
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,672,112 4,492,487 2,435,555
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,839,510 $ 2,672,112 $ 4,492,487
============= ============= =============
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 193,516 $ 501,872 $ 1,132,896
Interest paid on financed operating lease receivables 55,889 89,585 -
See accompanying notes to financial statements.
-16-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Organization
Capital Preferred Yield Fund, a California limited partnership (the
"Partnership"), was organized on July 13, 1989 under the laws of the
State of California pursuant to an Agreement of Limited Partnership (the
"Partnership Agreement"). The Partnership was formed for the purpose of
acquiring and leasing a diversified portfolio of equipment to
unaffiliated third parties. The general partner of the Partnership is CAI
Partners Management Company, a wholly owned subsidiary of Capital
Associates International, Inc. ("CAII"). The general partner manages the
Partnership, including investment of funds, purchase and sale of
equipment, lease negotiation and other administrative duties.
The Partnership entered its liquidation period in April of 1996. During
1997, the Partnership sold a substantial portion of its assets of which
$7,270,000 was included in accounts receivable and was delivered to an
escrow agent on December 31, 1997 to be released, per the terms of the
agreement, during 1998. The general partner anticipates that the
remaining assets will be liquidated and all liabilities settled during
1998. Any remaining cash will be distributed to the partners in
accordance with the liquidation provisions in the Partnership Agreement.
CAII is the Class B limited partner. CAII contributed $5,538,805 of
equipment to the Partnership in exchange for its Class B limited
partnership interest, which represents 10% of the net offering proceeds.
CAII has no remaining obligation to contribute cash and/or equipment to
the Partnership.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. For leasing entities, this includes the
estimate of residual values, as discussed below. Actual results could
differ from those estimates.
Partnership Cash Distributions and Allocations of Profit and Loss
Cash Distributions
------------------
During the Reinvestment Period, as defined in the Partnership Agreement,
cash distributions were made as follows:
First, the general partner and the Class A limited partners received
4.5% and 95.5%, respectively, of available cash until the Class A
limited partners received annual, non-compounded cumulative
distributions equal to 12% of their contributed capital during the
first three years after the initial closing date (January, 23, 1990)
and 13% of their contributed capital thereafter.
-17-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Cash Distributions, continued
------------------
Second, the general partner and the Class B limited partner receive
4.5% and 95.5%, respectively, of available cash until the Class B
limited partner received annual non-compounded cumulative distributions
equal to 11% of its contributed capital. Any remaining available cash
was reinvested or distributed to the partners as specified in the
Partnership Agreement.
During the Liquidation Period, as defined in the Partnership Agreement,
cash distributions are to be made as follows:
First, in accordance with the first and second allocations during the
Reinvestment Period as described above.
Second, 95.5% to the Class A limited partners and 4.5% to the general
partner, until the Class A limited partners have received aggregate
distributions from all sources equal to their capital contributions
plus their Priority Return, as defined in the Partnership Agreement.
Third, 85.5% to the Class B limited partner, 10% to the Class A limited
partners and 4.5% to the general partner until the Class B limited
partner has received aggregate distributions from all sources equal to
its capital contributions plus its Subordinated Priority Return, as
defined in the Partnership Agreement.
Thereafter, 90% to the Class A limited partners and the Class B limited
partner (and among them in proportion to their respective capital
contributions as of the first day of the calendar month for which the
amount of such distribution is being determined), and 10% to the
general partner.
Federal Income Tax Basis Profits and Losses
-------------------------------------------
Profits for any fiscal period are allocated according to the following
provisions:
First, profit is allocated to the partners in proportion to, and to the
extent of, any excess losses allocated to the partners as described in
the Partnership Agreement.
Second, any remaining profit is allocated to the partners in proportion
to, and to the extent of, all losses allocated to the partners for all
prior fiscal periods in reverse chronological order.
-18-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Federal Income Tax Basis Profits and Losses, continues
-------------------------------------------
Third, any remaining profit is allocated 85.5% to the Class A limited
partners, 10% to the Class B limited partner, and 4.5% to the general
partner, until the Class A limited partners have been allocated an
amount equal in the aggregate to the greater of (i) a 10% annual
cumulative return, non-compounded, or (ii) a 9% annual cumulative
return compounded daily on the Class A limited partners' adjusted
purchase price of units, calculated from the first day of the month
following the month each Class A limited partner (or a predecessor) was
admitted to the Partnership.
Fourth, any remaining profit is allocated 10% to the Class A limited
partners, 4.5% to the general partner, and 85.5% to the Class B limited
partner until the Class B limited partner has been allocated an amount
equal to a 9% annual cumulative return compounded daily on the Class B
limited partner's unreturned subordinated capital contribution
calculated from the first day of the month following the month in which
any subordinated capital contribution is first made.
Fifth, any remaining profit is allocated 90% to the Class A limited
partners and Class B limited partner (and among them in proportion to
their respective capital contributions) and 10% to the general partner.
Losses for any fiscal period are allocated according to the following
priorities:
First, to the partners in proportion to, and to the extent of, any
profits allocated for such fiscal period and all prior fiscal periods
in reverse chronological order and priority.
Second, 91.08% to the Class A limited partners, 7.92% to the Class B
limited partner, and 1% to the general partner.
Losses allocated to a partner in the first and second paragraphs above
cannot cause or increase an adjusted capital account deficit with respect
to such partner as of the end of any fiscal period. To the extent losses
allocated to a partner would exceed this limitation, such losses will be
allocated first to other partners in proportion to, and to the extent of,
their positive capital account balances, and then to the general partner.
Pursuant to Sections 10.8 and 15.2.11(vi) of the Partnership Agreement,
the general partner amended the Partnership Agreement during the last
quarter of the year ended December 31, 1991 to correct a "misallocated
item" (as defined in Section 10.8 of the Partnership Agreement),
effective as of January 1, 1991. The amendment provides as follows:
-19-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Federal Income Tax Basis Profits and Losses, continued
-------------------------------------------
SECTION 10.9 GENERAL PARTNER DEFICIT CAPITAL ACCOUNT RESTORATION.
Notwithstanding anything in this [Partnership] Agreement to the contrary,
and before any other allocation is made under this Section 10, items of
income and gain for each fiscal period shall be allocated, as quickly as
possible during such fiscal period, to the general partner to the extent
of any deficit balance existing in the general partner's capital account
as of the close of such fiscal period in order to restore the balance in
the general partner's capital account to zero. Any allocations of income
and/or gain to the general partner under this paragraph shall offset,
dollar for dollar, against any allocations of profit to the general
partner under any other provision of this [Partnership] Agreement.
The purpose of this amendment is (1) to allocate gross revenue (which is
fully taxable) to the general partner in an amount equal to the available
cash distributions to the general partner, and (2) to eliminate the
allocation of income or gain to the limited partners (which would be
taxable to them) that is attributable to such available cash
distributions to the general partner.
Pursuant to Section 15.2.11(iv) of the Partnership Agreement, the general
partner also amended the Partnership Agreement during the first quarter
of the year ended December 31, 1992 to correct an ambiguity in the
allocation and distribution provisions with respect to the Class A
limited partners. The amendment provides that profit and losses
allocated, and available cash distributed, to the Class A limited
partners (as a class) will be shared by the individual Class A limited
partners in proportion to their capital contributions and the number of
days that each such Class A limited partner is a partner during each
fiscal period. This amendment reflects the actual method of allocations
and distributions to the Class A limited partners that the Partnership
has used since its inception.
Financial Reporting - Profits and Losses
----------------------------------------
For financial reporting purposes, net income is allocated to the partners
in a manner consistent with the allocation of cash distributions.
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
-20-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Recently Issued Financial Accounting Standards
During 1997, the Partnership adopted SFAS No. 125, Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities ("SFAS No. 125"). SFAS No. 125 provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS No. 125 did
not have a material impact on the Partnership's financial position or
results of operations.
Long-lived Assets
The Partnership accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long- lived Assets to be Disposed
Of ("SFAS No. 121"). SFAS No. 121 requires that long-lived assets,
including operating leases, and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the
entity should estimate the future cash flows expected to result from the
use of the asset and its eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss for long-lived assets, including
operating leases, and identifiable intangibles held by the Partnership is
based on the fair value of the asset calculated by discounting the
expected future cash flows at an appropriate interest rate.
Lease Accounting
Statement of Financial Accounting Standards No. 13, Accounting for
Leases, requires that a lessor account for each lease by the direct
finance, sales-type or operating lease method. The Partnership currently
utilizes the direct financing and operating methods for all of the
Partnership's equipment under lease. Direct finance leases are defined as
those leases which transfer substantially all of the benefits and risks
of ownership of the equipment to the lessee. For all types of leases, the
determination of profit considers the estimated value of the equipment at
lease termination, referred to as the residual value. After the inception
of a lease, the Partnership may engage in financing of lease receivables
on a nonrecourse basis (i.e., "non-recourse debt" or "discounted lease
rentals") and/or equipment sale transactions to reduce or recover its
investment in the equipment.
The Partnership's accounting methods and their financial reporting effects
are described below:
-21-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Net Investment in Direct Financing Leases ("DFLs")
The cost of the equipment, including acquisition fees paid to the general
partner, is recorded as net investment in DFLs on the accompanying
balance sheet. Leasing revenue, which is recognized over the term of the
lease, consists of the excess of lease payments plus the estimated
residual value over the equipment's cost. Earned income is recognized
monthly to provide a constant yield and is recorded as direct finance
lease income on the accompanying income statements. Residual values are
established at lease inception equal to the estimated value to be
received from the equipment following termination of the initial lease
(which in certain circumstances includes anticipated re-lease proceeds),
as determined by the general partner. In estimating such values, the
general partner considers all relevant information regarding the
equipment and the lessee.
Equipment on Operating Leases ("OLs")
Leasing revenue consists principally of monthly rentals. The cost of
equipment, including acquisition fees paid to the general partner, is
recorded as leased equipment in the accompanying balance sheets and is
depreciated on a straight-line basis over the lease term to an amount
equal to the estimated residual value at the lease termination date.
Leasing revenue consists principally of monthly rents and is recognized
as operating lease rentals in the accompanying income statements.
Residual values are established at lease inception equal to the estimated
value to be received from the equipment following termination of the
initial lease (which in certain circumstances includes anticipated
re-lease proceeds), as determined by the general partner. In estimating
such values, the general partner considers all relevant information and
circumstances regarding the equipment and the lessee. Because revenue,
depreciation expense and the resultant profit margin before interest
expense are recorded on a straight-line basis, and interest expense on
discounted lease rentals (discussed below) is recorded on the interest
method, lower returns are realized in the early years of the term of an
OL and higher returns in later years.
Non-recourse Discounting of Rentals
The Partnership may assign the future rentals from leases to financial
institutions, or acquire leases subject to such assignments, at fixed
interest rates on a non-recourse basis. In return for such assigned
future rentals, the Partnership receives the discounted value of the
rentals in cash. In the event of default by a lessee, the financial
institution has a first lien on the underlying leased equipment, with no
further recourse against the Partnership. Cash proceeds from such
financings, or the assumption of such financings, are recorded on the
balance sheet as discounted lease rentals. As lessees make payments to
financial institutions, leasing revenue and interest expense are
recorded.
-22-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Non-recourse Financing of Operating Lease Rentals
The Partnership may assign substantially all of its rights under certain
operating leases to a purchaser and subsequently the purchaser may assign
the rentals from such leases to a financial institution at fixed interest
rates on a non-recourse basis. The Partnership receives the discounted
value of the rentals in cash from the financial institution. As with
discounted lease rentals discussed above, in the event of default by a
lessee, the financial institution has a first lien on the underlying
leased equipment, with no further recourse against the Partnership or the
Partnership's assets. The purchaser cannot be the owner of the equipment
for financial reporting purposes because the purchaser has not made a
sufficient investment in the equipment and does not have significant
risks of ownership. Therefore, the transaction cannot be recorded as a
sale. Accordingly, cash proceeds from financings related to such
transactions are recorded on the balance sheet as financed operating
lease rentals. As lessees make payments to financial institutions,
leasing revenue and interest expense are recorded.
Allowance for Losses
An allowance for losses is maintained at levels determined by the general
partner to adequately provide for any other-than-temporary declines in
asset values. In determining losses, economic conditions, the activity in
the used equipment markets, the effect of actions by equipment
manufacturers, the financial condition of lessees, the expected courses
of action by lessees with regard to leased equipment at termination of
the initial lease term, and other factors which the general partner
believes are relevant, are considered. Asset chargeoffs are recorded upon
the termination or remarketing of the underlying assets. The lease
portfolio is reviewed quarterly to determine the adequacy of the
allowance for losses.
Transactions Subsequent to Initial Lease Termination
After the initial lease term of equipment on lease expires, the equipment
is either sold or re-leased to the existing lessee or another third
party. The remaining net book value of equipment sold is removed and gain
or loss recorded when equipment is sold. The accounting for re-leased
equipment is consistent with the accounting described under "Net
Investment in Direct Finance Leases" and "Equipment on Operating Leases"
above.
Income Taxes
No provision for income taxes has been made in the financial statements
since taxable income or loss is recorded in the tax returns of the
individual partners.
-23-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Cash Equivalents
The Partnership considers short-term, highly liquid investments that are
readily convertible to known amounts of cash to be cash equivalents.
Cash equivalents of $2,776,000 and $2,595,000 at December 31, 1997 and
1996, respectively, are comprised of investments in a money market fund
which invests solely in U.S. Government securities having maturities of
90 days or less.
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.
Net Income Per Class A Limited Partner Unit
Net income per Class A limited partner unit is computed by dividing the
net income allocated to the Class A limited partners by the weighted
average number of Class A limited partner units outstanding during the
period.
2. Net Investment in Direct Finance Leases
---------------------------------------
The components of the net investment in direct finance leases as of
December 31, 1997 and 1996 were:
1997 1996
---- ----
Minimum lease payments receivable $ 58,429 $ 4,961,017
Estimated residual values 195,418 1,904,751
Deferred initial leasing costs, net 1,873 9,112
Less unearned income (26,024) (1,558,093)
---------- ------------
$ 229,696 $ 5,316,787
========= ============
-24-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
3. Leased Equipment
----------------
The Partnership's investments in equipment on operating leases by major
classes as of December 31, 1997 and 1996 were:
1997 1996
---- ----
Transportation and industrial equipment $ 2,796,018 $ 25,383,364
Computers and peripherals 822,667 2,547,947
Office furniture and equipment 1,689,361 2,316,692
Medical and research equipment 377,503 1,200,140
Other 60,350 508,293
------------ -------------
Total 5,745,899 31,956,436
Less:
Accumulated depreciation (4,593,820) (18,193,840)
Allowance for losses (77,479) (242,760)
------------ -------------
$ 1,074,600 $ 13,519,836
============ =============
Depreciation expense for 1997, 1996 and 1995 was $3,752,561, $6,093,950 and
$9,883,414, respectively.
4. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from leases at December 31, 1997
are as follows:
Year Ending December 31, DFLs OLs
------------------------ -------- ---------
1998 $ 58,429 $ 132,519
1999 - 49,992
2000 - 3,915
-------- ---------
Total $ 58,429 $ 186,426
======== =========
5. Financed Operating Lease Rentals
--------------------------------
Financed operating lease rentals outstanding at December 31, 1997 bear
interest at 8.25%. Aggregate maturities of such non-recourse financings are
as follows:
Year Ending December 31,
------------------------
1998 $ 802,433
1999 291,563
2000 29,274
-----------
Total $ 1,123,270
===========
-25-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
6. Transactions With the General Partner and Affiliates
----------------------------------------------------
Maximum Front-end Fee
---------------------
Pursuant to the Partnership Agreement, the total of all front-end fees
(sales commissions, organization and offering costs, acquisition fees and
reimbursements and initial leasing costs) may not exceed an amount which
would cause the Partnership's investment in equipment (total cost of
equipment excluding front-end fees) to be less than the greater of (1) a
percentage amount of total Class A limited partners' capital
contributions equal to 80% minus .0625% for each 1% of the aggregate
purchase price of equipment that is borrowed by the Partnership
(determined by dividing the principal amount of all such indebtedness
incurred by the Partnership by the aggregate purchase price of the
equipment) or (2) 75% of the total Class A limited partners capital
contributions. The maximum fee was reached in July 1993. Equipment
purchases after July 1993 did not (and will not in the future) include
any acquisition fees, reimbursements or initial lease cost payments to
the general partner.
Management Fees
---------------
As permitted under the terms of the Partnership Agreement, the general
partner receives management fees as compensation for services performed
in connection with managing the Partnership's equipment equal to the
lesser of (a) 5% of gross rentals received (limited to 2% of gross
rentals received in the case of full payout leases) or (b) the fee which
the general partner reasonably believes to be competitive with that which
would be charged by a non-affiliate for rendering comparable services.
Such fees totaled $425,860, $702,219 and $1,035,316 in 1997, 1996 and
1995, respectively.
Direct Services
---------------
The general partner and its affiliates 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. Such
reimbursements totaled $136,955, $101,145 and $90,270 in 1997, 1996 and
1995, respectively.
Payables to Affiliate
---------------------
Payables to affiliate consists primarily of management fees and direct
services payable to the general partner.
-26-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
7. Tax Information (Unaudited)
---------------------------
The following reconciles net income for financial reporting purposes to
income for federal income tax purposes for the years ended December 31,:
1997 1996 1995
---- ---- ----
Net income per financial statements $ 2,576,510 $ 2,239,112 $ 2,943,220
Differences due to:
Direct finance leases 2,090,563 2,949,142 6,912,037
Depreciation (455,865) (2,802,075) (3,451,073)
Provision for losses 740,000 1,130,000 605,000
Gain (loss) on sale of equipment 2,501,750 (2,624,981) 1,482,212
Other (131,242) 302,689 232,461
----------- ------------ ------------
Partnership income for
federal income tax purposes $ 7,321,716 $ 1,193,887 $ 8,723,857
=========== ============ ============
As of December 31, 1997, the partners' capital accounts per the
accompanying financial statements totaled $9,125,143 compared to partners'
capital accounts for federal income tax purposes of $18,455,851. The
difference arises primarily from commissions reported as a reduction in
partners' capital for financial reporting purposes but not for federal
income tax purposes, and temporary differences related to direct finance
leases, depreciation and provisions for losses.
8. Concentration of Credit Risk
----------------------------
As of December 31, 1997, approximately 63% of the Partnership's equipment
under lease was leased to investment grade lessees. Pursuant to the
Partnership Agreement, an investment grade lessee is a company (1) with a
credit rating of not less than Baa as determined by Moody's Investor
Services, Inc., (2) that has a comparable credit rating as determined by
other recognized credit rating services or, (3) if the lessee is not rated,
then a lessee whom the general partner believes would have received a
rating of Baa, or better, if the lessee would have been rated.
The Partnership's cash balance is maintained with a high credit quality
financial institution. At times such balances may exceed the FDIC insurance
limit due to the receipt of lockbox amounts that have not cleared the
presentment bank (generally for less than two days). As funds become
available, they are invested in a money market mutual fund.
-27-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS, continued
9. Disclosures about Fair Value of Financial Instruments
-----------------------------------------------------
Statement of Financial Standards No. 107, Disclosures about Fair Value of
Financial Instruments specifically excludes certain items from its
disclosure requirements such as the Partnership's investment in leased
assets. The carrying amounts at December 31, 1997 for cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
payable to affiliates, rents and sale proceeds received in advance and
distributions payable to partners approximate their fair values due to the
short maturity of these instruments.
-28-
INDEPENDENT AUDITORS' REPORT
----------------------------
THE PARTNERS
CAPITAL PREFERRED YIELD FUND,
A CALIFORNIA LIMITED PARTNERSHIP:
Under date of February 6, 1998, we reported on the balance sheets of Capital
Preferred Yield Fund, a California limited partnership, as of December 31, 1997
and 1996, and the related statements of income, partners' capital, and cash
flows for each of the years in the three-year period ended December 31, 1997, as
contained in the Partnership's annual report on Form 10-K for the year 1997. In
connection with our audits of the aforemen tioned financial statements, we also
audited the related financial statement Schedule II, as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
------------------------
KPMG PEAT MARWICK LLP
Denver, Colorado
February 6, 1998
-29-
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1997, 1996 and 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------------- -------- --------
Additions
Balance at (deductions) Balance
beginning charged to at end
Classification of period other accounts Deductions of period
- -------------- --------- -------------- ---------- ---------
(1) (2)
1997
- ---------------------
Allowance for losses:
Accounts receivable $ 5,000 $ 7,000 $ - $ 12,000
Equipment on leases 242,760 740,000 (905,281) 77,479
----------- ----------- ------------ ---------
Totals $ 247,760 $ 747,000 $ (905,281) $ 89,479
=========== =========== ============ =========
1996
- ---------------------
Allowance for losses:
Accounts receivable $ 5,000 $ - $ - $ 5,000
Equipment on leases 673,003 1,130,000 (1,560,243) 242,760
----------- ----------- ------------ ---------
Totals $ 678,003 $ 1,130,000 $ (1,560,243) $ 247,760
=========== =========== ============ =========
1995
- ---------------------
Allowance for losses:
Accounts receivable $ 5,000 $ - $ - $ 5,000
Equipment on leases 1,200,614 605,000 (1,132,611) 673,003
----------- ----------- ------------ ---------
Totals $ 1,205,614 $ 605,000 $ (1,132,611) $ 678,003
=========== =========== ============ =========
(1) Represents charge-offs against allowance and recoveries.
See accompanying independent auditors' report.
-30-
Item 9. Disagreements on Accounting and Financial Disclosure
----------------------------------------------------
None
Item 10. Directors and Executive Officers of the Partnership
---------------------------------------------------
The Partnership has no officers and directors. The general partner manages and
controls the affairs of the Partnership and has general responsibility and
authority in all matters affecting its business. Information concerning the
directors and executive officers of the general partner is as follows:
CAI Partners Management Company
Name Positions Held
---- --------------
John F. Olmstead President and Director
Dennis J. Lacey Senior Vice President and Director
Anthony M. DiPaolo Senior Vice President, Principle Financial and Chief
Administrative Officer and Director
Richard H. Abernethy Vice President and Director
John A. Reed Vice President, Assistant Secretary and Director
Joseph F. Bukofski Vice President, Assistant Secretary and Director
Robert A. Golden Director
Mick Myers Director
Ann Danielson Assistant Vice President
David J. Anderson Chief Accounting Officer and Secretary
JOHN F. OLMSTEAD, age 53, joined CAII as Vice President in December, 1988, is a
Senior Vice President of CAI and CAII and is head of CAII's Public Equity
division. He has served as Chairman of the Board for Neo-kam Industries, Inc.,
Matchless Metal Polish Company, Inc. and ACL, Inc. for more than 5 years. He has
over 20 years of experience holding various positions of responsibility in the
leasing industry. Mr. Olmstead holds a Bachelor of Science degree from Indiana
University and a Juris Doctorate degree from Indiana Law School.
DENNIS J. LACEY, age 44, joined CAI as Vice President, Operations, in October
1989. Mr. Lacey was appointed Treasurer on January 1, 1991, Chief Financial
Officer on April 11, 1991, a director on July 19, 1991, and President and Chief
Executive Officer on September 6, 1991. Prior to joining CAI, Mr. Lacey was an
audit partner for the public accounting firm of Coopers & Lybrand. Mr. Lacey is
also a director and senior officer of CAII, CAI Equipment Leasing I Corp., CAI
Equipment Leasing II Corp., CAI Equipment Leasing III Corp., CAI Equipment
Leasing IV Corp., CAI Equipment Leasing V Corp., CAI Leasing Canada, Ltd., CAI
Partners Management Company, CAI Securities Corporation, CAI Lease
Securitization I Corp. and Capital Equipment Corporation (collectively referred
to herein as the "CAI Affiliates"), all of which are first- or second-tier
wholly-owned subsidiaries of CAI.
-31-
Item 10. Directors and Executive Officers of the Partnership, continued
---------------------------------------------------
ANTHONY M. DIPAOLO, age 39, joined CAII in July 1990 as Assistant Treasurer and
is currently Senior Vice President-Chief Financial Officer. He also held the
positions of Senior Vice President-Controller and Assistant Vice
President-Credit Administration for the Company. Mr. DiPaolo has held similar
senior financial management positions with two public companies between 1986 and
June 1990, and prior to then was an audit manager for the public accounting firm
of Coopers & Lybrand. Mr. DiPaolo holds a Bachelor of Science degree in
Accounting from the University of Denver.
RICHARD H. ABERNETHY, age 43, joined CAII in April 1992 as Equipment Valuation
Manager and currently serves as Vice President of Asset Management. Mr.
Abernethy has thirteen years experience in the leasing industry, including prior
positions with Barclays Leasing Inc., from November 1986 to February 1992, and
Budd Leasing Corporation, from January 1981 to November 1986. Mr. Abernethy
holds a Bachelor of Arts in Business Administration from the University of North
Carolina at Charlotte.
JOHN A. REED, age 42, joined CAII in January 1990 as the Tax Director and
Assistant Secretary. Mr. Reed is currently the Vice President-Manager, Capital
Markets Group and is responsible for obtaining off balance sheet financing,
syndications and private programs. Prior to joining the Capital Markets Group,
Mr. Reed was Vice President of both Marketing Administration and Credit and Debt
Administration. He spent seven and one half years with Coopers & Lybrand in the
Tax Department and served on CAII's tax consulting engagement during that time.
Mr. Reed holds a Bachelor of Arts degree in Social Sciences and Masters of
Science in Accounting, from Colorado State University.
JOSEPH F. BUKOFSKI, age 43, joined CAII in June 1990 as a Financial Analyst. Mr.
Bukofski is currently the Vice President of Marketing and is responsible for all
lease documentation and management of transaction structuring and processing.
Prior to joining the Marketing Department, Mr. Bukofski was Assistant Vice
President and Controller. Prior to joining the Company, he was a geologist with
Barringer Geoservices, Inc. for eleven years. Mr. Bukofski holds a Bachelor of
Science degree in Secondary Education - Earth Science from Bloomsburg University
and a Masters of Science in Accounting from the University of Colorado.
ROBERT A. GOLDEN, age 52, is Vice President and the National Sales Manager of
the Company. Mr. Golden joined the Company in 1993 as a Branch Manager. He was
promoted to his current position in September 1994. Prior to joining the
Company, he was an Executive Vice President with the U.S. Funds Group, President
of BoCon Capital Group and Vice President with Ellco/GE Capital for fifteen
years. Mr. Golden is an officer, but not a director, of CAII.
MICK MYERS, age 40, joined CAI in February 1992 as a Senior Portfolio Manager.
Currently he is Assistant Vice President of Asset Management. Mr. Myers has nine
years experience in the leasing industry. Previously, he has held the position
of Senior End of Lease Negotiator with ELLCO/GE Capital. Mr. Myers holds a
Bachelor of Science degree from the University of Wyoming.
-32-
Item 10. Directors and Executive Officers of the Partnership, continued
---------------------------------------------------
ANN E. DANIELSON, age 35, joined CAII in February 1990 and is currently
Assistant Vice President, Assistant Treasurer and is responsible for the
Company's cash management and collections functions. Prior to joining the
Company, she was with U.S. West financial Services and Coopers & Lybrand. Ms.
Danielson holds a Bachelor of Arts Degree from the University of Northern Iowa.
DAVID J. ANDERSON, age 45, joined CAII in August 1990 as Manager of Billing &
Collections and currently serves as Assistant Vice-President/Chief Accounting
Officer. Prior to joining CAII, Mr. Anderson was Vice- President/Controller for
Systems Marketing, Inc., from 1985 to 1990, and previous to that worked in
several senior staff positions at the Los Alamos National Laboratory and with
Ernst & Whinney. Mr. Anderson holds a Bachelor of Business Administration degree
in Accounting from the University of Wisconsin.
Item 11. Executive Compensation
----------------------
No compensation was paid by the Partnership to the officers and directors of the
general partner. See Item 13 of this Report, "Certain Relationships and Related
Transactions", for a description of the compensation and fees paid to the
general partner and its affiliates by the Partnership during 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) As of the date hereof, no person is known by the Partnership to be the
beneficial owner of more than 5% of the Class A limited partner units
of the Partnership. The Partnership has no directors or officers, and
neither the general partner nor the Class B limited partner of the
Partnership own any Class A limited partner units.
CAII, the parent of the general partner, owns 100% of the
Partnership's Class B limited partner interest.
CAI Partners Management Company owns 100% of the Partnership's general
partner interest.
The names and addresses of the general partner and the Class B limited
partner are as follows:
General Partner
---------------
CAI Partners Management Company
7175 West Jefferson Avenue
Suite 4000
Lakewood, Colorado 80235
-33-
Item 12. Security Ownership of Certain Beneficial Owners and Management,
----------------------------------------------------------------------
continued
Class B Limited Partner
-----------------------
Capital Associates International, Inc.
7175 West Jefferson Avenue
Suite 4000
Lakewood, Colorado 80235
(b) No directors or officers of the general partner or the Class B limited
partner owned any Class A limited partner units as of December 31,
1997.
(c) The Partnership knows of no arrangements, the operation of which may
at a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The general partner and its affiliates receive certain types of compensation,
fees or other distributions in connection with the operations of the
Partnership.
Following is a summary of the amounts paid or payable to the general partner and
its affiliates during 1997:
Management Fees
- ---------------
The general partner receives a monthly fee as compensation for services rendered
in connection with managing the Partnership's equipment in an amount equal to
the lesser of (i) 5% of gross rentals received by the Partnership (but limited
to 2% of gross rentals received in the case of full payout leases), or (ii) the
fee which the general partner reasonably believes to be competitive with that
which would be charged by a non-affiliate for rendering comparable services.
Management fees of $425,860 were earned by the general partner during 1997.
Accountable General and Administrative Expenses
- -----------------------------------------------
The general partner is entitled to reimbursement of certain expenses paid on
behalf of the Partnership which are incurred in connection with the
Partnership's operations. Such reimbursable expenses amounted to $136,955 during
1997.
Additionally, the general partner receives 4.5% of Partnership cash
distributions, and is allocated certain Partnership income and gain, relating to
its general partner interest in the Partnership. Distributions paid and net
income allocated to the general partner totaled $341,070 for 1997. Distributions
paid and net income allocated to the Class B limited partner totaled $505,635
and $157,082, respectively, for 1997.
-34-
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a)
and
(d) The following documents are filed as part of this Report:
1. Financial Statements
2. Financial Statement Schedule
(b) The Partnership did not file any reports on Form 8-K during the three
months ended December 31, 1997.
(c) Exhibits required to be filed.
Exhibit Exhibit
Number Name
------- -------
4.1* Capital Preferred Yield Fund Limited Partnership Agreement
dated July 13, 1989 filed as Exhibit 4.1 to the Partnership's
Annual Report on Form 10-K for the year ended December 31,
1990.
4.2* First Amendment to Limited Partnership Agreement dated
December 31, 1991. (Filed April 1, 1992.)
4.3* Second Amendment to Limited Partnership Agreement dated
March 31, 1992. (Filed May 15, 1992.)
* Not filed herewith. In accordance with Rule 12b-32 of the
General Rules and Regulations under the Securities Exchange
Act of 1934, reference is made to the document previously
filed with the Commission.
-35-
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 1998 Capital Preferred Yield Fund,
A California Limited Partnership
By: CAI Partners Management Company
By: /s/John F. Olmstead
-------------------------------
John F. Olmstead
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the general partner
of the Partnership and in the capacities indicated on March 31, 1998.
Signature Title
- --------- -----
/s/John F. Olmstead
- -----------------------
John F. Olmstead President and Director
/s/Dennis J. Lacey
- -----------------------
Dennis J. Lacey Senior Vice President and Director
/s/Anthony M. DiPaolo
- ----------------------- Senior Vice President, Principle Financial and Chief
Anthony M. DiPaolo Administrative Officer and Director
/s/Richard H. Abernethy
- -----------------------
Richard H. Abernethy Vice President and Director
/s/John A. Reed
- -----------------------
John A. Reed Vice President, Assistant Secretary and Director
/s/Joseph F. Bukofski
- -----------------------
Joseph F. Bukofski Vice President, Assistant Secretary and Director
/s/Robert A. Golden
- -----------------------
Robert A. Golden Director
/s/Mick Myers
- -----------------------
Mick Myers Director
/s/Ann Danielson
- -----------------------
Ann Danielson Assistant Vice President
/s/David J. Anderson
- -----------------------
David J. Anderson Chief Accounting Officer and Secretary
-36-