SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19164
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Capital Preferred Yield Fund, A California Limited Partnership
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(Exact name of registrant as specified in its charter)
California 68-0190817
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(State of organization) (I.R.S. Employer Identification No.)
7175 West Jefferson Avenue, Suite 4000
Lakewood, Colorado 80235
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 980-1000
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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 12
Page 1 of 13 Pages
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Quarterly Report on Form 10-Q
For the Quarter Ended
June 30, 1998
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets-June 30, 1998 and December 31, 1997 3
Statements of Income - Three and Six Months Ended
June 30, 1998 and 1997 4
Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
2
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
------------ --------------
(Unaudited)
Cash and cash equivalents $ 3,655,429 $ 2,839,510
Accounts receivable, net 4,729,660 7,579,737
Receivable from related party 59,858 -
Equipment held for sale or re-lease 268,244 887,865
Net investment in direct finance leases 315,574 229,696
Leased equipment, net 357,416 1,074,600
----------- ------------
Total assets $ 9,386,181 $ 12,611,408
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Payables to affiliates $ 49,751 $ 44,916
Accounts payable and accrued liabilities 1,205,853 905,979
Rents received in advance 92,801 162,931
Distributions payable to partners 2,402,589 1,241,334
Financed operating lease rentals 494,013 1,131,105
----------- ------------
Total liabilities 4,245,007 3,486,265
----------- ------------
Partners' capital:
General partner - -
Limited partners:
Class A 3,224,503 6,923,098
Class B 1,916,671 2,202,045
----------- ------------
Total partners' capital 5,141,174 9,125,143
----------- ------------
Total liabilities and partners' capital $ 9,386,181 $ 12,611,408
=========== ============
The accompanying notes are an integral part of these financial statements.
3
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------- ------------ -------------
Revenue:
Operating lease rentals $ 50,755 $ 1,606,275 $ 160,928 $ 3,168,487
Direct finance lease income 9,594 264,957 104,308 514,379
Equipment sales margin 165,344 110,068 558,006 237,562
Interest income 16,294 22,102 35,433 42,170
---------- ----------- ---------- -----------
Total revenue 241,987 2,003,402 858,675 3,962,598
---------- ----------- ---------- -----------
Expenses:
Depreciation 22,467 936,231 128,783 1,944,767
Management fees paid to general partner 9,944 112,996 18,514 226,100
Direct services from general partner 34,856 39,058 58,639 84,149
Interest on discounted lease rentals - 55,031 28 125,223
Interest on financed operating lease rentals 14,398 13,505 27,037 26,662
General and administrative 125,198 96,233 180,576 162,142
Provision for losses 425,000 100,000 475,000 225,000
---------- ----------- ---------- -----------
Total expenses 631,863 1,353,054 888,577 2,794,043
---------- ----------- ---------- -----------
Net income (loss) $ (389,876) $ 650,348 $ (29,902) $ 1,168,555
========== =========== ========== ===========
Net income (loss) allocated:
To the general partner $ 92,018 $ 111,785 $ 177,934 $ 217,953
To the Class A limited partners (448,042) 500,718 (193,244) 883,802
To the Class B limited partner (33,852) 37,845 (14,592) 66,800
---------- ------------ ---------- -----------
$ (389,876) $ 650,348 $ (29,902) $ 1,168,555
========== =========== ========== ===========
Net income (loss) per weighted average
Class A limited partner units outstanding $ (1.78) $ 1.99 $ (0.77) $ 3.51
========== =========== ========== ===========
Weighted average Class A limited
partner unit outstanding 251,388 251,614 251,388 251,661
========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
4
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
---------------------------------
1998 1997
----------- -----------
Net cash provided by operating activities $ 4,245,823 $ 5,855,778
----------- -----------
Cash flows from financing activities:
Principal payments on financed operating lease rentals (629,257) (232,463)
Principal payments on discounted lease rentals (7,835) (1,372,128)
Distributions to partners (2,792,812) (5,287,568)
Redemptions of limited partner units - (15,669)
----------- -----------
Net cash used in financing activities (3,429,904) (6,907,828)
----------- -----------
Net increase (decrease) in cash and cash equivalents 815,919 (1,052,050)
Cash and cash equivalents at beginning of period 2,839,510 2,672,112
----------- -----------
Cash and cash equivalents at end of period $ 3,655,429 $ 1,620,062
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 28 $ 125,223
Interest paid on financed operating lease rentals 27,037 26,662
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, 1997 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,
1997, previously filed with the Securities and Exchange Commission.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"), which requires comprehensive income to be displayed
prominently within the financial statements. Comprehensive income is
defined as all recognized changes in equity during a period from
transactions and other events and circumstances except those resulting from
investments by owners and distributions to owners. Net income and items
that previously have been recorded directly in equity are included in
comprehensive income. Statement 130 affects only the reporting and
disclosure of comprehensive income but does not affect recognition or
measurement of income. Statement 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Partnership adopted Statement 130 in the first quarter of 1998. The
adoption did not have an impact on its financial reporting.
2. Transactions With the General Partner and Affiliate
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DIRECT SERVICES FROM GENERAL PARTNER:
The general partner and an affiliate provide accounting, investor
relations, billing, collecting, asset management, and other administrative
services to the Partnership. The Partnership reimburses the general partner
for these services performed on its behalf as permitted under the terms of
the Partnership Agreement. The Partnership recorded $58,639 of direct
services from the general partner for the six months ended June 30, 1998.
Of that amount $26,688 is included in payables to affiliates.
6
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Transactions With the General Partner and Affiliate, continued
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MANAGEMENT FEES PAID TO GENERAL PARTNER:
In accordance with the Partnership Agreement, the general partner earns a
management fee in connection with its management of the equipment,
calculated as a percentage of the monthly gross rentals received, and paid
monthly in arrears. The Partnership recorded a management fee of $18,514
for the six months ended June 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES:
The general partner and an affiliate are reimbursed for the actual cost of
administrative expenses paid on behalf of the Partnership per the terms of
the Partnership Agreement. At June 30, 1998, $23,063 of reimbursable
expenses are included in payables to affiliates.
RECEIVABLE FROM RELATED PARTY:
The general partner collects and applies rental payments to lessees'
accounts with the Partnership for those lessees who remit directly to the
general partner. The rental payments are then transferred to the
Partnership, eliminating the receivable from related party balance. At the
end of June 1998, $59,858 in rents were applied by the general partner that
were transferred to the Partnership in July 1998.
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 Condensed Statements
of Income for The Effect on of Income for The Effect on
the Three Months Net Income the Six Months Net Income
Ended June 30, of Changes Ended June 30, of Changes
--------------------------- Between -------------------------- Between
1998 1997 Periods 1998 1997 Periods
------------ ------------ -------------- ----------- ------------- --------------
Leasing margin $ 23,484 $ 866,465 $ (842,981) $ 109,388 $ 1,586,214 $(1,476,826)
Equipment sales margin 165,344 110,068 55,276 558,006 237,562 320,444
Interest income 16,294 22,102 (5,808) 35,433 42,170 (6,737)
Management fees paid to general partner (9,944) (112,996) 103,052 (18,514) (226,100) 207,586
Direct services from general partner (34,856) (39,058) 4,202 (58,639) (84,149) 25,510
General and administrative (125,198) (96,233) (28,965) (180,576) (162,142) (18,434)
Provision for losses (425,000) (100,000) (325,000) (475,000) (225,000) (250,000)
----------- ---------- ----------- ----------- ----------- -----------
Net income (loss) $ (389,876) $ 650,348 $(1,040,224) $ (29,902) $ 1,168,555 $(1,198,457)
=========== ========== =========== =========== =========== ===========
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. The Partnership recorded a net loss for the 1998 quarter
and the 1998 period primarily due to the provision for loss (discussed below)
taken on equipment returned to the Partnership.
LEASING MARGIN
Leasing margin consists of the following:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Operating lease rentals $ 50,755 $ 1,606,275 $ 160,928 $ 3,168,487
Direct financing lease income 9,594 264,957 104,308 514,379
Depreciation (22,467) (936,231) (128,783) (1,944,767)
Interest expense on related financed
operating lease rentals (14,398) (13,505) (27,037) (26,662)
Interest expense on related discounted
lease rentals - (55,031) (28) (125,223)
----------- ----------- ----------- -----------
Leasing margin $ 23,484 $ 866,465 $ 109,388 $ 1,586,214
=========== =========== =========== ===========
Leasing margin ratio 39% 46% 41% 43%
=========== =========== =========== ===========
8
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations, continued
- ---------------------
LEASING MARGIN, continued
The components of leasing margin have declined and are expected to decline
further due to portfolio run- off.
The ultimate rate of return on leases depends, in part, on interest rates at the
time the leases are originated, as well as future equipment values and on-going
lessee creditworthiness. Because leasing is an alternative to financing
equipment purchases with debt, lease rates tend to rise and fall with interest
rates (although lease rate movements generally lag interest rate changes in the
capital markets).
EQUIPMENT SALES MARGIN
Equipment sales margin consists of the following:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Equipment sales revenue $ 498,472 $ 220,845 $ 1,238,897 $ 1,478,046
Cost of equipment sales (333,128) (110,777) (680,891) (1,240,484)
---------- ---------- ----------- ------------
Equipment sales margin $ 165,344 $ 110,068 $ 558,006 $ 237,562
========== ========== =========== ===========
The Partnership is in it's liquidation period (as defined in the Partnership
Agreement). Currently, a portion of the Partnership's initial leases are
expiring and equipment is being remarketed (i.e., re-leased or sold to the
original lessee or third parties). Equipment sales margin increased as the
Partnership was successful in realizing amounts on equipment greater than their
net book values.
INTEREST INCOME
Interest income decreased due to a decrease in cash available for investment as
the Partnership is in liquidation and therefore distributing excess cash to the
partners.
PROVISION FOR LOSSES
The remarketing of equipment for an amount greater than its book value is
reported with equipment sales margin (if the equipment is sold) or leasing
margin (if the equipment is re-leased). The realization of less than the
carrying value of equipment (which is typically not known until remarketing
subsequent to the initial lease termination has occurred) is recorded as
provision for losses.
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
- ---------------------
PROVISION FOR LOSSES, continued
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.
The provision for losses recorded for the six months ended June 30, 1998 and for
the same period in 1997 was primarily related to lessees returning equipment to
the Partnership. For the 1998 quarter, the Partnership recorded a loss of
$425,000 on mining and transportation equipment and office furniture and
fixtures held for sale or re-lease. The Partnership had previously expected to
realize the carrying value of this equipment through proceeds from the sales of
equipment to the original lessees. The fair market value of the equipment is
less than anticipated.
EXPENSES
The increase in general and administrative expenses was primarily due to an
increase in non-resident withholding tax for 1997, paid and expensed on behalf
of the limited partners during the second quarter of 1998.
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 the three months ended June 30, 1998, the Partnership declared
distributions to the partners of $2,044,833 ($1,784,872 of which was paid during
July 1998). 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
re-leasing and sales of equipment after initial lease terms expire) have been
realized at the termination of the Partnership. The Partnership is in its
liquidation period (as defined in the Partnership Agreement) and distributions
during the liquidation period will vary based upon cash availability. All
distributions are expected to be a return of capital for economic purposes.
10
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources, continued
- -------------------------------
The general partner currently anticipates that the Partnership will generate
cash flow from operations and equipment sales during the remainder of 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 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 as of August 1997. The general partner
believes these cumulative distributions will be paid when the proceeds from the
sale of certain equipment become available for distribution. Such proceeds are
currently recorded in accounts receivable.
YEAR 2000 ISSUES
An affiliate provides accounting and other administrative services, including
data processing services to the Partnership. The affiliate has conducted a
comprehensive review of its computer systems to identify systems that could be
affected by the Year 2000 issue. The Year 2000 issue results from computer
programs being written using two digits rather than four to define the
applicable year. Certain computer programs which have time-sensitive software
could recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in major system failures or miscalculations. Certain of the
affiliates's software have already been updated to software which correctly
accounts for the Year 2000. In addition, the affiliate is engaged in a system
conversion, whereby the affiliates's main lease tracking and accounting software
is being replaced with new systems which will account for the Year 2000
correctly. The general partner does not expect any other changes required for
the Year 2000 to have a material effect on the financial position or results of
operations of the Partnership. In addition, the general partner does not expect
any Year 2000 issues relating to customers and vendors will have a material
effect on its financial position or results of operations of the Partnership.
Costs incurred by the Partnership to address the Year 2000 issue have been
immaterial.
11
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is involved in routine legal proceedings
incidental to the conduct of its business. The general partner
believes none of these legal proceedings will have a material
adverse effect on the financial condition or operations of the
Partnership.
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) The Partnership did not file any reports on Form 8-K during
the three months ended June 30, 1998
12
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL PREFERRED YIELD FUND
A California Limited Partnership
By: CAI Partners Management Company
Dated: August 12, 1998 By: /s/Anthony M. DiPaolo
--------------------------------
Anthony M. DiPaolo
Senior Vice President
13