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, 2002
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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 33-44158
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Capital Preferred Yield Fund-III, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 84-1248907
- ---------------------------- -----------------------------------
(State of organization) (I.R.S. Employer Identification No.)
2750 South Wadsworth, C-200
Denver, Colorado 80227
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (720) 963-9600
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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 14
Page 1 of 15 Pages
CAPITAL PREFERRED YIELD FUND-III, L.P.
Quarterly Report on Form 10-Q
For the Quarter Ended
June 30, 2002
Table of Contents
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 2002 and December 31, 2001 3
Statements of Income - Three and Six Months Ended
June 30, 2002 and 2001 4
Statements of Cash Flows - Six Months Ended
June 30, 2002 and 2001 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Exhibit Index 14
Signature 15
2
CAPITAL PREFERRED YIELD FUND-III, L.P.
BALANCE SHEETS
ASSETS
June 30, December 31,
2002 2001
---- ----
(Unaudited)
Cash and cash equivalents $ 1,553,250 $ 1,603,588
Accounts receivable 184,495 1,257,040
Equipment held for sale or re-lease 370,596 349,333
Net investment in direct finance leases 1,866,794 2,348,080
Leased equipment, net 10,963,354 15,119,260
----------- -----------
Total assets $14,938,489 $20,677,301
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 1,046,043 $ 1,805,041
Payables to affiliates 42,181 48,806
Rents received in advance 40,206 40,205
Distributions payable to partners 581,908 789,971
Discounted lease rentals 3,615,736 4,985,065
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Total liabilities 5,326,074 7,669,088
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Partners' capital:
General partner -- --
Limited partners:
Class A 9,343,457 12,719,270
Class B 268,958 288,943
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Total partners' capital 9,612,415 13,008,213
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Total liabilities and partners' capital $14,938,489 $20,677,301
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See accompanying notes to financial statements.
3
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenue:
Operating lease rentals $2,129,512 $2,681,632 $4,340,487 $5,523,373
Direct finance lease income 59,942 73,236 129,268 185,419
Equipment sales margin 216,604 255,380 280,581 353,224
Interest income 6,189 14,881 12,720 30,201
---------- ---------- ---------- ----------
Total revenue 2,412,247 3,025,129 4,763,056 6,092,217
---------- ---------- ---------- ----------
Expenses:
Depreciation 1,474,127 2,046,709 3,159,398 4,325,016
Management fees to general partner 47,642 66,766 98,585 131,859
Direct services from general partner 67,361 43,319 132,992 85,212
General and administrative 184,907 165,392 302,927 452,823
Interest on discounted lease rentals 81,976 136,658 181,949 338,652
Provision for losses 145,000 425,000 220,000 475,000
---------- ---------- ---------- ----------
Total expenses 2,000,013 2,883,844 4,095,851 5,808,562
---------- ---------- ---------- ----------
Net income $ 411,234 $ 141,285 $ 667,205 $ 283,655
========== ========== ========== ==========
Net income allocated:
To the general partner $ 21,575 $ 25,741 $ 40,630 $ 38,378
To the Class A limited partners 385,763 114,393 620,310 242,825
To the Class B limited partner 3,896 1,151 6,265 2,452
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$ 411,234 $ 141,285 $ 667,205 $ 283,655
========== ========== ========== ==========
Net income per weighted average Class A
limited partner unit outstanding $ 0.79 $ 0.23 $ 1.26 $ 0.49
========== ========== ========== ==========
Weighted average Class A limited
partner units outstanding 491,011 491,011 491,011 491,011
========== ========== ========== ==========
See accompanying notes to financialstatements.
4
CAPITAL PREFERRED YIELD FUND-III, L.P.,
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------
2002 2001
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Net cash provided by operating activities $ 5,590,053 $ 5,579,411
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Cash flows from financing activities:
Principal payments on discounted lease rentals (1,369,329) (2,157,819)
Distributions to partners (4,271,062) (3,476,744)
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Net cash used in financing activities (5,640,391) (5,634,563)
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Net decrease in cash and cash equivalents (50,338) (55,152)
Cash and cash equivalents at beginning of period 1,603,588 1,529,900
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Cash and cash equivalents at end of period $ 1,553,250 $ 1,474,748
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Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 181,949 $ 338,652
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See accompanying notes to financial statements.
5
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America 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 accounting
principles generally accepted in the United States of America for annual
financial statements. In the opinion of the General Partner, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. The balance sheet at
December 31, 2001 was derived from the audited financial statements
included in the Partnership's 2001 Form 10-K. For further information,
refer to the financial statements of Capital Preferred Yield Fund-III, L.P.
(the "Partnership"), and the related notes, included in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 2001, previously
filed with the Securities and Exchange Commission.
Recently Issued Financial Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145 ("SFAS 145"),
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS 145 updates, clarifies
and simplifies existing accounting pronouncements. SFAS 145 rescinds
Statement 4, which required all gains and losses from extinguishments of
debt to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the criteria in APB
Opinion 30 will now be used to classify those gains and losses. Statement
64 amended Statement 4, and is no longer necessary because Statement 4 has
been rescinded. Statement 44 was issued to establish accounting
requirements for the effects of transition to the provisions of the Motor
Carrier Act of 1980. Because the transition has been completed, Statement
44 is no longer necessary. SFAS 145 amends Statement 13 to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with the FASB's
goal of requiring similar accounting treatment for transactions that have
similar economic effects. SFAS 145 also makes technical corrections to
existing pronouncements. The Partnership does not believe the adoption of
SFAS 145 will have a material impact on the Partnership's financial
position, results of operations or cash flows.
6
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. Transactions With the General Partner and Affiliates
----------------------------------------------------
Management Fees 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. At June 30, 2002, management fees of $14,928 are
included in payables to affiliates.
Direct Services from General Partner
The General Partner and an affiliate provide accounting, investor
relations, billing, collecting, asset management, and other administrative
services to the Partnership. The Partnership reimburses the General Partner
for these services performed on its behalf as permitted under the terms of
the Partnership Agreement. At June 30, 2002, direct services from the
General Partner of $24,043 are included in payables to affiliates.
General and Administrative Expenses
The General Partner and an affiliate are reimbursed for the actual cost of
administrative expenses incurred on behalf of the Partnership per the terms
of the Partnership Agreement. At June 30, 2002, general and administrative
costs of $3,210 are included in payables to affiliates.
7
CAPITAL PREFERRED YIELD FUND-III, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Presented below are schedules (prepared solely to facilitate the discussion of
results of operations that follows) showing items of income and expense and
changes in those items derived from the Statements of Income:
Three Months Six Months
Ended June 30, Ended June 30,
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2002 2001 Change 2002 2001 Change
----------- ----------- ------------ ----------- ------------ ------------
Leasing margin $ 633,351 $ 571,501 $ 61,850 $ 1,128,408 $ 1,045,124 $ 83,284
Equipment sales margin 216,604 255,380 (38,776) 280,581 353,224 (72,643)
Interest income 6,189 14,881 (8,692) 12,720 30,201 (17,481)
Management fees to general partner (47,642) (66,766) 19,124 (98,585) (131,859) 33,274
Direct services from general partner (67,361) (43,319) (24,042) (132,992) (85,212) (47,780)
General and administrative (184,907) (165,392) (19,515) (302,927) (452,823) 149,896
Provision for losses (145,000) (425,000) 280,000 (220,000) (475,000) 255,000
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 411,234 $ 141,285 $ 269,949 $ 667,205 $ 283,655 $ 383,550
=========== =========== =========== =========== =========== ===========
The Partnership is in its liquidation period, as defined in the Partnership
Agreement, and is not purchasing additional equipment. Initial leases are
expiring, and the amount of equipment being remarketed (i.e. re-leased, renewed
or sold) is generally decreasing. As a result, both the size of the
Partnership's portfolio and the amount of total revenue are decreasing
("portfolio runoff").
Leasing Margin
Leasing margin consists of the following:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Operating lease rentals $ 2,129,512 $ 2,681,632 $ 4,340,487 $ 5,523,373
Direct finance lease income 59,942 73,236 129,268 185,419
Depreciation (1,474,127) (2,046,709) (3,159,398) (4,325,016)
Interest expense on discounted lease rentals (81,976) (136,658) (181,949) (338,652)
----------- ----------- ----------- -----------
Leasing margin $ 633,351 $ 571,501 $ 1,128,408 $ 1,045,124
=========== =========== =========== ===========
Leasing margin ratio 29% 21% 25% 18%
=== == == ==
8
CAPITAL PREFERRED YIELD FUND-III, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Results of Operations, continued
- ---------------------
Leasing Margin, continued
The components of leasing margin decreased for the three and six months ended
June 30, 2002 compared to the three and six months ended June 30, 2001 primarily
as a result of portfolio runoff.
Leasing margin ratio will vary due to changes in the portfolio, including, among
other things, the mix of operating leases versus direct finance leases, the
average maturity of leases comprising the portfolio, the average residual value
of leased assets in the portfolio, and the amount of discounted lease rentals
financing the portfolio. Leasing margin ratio increased for the three and six
months ended June 30, 2002 compared to the three and six months ended June 30,
2001 primarily as a result of operating leases in the Partnership's portfolio
being in the latter stages of their lease terms. Leasing margin ratio for a
direct finance lease is fixed over the term of the lease. Leasing margin ratio
for an operating lease financed with non-recourse debt increases during the term
of the lease since rents and depreciation are typically fixed while interest
expense declines as the related non-recourse debt principle is repaid.
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,
--------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ -----------
Equipment sales revenue $ 310,482 $ 958,427 $ 1,164,903 $ 1,656,864
Cost of equipment sales (93,878) (703,047) (884,322) (1,303,640)
----------- ----------- ----------- -----------
Equipment sales margin $ 216,604 $ 255,380 $ 280,581 $ 353,224
=========== =========== =========== ===========
Equipment sales margin fluctuates based on the composition of equipment
available for sale. Currently, the Partnership is in its liquidation period (as
defined in the Partnership Agreement). Initial leases are expiring and the
equipment is either being re-leased or sold to the lessee or a third party.
Equipment sales margin varies with the number and dollar amount of equipment
leases that mature in a particular period and the current market for specific
equipment.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Results of Operations, continued
- ---------------------
Interest Income
Interest income varies due to (1) the amount of cash available for investment
(pending distribution or equipment purchases) and (2) the interest rate on such
invested cash.
Expenses
Management fees paid to the General Partner decreased for the three and six
months ended June 30, 2002 as compared to the corresponding period in 2001
primarily due to portfolio run-off. Management fees are calculated as a
percentage of rents collected.
Direct services from the General Partner increased for the three and six months
ended June 30, 2002 compared to the three and six months ended June 30, 2001
primarily due to increased costs related to management's efforts to collect
receivables owed to the partnership.
General and administrative expenses decreased for the six months ended June 30,
2002 compared to the six months ended June 30, 2001 primarily because the six
month period during 2001 included a one-time charge for software and computer
equipment related to a change in the ownership of the General Partner.
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 occurs when the equipment is remarketed
subsequent to the termination of the initial lease) 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 such that it
has credit and residual value exposure and will incur losses from those
exposures in the ordinary course of business. The Partnership performs quarterly
assessments of the estimated residual values of its assets to identify any
other-than-temporary losses in value.
The provision for losses of $145,000 and $220,000 recorded during the three and
six months ended June 30, 2002 related primarily to lower of cost or market
write downs of equipment in inventory in addition to residual value write downs
of leased equipment.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Liquidity & Capital Resources
- -----------------------------
The Partnership is in its liquidation period, as defined in the Partnership
Agreement. 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) is increasing. As a result, both the size of the
Partnership's lease portfolio and the amount of leasing revenue are declining.
The Partnership funds its operating activities principally with cash from rents,
interest income, and sales of off-lease equipment. Available cash and cash
reserves of the Partnership are invested in short-term government securities
pending distribution to the partners.
During the six months ended June 30, 2002, the Partnership declared
distributions to the Class A limited partners of $3,996,120 ($571,915 of which
was paid during July 2002). A substantial portion of such distributions is
expected to constitute a return of capital. Distributions may be characterized
for tax, accounting and economic purposes as a return of capital, a return on
capital, or a portion of both. The portion of each cash distribution that
exceeds its net income for the fiscal period may be deemed a return of capital
for accounting purposes. However, the total percentage of the partnership's
return on capital over its life will only be determined after all residual cash
flows (which include proceeds from the re-leasing and sale of equipment) have
been realized at the termination of the partnership.
The General Partner believes that the Partnership will generate sufficient cash
flows from operations during the remainder of 2002, to (1) meet current
operating requirements, (2) fund cash distributions to Class A limited partners
in accordance with the Partnership Agreement. All distributions are expected to
be a return of capital for economic purposes.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
New Accounting Pronouncements
- -----------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145 ("SFAS 145"), "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS 145 updates, clarifies and simplifies existing
accounting pronouncements. SFAS 145 rescinds Statement 4, which required all
gains and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in APB Opinion 30 will now be used to classify those gains
and losses. Statement 64 amended Statement 4, and is no longer necessary because
Statement 4 has been rescinded. Statement 44 was issued to establish accounting
requirements for the effects of transition to the provisions of the Motor
Carrier Act of 1980. Because the transition has been completed, Statement 44 is
no longer necessary. SFAS 145 amends Statement 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
amendment is consistent with the FASB's goal of requiring similar accounting
treatment for transactions that have similar economic effects. SFAS 145 also
makes technical corrections to existing pronouncements. The Partnership does not
believe the adoption of SFAS 145 will have a material impact on the
Partnership's financial position, results of operations or cash flows.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
- -----------------------------------------------------------------------------
1995
- ----
The statements contained in this report which are not historical facts may be
deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, and are subject to factors
that could cause actual future results to differ both adversely and materially
from currently anticipated results, including, without limitation, the level of
lease originations, realization of residual values, the availability and cost of
financing sources and the ultimate outcome of any contract disputes. Certain
specific risks associated with particular aspects of the Partnership's business
are discussed under Results of Operations in this report and under Results of
Operations in the 2001 Form 10-K when and where applicable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Partnership's leases with equipment users are non-cancelable and have lease
rates which are fixed at lease inception. The partnership finances its leases,
in part, with discounted lease rentals at a fixed debt rate. The Partnership's
other assets and liabilities are also at fixed rates. Consequently, the
Partnership has no interest rate risk or other market risk exposure.
12
CAPITAL PREFERRED YIELD FUND-III, L.P.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is involved in routine legal proceedings incidental
to the conduct of its business. The General Partner believes none of
these legal proceedings will have a material adverse effect on the
financial condition or operations of the Partnership.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) The Partnership did not file any reports on Form 8-K during the
quarter ended June 30, 2002.
13
Item No. Exhibit Index
No exhibits were filed with this Form 10-Q.
14
CAPITAL PREFERRED YIELD FUND-III, L.P.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL PREFERRED YIELD FUND-III, L.P.
By: CAI Equipment Leasing IV Corp.
Dated: August 14, 2002 By: /s/Joseph F. Bukofski
------------------------
Joseph F. Bukofski
Chief Accounting Officer
15
CAPITAL PREFERRED YIELD FUND-III, L.P.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL PREFERRED YIELD FUND-III, L.P.
By: CAI Equipment Leasing IV Corp.
Dated: August 14, 2002 By:
Joseph F. Bukofski
Chief Accounting Officer
15