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 March 31, 2003
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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.
(Exact name of registrant as specified in its charter)
Delaware 84-1248907
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(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 .
--- ---
Exhibit Index appears on Page 14
Page 1 of 19 Pages
CAPITAL PREFERRED YIELD FUND-III, L.P.
Quarterly Report on Form 10-Q
For the Quarter Ended
March 31, 2003
Table of Contents
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PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 2003 and December 31, 2002 3
Statements of Income - Three Months Ended
March 31, 2003 and 2002 4
Statements of Cash Flows - Three Months Ended
March 31, 2003 and 2002 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
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Exhibit Index 14
Signatures 15
Certifications 16-17
2
CAPITAL PREFERRED YIELD FUND-III, L.P.
BALANCE SHEETS
ASSETS
March 31, December 31,
2003 2002
---- ----
(Unaudited)
Cash and cash equivalents $ 1,030,805 $ 1,229,412
Accounts receivable, net 57,343 158,424
Equipment held for sale or re-lease 110,422 51,730
Net investment in direct finance leases 1,182,849 1,368,607
Leased equipment, net 7,050,850 8,391,053
----------- -----------
Total assets $ 9,432,269 $11,199,226
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 1,005,743 $ 1,076,491
Payables to affiliates 55,685 48,510
Rents received in advance 110,784 108,771
Distributions payable to partners 282,893 363,351
Discounted lease rentals 2,117,281 2,526,644
----------- -----------
Total liabilities 3,572,386 4,123,767
----------- -----------
Partners' capital:
General partner -- --
Limited partners:
Class A 5,595,254 6,811,509
Class B 264,629 63,950
----------- -----------
Total partners' capital 5,859,883 7,075,459
----------- -----------
Total liabilities and partners' capital $ 9,432,269 $11,199,226
=========== ===========
See accompanying notes to financial statements.
3
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
---- ----
Revenue:
Operating lease rentals $1,194,515 $2,210,975
Direct finance lease income 46,885 69,326
Equipment sales margin 211,594 63,977
Interest income 2,237 6,531
---------- ----------
Total revenue 1,455,231 2,350,809
---------- ----------
Expenses:
Depreciation 905,596 1,685,271
Management fees to general partner 29,763 50,943
Direct services from general partner 65,845 65,631
General and administrative 259,348 118,020
Interest on discounted lease rentals 47,752 99,973
Provision for losses 66,000 75,000
---------- ----------
Total expenses 1,374,304 2,094,838
---------- ----------
Net income $ 80,927 $ 255,971
========== ==========
Net income allocated:
To the general partner $ 12,965 $ 19,055
To the Class A limited partners 67,283 234,547
To the Class B limited partner 679 2,369
---------- ----------
$ 80,927 $ 255,971
========== ==========
Net income per weighted average Class A
limited partner unit outstanding $ 0.14 $ 0.48
========== ==========
Weighted average Class A limited
partner units outstanding 491,011 491,011
========== ==========
See accompanying notes to financial statements.
4
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
---- ----
Net cash provided by operating activities $ 1,587,714 $ 2,980,790
----------- -----------
Cash flows from financing activities:
Principal payments on discounted lease rentals (409,363) (720,158)
Distributions to partners (1,376,958) (2,252,748)
----------- -----------
Net cash used in financing activities (1,786,321) (2,972,906)
----------- -----------
Net increase (decrease) in cash and cash equivalents (198,607) 7,884
Cash and cash equivalents at beginning of period 1,229,412 1,603,588
----------- -----------
Cash and cash equivalents at end of period $ 1,030,805 $ 1,611,472
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 47,752 $ 99,973
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, 2002 was derived from the audited financial statements
included in the Partnership's 2002 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, 2002, previously
filed with the Securities and Exchange Commission.
The Partnership is in its liquidation period, as defined in the Partnership
Agreement. Even so, because the liquidation period extends over an
undefined number of accounting periods, the accompanying financial
statements have been prepared on a going concern basis that contemplates
the realization of assets and payments of liabilities in the ordinary
course of business, which is in accordance with accounting principles
generally accepted in the United States of America.
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 March 31, 2003, management fees of $9,316 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 March 31, 2003, direct services from the
General Partner of $23,827 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 March 31, 2003, general and administrative
costs of $22,542 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
Ended March 31,
---------------
2003 2002 Change
---- ---- ------
Leasing margin $ 288,052 $ 495,057 $(207,005)
Equipment sales margin 211,594 63,977 147,617
Interest income 2,237 6,531 (4,294)
Management fees to general partner (29,763) (50,943) 21,180
Direct services from general partner (65,845) (65,631) (214)
General and administrative (259,348) (118,020) (141,328)
Provision for losses (66,000) (75,000) 9,000
--------- --------- ---------
Net income $ 80,927 $ 255,971 $(175,044)
========= ========= =========
The Partnership is in its liquidation stage, 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"). Even so, because the liquidation period extends over an
undefined number of accounting periods, the accompanying financial statements
have been prepared on a going concern basis that contemplates the realization of
assets and payments of liabilities in the ordinary course of business, which is
in accordance with accounting principles generally accepted in the United States
of America.
Leasing Margin
Leasing margin consists of the following:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Operating lease rentals $ 1,194,515 $ 2,210,975
Direct finance lease income 46,885 69,326
Depreciation (905,596) (1,685,271)
Interest expense on discounted lease rentals (47,752) (99,973)
----------- -----------
Leasing margin $ 288,052 $ 495,057
=========== ===========
Leasing margin ratio 23% 22%
== ==
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
Leasing margin and all of its components including operating lease rentals,
direct finance lease income, depreciation on leased equipment and interest
expense on discounted lease rentals decreased due to portfolio runoff. Because
the Partnership is in its liquidation stage, no additional equipment is being
purchased. As a result, leasing margin and its components will decline over the
remaining life of the related leases in the Partnership's portfolio.
Leasing margin ratio increased for the three months ended March 31, 2003
compared to the three months ended March 31, 2002 primarily due to increases in
a) the percentage of leases in the portfolio that have entered their remarketing
stage, and b) the average maturity of operating leases in the portfolio. Leasing
margin and leasing margin ratio are generally higher as leases enter their
remarketing stage because typically the rate of return on remarketed leases is
higher. Leasing margin and leasing margin ratio for an operating lease financed
with discounted lease rentals increase as the lease matures since rents and
depreciation are typically fixed while interest expense declines as the related
discounted lease rentals principal 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
March 31,
--------------------------
2003 2002
---- ----
Equipment sales revenue $ 545,369 $ 854,422
Cost of equipment sales (333,775) (790,445)
--------- ---------
Equipment sales margin $ 211,594 $ 63,977
========= =========
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 and residual value estimates.
9
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
- ---------------------
Interest Income
Interest income varies due to (1) the amount of cash available for investment
pending distribution to partners and (2) the interest rate on such invested
cash.
Expenses
Management fees paid to the general partner are earned on gross rents received
and will fluctuate due to variances in cash flow and the size of the
Partnership's portfolio. Management fees paid to the general partner decreased
due to portfolio run-off.
General and administrative expenses increased primarily due to a) increased
insurance costs of $49,100, and b) upgrades to computer equipment of $42,100
needed to effectively and efficiently manage the Partnership's assets.
Provision for Losses
The realization of greater than the carrying value of equipment (which occurs
when the equipment is remarketed subsequent to initial lease termination) 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 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 or purchase
the equipment. The nature of the Partnership's leasing activities is such that
it has credit exposure 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 value of its assets to identify
any other-than-temporary losses in value that, if any, are also recorded as
provision for losses.
The provision for losses of $66,000 recorded during the three months ended March
31, 2003 related primarily to losses on equipment returned to the Partnership at
lease maturity occurring because the residual realized was, or is expected to
be, less than the residual value originally estimated.
10
CAPITAL PREFERRED YIELD FUND-III, L.P.
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.
Even so, because the liquidation period extends over an undefined number of
accounting periods, the accompanying financial statements have been prepared on
a going concern basis that contemplates the realization of assets and payments
of liabilities in the ordinary course of business, which is in accordance with
accounting principles generally accepted in the United States of America.
The Partnership funds its operating activities principally with cash from rents
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 three months ended March 31, 2003, the Partnership declared
distributions to the Class A limited partners of $1,283,535 ($280,255 of which
was paid during April 2003). All such distributions are expected to constitute a
return of capital for economic purposes. 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 2003, to (1) meet current
operating requirements, and (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 and accounting purposes.
Additionally, the General Partner anticipates that all equipment owned by the
Partnership will be sold and the Partnership liquidated during 2003 or 2004.
11
CAPITAL PREFERRED YIELD FUND-III, L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
"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.
Item 4. Controls and Procedures
Within 90 days prior to the date of this quarterly report, an evaluation was
performed under the supervision and with the participation of the General
Partner's management, including the President and Director, and the Chief
Accounting Officer, of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures. Based on that evaluation, the
General Partner's management, including the President and Director, and the
Chief Accounting Officer, concluded that the Partnership's disclosure controls
and procedures are effective in timely alerting them to material information
relating to the Partnership required to be included in the Partnership's
periodic SEC reports. There have been no significant changes in the
Partnership's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation.
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 March 31, 2003.
13
Index to Exhibits
Exhibit
Number Description
* 99.1 Certification by John F. Olmstead pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* 99.2 Certification by Joseph F. Bukofski pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* Filed herewith
14
CAPITAL PREFERRED YIELD FUND-III, L.P.
Signatures
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: May 14, 2003 By: /s/John F. Olmstead
-------------------
John F. Olmstead
President and Director
(Principal Executive Officer)
CAPITAL PREFERRED YIELD FUND-III, L.P.
By: CAI Equipment Leasing IV Corp.
Dated: May 14, 2003 By: /s/Joseph F. Bukofski
---------------------
Joseph F. Bukofski
Chief Accounting Officer
(Principal Accounting and Financial Officer)
15
CERTIFICATION
I, John F. Olmstead, President and Director of CAI Equipment Leasing IV Corp.,
the General Partner of Capital Preferred Yield Fund-III, L.P. (the
"Partnership"), certify that:
1. I have reviewed this report on Form 10-Q of the Partnership;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading as with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Partnership as of, and for, the periods presented in this quarterly report;
4. The Partnership's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Partnership and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Partnership, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report in being
prepared;
b. evaluated the effectiveness of the Partnership's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Partnership's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Partnership's auditors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Partnership's ability to record,
process, summarize and report financial data and have identified for the
Partnership's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the Partnership's internal
controls; and
6. The Partnership's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/John F. Olmstead
-------------------
John F. Olmstead
President and Director
(Principal Executive Officer)
May 14, 2003
16
CERTIFICATION
I, Joseph F. Bukofski, Chief Accounting Officer of CAI Equipment Leasing IV
Corp., the General Partner of Capital Preferred Yield Fund-III, L.P. (the
"Partnership"), certify that:
1. I have reviewed this report on Form 10-Q of the Partnership;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading as with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Partnership as of, and for, the periods presented in this quarterly report;
4. The Partnership's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Partnership and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Partnership, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report in being
prepared;
b. evaluated the effectiveness of the Partnership's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Partnership's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Partnership's auditors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Partnership's ability to record,
process, summarize and report financial data and have identified for the
Partnership's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the Partnership's internal
controls; and
6. The Partnership's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/Joseph F. Bukofski
---------------------
Joseph F. Bukofski
Chief Accounting Officer
(Principal Accounting and Financial Officer)
May 14, 2003
17