10-Q 1 cappref310q_06-01.txt JUNE 30 2001 FORM 10Q 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, 2001 -------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- Commission file number 33-44158 --------------- Capital Preferred Yield Fund-III, L.P. -------------------------------------- (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 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (720) 963-9600 -------------- 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 15 Pages CAPITAL PREFERRED YIELD FUND-III, L.P. Quarterly Report on Form 10-Q For the Quarter Ended June 30, 2001 Table of Contents ----------------- PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (Unaudited) Balance Sheets - June 30, 2001 and December 31, 2000 3 Statements of Income (Loss) - Three and Six Months Ended June 30, 2001 and 2000 4 Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 5 Notes to Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 Exhibit Index 14 Signature 15 2 CAPITAL PREFERRED YIELD FUND-III, L.P. BALANCE SHEETS

~~March~~ASSETS 31June 30, December 31, 2001 2000 ----------- ----------- (Unaudited) Cash and cash equivalents $ 1,~~222~~474,~~711~~748 $ 1,529,900 Accounts receivable 21,~~280~~958,~~328~~971 967,890 Equipment held for sale or re-lease ~~293~~248,~~517~~292 135,328 Net investment in direct finance leases 2,~~456~~275,~~377~~867 2,531,647 Leased equipment, net 2321,~~961~~057,~~407~~286 27,276,407 ----------- ----------- Total assets $3027,~~214~~015,~~340~~164 $32,441,172 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Liabilities: Accounts payable and accrued liabilities $ 1,~~240~~076,~~421~~281 $ 1,018,178 Payables to affiliates ~~194~~91,~~772~~149 194,756 Rents received in advance 122,776 108,751 Distributions payable to partners ~~322~~1,~~908~~013,837 652,782 Discounted lease rentals 76,~~674~~485,~~683~~053 8,686,491 ----------- ----------- Total liabilities 98,~~555~~789,~~560~~096 10,660,958 ----------- ----------- Partners' capital: General partner -- -- Limited partners: Class A 2017,~~333~~912,~~404~~661 21,451,760 Class B ~~325~~313,~~376~~407 328,454 ----------- ----------- Total partners' capital 2018,~~658~~226,~~780~~068 21,780,214 ----------- ----------- Total liabilities and partners' capital $3027,~~214~~015,~~340~~164 $32,441,172 =========== ===========

The accompanying notes are an integral part of these financial statements. 3 CAPITAL PREFERRED YIELD FUND-III, L.P. STATEMENTS OF INCOME (LOSS) (Unaudited)

Three Months Ended ~~March~~Six 31Months Ended June 30, June 30, -------------------------- ------------------------- 2001 2000 2001 2000 -------------------------- ------------------------- Revenue: Operating lease rentals $ 2,~~841~~681,~~741~~632 $ 3,~~849~~397,~~022~~542 $ 5,523,373 $ 7,246,564 Direct finance lease income ~~112~~73,~~183~~236 4373,~~632~~367 185,419 116,999 Equipment sales margin 97255,~~844~~380 ~~110~~215,~~606~~540 353,224 326,146 Interest income 1514,~~320~~881 5034,~~078~~177 30,201 84,255 ----------- ----------- ----------- ----------- Total revenue 3,~~067~~025,~~088~~129 43,~~053~~720,~~338~~626 6,092,217 7,773,964 ----------- ----------- ----------- ----------- Expenses: Depreciation 2,~~278~~046,~~308~~709 32,~~072~~806,~~098~~051 4,325,016 5,878,149 Management fees to general partner 6566,~~093~~766 ~~128~~26,~~245~~113 131,859 154,358 Direct services from general partner 4143,~~893~~319 7347,~~955~~088 85,212 121,043 General and administrative ~~287~~165,~~431~~392 72161,~~784~~371 452,823 234,155 Interest on discounted lease rentals ~~201~~136,~~994~~658 ~~233~~215,~~242~~858 338,652 449,100 Provision for losses 50425,000 50550,000 475,000 600,000 ----------- ----------- ----------- ----------- Total expenses 2,~~924~~883,~~719~~844 3,~~630~~806,~~324~~481 5,808,562 7,436,805 ----------- ----------- ----------- ----------- Net income (loss) $ ~~142~~141,~~369~~285 $ ~~423~~(85,~~014~~855) $ 283,655 $ 337,159 =========== =========== =========== =========== Net income (loss) allocated: To the general partner $ 1225,~~638~~741 $ 13,~~162~~155 $ 38,378 $ 26,317 To the Class A limited partners ~~128~~114,~~434~~393 ~~405~~(98,~~753~~020) 242,825 307,733 To the Class B limited partner 1,~~297~~151 4(990) 2,~~099~~452 3,109 ----------- ----------- ----------- ----------- $ ~~142~~141,~~369~~285 $ ~~423~~(85,~~014~~855) $ 283,655 $ 337,159 =========== =========== =========== =========== Net income (loss) per weighted average Class A limited partner unit outstanding $ 0.2623 $ (0.8320) $ 0.49 $ 0.63 =========== =========== =========== =========== Weighted average Class A limited partner units outstanding 491,~~184~~011 491,~~795~~253 491,011 491,359 =========== =========== =========== ===========

The accompanying notes are an integral part of these financial statements. 4 CAPITAL PREFERRED YIELD FUND-III, L.P. STATEMENTS OF CASH FLOWS (Unaudited)

~~Three~~Six Months Ended ~~March~~June 3130, --------------------------- 2001 2000 ----~~--------~~ ----~~-------~~ Net cash provided by operating activities $ 25,~~298~~579,~~291~~411 $ 39,~~903~~283,~~702~~235 ----------- ----------- Cash flows from investing activities: Purchases of equipment on operating leases from affiliate -- (26,~~839~~604,~~081~~536) Investment in direct finance leases, acquired from affiliate -- (~~503~~750,~~062~~394) ----------- ----------- Net cash (used in) investing activities -- (37,~~342~~354,~~143~~930) ----------- ----------- Cash flows from financing activities: Proceeds from discounted lease rentals -- 896,890 Principal payments on discounted lease rentals (12,~~011~~157,~~807~~819) (12,~~617~~848,~~653~~710) Redemptions of Class A limited partner units -- (19,964) Distributions to partners (13,~~593~~476,~~673~~744) (12,~~320~~627,~~651~~789) ----------- ----------- Net cash (used in) financing activities (25,~~605~~634,~~480~~563) (24,~~938~~599,~~304~~573) ----------- ----------- Net decrease in cash and cash equivalents (~~307~~55,~~189~~152) (2,~~376~~671,~~745~~268) Cash and cash equivalents at beginning of period 1,529,900 4,382,378 ----------- ----------- Cash and cash equivalents at end of period $ 1,~~222~~474,~~711~~748 $ 21,~~005~~711,~~633~~110 =========== =========== Supplemental disclosure of cash flow information: Interest paid on discounted lease rentals $ ~~201~~338,~~994~~652 $ ~~233~~449,~~242~~100 Supplemental disclosure of noncash investing and financing activities: Discounted lease rentals assumed in equipment acquisitions -- 43,~~515~~588,~~454~~148 Rents deducted from cash paid for equipment acquisitions -- 99,061

The accompanying notes are an integral part of these 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 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 of normal recurring adjustments) considered necessary for a fair presentation have been included. The balance sheet at December 31, 2000 was derived from the audited financial statements included in the Partnership's 2000 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, 2000, previously filed with the Securities and Exchange Commission. Recently Issued Financial Accounting Standards In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" which requires the purchase method and eliminates the option of using the pooling-of-interests method of accounting for all business combinations. The provisions in this statement apply to all business combinations initiated after June 30, 2001, and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Partnership does not believe the adoption of this statement will have a material impact on the Partnership's financial position, results of operations or cash flows. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets" which requires that all intangible assets acquired, other than those acquired in a business combination, be initially recognized and measured based on the asset's fair value. In addition, the intangible asset should be amortized based upon its useful life. If the intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life can be determined. The Partnership does not believe the adoption of this statement will have a material impact on the Partnership's financial position, results of operations or cash flows. 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, 2001, management fees of $21,662 are included in payables to affiliates. 6 CAPITAL PREFERRED YIELD FUND-III, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited) 2. Transactions With the General Partner and Affiliates, continued ---------------------------------------------------- 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, 2001, direct services from the General Partner of $46,161 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 Partnership per the terms of the Partnership Agreement. At June 30, 2001, general and administrative costs of $23,326 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:

Leasing Margin Leasing margin consists of the following:

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 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 leases in the portfolio, and the amount of discounted lease rentals financing the portfolio. Leasing margin and the related leasing margin ratio for an operating lease financed with non-recourse debt increases during the term of the lease since rents and depreciation are typically fixed while interest expense declines as the related non-recourse debt principle is repaid. Leasing margin ratio increased for the three and six months ended June 30, 2001 compared to the three and six months ended June 30, 2000 in part due to the increase in direct finance lease income as well as the decrease in interest expense on discounted lease rentals. In addition, operating lease rentals and depreciation decreased for the three and six months ended June 30, 2001 as compared to the three and six months ended June 30, 2000 primarily due to portfolio runoff. Direct finance lease income increased due to an increase in the renewals of operating leases to direct finance leases. Interest expense on discounted lease rentals decreased for the three and six months ended June 30, 2001 as compared to the three and six months ended June 30, 2000 primarily due to a decrease in discounted lease rentals. 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). 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 --------------------- Equipment Sales Margin Equipment sales margin consists of the following:

Equipment sales margin fluctuates based on the composition of equipment available for sale. Currently, the Partnership is in its liquidation phase (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. Interest Income Interest income decreased due to a decrease in the amount of invested cash during the three and six months ended June 30, 2001 as compared to the three and six months ended June 30, 2000. 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 and direct services from the General Partner decreased for the six months ended June 30, 2001 as compared to the corresponding period in 2000 primarily due to portfolio run-off. Management fees increased for the three months ended June 30, 2001 compared to the same period in 2000 primarily due to an increase in rents received after lease maturity. Management fees are calculated as a percentage of rents collected. General and administrative expenses increased for the three and six months ended June 30, 2001 compared to the three and six months ended 2000 due to an increase in insurance expense, data processing charges and audit fees. Also contributing to the increase in general and administrative expenses is a one-time charge for software and computer equipment related to a change in the ownership of the General Partner. 10 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 --------------------- 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 $475,000 recorded during the six months ended June 30, 2001 related to losses on equipment returned to the Partnership at lease maturity and a reserve for uncollectible accounts receivable. The reserve was recorded due to the uncertainty of collection. However, management will continue its efforts in trying to collect the receivables. 11 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 stage, 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, 2001, the Partnership declared distributions to the partners of $3,837,799 ($1,013,837 of which was paid during July 2001). 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 which 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 2001, 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. 12 CAPITAL PREFERRED YIELD FUND-III, L.P. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued New Accounting Pronouncements ----------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" which requires the purchase method and eliminates the option of using the pooling-of-interests method of accounting for all business combinations. The provisions in this statement apply to all business combinations initiated after June 30, 2001, and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Partnership does not believe the adoption of this statement will have a material impact on the Partnership's financial position, results of operations or cash flows. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets" which requires that all intangible assets acquired, other than those acquired in a business combination, be initially recognized and measured based on the asset's fair value. In addition, the intangible asset should be amortized based upon its useful life. If the intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life can be determined. The Partnership does not believe the adoption of this statement 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 2000 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. 13 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, 2001. 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 28, 2001 By: /s/Susan M. Landi ----------------- Susan M. Landi 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 28, 2001 By: Susan M. Landi Chief Accounting Officer 16

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