10-Q 1 d81974e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2000 1 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 September 30, 2000 ------------------------------------------------- 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.) 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 -------------- 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 . --- --- Page 1 of 18 Pages Exhibit Index appears on Page 19 2 CAPITAL PREFERRED YIELD FUND-III, L.P. Quarterly Report on Form 10-Q For the Quarter Ended September 30, 2000 Table of Contents

2 3 CAPITAL PREFERRED YIELD FUND-III, L.P. BALANCE SHEETS ASSETS

The accompanying notes are an integral part of these financial statements. 3 4 CAPITAL PREFERRED YIELD FUND-III, L.P. STATEMENTS OF INCOME (Unaudited)

The accompanying notes are an integral part of these financial statements. 4 5 CAPITAL PREFERRED YIELD FUND-III, L.P. STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these financial statements. 5 6 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, 1999 was derived from the audited financial statements included in the Partnership's 1999 Form 10-KA. 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-KA for the year ended December 31, 1999, previously filed with the Securities and Exchange Commission. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"). Statement 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Statement 133 is effective for fiscal years beginning after June 15, 1999, with earlier application permitted. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement 133, an Amendment of FASB Statement 133. Statement 137 effectively extends the required application of Statement 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier application permitted. The Partnership adopted Statement 133 in the first quarter of 1999. 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 September 30, 2000, management fees of $26,488 are included in payables to affiliates. 6 7 CAPITAL PREFERRED YIELD FUND-III, L.P. NOTES TO FINANCIAL STATEMENTS, CONTINUED (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 September 30, 2000, there were no direct services from the General Partner 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. RECEIVABLE FROM AFFILIATES The General Partner collects rents from lessees and applies these rental payments to the lessee's account with the Partnership. The General Partner then transfers the collected rental payments to the Partnership, eliminating the receivable from related party balance. 7 8 CAPITAL PREFERRED YIELD FUND-III, L.P. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Unaudited) 2. Transactions With the General Partner and Affiliates, continued EQUIPMENT PURCHASES During the nine months ended September 30, 2000, the Partnership acquired the equipment described below from Capital Associates International, Inc. ("CAII"):

8 9 CAPITAL PREFERRED YIELD FUND-III, L.P. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Unaudited)

3. General Partner Matters Until September 2000, the Partnership relied upon the services of Capital Associates International, Inc. ("CAII"), its affiliate, for origination of leases, administrative and accounting services and remarketing of leases and equipment, among other services. The General Partner has terminated its relationship with CAII and has contracted with Stellar Financial, Inc. to provide billing, accounting and property tax repayment services and Mishawaka Leasing Company, Inc. ("Mishawaka") to provide all other lease accounting, administrative and remarketing services. Many of the management and administrative personnel of Mishawaka formerly worked for CAII and serviced the Partnership leases. CAII owed the Partnership $370,324 for rents, remarketing proceeds and other amounts (the "Prior Rents") collected by CAII on behalf of the Partnership during the periods prior to February 1, 2000. On September 8, 2000, as part of the sale of the General Partnership interest owned by CAII to Mishawaka, Mishawaka repaid the Prior Rents owed by CAII to the Partnership. Included in payables to affiliates is $104,357 of administrative expenses that are reimbursable to the General Partner. 9 10 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:

10 11 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 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. Net income has increased for the three months ended September 30, 2000 compared to the corresponding period in 1999 primarily due to the increase in leasing margin. Leasing margin and the leasing margin ratio has increased for the quarter primarily due to a decrease in depreciation expense. The decrease in depreciation expense was related to an increase in the expiration of equipment during the third quarter. Leasing margin and the leasing margin ratio decreased for the nine months ended September 30, 2000 primarily due to a decrease in operating lease rentals. As of July 2000, the Partnership is no longer purchasing equipment and thus expects operating lease rentals to decline. Net income decreased for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999 primarily due to a provision for loss in the amount of $550,000 that was recorded in the second quarter of this year. The provision for loss was related to the decline in the realizable value of computer equipment returned to the Partnership. In addition, operating lease rentals decreased for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999 primarily due to portfolio runoff. 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:

11 12 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, continued Currently, a portion of the Partnership's initial leases have expired and the equipment is either being re-leased or sold to the lessee or a third party. Equipment sales margin is affected by the volume and composition of equipment that become available for sale. Equipment sales margin was higher for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999 primarily due to the sale of semiconductor equipment in 2000. INTEREST INCOME Interest income decreased due to a decrease in the amount of invested cash during the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. 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 are earned on gross rents received and will fluctuate due to variances in cash flow. Management fees paid to general partner for the nine months ended September 30, 2000 were lower than the nine months ended September 30, 1999 primarily due to a decrease in rents collected. Management fees are expected to decline during the liquidation period of the Partnership. The Partnership will no longer reinvest in additional equipment. Direct services from general partner decreased for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999 primarily due to a change in the method in which the general partner charges for its asset management services that was implemented during the fourth quarter of 1999. The Partnership pays a refurbishing charge to the general partner at the time computer equipment is returned by the lessee to the Partnership. The refurbishing charge includes all services necessary to prepare the equipment for re-sale. Computer equipment returned to the Partnership for the nine months ended September 30, 2000 generated refurbishing charges in the amount of $75,400. General and administrative charges increased for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999 primarily due to an increase in storage charges for equipment returned to the Partnership at lease maturity, and increase in sales tax expense due to a change in the way Michigan apportions multi state companies and an increase in appraisal fees. 12 13 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 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 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 assessments of the estimated residual values of its assets to identify any other-than-temporary losses in value. A provision for loss of $700,000 was recorded for the nine months ended September 30, 2000 related to a decline in the realizable value of computer equipment returned to the Partnership. Liquidity & Capital Resources The Partnership funds its operating activities principally with cash from rents, discounted lease rentals (non-recourse debt), 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 nine months ended September 30, 2000, the Partnership acquired equipment subject to leases with a total equipment purchase price of $11,638,588. During the nine months ended September 30, 2000, the Partnership declared distributions to the partners of $5,922,315 ($992,081 of which was paid during October 2000). 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. 13 14 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, continued Liquidity & Capital Resources, continued The General Partner believes that the Partnership will generate sufficient cash flows from operations, to (1) meet current operating requirements, (2) fund cash distributions to Class A limited partners in accordance with the Partnership Agreement. Distributions during the liquidation phase will vary based upon cash availability. All distributions are expected to be a return of capital for economic purposes. The Class B limited partner distributions of cash from operations are subordinated to the Class A limited partners cumulative preferred distribution of 10.5% per annum per the Partnership Agreement. During the nine months ended September 30, 2000, CAII, the sole Class B limited partner, received distributions in the amount of $39,375. The Partnership entered its liquidation period (as defined in the Partnership Agreement) on approximately July 1, 2000. As a result, the Partnership will no longer reinvest in additional equipment under leases. Until September 2000, the Partnership relied upon the services of Capital Associates International, Inc. ("CAII"), its affiliate, for origination of leases, administrative and accounting services and remarketing of leases and equipment, among other services. The General Partner has terminated its relationship with CAII and has contracted with Stellar Financial, Inc. to provide billing, accounting and property tax repayment services and Mishawaka Leasing Company, Inc. ("Mishawaka") to provide all other lease accounting, administrative and remarketing services. Many of the management and administrative personnel of Mishawaka formerly worked for CAII and serviced the Partnership leases. CAII owed the Partnership $370,324 for rents, remarketing proceeds and other amounts (the "Prior Rents") collected by CAII on behalf of the Partnership during the periods prior to February 1, 2000. On September 8, 2000, as part of the sale of the General Partnership interest owned by CAII to Mishawaka, Mishawaka repaid the Prior Rents owed by CAII to the Partnership. Included in payables to affiliates is $104,357 of administrative expenses that are reimbursable to the General Partner. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"). Statement 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Statement 133 is effective for fiscal years beginning after June 15, 1999, with earlier application permitted. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement 133, an Amendment of FASB Statement 133. Statement 137 effectively extends the required application of Statement 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier application permitted. The Partnership adopted Statement 133 in the first quarter of 1999. 14 15 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, 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 1999 Form 10-KA when and where applicable. 15 16 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 significant interest rate risk or other market risk exposure. 16 17 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 27 Financial Data Schedule (b) The Partnership did not file any reports on Form 8-K during the quarter ended September 30, 2000. 17 18 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: November 14, 2000 By: /s/Susan M. Landi -------------------------------- Susan M. Landi Chief Accounting Officer 18 19 INDEX TO EXHIBITS

CAPITAL PREFERRED YIELD FUND III L P 10-Q