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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 33-44158
CAPITAL PREFERRED YIELD FUND-III
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1248907
(State of organization) (I.R.S. Employer Identification Number)
7175 W. JEFFERSON AVENUE, LAKEWOOD, COLORADO 80235
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 980-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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
----- -----.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
Exhibit Index Appears on Page 38
Page 1 of 39 Pages
Item 1. Business
--------
Capital Preferred Yield Fund-III, L.P., a Delaware limited partnership (the
"Partnership"), was organized on November 2, 1993 and is engaged in the business
of owning and leasing equipment. CAI Equipment Leasing IV Corp., a Colorado
corporation and a wholly owned subsidiary of Capital Associates, Inc. ("CAI"),
is the general partner of the Partnership.
Capital Associates International, Inc. ("CAII"), an affiliate of the general
partner, is the sole Class B limited partner of the Partnership. In exchange for
its Class B limited partner interest, CAII was required to contribute cash of
$10,000 for each $1,000,000 of investors' capital contribution (i.e., cash
investments in the Partnership) to the Partnership. In addition, the Class B
limited partner's interest in Distributable Cash is subordinated to the Class A
limited partners' interest. The contributions of the CAII were made
simultaneously with the purchase of equipment by the Partnership. As of December
31, 1997, CAII contributed $500,000 to the Partnership making it the largest
single investor in the Partnership.
The Partnership's overall investment objectives are to (i) raise the maximum
allowable capital from investors (which was achieved on April 10, 1996) for
investment in accordance with the Partnership's investment objectives described
in the Prospectus; (ii) invest such capital and related indebtedness in a
diversified portfolio of equipment subject to leases to creditworthy businesses
with terms ranging from two to seven years; (iii) if funds are available for
distribution, make monthly cash distributions to the Class A and Class B limited
partners during the reinvestment period (a period that ends approximately June
30, 2000); (iv) re-invest all available undistributed cash from operations and
cash from sales in additional equipment during the reinvestment period to
increase the Partnership's portfolio of revenue-generating equipment, provided
that suitable equipment can be identified and acquired; and (v) sell or
otherwise dispose of the Partnership's equipment and other assets in an orderly
manner and promptly distribute cash from sales thereof to the Partners within
three years of the end of the reinvestment period.
During 1997, the Partnership acquired capital of various types under lease to
third parties. All of the capital was purchased by CAII directly from
manufacturers or from other independent third parties and sold to the
Partnership. The capital is generally comprised of material handling equipment,
computer and peripheral equipment, industrial equipment, and telecommunications
equipment, among others (the "equipment"). See Item 13 of this report, "Certain
Relationships and Related Transactions" for the detail listing of equipment
purchased during 1997. The Partnership expects that a majority of the equipment
purchased during 1998 will be similar in nature to that mentioned above.
The Partnership may assign the rentals from leases to financial institutions, or
acquire leases subject to such assignments, at fixed interest rates on a
nonrecourse basis. This non-recourse debt financing will be utilized to finance
the purchase of equipment under lease or to invest the proceeds therefrom in
additional equipment under lease. In the event of default by a lessee, the
financial institution has a first lien on the underlying leased equipment with
no further recourse against the Partnership. Cash proceeds from such financings,
or financings assumed in the acquisition of leases, are recorded on the balance
sheet as discounted lease rentals. As lessees make payments to financial
institutions, leasing revenue and interest expense are recorded.
-2-
Item 1. Business, continued
--------
During 1997, the Partnership leased equipment to investment grade lessees in
diverse industries including the financial services, retail, telecommunications,
energy and manufacturing industries. Approximately 70% of the Partnership's
total equipment under lease was leased to investment grade lessees as of
December 31, 1997. Pursuant to the Partnership Agreement, an investment grade
lessee is a company (i) with a net worth in excess of $100,000,000 (and no debt
issues that are rated); or (ii) with a credit rating of not less than Baa as
determined by Moody's Investor Services, Inc. or comparable credit rating, as
determined by another recognized credit rating service; or (iii) a lessee, all
of whose lease payments have been unconditionally guaranteed or supported by a
letter of credit issued by a company meeting one of the above requirements. The
Partnership limits its credit risk through selective use of non-recourse debt
financing of future lease rentals, as described above.
The Partnership only acquires equipment that is on lease at the time of
acquisition. After the initial term of its lease, each item of equipment will be
expected to provide additional investment income from its re-lease or sale. Upon
expiration of the initial lease, the Partnership attempts to re-lease or sell
the equipment to the existing lessee. If a re-lease or sale to the lessee cannot
be negotiated, the Partnership will attempt to lease or sell the equipment to a
third party.
The Partnership's business is not subject to seasonal variations.
The ultimate rate of return on leases depends, in part, on the general level of
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). The amount of future distributions to the
partners will depend, in part, on future interest rates.
The Partnership has no employees. The officers, directors and employees of the
general partner and its affiliates perform services on behalf of the
Partnership. The general partner is entitled to receive certain fees and expense
reimbursements in connection with the performance of these services. See Item 10
of this Report, "Directors and Executive Officers of the Partnership" and Item
13 of this Report, "Certain Relationships and Related Transactions," which are
incorporated herein by reference.
The Partnership competes in the leasing marketplace as a lessor with a
significant number of other companies, including equipment manufacturers,
leasing companies and financial institutions. The Partnership competes mainly on
the basis of the expertise of its general partner in remarketing equipment,
terms offered in its transactions, pricing and service. Although the Partnership
does not account for a significant percentage of the leasing market, the general
partner believes that the Partnership's marketing strategies and financing
capabilities enable it to compete effectively in the equipment leasing and
remarketing markets.
The Partnership leases equipment to a significant number of lessees. No one
lessee and its affiliates accounted for more than 10% of total rental revenue of
Partnership during 1997.
The Partnership is required to dissolve and distribute all of its assets no
later than December 31, 2011. However, the general partner anticipates that all
equipment will be sold and the Partnership will be liquidated prior to that
date.
-3-
Item 2. Properties
----------
Per the Partnership Agreement, the Partnership does not own or lease any
physical properties other than the equipment discussed in Item 1 of this Report,
"Business," which is incorporated herein by reference.
Item 3. Legal Proceedings
-----------------
Neither the Partnership nor any of the Partnership's equipment is the subject of
any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of the limited partners of the Partnership,
through the solicitation of proxies or otherwise, during the fourth quarter
ended December 31, 1997.
Item 5. Market for the Partnership's Common Equity and Related Stockholder
-----------------------------------------------------------------------
Matters
-------
(a) The Partnership's Class A limited partner units, Class B interest and
general partner interest are not publicly traded. There is no
established public trading market for such units and interests and none
is expected to develop.
(b) At December 31, 1997, there were 2,891 Class A limited partners.
(c) Distributions
-------------
During 1997, the Partnership made twelve (12) distributions (a portion
of which constituted a return of capital) to Class A limited partners
as follows:
Distributions Per
$100 Investment
For the Payment (computed on Total
Period Ended Made During weighted average) Distributions
------------ ----------- ----------------- -------------
December 31, 1996 January 1997 $ 0.875 $ 435,790
January 31, 1997 February 1997 0.875 433,808
February 28, 1997 March 1997 0.875 433,807
March 31, 1997 April 1997 0.875 435,690
April 30, 1997 May 1997 0.875 433,388
May 31, 1997 June 1997 0.875 433,344
June 30, 1997 July 1997 0.875 435,313
July 31, 1997 August 1997 0.875 432,883
August 31, 1997 September 1997 0.875 432,839
September 30, 1997 October 1997 0.875 434,415
October 31, 1997 November 1997 0.875 432,576
November 30, 1997 December 1997 0.875 431,108
------- -----------
$ 10.50 $ 5,204,961
======= ===========
-4-
Item 5. Market for the Partnership's Common Equity and Related Stockholder
-----------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
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 by a partnership which
exceeds its net income for the fiscal period may be deemed a return of
capital for accounting purposes. However, the total percentage of a
leasing partnership's return on capital over its life can only be
determined after all residual cash flows (which include proceeds from
the re-leasing and sale of equipment) have been realized at the
termination of the Partnership.
The distribution for the month ended December 31, 1997, totaling
$432,859, was paid to the Class A limited partners on January 5, 1998.
Distributions to the general partner and Class B limited partner during
1997 are discussed in Item 13 of this Report, "Certain Relationships
and Related Transactions."
The general partner believes that the Partnership will generate
sufficient cash flows from operations during 1998, to (1) meet current
operating requirements, (2) enable it to fund cash distributions to
both the Class A and Class B limited partners at annualized rates of
10.5% on their capital contributions (portions of which are expected to
constitute returns of capital), and (3) reinvest in additional
equipment under leases, provided that suitable equipment can be
identified and acquired.
During 1996, the Partnership made twelve (12) distributions (a portion
of which constituted a return of capital) to Class A limited partners
as follows:
Distributions Per
$100 Investment
For the Payment (computed on Total
Period Ended made during weighted average) Distributions
------------ ----------- ----------------- -------------
December 31, 1995 January 1996 $ 0.875 $ 313,566
January 31, 1996 February 1996 0.875 345,254
February 28, 1996 March 1996 0.875 376,218
March 31, 1996 April 1996 0.875 414,345
April 30, 1996 May 1996 0.875 434,253
May 31, 1996 June 1996 0.875 435,339
June 30, 1996 July 1996 0.875 436,957
July 31, 1996 August 1996 0.875 435,339
August 31, 1996 September 1996 0.875 434,827
September 30, 1996 October 1996 0.875 436,228
October 31, 1996 November 1996 0.875 434,346
November 30, 1996 December 1996 0.875 433,908
------- -----------
$ 10.50 $ 4,930,580
======= ===========
-5-
Item 5. Market for the Partnership's Common Equity and Related Stockholder
-----------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
The following represents annual and cumulative distributions per Class
A limited partner unit, as described in Footnote 1 to Notes to
Consolidated Financial Statements.
Distributions per
$ Per Class A Limited
Class A Partner Unit
Payment Limited Partner (computed on
Made During Unit Invested weighted average) % (1)
----------- --------------- ----------------- -----
1994 $ 100 $ 5.25 10.5%
1995 10.50 10.5%
1996 10.50 10.5%
1997 10.50 10.5%
-------
$ 36.75
=======
(1) Cumulative distributions, as described in Footnote 1 to Notes to
Consolidated Financial Statements began July 1994.
Item 6. Selected Financial Data
-----------------------
The following selected financial data relates to the years ended December 31,
1994 through 1997. The data should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing with Item
8.
1997 1996 1995 1994
---- ---- ---- ----
Total revenue $20,994,438 $17,245,131 $ 8,195,180 $ 512,864
Net income 4,414,329 2,074,001 553,710 42,939
Net income per weighted average Class A
limited partner unit outstanding 8.71 4.13 1.91 0.27
Total assets 53,890,874 62,471,309 48,463,584 12,365,947
Discounted lease rentals 15,828,174 23,437,868 16,863,892 1,159,380
Distributions declared to Class A limited partners 5,202,029 5,052,804 2,660,332 451,009
Distributions declared per monthly weighted average
Class A limited partner unit outstanding 10.50 10.50 10.50 6.13
-6-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Results of Operations
- ---------------------
Presented below are schedules (prepared solely to facilitate the discussion of
results of operations that follows) showing condensed income statement
categories and analyses of changes in those condensed categories derived from
the Statements of Income:
Condensed Condensed
Statements of Income The effect on Statements of Income The effect on
for the years net income for the years net income
ended December 31, of changes ended December 31, of changes
--------------------------- between --------------------------- between
1997 1996 years 1996 1995 years
----------- ---------- ----------- ----------- ------------- -------------
Leasing margin $ 3,496,347 $ 2,442,000 $ 1,054,347 $ 2,442,000 $ 1,044,113 $ 1,397,887
Equipment sales margin 1,821,419 110,831 1,710,588 110,831 - 110,831
Interest income 112,367 320,679 (208,312) 320,679 238,293 82,386
Provision for losses (250,000) (50,000) (200,000) (50,000) (275,000) 225,000
Management fees paid to
general partner (409,275) (390,559) (18,716) (390,559) (156,351) (234,208)
Direct services from
general partner (120,015) (93,690) (26,325) (93,690) (93,598) (92)
General and administrative (236,514) (265,260) 28,746 (265,260) (203,747) (61,513)
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 4,414,329 $ 2,074,001 $ 2,340,328 $ 2,074,001 $ 553,710 $ 1,520,291
=========== =========== =========== =========== =========== ===========
LEASING MARGIN
Leasing margin consists of the following:
Years ended December 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
Operating lease rentals $ 18,695,558 $ 16,399,312 $ 7,683,820
Direct finance lease income 365,094 414,309 273,067
Depreciation (14,058,981) (12,585,981) (5,895,602)
Interest expense on discounted
lease rentals (1,505,324) (1,785,640) (1,017,172)
------------ ------------ ------------
Leasing margin $ 3,496,347 $ 2,442,000 $ 1,044,113
============ ============ ============
Leasing margin ratio 18% 15% 13%
============ ============ ============
Operating lease rentals and depreciation increased 14% and 113% for the years
ended December 31, 1997 and 1996, respectively compared to the prior years due
to a higher average operating lease portfolio. The decrease in interest expense
for the year ended December 31, 1997 and the increase in interest expense for
the year ended December 31, 1996 compared to the previous years was directly
related to the change in the average outstanding non-recourse debt balance
during the comparable periods.
-7-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
Results of Operations, continued
- ---------------------
LEASING MARGIN, continued
Leasing margin ratio increased for the years ended December 31, 1997 and 1996,
and is expected to increase further primarily because a portion of the
Partnership's portfolio consists of operating leases financed with non-recourse
debt. 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 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:
Years ended December 31,
-----------------------------
1997 1996
---- ----
Equipment sales revenue $ 6,776,782 $ 454,045
Cost of equipment sales (4,955,363) (343,214)
----------- -----------
Equipment sales margin $ 1,821,419 $ 100,831
=========== ===========
Equipment sales margin is affected by the number and dollar amount of equipment
leases that mature in a particular period. Revenue from equipment sales
increased primarily due to revenue from the sales of manufacturing, earth moving
and computer equipment.
INTEREST INCOME
Interest income decreased in 1997 compared to 1996 due to a decrease in invested
cash. During a significant portion of 1996, the Partnership was in its offering
period and as such, invested cash was generally higher pending purchases of
additional equipment.
Interest income increased in 1996 compared to 1995 due to an increase in
invested cash from sales of Class A limited partner units pending the
Partnership's initial acquisition of equipment.
-8-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
Results of Operations, continued
- ---------------------
EXPENSES
Management fees paid to and direct services from general partner increased in
1997 compared to 1996 due to growth in the Partnership's lease portfolio.
General and administrative expenses decreased in 1997 compared to 1996 primarily
due to lower legal fees associated with bankrupt lessees.
PROVISION FOR LOSSES
The remarketing of equipment for an amount greater than its book value 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 (which is typically not known until remarketing subsequent to the
initial lease termination has occurred) 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 that it has
credit and residual value exposure and, accordingly, in the ordinary course of
business, it will incur losses from those exposures. The Partnership performs
on-going quarterly assessments of its assets to identify any
other-than-temporary losses in value.
The provision for losses recorded during 1997 was primarily due to the
Partnership's loss exposure related to troubled lessees. In addition, there were
also losses related to the sales of equipment having a lower fair market value
than originally anticipated.
The provision for losses recorded during 1996 was primarily for a deficiency
resulting from a lessee default under a note secured by a high pressure cleaning
unit under lease to the lessee. Although the lessee has not filed for
bankruptcy, they have discontinued their operations and have ceased making
rental payments. The equipment was repossessed and sold by the lender pursuant
to the terms of the non-recourse debt agreement. The sale of the equipment went
toward retiring the debt and the general partner believes it is unlikely that
the deficiency will be recovered.
The provision for losses recorded during 1995 was related to two lessees that
filed for bankruptcy protection.
Liquidity and 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 the acquisition of
equipment or distribution to the partners.
-9-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
Liquidity and Capital Resources, continued
- -------------------------------
During 1997, 1996 and 1995, the Partnership acquired equipment subject to leases
with a total equipment purchase price of approximately $10,426,000, $35,688,000,
and $36,496,000, respectively, net of non-recourse debt to lenders of
approximately $3,240,000, $11,368,000 and $2,685,000, respectively. Also, during
1996 and 1995 the Partnership discounted future rental payments from certain
leases to non-recourse lenders and received proceeds of $4,767,000 and
$15,970,000, respectively. Non-recourse borrowing against unleveraged leases in
the Partnership's lease portfolio may occur in the future as well, when the
general partner, in its discretion, determines that such non-recourse financing
is in the best interest of the Partnership.
During June 1995, CAII and the Partnership entered into an agreement with a
lender to debt finance up to $50 million of lease receivables as part of a lease
securitization program. Under this program, the Partnership's financing
obligations are collateralized by the leased equipment and related rentals, and
the Partnership has no recourse liability to the lender for repayment of the
debt. In addition, this securitized debt vehicle provides attractive interest
rates. Aggregate closings through December 31, 1997 were $10.3 million for the
Partnership.
During 1997, 1996 and 1995, the Partnership declared distributions to the
partners of approximately $5,308,000, $5,155,000, and $2,712,000, respectively.
A substantial portion of such distributions are 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 by a partnership which exceeds its net income
for the fiscal period may be deemed a return of capital for accounting purposes.
However, the total percentage of a partnership's return on capital over its life
can only be determined after all residual cash flows (which include proceeds
from the re-leasing and 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 1998, to (1) meet current operating requirements,
(2) enable it to fund cash distributions to both the Class A and Class B limited
partners at annualized rates of 10.5% on their capital contributions (portions
of which are expected to constitute returns of capital), and (3) reinvest in
additional equipment under leases, provided that suitable equipment can be
identified and acquired.
-10-
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements and
Financial Statement Schedule
Page
Number
Financial Statements ------
--------------------
Independent Auditors' Report 12
Balance Sheets as of December 31, 1997 and 1996 13
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 14
Statements of Partners' Capital for the years ended
December 31, 1997, 1996 and 1995 15
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 16-17
Notes to Financial Statements 18-29
Financial Statement Schedule
----------------------------
Independent Auditors' Report 30
Schedule II - Valuation and Qualifying Accounts 31
-11-
INDEPENDENT AUDITORS' REPORT
----------------------------
THE PARTNERS
CAPITAL PREFERRED YIELD FUND-III, L.P.:
We have audited the accompanying balance sheets of Capital Preferred Yield
Fund-III, L.P. as of December 31, 1997 and 1996, and the related statements of
income, partners' capital, and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Preferred Yield
Fund-III, L.P. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
------------------------
KPMG PEAT MARWICK LLP
Denver, Colorado
February 6, 1998
-12-
CAPITAL PREFERRED YIELD FUND-III, L.P.
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
------------ ------------
Cash and cash equivalents $ 2,813,686 $ 798,140
Accounts receivable 1,044,068 883,201
Receivable from related party 6,523 42,691
Equipment held for sale or re-lease 506,197 -
Net investment in direct finance leases 3,326,833 5,479,265
Leased equipment, net 46,193,567 55,261,435
Deferred financing costs - 6,577
------------ ------------
Total assets $ 53,890,874 $ 62,471,309
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 687,727 $ 684,684
Payables to affiliates 39,276 54,351
Rents received in advance 632,478 461,450
Distributions payable to partners 441,650 444,611
Discounted lease rentals 15,828,174 23,437,868
------------ ------------
Total liabilities 17,629,305 25,082,964
------------ ------------
Partners' capital:
General partner - -
Limited partners:
Class A 500,000 units authorized; 493,362 and
496,660 units issued and outstanding in 1997
and 1996, respectively 35,818,106 36,936,407
Class B 443,463 451,938
------------ ------------
Total partners' capital 36,261,569 37,388,345
------------ ------------
Total liabilities and partners' capital $ 53,890,874 $ 62,471,309
============ ============
See accompanying notes to financial statements.
-13-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
REVENUE:
Operating lease rentals $18,695,558 $16,399,312 $ 7,683,820
Direct finance lease income 365,094 414,309 273,067
Equipment sales margin 1,821,419 110,831 -
Interest income 112,367 320,679 238,293
----------- ----------- -----------
Total revenue 20,994,438 17,245,131 8,195,180
----------- ----------- -----------
EXPENSES:
Depreciation 14,058,981 12,585,981 5,895,602
Management fees payable to general partner 409,275 390,559 156,351
Direct services from general partner 120,015 93,690 93,598
General and administrative 236,514 265,260 203,747
Interest on discounted lease rentals 1,505,324 1,785,640 1,017,172
Provision for losses 250,000 50,000 275,000
----------- ----------- -----------
Total expenses 16,580,109 15,171,130 7,641,470
----------- ----------- -----------
Net income $ 4,414,329 $ 2,074,001 $ 553,710
=========== =========== ===========
Net income allocated:
To the general partner $ 53,076 $ 68,376 $ 64,746
To the Class A limited partners 4,317,228 1,985,340 483,976
To the Class B limited partner 44,025 20,285 4,988
----------- ----------- -----------
$ 4,414,329 $ 2,074,001 $ 553,710
=========== =========== ===========
Net income per weighted average Class A limited
partner unit outstanding $ 8.71 $ 4.13 $ 1.91
=========== =========== ===========
Weighted average Class A limited partner
units outstanding 495,621 480,456 253,759
=========== =========== ===========
See accompanying notes to financial statements.
-14-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF PARTNERS' CAPITAL
Years ended December 31, 1997, 1996 and 1995
Class A
Limited Class A Class B
General Partner Limited Limited
Partner Units Partners Partner Total
------- ----- -------- ------- -----
Partners' capital, January 1, 1995 $ - 130,993 $ 10,799,497 $ 130,233 $ 10,929,730
Capital contributions - 252,777 25,277,699 240,000 25,517,699
Commissions and offering costs on
sales of Class A limited partner units (36,071) - (3,571,045) - (3,607,116)
Redemptions - (1,655) (146,220) - (146,220)
Net income 64,746 - 483,976 4,988 553,710
Distributions declared to partners (28,675) - (2,660,332) (23,179) (2,712,186)
--------- -------- ------------ --------- ------------
Partners' capital, December 31, 1995 - 382,115 30,183,575 352,042 30,535,617
Capital contributions - 116,230 11,623,048 130,000 11,753,048
Commissions and offering costs on
sales of Class A limited partner units (16,889) - (1,672,031) - (1,688,920)
Redemptions - (1,685) (130,721) - (130,721)
Net income 68,376 - 1,985,340 20,285 2,074,001
Distributions declared to partners (51,487) - (5,052,804) (50,389) (5,154,680)
--------- -------- ------------ --------- ------------
Partners' capital, December 31, 1996 - 496,660 36,936,407 451,938 37,388,345
Redemptions - (3,250) (233,500) - (233,500)
Net income 53,076 - 4,317,228 44,025 4,414,329
Distributions declared to partners (53,076) - (5,202,029) (52,500) (5,307,605)
--------- -------- ------------ --------- ------------
Partners' capital, December 31, 1997 $ - 493,410 $ 35,818,106 $ 443,463 $ 36,261,569
========= ======== ============ ========= ============
See accompanying notes to financial statements.
-15-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,414,329 $ 2,074,001 $ 553,710
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 14,058,981 12,585,981 5,895,602
Provision for losses 250,000 50,000 275,000
Cost of equipment sales 4,955,363 343,214 -
Recovery of investment in direct finance leases 1,903,849 2,204,916 737,285
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (188,746) 484,435 (1,231,163)
(Increase) decrease in receivable from related party 36,168 (42,691) 19,917
(Increase) decrease in deferred financing costs 6,577 79,137 (85,714)
Increase in accounts payable and accrued liabilities 3,043 282,898 282,983
Increase (decrease) in payables to affiliates (15,075) (51,845) 16,301
Increase in rents received in advance 171,028 225,264 229,446
------------ ------------ ------------
Net cash provided by operating activities 25,595,517 18,235,310 6,693,367
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment on operating leases from affiliate (7,135,854) (23,483,867) (29,208,749)
Investment in direct financing leases, acquired from affiliates (50,602) (836,057) (4,602,039)
------------ ------------ ------------
Net cash used in investing activities (7,186,456) (24,319,924) (33,810,788)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Class A capital contributions - 11,623,048 25,277,699
Proceeds from Class B capital contributions - 130,000 240,000
Proceeds from discounted lease rentals - 4,767,017 15,969,859
Principal payments on discounted lease rentals (10,849,449) (9,561,511) (2,950,770)
Redemptions of Class A limited partner units (233,500) (130,721) (146,220)
Commissions paid to affiliate in connection with the sale of
Class A limited partner units - (1,162,305) (2,500,740)
Non-accountable organization and offering expense
reimbursement paid to the general partner in
connection with the sale of Class A limited partner units - (526,615) (1,064,160)
Distributions to partners (5,310,566) (5,030,230) (2,489,733)
------------ ------------ ------------
Net cash (used in) provided by financing activities (16,393,515) 108,683 32,335,935
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,015,546 (5,975,931) 5,218,514
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 798,140 6,774,071 1,555,557
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,813,686 $ 798,140 $ 6,774,071
============ ============ ============
-16-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
(continued)
1997 1996 1995
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 1,505,324 $ 1,785,640 $ 1,017,172
Supplemental disclosure of noncash investing and
financing activities:
Reduction in Partners' capital accounts for commissions
and offering costs payable to affiliates - - 42,217
Discounted lease rentals assumed in equipment acquisitions 3,239,755 11,368,469 2,685,425
See accompanying notes to financial statements.
-17-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Organization
Capital Preferred Yield Fund-III, L.P. (the "Partnership") was organized on
November 2, 1993 as a limited partnership under the laws of the State of
Delaware pursuant to an Agreement of Limited Partnership (the "Partnership
Agreement"). The Partnership was formed for the purpose of acquiring and
leasing a diversified portfolio of equipment to unaffiliated third parties.
The Partnership will continue until December 31, 2011 unless terminated
earlier in accordance with the terms of the Partnership Agreement. All
Partnership equipment is expected to be sold and the Partnership liquidated
between 2000 and 2003. The general partner of the Partnership is CAI
Equipment Leasing IV Corp., a wholly owned subsidiary of Capital
Associates, Inc. ("CAI").
The general partner manages the Partnership, including investment of funds,
purchase and sale of equipment, lease negotiation and other administrative
duties. The Partnership initially sold 500,000 Class A limited partner
units to 4,968 investors at a price of $100 per Class A limited partner
unit.
Capital Associates International, Inc. ("CAII"), a wholly owned subsidiary
of CAI, is the Class B limited partner. The Class B limited partner was
required to contribute cash, upon acquisition of equipment, in an amount
equal to 1% of gross offering proceeds received from the sale of Class A
limited partner units.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. For leasing entities, this includes the
estimate of residual values, as discussed below. Actual results could
differ from those estimates.
Partnership Allocations
Cash Distributions
------------------
During the Reinvestment Period (as defined in the Partnership Agreement),
available cash is distributed to the partners as follows:
-18-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Partnership Allocations, continued
Cash Distributions, continued
------------------
First, 1.0% to the general partner and 99.0% to the Class A limited
partners until the class A limited partners receive annual,
non-compounded cumulative distributions equal to 10.5% of their
contributed capital.
Second, 1.0% to the general partner and 99.0% to the Class B limited
partner until the Class B limited partner receives annual
non-compounded cumulative distributions equal to 10.5% of its
contributed capital.
Third, any remaining available cash will be reinvested or distributed
to the partners as specified in the Partnership Agreement.
After the Reinvestment Period (as defined in the Partnership Agreement),
available cash will be distributed to the partners as follows:
First, in accordance with the first and second allocations during the
Reinvestment Period as described above.
Second, 99.0% to the Class A limited partners and 1.0% to the general
partner, until the Class A limited partners achieve Payout (as defined
in the Partnership Agreement).
Third, 99.0% to the Class B limited partner, 1.0% to the general
partner, until the Class B limited partner achieves Payout (as defined
in the Partnership Agreement).
Fourth, 99.0% to the Class A and Class B limited partners (as a class)
and 1.0% to the general partner, until the Class A and Class B limited
partners receive cash distributions equal to 170% of their capital
contributions.
Thereafter, 90% to the Class A and Class B limited partners (as a class)
and 10% to the general partner.
Profits and Losses
------------------
There are several special allocations that precede the general
allocations of profits and losses to the partners. The most significant
special allocations are as follows:
-19-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Profits and Losses (continued)
------------------
First, commissions and expenses paid in connection with the sale of
Class A limited partner units are allocated 1.0% to the general partner
and 99.0% to the Class A limited partners.
Second, depreciation relating to Partnership equipment and any losses
resulting from the sale of equipment are generally allocated 1.0% to
the general partner and 99.0% to the limited partners (shared
99.0%/1.0% by the Class A and Class B limited partners, respectively)
until the cumulative amount of such depreciation and such losses
allocated to each limited partner equals such limited partner's
contributed capital reduced by commissions and other expenses paid in
connection with the sale of Class A limited partner units allocated to
such partner. Thereafter, gain on sale of equipment, if any, will be
allocated to the general partner in an amount equal to the sum of
depreciation and loss on sale of equipment previously allocated to the
general partner.
Third, notwithstanding anything in the Partnership Agreement to the
contrary, and before any other allocation is made, items of income and
gain for the current year (or period) shall be allocated, as quickly as
possible, to the general partner to the extent of any deficit balance
existing in the general partner's capital account as of the close of
the immediately preceding year, in order to restore the balance in the
general partner's capital account to zero.
After giving effect to special allocations, profits (as defined in the
Partnership Agreement) are first allocated in proportion to, and to the
extent of, any previous losses, in reverse chronological order and
priority. Any remaining profits are allocated in the same order and
priority as cash distributions.
After giving effect to special allocations, losses (as defined in the
Partnership Agreement) are allocated in proportion to, and to the extent
of, any previous profits, in reverse chronological order and priority.
Any remaining losses are allocated 1.0% to the general partner and 99.0%
to the limited partners (shared 99.0%/1.0% by the Class A and Class B
limited partners, respectively).
Financial Reporting
-------------------
For financial reporting purposes, net income is allocated to the partners
in a manner consistent with the allocation of cash distributions.
-20-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Recently Issued Financial Accounting Standards
During 1997, the Partnership adopted SFAS No. 125, Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities ("SFAS No. 125"). SFAS No. 125 provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS No. 125 did
not have a material impact on the Partnership's financial position or
results of operations.
Long-lived Assets
The Partnership accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of ("SFAS No. 121"). SFAS No. 121 requires that long-lived assets,
including operating leases, and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the
entity should estimate the future cash flows expected to result from the
use of the asset and its eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss for long-lived assets, including
operating leases, and identifiable intangibles held by the Partnership is
based on the fair value of the asset calculated by discounting the
expected future cash flows at an appropriate interest rate.
Lease Accounting
Statement of Financial Accounting Standards No. 13, Accounting for
Leases, requires that a lessor account for each lease by the direct
finance, sales-type or operating lease method. The Partnership currently
utilizes the direct financing and operating methods for all of the
Partnership's equipment under lease. Direct finance leases are defined as
those leases which transfer substantially all of the benefits and risks
of ownership of the equipment to the lessee. For all types of leases, the
determination of profit considers the estimated value of the equipment at
lease termination, referred to as the residual value. After the inception
of a lease, the Partnership may engage in financing of lease receivables
on a nonrecourse basis (i.e., "non-recourse debt" or "discounted lease
rentals") and/or equipment sale transactions to reduce or recover its
investment in the equipment.
The Partnership's accounting methods and their financial reporting effects
are described below.
-21-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Net Investment in Direct Financing Leases ("DFLs")
The cost of the equipment, including acquisition fees paid to the general
partner, is recorded as net investment in DFLs on the accompanying
balance sheet. Leasing revenue, which is recognized over the term of the
lease, consists of the excess of lease payments plus the estimated
residual value over the equipment's cost. Earned income is recognized
monthly to provide a constant yield and is recorded as direct finance
lease income on the accompanying income statements. Residual values are
established at lease inception equal to the estimated value to be
received from the equipment following termination of the initial lease
(which in certain circumstances includes anticipated re-lease proceeds),
as determined by the general partner. In estimating such values, the
general partner considers all relevant information regarding the
equipment and the lessee.
Equipment on Operating Leases ("OLs")
The cost of equipment, including acquisition fees paid to the general
partner, is recorded as leased equipment in the accompanying balance
sheets and is depreciated on a straight-line basis over the lease term to
an amount equal to the estimated residual value at the lease termination
date. Leasing revenue consists principally of monthly rents and is
recognized as operating lease rentals in the accompanying income
statements. Residual values are established at lease inception equal to
the estimated value to be received from the equipment following
termination of the initial lease (which in certain circumstances includes
anticipated re-lease proceeds), as determined by the general partner. In
estimating such values, the general partner considers all relevant
information and circumstances regarding the equipment and the lessee.
Because revenue, depreciation expense and the resultant profit margin
before interest expense are recorded on a straight-line basis, and
interest expense on discounted lease rentals (discussed below) is
recorded on the interest method, lower returns are realized in the early
years of the term of an OL and higher returns in later years.
Non-recourse Discounting of Rentals
The Partnership may assign the future rentals from leases to financial
institutions, or acquire leases subject to such assignments, at fixed
interest rates on a non-recourse basis. In return for such assigned
future rentals, the Partnership receives the discounted value of the
rentals in cash. In the event of default by a lessee, the financial
institution has a first lien on the underlying leased equipment, with no
further recourse against the Partnership. Cash proceeds from such
financings, or the assumption of such financings, are recorded on the
balance sheet as discounted lease rentals. As lessees make payments to
financial institutions, leasing revenue and interest expense are
recorded.
-22-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Allowance for Losses
An allowance for losses is maintained at levels determined by the general
partner to adequately provide for any other-than-temporary declines in
asset values. In determining losses, economic conditions, the activity in
the used equipment markets, the effect of actions by equipment
manufacturers, the financial condition of lessees, the expected courses
of action by lessees with regard to leased equipment at termination of
the initial lease term, and other factors which the general partner
believes are relevant, are considered. Asset chargeoffs are recorded upon
the termination or remarketing of the underlying assets. The lease
portfolio is reviewed quarterly to determine the adequacy of the
allowance for losses.
Transactions Subsequent to Initial Lease Termination
After the initial term of equipment under lease expires, the equipment is
either sold or re-leased to the existing lessee or another third party.
The remaining net book value of equipment sold is removed and gain or
loss recorded when equipment is sold. The accounting for re-leased
equipment is consistent with the accounting described under "Net
Investment in Direct Financing Leases" and "Equipment on Operating
Leases" above.
Income Taxes
No provision for income taxes has been made in the financial statements
since taxable income or loss is recorded in the tax return of the
individual partners.
Cash Equivalents
The Partnership considers short-term, highly liquid investments that are
readily convertible to known amounts of cash to be cash equivalents.
Cash equivalents of approximately $2,681,000 and $747,000 at December 31,
1997 and 1996, respectively, are comprised of investments in a mutual
fund which invests solely in U.S. Government treasury bills having
maturities of 90 days or less.
Deferred Financing Costs
Deferred financing costs, which were incurred by the Partnership in
connection with an agreement with a lender to debt finance lease rentals,
are charged ratably to operations as additional interest expense over the
expected life of the underlying indebtedness.
-23-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Net Income Per Class A Limited Partner Unit
Net income per Class A limited partner unit is computed by dividing the
net income allocated to the Class A limited partners by the weighted
average number of Class A limited partner units outstanding during the
period.
2. Net Investment in Direct Financing Leases
-----------------------------------------
The components of the net investment in direct finance leases as of
December 31, 1997 and 1996 were:
1997 1996
----------- -----------
Minimum lease payments receivable $ 3,072,652 $ 5,340,323
Estimated residual values 606,407 749,760
Less unearned income (352,226) (610,818)
----------- -----------
Total $ 3,326,833 $ 5,479,265
=========== ===========
3. Leased Equipment
----------------
The Partnership's investment in equipment on operating leases by major
classes as of December 31, 1997 and 1996 were:
1997 1996
-------------- -------------
Transportation and industrial equipment $ 41,131,072 $ 47,672,965
Computers and peripherals 13,810,207 12,437,727
Furniture, fixtures and equipment 14,197,395 13,329,611
Other 1,963,783 657,330
------------- -------------
71,102,457 74,097,633
Less accumulated depreciation (24,677,113) (18,658,399)
Allowance for losses (231,777) (177,799)
------------- -------------
$ 46,193,567 $ 55,261,435
============= =============
Depreciation expense for 1997, 1996 and 1995 was $14,058,981, $12,585,981
and $5,895,602, respectively.
-24-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
4. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from noncancelable leases as of
December 31, 1997 are:
Years Ending December 31, DFLs OLs
------------------------- ---- ---
1998 $ 1,632,178 $ 15,207,677
1999 1,241,601 10,351,485
2000 196,149 3,890,580
2001 2,724 1,121,646
2002 - 254,764
Thereafter - 229,962
----------- ------------
Total $ 3,072,652 $ 31,056,114
=========== ============
5. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at December 31, 1997 bear interest at
rates primarily ranging between 6% and 11%. Aggregate maturities of such
non-recourse obligations are:
Years Ending December 31,
-------------------------
1998 $ 8,792,271
1999 5,593,718
2000 1,203,004
2001 231,550
2002 7,631
------------
Total $ 15,828,174
============
6. Transactions With the General Partner and Affiliates
----------------------------------------------------
Sales Commissions and Offering Costs
------------------------------------
Under the terms of the Partnership Agreement, an affiliate of the general
partner is entitled to receive sales commissions and wholesaling fees
equal to 10% of the Class A limited partners' capital contributions, up
to 9% of which are paid to participating broker-dealers. During 1996 and
1995, CAI Securities Corporation earned commissions and fees of
approximately $1,162,000 and $2,528,000, of which $992,000 and
$2,189,000, respectively, were paid to participating broker-dealers.
-25-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
6. Transactions With the General Partner and Affiliates, continued
----------------------------------------------------
Sales Commissions and Offering Costs, continued
------------------------------------
As provided in the Partnership Agreement, the general partner earned
approximately $465,000 and $1,011,000, as reimbursement for expenses
incurred during 1996 and 1995, respectively, in connection with the
organization of the Partnership and the offering of Class A limited
partner units. The general partner also received approximately $62,000
and $68,000, as reimbursement for due diligence expenses incurred during
1996 and 1995, respectively.
Capital Contributions
---------------------
Under terms of the Partnership Agreement, the Class B limited partner
made capital contributions to the Partnership of $130,000 and $240,000
during 1996 and 1995, respectively.
Origination Fee and Evaluation Fee
----------------------------------
The general partner receives a fee equal to 3.5% of the sales price of
equipment sold to the Partnership (up to a maximum cumulative amount as
specified in the Partnership Agreement), 1.5% of which represents
compensation for selecting, negotiating and consummating the acquisition
of the equipment and 2%, of which, represents reimbursement for services
rendered in connection with evaluating the suitability of the equipment
and the credit worthiness of the lessees. Origination and evaluation fees
totaled approximately $347,000, $1,185,000 and $1,210,000 in 1997, 1996
and 1995, respectively, all of which were capitalized by the Partnership
as part of the cost of equipment on operating leases and net investment
in direct financing leases.
Management Fees
---------------
The general partner earns management fees for services performed in
connection with managing the Partnership's equipment equal to 2% of gross
rentals received as permitted under terms of the Partnership Agreement.
The general partner earned approximately $409,000, $391,000 and $156,000
during 1997, 1996 and 1995, respectively.
Direct Services
---------------
The general partner and its affiliates provide accounting, investor
relations, billing, collecting, asset management, and other
administrative services to the Partnership. The Partnership reimburses
the general partner for these services performed on its behalf as
permitted under the terms of the Partnership Agreement. The Partnership
recorded approximately $120,000, $94,000 and $94,000 during 1997, 1996
and 1995, respectively.
-26-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
6. Transactions With the General Partner and Affiliates, continued
----------------------------------------------------
Equipment Purchases
-------------------
The Partnership purchased equipment from CAII, with a total purchase
price of approximately $10,426,000, $35,688,000 and $36,496,000
(including $3,240,000, $11,369,000 and $2,685,000 of discounted lease
rentals) during 1997, 1996 and 1995, respectively. The Partnership
purchased the equipment at CAII's historical cost plus reimbursement of
other net acquisition costs, as provided for in the Partnership
Agreement.
Payables to Affiliates
----------------------
Payables to affiliates of approximately $39,000 and $54,000 during 1997
and 1996, respectively, consists of direct services, management fees and
expenses payable to the general partner and its affiliates.
Receivable from Related Party
-----------------------------
Receivable from related party represents rents received by the general
partner for a lease that was subsequently sold to the Partnership.
7. Tax Information (Unaudited)
---------------------------
The following reconciles net income for financial reporting purposes to the
income for federal income tax purposes for the year and period ended
December 31,:
1997 1996 1995
------------- ------------- ------------
Net income per financial
statements $ 4,414,329 $ 2,074,001 $ 553,710
Direct financing leases 1,900,541 2,192,802 737,287
Depreciation (4,277,382) (6,587,214) (3,820,726)
Provision for losses 250,000 50,000 275,000
Other (932,509) 595,201 (24,469)
------------ ------------ ------------
Partnership income for
federal income tax purposes $ 1,354,979 $ (1,675,210) $ (2,279,198)
============ ============ ============
-27-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
7. Tax Information (Unaudited), continued
---------------------------
The following reconciles partners' capital for financial reporting purposes
to partners' capital for federal income tax purposes for the year and
period ended December 31,:
1997 1996 1995
------------- ------------- ------------
Partners' capital per
financial statements $ 36,261,569 $ 37,388,345 $ 30,535,617
Commissions and offering costs 7,184,603 7,184,603 5,495,683
Direct financing leases 4,862,737 2,962,196 769,394
Depreciation (15,184,234) (10,906,852) (4,319,638)
Provision for losses 575,000 325,000 275,000
Other (355,482) 582,258 (8,487)
------------- ------------- -------------
Partners' capital for federal
income tax purposes $ 33,344,193 $ 37,535,550 $ 32,747,569
============= ============= ============
8. Concentration of Credit Risk
----------------------------
Approximately 70% of the Partnership's equipment under lease was leased to
investment grade companies. Pursuant to the Partnership Agreement, an
investment grade lessee is a company (i) with a net worth in excess of
$100,000,000 (and no debt issues that are rated), or (ii) with a credit
rating of not less than Baa as determined by Moody's Investor Services,
Inc. or comparable credit rating as determined by another recognized credit
rating service; or (iii) a lessee, all of whose lease payments have been
unconditionally guaranteed or supported by a letter of credit issued by a
company meeting one of the above requirements.
The Partnership's cash balance is maintained with a high credit quality
financial institution. At times, such balances may be in excess of the FDIC
insurance limit due to the receipt of lockbox amounts that have not cleared
the presentment bank (generally for less than two days). As the funds
become available, they are invested in a money market mutual fund.
9. Disclosures about Fair Value of Financial Instruments
-----------------------------------------------------
Statement of Financial Standards No. 107, Disclosures about Fair Value of
Financial Instruments specifically excludes certain items from its
disclosure requirements such as the Company's investment in leased assets.
The carrying amounts at December 31, 1997 for cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, payable to
affiliates, rents and sale proceeds received in advance and distributions
payable to partners approximate their fair values due to the short maturity
of these instruments.
-28-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
9. Disclosures about Fair Value of Financial Instruments, continued
-----------------------------------------------------
As of December 31, 1997, discounted lease rentals of approximately
$15,828,000 had a fair value of approximately $15,132,000. The fair value
was estimated utilizing market rates of comparable debt having similar
maturities and credit quality as of December 31, 1997.
-29-
INDEPENDENT AUDITORS' REPORT
----------------------------
THE PARTNERS
CAPITAL PREFERRED YIELD FUND-III, L.P.:
Under date of February 6, 1998, we reported on the balance sheets of Capital
Preferred Yield Fund-III, L.P. as of December 31, 1997 and 1996, and the related
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 1997 as contained in the Partnership's
annual report on Form 10-K for the year 1997. In connection with our audits of
the aforementioned financial statements, we also audited the related financial
statement Schedule II, as listed in the accompanying index. This financial
statement schedule is the responsibility of the Partnership's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
------------------------
KPMG PEAT MARWICK LLP
Denver, Colorado
February 6, 1998
-30-
CAPITAL PREFERRED YIELD FUND-III, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1997, 1996 and 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- --------------------------- ------------- ----------
Balance at Additions Additions Balance
beginning charged to charged to at end
Classification of period expenses other accounts Deductions(1) of period
- -------------- --------- -------- -------------- ------------- ---------
1997
- -------------------------------
Allowance for losses:
Equipment on leases $ 177,799 $250,000 $ - $ (196,022) $ 231,777
========= ======== ========= ========== =========
1996
- -------------------------------
Allowance for losses:
Equipment on leases $ 275,000 $ 50,000 $ 1,331 $ (148,532) $ 177,799
========= ======== ========= ========== =========
1995
- -------------------------------
Allowance for losses:
Equipment on leases $ - $275,000 $ - $ - $ 275,000
========= ======== ========= ========== = ========
(1) Principally charge-offs of assets against the established allowances.
See accompanying independent auditor's report
-31-
Item 9. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 10. Directors and Executive Officers of the Partnership
---------------------------------------------------
The Partnership has no officers and directors. The general partner manages and
controls the affairs of the Partnership and has general responsibility and
authority in all matters affecting its business. Information concerning the
directors and executive officers of the general partner is as follows:
CAI Equipment Leasing IV Corporation
Name Positions Held
---- --------------
John F. Olmstead President and Director
Dennis J. Lacey Senior Vice President and Director
Anthony M. DiPaolo Senior Vice President, Principle Financial and Chief
Administrative Officerand Director
Richard H. Abernethy Vice President and Director
John A. Reed Vice President, Assistant Secretary and Director
Joseph F. Bukofski Vice President, Assistant Secretary and Director
Robert A. Golden Director
Mick Myers Director
Ann Danielson Assistant Vice President
David J. Anderson Chief Accounting Officer and Secretary
JOHN F. OLMSTEAD, age 53, joined CAII as Vice President in December, 1988, is a
Senior Vice President of CAI and CAII and is head of CAII's Public Equity
division. He has served as Chairman of the Board for Neo-kam Industries, Inc.,
Matchless Metal Polish Company, Inc. and ACL, Inc. for more than 5 years. He has
over 20 years of experience holding various positions of responsibility in the
leasing industry. Mr. Olmstead holds a Bachelor of Science degree from Indiana
University and a Juris Doctorate degree from Indiana Law School.
DENNIS J. LACEY, age 44, joined CAI as Vice President, Operations, in October
1989. Mr. Lacey was appointed Treasurer on January 1, 1991, Chief Financial
Officer on April 11, 1991, a director on July 19, 1991, and President and Chief
Executive Officer on September 6, 1991. Prior to joining CAI, Mr. Lacey was an
audit partner for the public accounting firm of Coopers & Lybrand. Mr. Lacey is
also a director and senior officer of CAII, CAI Equipment Leasing I Corp., CAI
Equipment Leasing II Corp., CAI Equipment Leasing III Corp., CAI Equipment
Leasing IV Corp., CAI Equipment Leasing V Corp., CAI Leasing Canada, Ltd., CAI
Partners Management Company, CAI Securities Corporation, CAI Lease
Securitization I Corp. and Capital Equipment Corporation (collectively referred
to herein as the "CAI Affiliates"), all of which are first- or second-tier
wholly-owned subsidiaries of CAI.
-32-
Item 10. Directors and Executive Officers of the Partnership, continued
---------------------------------------------------
ANTHONY M. DIPAOLO, age 39, joined CAII in July 1990 as Assistant Treasurer and
is currently Senior Vice President-Chief Financial Officer. He also held the
positions of Senior Vice President-Controller and Assistant Vice
President-Credit Administration for the Company. Mr. DiPaolo has held similar
senior financial management positions with two public companies between 1986 and
June 1990, and prior to then was an audit manager for the public accounting firm
of Coopers & Lybrand. Mr. DiPaolo holds a Bachelor of Science degree in
Accounting from the University of Denver.
RICHARD H. ABERNETHY, age 43, joined CAII in April 1992 as Equipment Valuation
Manager and currently serves as Vice President of Asset Management. Mr.
Abernethy has thirteen years experience in the leasing industry, including prior
positions with Barclays Leasing Inc., from November 1986 to February 1992, and
Budd Leasing Corporation, from January 1981 to November 1986. Mr. Abernethy
holds a Bachelor of Arts in Business Administration from the University of North
Carolina at Charlotte.
JOHN A. REED, age 42, joined CAII in January 1990 as the Tax Director and
Assistant Secretary. Mr. Reed is currently the Vice President-Manager, Capital
Markets Group and is responsible for obtaining off balance sheet financing,
syndications and private programs. Prior to joining the Capital Markets Group,
Mr. Reed was Vice President of both Marketing Administration and Credit and Debt
Administration. He spent seven and one half years with Coopers & Lybrand in the
Tax Department and served on CAII's tax consulting engagement during that time.
Mr. Reed holds a Bachelor of Arts degree in Social Sciences and Masters of
Science in Accounting, from Colorado State University.
JOSEPH F. BUKOFSKI, age 43, joined CAII in June 1990 as a Financial Analyst. Mr.
Bukofski is currently the Vice President of Marketing and is responsible for all
lease documentation and management of transaction structuring and processing.
Prior to joining the Marketing Department, Mr. Bukofski was Assistant Vice
President and Controller. Prior to joining the Company, he was a geologist with
Barringer Geoservices, Inc. for eleven years. Mr. Bukofski holds a Bachelor of
Science degree in Secondary Education - Earth Science from Bloomsburg University
and a Masters of Science in Accounting from the University of Colorado.
ROBERT A. GOLDEN, age 52, is Vice President and the National Sales Manager of
the Company. Mr. Golden joined the Company in 1993 as a Branch Manager. He was
promoted to his current position in September 1994. Prior to joining the
Company, he was an Executive Vice President with the U.S. Funds Group, President
of BoCon Capital Group and Vice President with Ellco/GE Capital for fifteen
years. Mr. Golden is an officer, but not a director, of CAII.
MICK MYERS, age 40, joined CAI in February 1992 as a Senior Portfolio Manager.
Currently he is Assistant Vice President of Asset Management. Mr. Myers has nine
years experience in the leasing industry. Previously, he has held the position
of Senior End of Lease Negotiator with ELLCO/GE Capital. Mr. Myers holds a
Bachelor of Science degree from the University of Wyoming.
-33-
Item 10. Directors and Executive Officers of the Partnership, continued
---------------------------------------------------
ANN DANIELSON, age 34, joined CAII in February 1990 and is currently Assistant
Vice President, Assistant Treasurer and is responsible for the Company's cash
management and collections functions. Prior to joining the Company, she was with
U.S. West financial Services and Coopers & Lybrand. Ms. Danielson holds a
Bachelor of Arts Degree from the University of Northern Iowa.
DAVID J. ANDERSON, age 45, joined CAII in August 1990 as Manager of Billing &
Collections and currently serves as Assistant Vice-President/Chief Accounting
Officer. Prior to joining CAII, Mr. Anderson was Vice- President/Controller for
Systems Marketing, Inc., from 1985 to 1990, and previous to that worked in
several senior staff positions at the Los Alamos National Laboratory and with
Ernst & Whinney. Mr. Anderson holds a Bachelor of Business Administration degree
in Accounting from the University of Wisconsin.
Item 11. Executive Compensation
----------------------
No compensation was paid by the Partnership to the officers and directors of the
general partner. See Item 13 of this Report, "Certain Relationships and Related
Transactions," which is incorporated herein by reference, for a description of
the compensation and fees paid to the general partner and its affiliates by the
Partnership during 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) As of the date hereof, no person is known by the Partnership to be the
beneficial owner of more than 5% of the Class A limited partner units
of the Partnership. The Partnership has no directors or officers, and
neither the general partner nor the Class B limited partner of the
Partnership own any Class A limited partner units.
CAII, an affiliate of the general partner, is the sole Class B limited
partner.
CAI Equipment Leasing IV Corp. is the general partner.
The names and addresses of the general partner and the Class B limited
partner are as follows:
General Partner
---------------
CAI Equipment Leasing IV Corp.
7175 West Jefferson Avenue
Suite 4000
Lakewood, Colorado 80235
-34-
Item 12. Security Ownership of Certain Beneficial Owners and Management,
-----------------------------------------------------------------------
continued
Class B Limited Partner
-----------------------
Capital Associates International, Inc.
7175 West Jefferson Avenue
Suite 4000
Lakewood, Colorado 80235
(b) No directors or officers of the general partner or the Class B limited
partner owned any Class A limited partner units as of December 31,
1997.
(c) The Partnership knows of no arrangements, the operation of which may at
a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The general partner and its affiliates receive certain types of compensation,
fees or other distributions in connection with the operations of the
Partnership.
Following is a summary of the amounts paid or payable to the general partner and
its affiliates during 1997:
ACQUISITION AND OPERATING STAGES
Acquisition Fee and Acquisition Cost Reimbursement
- --------------------------------------------------
The general partner receives a fee equal to 3.5% of the sales price of equipment
sold to the Partnership, 1.5% of which represents compensation for selecting,
negotiating and consummating the acquisition of the equipment and 2% of which
represents reimbursement for services rendered in connection with evaluating the
suitability of the equipment and the credit worthiness of the Lessee.
Origination and evaluation fees totaled approximately $347,000 in 1997, all of
which were capitalized by the Partnership as part of the cost of equipment on
operating leases and net investment in direct financing leases.
Management Fees
- ---------------
The general partner earns management fees as compensation for services rendered
in connection with managing the Partnership's equipment equal to 2% of gross
rentals received. Such fees totaled approximately $409,000 for 1997.
-35-
Item 13. Certain Relationships and Related Transactions, continued
----------------------------------------------
Accountable General and Administrative Expenses
- -----------------------------------------------
The general partner is entitled to reimbursement of certain expenses paid on
behalf of the Partnership which are incurred in connection with the
Partnership's operations. Such reimbursable expenses amounted to approximately
$120,000 during 1997.
Additionally, the general partner is allocated 1% of Partnership cash
distributions and net income relating to its general partner interest in the
Partnership. Distributions and net income allocated to the general partner
totaled approximately $13,000 and $13,000, respectively, for 1997. Distributions
and net income allocated to the Class B limited partner totaled approximately
$13,000 and $9,000, respectively, for 1997.
During 1997, the Partnership acquired the equipment described below from CAII:
Cost to
Partnership
Including
Date Cost to Acquisition Debt Annual
Purchased Lessee Term Equipment Description CAII Fees* Assumed Rents
- --------- ------ ---- --------------------- ------------ ------------ ----------- -----------
02/28/97 HK Systems, Inc. 45 Phone system $ 38,568 $ 39,904 $ - $ 12,447
04/28/97 Maryland Casualty 24 Mail sorter system upgrade 8,523 8,818 - 46,275
04/30/97 Texas Utilities 36 Cisco routers 137,936 142,329 - 44,619
05/13/97 System One 33 Computer network 670,650 693,166 - 250,015
05/09/97 General Motors 36 Material handling equipment 6,320 6,539 - 2,116
05/09/97 General Motors 36 Material handling equipment 38,079 39,398 - 12,746
05/16/97 General Motors 36 Forklift 7,681 7,947 - 2,571
05/15/97 Thomson Industries 60 Gear shaper 64,304 66,532 - 11,897
06/09/97 Owens Corning 30 Computer equipment 1,074,472 1,111,702 - 399,852
06/10/97 William Sonoma 36 POS equipment 237,154 245,372 - 73,344
06/13/97 General Motors 36 Scrubbers 12,904 13,351 - 4,320
06/24/97 Paramount 7 Printing equipment 96,442 99,784 - 108,154
07/25/97 Alliant Techsystems, Inc. 24 Reflow oven 68,786 71,170 - 24,818
07/21/97 HK Systems 52 Computer equipment 10,339 10,697 - 3,639
08/11/97 Diamond Shamrock Refining 31 POS equipment 1,692,369 1,751,009 - 577,814
08/11/97 Analysis & Technology, Inc. 36 Computer equipment 114,693 118,557 97,601 38,030
08/29/97 General Motors Corp. 60 Material handling equipment 113,364 117,293 - 22,655
08/29/97 General Motors Corp. 60 Material handling equipment 83,701 86,602 - 16,393
08/29/97 General Motors Corp. 60 Material handling equipment 21,717 22,470 - 4,092
08/29/97 General Motors Corp. 60 Material handling equipment 22,994 23,791 - 4,493
08/29/97 General Motors Corp. 60 Material handling equipment 187,773 194,279 - 36,720
08/29/97 General Motors Corp. 60 Material handling equipment 241,831 250,210 - 49,562
08/29/97 General Motors Corp. 60 Material handling equipment 54,123 55,999 - 10,231
08/29/97 General Motors Corp. 60 Material handling equipment 55,777 57,710 - 10,440
08/29/97 General Motors Corp. 60 Material handling equipment 75,371 77,982 - 14,323
09/26/97 General Motors Corp. 36 Material handling equipment 14,236 14,729 - 4,765
09/26/97 General Motors Corp. 36 Material handling equipment 38,852 40,199 - 12,265
10/07/97 General Motors Corp. 36 Material handling equipment 52,414 54,434 - 17,611
10/07/97 Apple Computer 23 Phone system 572,898 592,749 419,271 225,516
10/07/97 Norlight, Inc. 46 Phone system 86,672 89,675 75,026 23,520
-36-
Item 13. Certain Relationships and Related Transactions, continued
----------------------------------------------
Cost to
Partnership
Including
Date Cost to Acquisition Debt Annual
Purchased Lessee Term Equipment Description CAII Fees* Assumed Rents
- --------- ------ ---- --------------------- ------------ ------------ ----------- -----------
10/07/97 Norlight, Inc. 46 Phone system $ 120,861 $ 125,049 $ 120,861 $ 35,808
10/07/97 Texas Utilities Company 32 Phone system 661,868 684,802 455,233 243,960
10/07/97 Texas Utilities Company 32 Phone system 46,588 48,202 32,043 17,172
10/07/97 Texas Utilities Company 32 Phone system 36,779 38,054 25,314 13,740
10/07/97 Apple Computer 24 Phone system 178,983 185,185 136,250 70,920
10/07/97 Apple Computer 24 Phone system 441,862 457,172 328,138 171,204
10/07/97 GE Appliances 27 Phone system 309,902 320,641 217,755 101,712
10/07/97 Norlight, Inc. 42 Phone system 487,269 504,152 399,340 123,720
10/07/97 Norlight, Inc. 43 Phone system 1,131,474 1,170,679 932,923 25,544
10/17/97 Honeywell, Inc. 36 Computer equipment 41,728 43,174 - 14,056
10/31/97 Shisedo America, Inc. 62 Material handling equipment 64,500 66,735 - 12,423
10/31/97 Honeywell, Inc. 33 Laptop computers 110,117 113,707 - 39,138
11/07/97 General Motors Corp. 36 Material handling equipment 17,301 17,900 - 5,791
11/20/97 Analysis & Technology, Inc. 34 Computer equipment 110,384 113,984 - 38,845
11/20/97 Analysis & Technology, Inc. 35 Computer equipment 219,949 227,134 - 75,533
12/24/97 Lexmark International, Inc. 24 Material handling equipment 113,132 117,052 - 53,299
12/30/97 Thomson Saginaw 60 Material handling equipment 85,239 88,192 - 16,714
------------ ------------ ----------- -----------
$ 10,078,879 $ 10,426,211 $ 3,239,755 $ 3,124,822
============ ============ =========== ===========
* The lower of (a) the price for the equipment plus all costs incurred in
maintaining the equipment (including, without limitation, the reasonable,
necessary and actual expenses, as determined in accordance with generally
accepted accounting principles, of storage, carrying, warehousing,
repair, marketing, financing and taxes) from the date of acquisition
thereof, provided that any proceeds accrued from the first basic rent
date thereof and retained by the general partner or an affiliate thereof
from leasing the equipment or any other arrangement with respect to the
equipment shall be deemed a credit towards the purchase price paid by the
Partnership, or (b) the fair market value of such equipment, as
determined by an independent nationally recognized appraiser selected by
the general partner.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a)
and
(d) The following documents are filed as part of this Report:
1. Financial Statements: (Incorporated by reference to Item 8 of this
Report, "Financial Statements and Supplementary Data").
2. Financial Statement Schedule: (Incorporated by reference to Item 8
of this Report, "Financial Statements and Supplementary Data").
(b) The Partnership did not file any reports on Form 8-K during the quarter
ended December 31, 1997.
-37-
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K,
-----------------------------------------------------------------------
continued
(c) Exhibits required to be filed.
Exhibit Exhibit
Number Name
------- -------
4.1* Capital Preferred Yield Fund-III Limited Partnership Agreement
4.2* First Amendment to Limited Partnership Agreement dated June
14, 1994
4.3* Amended and Restated Agreement of Limited Partnership of
Capital Preferred Yield Fund-III, L.P.
* Not filed herewith. In accordance with Rule 12b-32 of the
General Rules and Regulations under the Securities Exchange
Act of 1934, reference is made to the document previously
filed with the Commission.
-38-
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 26, 1998 Capital Preferred Yield Fund-III, L.P.
By: CAI Equipment Leasing IV Corporation
By: /s/John F. Olmstead
------------------------------------
John F. Olmstead
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the general partner
of the Partnership and in the capacities indicated on March 26, 1998.
Signature Title
- --------- -----
/s/John F. Olmstead
- -------------------------
John F. Olmstead President and Director
/s/Dennis J. Lacey
- -------------------------
Dennis J. Lacey Senior Vice President and Director
/s/Anthony M. DiPaolo
- ------------------------- Senior Vice President, Principle Financial and Chief
Anthony M. DiPaolo Administrative Officer and Director
/s/Richard H. Abernethy
- -------------------------
Richard H. Abernethy Vice President and Director
/s/John A. Reed
- -------------------------
John A. Reed Vice President, Assistant Secretary and Director
/s/Joseph F. Bukofski
- -------------------------
Joseph F. Bukofski Vice President, Assistant Secretary and Director
/s/Robert A. Golden
- -------------------------
Robert A. Golden Director
/s/Mick Myers
- -------------------------
Mick Myers Director
/s/Ann Danielson
- -------------------------
Ann Danielson Assistant Vice President
/s/David J. Anderson
- -------------------------
David J. Anderson Chief Accounting Officer and Secretary
-39-