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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, 1999
[ ] 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, L.P.
--------------------------------------
(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 Class B limited partner of the Partnership. In exchange for its
Class B limited partner interest, CAII contributed cash of $10,000 for each
$1,000,000 of investors' capital contribution (i.e., cash investments in the
Partnership) to the Partnership. The Class B limited partner's interest in
Distributable Cash is subordinated to the Class A limited partners' interest.
The contributions of CAII were made simultaneously with the purchase of
equipment by the Partnership. CAII has 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 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 1999, the Partnership acquired equipment of various types under lease to
third parties. All of the equipment was purchased by CAII directly from
manufacturers or from other independent third parties and sold to the
Partnership. The equipment 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 1999. The Partnership expects that a
majority of the equipment purchased during 2000 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 non-
recourse basis. The proceeds of this non-recourse debt financing will be
utilized to finance the purchase of equipment under lease or to invest 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 1999, the Partnership leased equipment to investment grade lessees in
diverse industries including the financial services, retail, telecommunications,
energy and manufacturing industries. Approximately 68% of the Partnership's
total equipment under lease was leased to investment grade lessees as of
December 31, 1999. 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 is
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,
financing capabilities, and remarketing expertise 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 revenue of
Partnership during 1999.
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, 1999.
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters
-------
(a) The Partnership's Class A limited partner units, Class B limited partner
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, 1999, there were 2,858 Class A limited partners.
(c) Distributions
-------------
During 1999, 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, 1998 January 1999 $0.875 $ 432,014
January 31, 1999 February 1999 0.875 429,870
February 28, 1999 March 1999 0.875 429,870
March 31, 1999 April 1999 0.875 432,015
April 30, 1999 May 1999 0.875 429,564
May 31, 1999 June 1999 0.875 429,564
June 30, 1999 July 1999 0.875 431,708
July 31, 1999 August 1999 0.875 429,564
August 31, 1999 September 1999 0.875 429,564
September 30, 1999 October 1999 0.875 431,708
October 31, 1999 November 1999 0.875 429,564
November 30, 1999 December 1999 0.875 429,467
------ ----------
$10.50 $5,164,472
====== ==========
-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 equip ment) have been realized at the
termination of the Partnership.
The distribution for the month ended December 31, 1999, totaling
$433,568, was paid to the Class A limited partners on January 4, 2000.
Distributions to the general partner and Class B limited partner during
1999 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 2000, 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 1998, 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, 1997 January 1998 $ 0.875 $ 432,859
January 31, 1998 February 1998 0.875 431,108
February 28, 1998 March 1998 0.875 431,108
March 31, 1998 April 1998 0.875 432,378
April 30, 1998 May 1998 0.875 430,058
May 31, 1998 June 1998 0.875 429,927
June 30, 1998 July 1998 0.875 432,072
July 31, 1998 August 1998 0.875 429,927
August 31, 1998 September 1998 0.875 429,870
September 30, 1998 October 1998 0.875 432,015
October 31, 1998 November 1998 0.875 429,870
November 30, 1998 December 1998 0.875 429,870
------- ----------
$ 10.50 $5,171,062
======= ==========
-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 note 1 to Notes to Consolidated
Financial Statements.
Distribution Amount Distribution %
per $100 Class A per $100 Class A
Limited Partner Unit Limited Partner Unit
Payment (computed on (computed on
Made During weighted average) weighted average) (1)
----------- --------------------- ---------------------
1994 $ 5.25 10.5%
1995 10.50 10.5%
1996 10.50 10.5%
1997 10.50 10.5%
1998 10.50 10.5%
1999 10.50 10.5%
------
$57.75
======
(1) Cumulative distributions, as described in note 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,
1995 through 1999. 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
herein.
Years Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -----------
Total revenue $17,896,120 $18,490,540 $20,994,438 $17,245,131 $ 8,195,180
Net income 2,500,668 1,745,560 4,414,329 2,074,001 553,710
Net income per weighted average Class A
limited partner unit outstanding 4.93 3.40 8.71 4.13 1.91
Total assets 42,297,040 47,803,687 53,890,874 62,471,309 48,463,584
Discounted lease rentals 9,257,171 12,603,909 15,828,174 23,437,868 16,863,892
Distributions declared to partners 5,271,238 5,275,471 5,307,605 5,154,680 2,712,186
Distributions declared per weighted average
Class A limited partner unit outstanding 10.50 10.50 10.50 10.50 10.50
-6-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
I. 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:
Years Ended December 31, Years Ended December 31,
---------------------------- ---------------------------------------------------------
1999 1998 Change 1998 1997 Change
------------- ------------- ------------- ------------ ------------- -------------
Leasing margin $ 3,375,087 $ 3,295,648 $ 79,439 $ 3,295,648 $ 3,496,347 $ (200,699)
Equipment sales margin 1,187,086 450,186 736,900 450,186 1,821,419 (1,371,233)
Interest income 390,199 165,182 225,017 165,182 112,367 52,815
Management fees paid to
general partner (348,688) (419,816) 71,128 (419,816) (409,275) (10,541)
Direct services from
general partner (135,846) (209,528) 73,682 (209,528) (120,015) (89,513)
General and administrative (276,855) (286,112) 9,257 (286,112) (236,514) (49,598)
Provision for losses (1,690,315) (1,250,000) (440,315) (1,250,000) (250,000) (1,000,000)
------------ ------------ ------------ ----------- ----------- -----------
Net income $ 2,500,668 $ 1,745,560 $ 755,108 $ 1,745,560 $ 4,414,329 $(2,668,769)
============ ============ ============ =========== =========== ===========
Leasing Margin
Leasing margin consists of the following:
Years Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ----------- -----------
Operating lease rentals $ 16,104,518 $17,367,092 $18,695,558
Direct finance lease income 214,317 508,080 365,094
Depreciation (12,284,633) (13,493,620) (14,058,981)
Interest expense on discounted lease rentals (659,115) (1,085,904) (1,505,324)
------------ ----------- -----------
Leasing margin $ 3,375,087 $ 3,295,648 $ 3,496,347
============ =========== ===========
Leasing margin ratio 21% 18% 18%
============ =========== ===========
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 ratio increased 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.
-7-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
I. Results of Operations, continued
---------------------
Leasing Margin, continued
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 from remarketing consists of the following:
Years Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
Equipment sales revenue $ 6,784,879 $ 4,934,639 $ 6,776,782
Cost of equipment sales (5,597,793) (4,484,453) (4,955,363)
----------- ----------- -----------
Equipment sales margin $ 1,187,086 $ 450,186 $ 1,821,419
=========== =========== ===========
Equipment sales margin is affected by the number and dollar amount of equipment
leases that mature in a particular period. 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 third parties and, accordingly, the timing and
amount of equipment sales cannot be projected accurately.
Interest Income
Interest income increased due to an increase in invested cash pending investment
in additional equipment or distribution to the partners.
Expenses
Management fees, direct services and general and administrative expenses paid to
general partner decreased in 1999 compared to 1998 due to portfolio runoff.
Management fees paid to general partner increased in 1998 compared to 1997
primarily due to an increase in the receipt of rents billed for direct finance
leases. Direct services from general partner increased in 1998 due to an
increase in remarketing activities associated with equipment returned to the
Partnership at lease maturity. General and administrative expenses increased in
1998 due to an increase in costs associated with remarketing equipment returned
to the Partnership at lease maturity.
-8-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
I. Results of Operations, continued
---------------------
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 occurs) 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.
A provision for loss of $1,690,315 was recorded for 1999. Of this amount,
$298,130 is related to a decline in the residual value on computer equipment and
$160,287 related to declines in the fair market value of forklifts returned to
the Partnership at lease maturity. In addition, $282,000 was related to losses
on the sales of certain telecommunications, computer, furniture, fixtures,
forklift and aircraft equipment, and $262,000 was recognized as losses on sales
of certain computer equipment. The provision also includes $501,000 which is
related to anticipated declines of telecommunications equipment, as well as
other miscellaneous equipment for $186,898.
A provision for loss of $1,250,000 was recorded for 1998. Of this amount
$286,000 is related to the estimated decline in residual value on computers and
furniture, fixtures and equipment returned to the Partnership at lease maturity.
In addition, $495,000 was recognized as losses on the sales of certain earth
moving, computer, manufacturing and printing equipment. The balance is
comprised of anticipated declines in the realizable value of mining equipment
for $350,000 and other miscellaneous equipment for $119,000.
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.
-9-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
II. 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.
During 1999, 1998 and 1997, the Partnership acquired equipment subject to leases
with a total equipment purchase price of approximately $13,583,000, $15,381,000
and $10,426,000, respectively, including non-recourse debt to lenders of
$6,646,000, $4,759,000, and $3,240,000, respectively. Also, during 1999 and
1998 the Partnership discounted future rental payments from certain leases to
non-recourse lenders and received proceeds of $206,000 and $1,728,000,
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 1999, 1998 and 1997 the Partnership declared distributions to the
partners of approximately $5,271,000, $5,275,000 and $5,308,000, 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 2000, 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.
The Partnership will enter its liquidation period (as defined in the Partnership
Agreement) on approximately July 1, 2000. At that time, except for commitments
to purchase made during the reinvestment period, the Partnership will no longer
reinvest in additional equipment under leases.
CAII, an affiliate of the general partner, owes the Partnership $654,087 for
rents, remarketing proceeds and other amounts (collectively, the "Prior Rents")
collected by CAII on behalf of the Partnership during periods prior to February
1, 2000 (the "Prior Periods"). According to its own records, CAII owes
approximately $3.3 million to other investors and creditors (who, along with the
Partnership, are referred to herein as the "Payees"), for Prior Rents collected
by CAII on their behalf during the Prior Periods. CAII, which presently does not
have the funds to repay all of the Prior Rents, is in negotiations with the
Payees to develop a plan for repayment of the Prior Rents owed to all Payees
over time. The Partnership is withholding acquisition fees and managements fees
otherwise payable to the general partner and crediting such withheld fees (the
"Fees") against the Prior Rents owing from CAII. The Partnership intends to
continue to withhold future Fees until such time as it recovers all Prior Rents.
Because the Partnership is not the only Payee to whom Prior Rents are owed and
because recovery of such Prior Rents is entirely dependent on CAII's ability to
generate sufficient proceeds from operations after repayment of debt service,
there can be no assurance that CAII will, in fact, be able to repay all of the
Prior Rents owed to the Partnership.
The Partnership relies upon the services of CAII for origination of leases,
administrative and accounting services and remarketing of leases and equipment,
among other services. Should CAII be unable to develop a plan for repayment with
it's Payees, the Partnership may be required to contract with another party for
these services. In such event, there is no assurance that another provider of
these services can be identified.
III. 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. 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 No. 133, an Amendment of FASB Statement 133. Statement 137 effectively
extends the required application of Statement 133 to fiscal years
-10-
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
III. New Accounting Pronouncements, continued
-----------------------------
beginning after June 15, 2000, with earlier application permitted. The
Partnership adopted Statement 133 in the first quarter of 1999. The General
Partner does not expect the adoption of Statement 133 or Statement 137 to have
an impact on its financial reporting.
IV. "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; customer credit risk;
competition from other lessors, specialty finance lenders or banks; and the
availability and cost of financing sources. Certain specific risks associated
with particular aspects of the Partnership's business are discussed in detail
throughout Parts I and II when and where applicable.
Item 7A. 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. Discounted lease rentals are a fixed
rate debt. The partnerships other assets and liabilities are also at fixed
rates. Consequently the partnership has no significant interest rate risk or
other market risk exposure.
-11-
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements and
Financial Statement Schedule
Page
Number
Financial Statements ------
--------------------
Independent Auditors' Report 13
Balance Sheets as of December 31, 1999 and 1998 14
Statements of Income for the years ended
December 31, 1999, 1998 and 1997 15
Statements of Partners' Capital for the years ended
December 31, 1999, 1998 and 1997 16
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 17-18
Notes to Financial Statements 19-30
Financial Statement Schedule
----------------------------
Independent Auditors' Report 31
Schedule II - Valuation and Qualifying Accounts 32
-12-
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, 1999 and 1998, and the related statements of
income, partners' capital, and cash flows for each of the years in the three-
year period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1999, 1998 and 1997 in conformity with generally accepted accounting
principles.
/s/KPMG LLP
------------------
KPMG LLP
Denver, Colorado
March 24, 2000
-13-
CAPITAL PREFERRED YIELD FUND-III, L.P.
BALANCE SHEETS
Years Ended December 31, 1999 and 1998
ASSETS
1999 1998
----------- -----------
Cash and cash equivalents $ 4,382,378 $ 2,723,454
Accounts receivable 1,404,792 1,340,631
Receivable from affiliates 908,823 50,521
Equipment held for sale or re-lease 1,470,585 534,643
Net investment in direct finance leases 964,621 3,560,216
Leased equipment, net 33,165,841 39,594,222
----------- -----------
Total assets $42,297,040 $47,803,687
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 2,230,710 $ 1,508,619
Payables to affiliates 60,405 48,360
Rents received in advance 471,353 554,824
Distributions payable to partners 442,346 440,798
Discounted lease rentals 9,257,171 12,603,909
----------- -----------
Total liabilities 12,461,985 15,156,510
----------- -----------
Commitments and contingencies (Note 10)
Partners' capital:
General partner - -
Limited partners:
Class A 500,000 units authorized; 491,470
and 492,145 units issued and outstanding
in 1999 and 1998, respectively 29,455,012 32,239,114
Class B 380,043 408,063
----------- -----------
Total partners' capital 29,835,055 32,647,177
----------- -----------
Total liabilities and partners'
capital $42,297,040 $47,803,687
=========== ===========
See accompanying notes to financial statements.
-14-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Revenue:
Operating lease rentals $16,104,518 $17,367,092 $18,695,558
Direct finance lease income 214,317 508,080 365,094
Equipment sales margin 1,187,086 450,186 1,821,419
Interest income 390,199 165,182 112,367
----------- ----------- -----------
Total revenue 17,896,120 18,490,540 20,994,438
----------- ----------- -----------
Expenses:
Depreciation 12,284,633 13,493,620 14,058,981
Management fees paid to general partner 348,688 419,816 409,275
Direct services from general partner 135,846 209,528 120,015
General and administrative 276,855 286,112 236,514
Interest on discounted lease rentals 659,115 1,085,904 1,505,324
Provision for losses 1,690,315 1,250,000 250,000
----------- ----------- -----------
Total expenses 15,395,452 16,744,980 16,580,109
----------- ----------- -----------
Net income $ 2,500,668 $ 1,745,560 $ 4,414,329
=========== =========== ===========
Net income allocated:
To the general partner $ 52,712 $ 52,755 $ 53,076
To the Class A limited partners 2,423,476 1,675,705 4,317,228
To the Class B limited partner 24,480 17,100 44,025
----------- ----------- -----------
$ 2,500,668 $ 1,745,560 $ 4,414,329
=========== =========== ===========
Net income per weighted average Class A limited
partner unit outstanding $4.93 $3.40 $8.71
=========== =========== ===========
Weighted average Class A limited partner
units outstanding 491,874 492,500 495,621
=========== =========== ===========
See accompanying notes to financial statements.
-15-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1999, 1998 and 1997
Limited Class A Class A Class B
General Partner Limited Limited
Partner Units Partners Partner Total
--------- ------------ ------------- ---------- -------------
Partners' capital, January 1, 1997 - 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
Redemptions - (1,265) (84,481) - (84,481)
Net income 52,755 - 1,675,705 17,100 1,745,560
Distributions declared to partners (52,755) - (5,170,216) (52,500) (5,275,471)
-------- ----------- ----------- -------- -----------
Partners' capital, December 31, 1998 - 492,145 32,239,114 408,063 32,647,177
Redemptions - (675) (41,552) - (41,552)
Net income 52,712 - 2,423,476 24,480 2,500,668
Distributions declared to partners (52,712) - (5,166,026) (52,500) (5,271,238)
-------- ----------- ----------- -------- -----------
Partners' capital, December 31, 1999 $ 0 491,470 $29,455,012 $380,043 $29,835,055
======== =========== =========== ======== ===========
See accompanying notes to financial statements.
-16-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 2,500,668 $ 1,745,560 $ 4,414,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 12,284,633 13,493,620 14,058,981
Provision for losses 1,690,315 1,250,000 250,000
Cost of equipment sales 5,597,793 4,484,453 4,955,363
Recovery of investment in direct finance leases 1,934,798 2,297,749 1,903,849
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 45,254 (103,731) (187,747)
(Increase) decrease in receivable from related party 50,521 (43,998) 36,168
Increase in accounts payable and accrued liabilities 828,792 820,892 9,620
Increase (decrease) in payables to affiliates (1,003,478) 9,084 (15,075)
Increase (decrease) in rents received in advance (83,471) (77,654) 171,028
------------ ------------ ------------
Net cash provided by operating activities 23,845,826 23,875,975 25,596,516
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment on operating leases from affiliate (6,748,130) (8,336,063) (7,135,854)
Investment in direct financing leases, acquired from affiliate (191,975) (2,286,569) (50,602)
------------ ------------ ------------
Net cash used in investing activities (6,940,105) (10,622,632) (7,186,456)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from discounted lease rentals 205,734 1,728,059 -
Principal payments on discounted lease rentals (10,141,287) (9,710,829) (10,849,449)
Redemptions of Class A limited partnership units (41,553) (84,481) (233,500)
Distributions to partners (5,269,691) (5,276,324) (5,310,566)
------------ ------------ ------------
Net cash (used in) provided by financing activities (15,246,797) (13,343,575) (16,393,515)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,658,924 (90,232) 2,015,546
Cash and cash equivalents at beginning of year 2,723,454 2,813,686 798,140
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,382,378 $ 2,723,454 $ 2,813,686
============ ============ ============
-17-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
(continued)
1999 1998 1997
---------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 651,468 $1,084,481 $1,505,324
Supplemental disclosure of noncash investing and
financing activities:
Discounted lease rentals assumed in equipment acquisitions 6,645,920 4,758,504 3,239,755
Discounted lease rentals for bankrupt lessee
written-off as uncollectible 57,104 - -
See accompanying notes to financial statements.
-18-
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
equipment owned by the Partnership 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
contributed 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, collectibility of accounts receivable and valuation of
inventory, 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:
-19-
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.
Federal Income Tax Basis 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:
-20-
CAPITAL PREFERRED YIELD FUND - III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Partnership Allocations, continued
Federal Income Tax Basis 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 - Profits and Losses
----------------------------------------
For financial reporting purposes, net income is allocated to the partners in
a manner consistent with the allocation of cash distributions.
-21-
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
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.
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 No. 133, an Amendment of FASB Statement 133.
Statement 137 effectively extends the required application of Statement 133
to fiscal years beginning after June 15, 2000, with earlier application
permitted. The Partnership adopted Statement 133 in the first quarter of
1999. The General Partner does not expect the adoption of Statement 133 or
Statement 137 to have an impact on its financial reporting.
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
equipment subject to 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 net cash flows expected to result from the
use of the asset and its eventual disposition. If the sum of the expected
future net 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 equipment
subject to operating leases and identifiable intangibles held by the
Partnership, is based on the fair value of the asset. The fair value of the
asset may be calculated by discounting the expected future net cash flows at
an appropriate interest rate.
-22-
CAPITAL PREFERRED YEILD FUND - III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
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.
Net Investment in Direct Finance 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.
-23-
CAPITAL PREFERRED YIELD FUND - III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
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 institu
tions, leasing revenue and interest expense are recorded.
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
Finance Leases" and "Equipment on Operating Leases" above.
-24-
CAPITAL PREFERRED YIELD FUND - III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
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 $4,299,000 and $2,546,000 at December 31, 1999
and 1998, 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.
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 Finance Leases
---------------------------------------
The components of the net investment in direct finance leases as of December
31, 1999 and 1998 were:
1999 1998
---------- ------------
Minimum lease payments receivable $501,072 $2,099,035
Estimated residual values 532,941 1,633,266
Less unearned income (69,392) (172,085)
-------- ----------
Total $964,621 $3,560,216
======== ==========
-25-
CAPITAL PREFERRED YIELD FUND - III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
3. Leased Equipment, net
---------------------
The Partnership's investment in equipment on operating leases by major
classes as of December 31, 1999 and 1998 were:
1999 1998
------------- -------------
Transportation and industrial equipment $ 28,744,322 $ 39,323,302
Computers and peripherals 11,919,735 15,279,370
Furniture, fixtures and equipment 17,155,192 12,542,349
Other 2,304,378 1,126,682
------------ ------------
60,123,627 68,271,703
Less accumulated depreciation (26,737,041) (28,499,909)
Allowance for losses (220,745) (177,572)
------------ ------------
$ 33,165,841 $ 39,594,222
============ ============
Depreciation expense for 1999, 1998 and 1997 was $12,284,633, $13,493,620
and $14,058,981, respectively.
4. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from noncancelable leases as of
December 31, 1999 are:
Years Ending December 31, DFLs OLs
------------------------- -------- -----------
2000 $335,415 $10,024,844
2001 55,033 4,941,260
2002 41,958 2,950,403
2003 35,412 1,938,363
Thereafter 33,254 781,742
-------- -----------
Total $501,072 $20,636,612
======== ===========
-26-
CAPITAL PREFERRED YIELD FUND - III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
5. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at December 31, 1999 bear interest at
rates primarily ranging between 6% and 11%. Aggregate maturities of such
non-recourse obligations are:
Years Ending December 31,
-------------------------
2000 $4,634,218
2001 2,195,696
2002 1,091,085
2003 853,518
Thereafter 482,654
----------
Total $9,257,171
==========
6. Transactions With the General Partner and Affiliates
----------------------------------------------------
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 $415,000, $516,000 and $347,000 in 1999, 1998 and
1997, 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.
-27-
CAPITAL PREFERRED YIELD FUND - III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
6. Transactions With the General Partner and Affiliates, continued
----------------------------------------------------
Management Fees Paid to General Partner
---------------------------------------
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 $349,000, $420,000, and $409,000 during
1999, 1998 and 1997, respectively.
Direct Services from General Partner
------------------------------------
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 $136,000,
$210,000, and $120,000 during 1999, 1998 and 1997, respectively.
Equipment Purchases
-------------------
The Partnership purchased equipment from CAII, with a total purchase price
of approximately $13,583,000, $15,381,000 and $10,426,000 (including
approximately $6,646,000, $4,759,000 and $3,240,000 of discounted lease
rentals) during 1999, 1998 and 1997, 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 $60,000 and $48,000 during 1999 and
1998, respectively, consists of $13,000 for direct services from general
partner, $27,000 for management fees paid to general partner and $20,000 for
reimbursable general and administrative expenses for 1999 and $9,000 for
direct services from general partner, $33,000 for management fees paid to
general partner and $6,000 for reimbursable general and administrative
expenses for 1998.
Receivable from Affiliates
--------------------------
The General Partner collects and applies rental payments to the lessee's
account with the Partnership, for those lessees who remit directly to the
General Partner. The rental payments are then transferred to the
Partnership, eliminating the receivable from related party balance.
-28-
CAPITAL PREFERRED YIELD FUND - III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
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,:
1999 1998 1997
----------- ----------- -----------
Net income per financial statements $ 2,500,668 $ 1,745,560 $ 4,414,329
Direct finance leases 1,875,238 2,297,748 1,900,541
Depreciation (1,555,692) (2,401,465) (4,277,382)
Provision for losses 1,690,315 1,250,000 250,000
Gain (loss) on sale of equipment 550,629 362,981 (937,344)
Other (124,300) 397,457 4,835
----------- ----------- -----------
Partnership income for federal income tax purposes $ 4,936,858 $ 3,652,281 $ 1,354,979
=========== =========== ===========
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,:
1999 1998 1997
------------ ------------ ------------
Partners' capital per financial statements $ 29,835,055 $ 32,647,177 $ 36,261,569
Commissions and offering costs 7,184,603 7,184,603 7,184,603
Direct finance leases 9,035,723 7,160,485 4,862,737
Depreciation (19,141,391) (17,585,699) (15,184,234)
Provision for losses 3,515,314 1,825,000 575,000
Gain (loss) on sale of equipment 897 (549,732) (912,713)
Other 818,080 947,953 557,231
------------ ------------ ------------
Partners' capital for federal income tax purposes $ 31,248,281 $ 31,629,787 $ 33,344,193
============ ============ ============
8. Concentration of Credit Risk
----------------------------
Approximately 68% 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.
The Partnership leases equipment to a significant number of lessees. No one
lessee and its affiliates accounted for more than 10% of total revenue of
Partnership during 1999. One lessee accounted for approximately 9% of total
revenue of the Partnership during 1999.
-29-
CAPITAL PREFERRED YIELD FUND - III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
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, 1999 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.
As of December 31, 1999, discounted lease rentals of approximately
$9,257,000 had a fair value of approximately $9,088,000. The fair value was
estimated utilizing market rates of comparable debt having similar
maturities and credit quality as of December 31, 1999.
10. General Partner Matters (unaudited)
-----------------------------------
CAII, an affiliate of the general partner, owes the Partnership $654,087 for
rents and other amounts (collectively, the "Prior Rents") collected by CAII
on behalf of the Partnership during periods prior to February 1, 2000 (the
"Prior Periods"). According to its own records, CAII owes approximately $3.3
million to other investors and creditors (who, along with the Partnership,
are referred to herein as the "Payees"), for Prior Rents collected by CAII
on their behalf during the Prior Periods. CAII, which presently does not
have the funds to repay all of the Prior Rents owed to all Payees over time.
The Partnership intends to continue to withhold future Fees until such time
as it recovers all Prior Rents.
The Partnership relies upon the services of CAII for origination of leases,
administrative and accounting services and remarketing of leases and
equipment, among other services. Should CAII be unable to develop a plan for
repayment with it's Payees, the Partnership may be required to contract with
another party for these services. In such event, there is no such assurance
that another provider of these services can be identified.
-30-
Independent Auditors' Report
----------------------------
The Partners
Capital Preferred Yield Fund-III, L.P.:
Under date of March 24, 2000, we reported on the balance sheets of Capital
Preferred Yield Fund-III, L.P. as of December 31, 1999 and 1998, and the related
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 1999 as contained in the Partnership's
annual report on Form 10-K for the year 1999. 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, such 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 LLP
-----------------------
KPMG LLP
Denver, Colorado
March 24, 2000
-31-
CAPITAL PREFERRED YIELD FUND-III, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1999, 1998 and 1997
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
- -------------- ----------- -------------------------------- ------------- ----------
1999
- ---------------------
Allowance for losses:
Accounts receivable $ 10,000 $ - $ - $ - $ 10,000
Equipment on operating leases 177,572 1,690,315 - (1,647,142) 220,745
---------- -------------- ------------ ------------ ----------
$ 187,572 $ 1,690,315 $ - $ (1,647,142) $ 230,745
========== ============== ============ ============ ==========
1998
- ---------------------
Allowance for losses:
Accounts receivable $ - $ 10,000 $ - $ - $ 10,000
Equipment on operating leases 231,777 1,240,000 - (1,294,205) 177,572
---------- -------------- ------------ ------------ ----------
$ 231,777 $ 1,250,000 $ - $ (1,294,205) $ 187,572
========== ============== ============ ============ ==========
1997
- ---------------------
Allowance for losses:
Equipment on operating leases $ 177,799 $ 250,000 $ - $ (196,022) $ 231,777
========== ============== ============ ============ ==========
(1) Principally charge-offs of assets against the established allowances.
See accompanying independent auditor's report
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
Richard H. Abernethy Vice President and Director
Joseph F. Bukofski Chief Accounting Officer, Vice President, and
Director
Mick Myers Director
John F. Olmstead, age 56, 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.
Richard H. Abernethy, age 46, joined CAII in April 1992 as Equipment Valuation
Manager and currently serves as Vice President of Portfolio Management. Mr.
Abernethy has fourteen 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.
Joseph F. Bukofski, age 44, joined CAII in June 1990 as a Financial Analyst.
Mr. Bukofski is currently the Vice President and Treasurer. Prior to becoming
Treasurer, 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.
Mick Myers, age 42, 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 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 1998.
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 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
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,
1999.
(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.
-34-
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 1999:
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 $415,000 in 1999, 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 $349,000 for 1999.
-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
$136,000 during 1999.
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 $52,712 and $52,712, respectively, for 1999. Distributions and net
income allocated to the Class B limited partner totaled $52,500 and $27,305,
respectively, for 1999.
During 1999, the Partnership acquired the equipment described below from CAII:
Cost to
Partnership
Including
Cost to Acquisition Debt Annual
Lessee Equipment Description CAII Fees* Assumed Rents
- ------ --------------------- ---------- ----------- --------- ---------
Ball Aerospace Office Furniture 56,589 58,550 - 11,318
Birmingham Steel Corp Copier 9,450 9,777 - 2,525
E-Trade Office Furniture 6,811,430 7,006,981 6,194,595 1,595,616
Geico Servers 74,297 76,871 - 25,648
Geico Computer Equipment 12,154 12,576 - 4,425
General Motors Cameras 379,175 392,313 - 132,536
General Motors Forklift 180,141 186,383 - 45,492
General Motors Lift Truck 48,437 50,115 - 9,364
General Motors Material Handling 191,454 198,088 - 56,118
General Motors Scrubber 583,644 603,867 - 167,614
General Motors Sweeper 449,030 464,589 - 135,851
General Motors Tractor 74,637 77,223 - 15,057
General Motors Walkie Lift 110,212 114,031 - 36,893
Hitachi Computer Products Cisco Routers 200,826 207,785 - 66,516
HK Systems Teleconferencing 41,413 42,848 - 26,262
Honeywell Desktops, Printers 55,285 57,200 49,421 19,899
McGraw Hill Computer Equipment 21,996 22,759 - 9,417
New Stevens Snow Groomer 120,405 124,577 - 51,312
New York Life Collator Equip 80,000 82,772 - 17,984
-36-
Item 13. Certain Relationships and Related Transactions, continued
----------------------------------------------
Accountable General and Administrative Expenses, continued
- ------------------------------------------------------------
Cost to
Partnership
Including
Cost to Acquisition Debt Annual
Lessee Equipment Description CAII Fees* Assumed Rents
- ------ --------------------- --------- ----------- -------- --------
Rental Services Tractors, Trucks 544,227 563,085 - 116,291
Sebastiani Vineyards Bottle Equipment 907,798 939,253 - 280,000
Security Mutual Computer Equipment 21,267 22,004 - 6,703
Thompson Industries Computer Equipment 13,019 13,470 - 4,675
Thomson Computer Equipment 32,551 33,679 - 11,689
Treasure Chest Advertising Forklift 20,685 21,402 - 7,171
United Airlines Docking System 78,551 80,630 - 108,515
Williams Sonoma POS 547,631 566,606 401,904 166,536
Wyle Labs Office Furniture 26,217 27,126 - 8,793
Wyle Labs Servers 16,485 17,056 - 5,194
Wyle Labs Thermal Cycling 407,972 422,108 - 98,048
Xerox Computer Equipment 1,050,787 1,087,301 - 466,260
13,167,765 13,583,025 6,645,920 3,709,722
* 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.
-37-
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, 1999.
(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-
SIGNATURES
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: _________, 2000 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 30,
1999.
Signature Title
- --------- -----
/s/John F. Olmstead
- -----------------------
John F. Olmstead President and Director
/s/Richard H. Abernethy
- -----------------------
Richard H. Abernethy Vice President and Director
/s/Joseph F. Bukofski
- -----------------------
Joseph F. Bukofski Chief Accounting Officer, Vice President,
and Director
/s/Mick Myers
- -----------------------
Mick Myers Director
-39-