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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, 2000
[ ] 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)
2750 South Wadsworth, C-200, Denver, CO 80227
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 963-9600
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 37
Page 1 of 38 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 was a wholly owned subsidiary of Capital Associates, Inc. ("CAI").
CAI Equipment Leasing IV became a wholly owned subsidiary of Mishawaka Leasing
Company, Inc. ("MLC") on September 12, 2000 and is the general partner of the
Partnership. CAI discontinued its operations on December 15, 2000.
The Partnership entered its liquidation stage, as defined in the Partnership
Agreement, in July 2000. During the liquidation stage, purchases of equipment
have ceased (other than for prior commitments and equipment upgrades). 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.
CAII owed the Partnership $370,324 for rents, remarketing proceeds and other
amounts (the "Prior Rents") collected by CAII on behalf of the Partnership
during the periods prior to February 1, 2000. On September 12, 2000, as part of
the Sale of the General Partnership interest owned by CAII to MLC, MLC repaid in
full the Prior Rents owed by CAII to the Partnership. Included in payables to
affiliates is $251,409 of administrative expenses that are reimbursable to the
General Partner. During the year CAII was preparing to liquidate, which it did
on December 15, 2000, CAII was unable to provide investment opportunities for
reinvestment to the Partnership and consequently the Partnership's cash balances
are higher than normal. Also during the same period, CAII did not keep up with
collections of accounts receivable, which are higher than normal. Both of these
events have adversely affected the Partnership's performance.
Capital Associates International, Inc. ("CAII") was the Class B limited partner
of the Partnership through September 12, 2000. 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. MLC became the Class B limited partner as of
September 12, 2000.
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.
-3-
Item 1. Business, continued
--------
Until July 2000 when the Partnership entered its liquidation stage, 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 2000.
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.
During 2000, the Partnership leased equipment to investment grade lessees in
diverse industries including the financial services, retail, telecommunications,
energy and manufacturing industries. Approximately 67% of the Partnership's
total equipment under lease was leased to investment grade lessees as of
December 31, 2000. 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.
-4-
Item 1. Business, continued
--------
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. One lessee
and its affiliates accounted for 15% of total leasing and remarketing revenue of
Partnership during 2000.
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."
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, 2000.
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, 2000, there were 2,854 Class A limited partners.
(c) Distributions
During 2000, the Partnership made twelve (12) distributions (a portion of
which constituted a return of capital) to Class A limited partners as
follows:
-5-
Item 5. Market for the Partnership's Common Equity and Related Stockholder
Matters, continued
-------
(c) Distributions, continued
-------------
Distributions Per
$100 Investment
For the Payment (computed on Total
Period Ended Made During weighted average) Distributions
- ------------------------ -------------- ----------------- -------------
December 31, 1999 January 2000 $ 0.875 $ 431,424
January 31, 2000 February 2000 0.875 429,279
February 28, 2000 March 2000 0.875 429,279
March 31, 2000 April 2000 0.875 431,424
April 30, 2000 May 2000 0.875 429,279
May 31, 2000 June 2000 0.875 428,906
June 30, 2000 July 2000 0.875 431,050
July 31, 2000 August 2000 0.875 428,906
August 31, 2000 September 2000 3.750 1,839,910
September 30, 2000 October 2000 1.990 977,812
October 31, 2000 November 2000 1.320 648,933
November 30, 2000 December 2000 2.000 983,985
------- ----------
$ 16.06 $7,890,187
======= ==========
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, 2000, totaling $614,657,
was paid to the Class A limited partners in January, 2001. Distributions to
the general partner and Class B limited partner during 2000 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 2001, to (1) meet current operating
requirements, (2) enable it to fund cash distributions to the Class A
limited partners in accordance with the Partnership Agreement.
Distributions during the liquidation period will be based upon cash
availability and may vary. All distributions are expected to be a return of
capital for economic purposes.
During 1999, the Partnership made twelve (12) distributions (a portion of
which constituted a return of capital) to Class A limited partners as
follows:
-6-
Item 5. Market for the Partnership's Common Equity and Related Stockholder
Matters, continued
-------
(c) Distributions, continued
-------------
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
======== ===========
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%
2000 16.06 16.1%
-------
$ 73.81
(1) Cumulative distributions, as described in note 1 to Notes to
Consolidated Financial Statements, began July 1994.
-7-
Item 6. Selected Financial Data
The following selected financial data relates to the years ended December 31,
1996 through 2000. 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,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total revenue $15,392,908 $17,896,120 $18,490,540 $20,994,438 $17,245,131
Net income 473,136 2,200,668 1,745,560 4,414,329 2,074,001
Net income per weighted average Class A
limited partner unit outstanding 0.79 4.32 3.40 8.71 4.13
Total assets 32,441,172 42,103,741 47,803,687 53,890,874 62,471,309
Discounted lease rentals 8,686,491 9,257,171 12,603,909 15,828,174 23,437,868
Distributions declared to partners 8,208,013 5,271,238 5,275,471 5,307,605 5,154,680
Distributions declared per weighted average
Class A limited partner unit outstanding 16.44 10.50 10.50 10.50 10.50
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,
------------------------ ------------------------
2000 1999 Change 1999 1998 Change
----------- ----------- ----------- ----------- ----------- -----------
Leasing margin $ 2,532,535 $ 3,375,087 $ (842,552) $ 3,375,087 $ 3,295,648 $ 79,439
Equipment sales margin 933,489 1,187,086 (253,597) 1,187,086 450,186 736,900
Interest income 136,770 390,199 (253,429) 390,199 165,182 225,017
Management fees paid to
general partner (317,680) (348,688) 31,008 (348,688) (419,816) 71,128
Direct services from
general partner (83,615) (135,846) 52,231 (135,846) (209,528) 73,682
General and administrative (496,241) (276,855) (219,386) (276,855) (286,112) 9,257
Provision for losses (2,232,122) (1,990,315) (241,807) (1,990,315) (1,250,000) (740,315)
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 473,136 $ 2,200,668 $(1,727,532) $ 2,200,668 $ 1,745,560 $ 455,108
=========== =========== =========== =========== =========== ===========
The Partnership is in its liquidation stage, as defined in the Partnership
Agreement, and is not purchasing additional equipment. Initial leases are
expiring, and the amount of equipment being remarketed (i.e., re-leased, renewed
or sold) is increasing. As a result, both the size of the Partnership's leasing
portfolio and the amount of leasing revenue are declining.
-8-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
-------------
Leasing Margin
Leasing margin consists of the following:
Years Ended December 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
Operating lease rentals $ 14,073,931 $ 16,104,518 $ 17,367,092
Direct finance lease income 248,718 214,317 508,080
Depreciation (10,923,830) (12,284,633) (13,493,620)
Interest expense on discounted lease rentals (866,284) (659,115) (1,085,904)
------------ ------------ ------------
Leasing margin $ 2,532,535 $ 3,375,087 $ 3,295,648
============ ============ ============
Leasing margin ratio 18 % 21% 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 and the related leasing margin ratio decreased for the year 2000
as compared to the year 1999 due to portfolio runoff. Direct finance lease
income increased due to the renewal of operating leases as direct finance
leases. Interest expense on discounted lease rentals increased due to the
increase in leases being financed with non- recourse debt.
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,
-----------------------------------------
2000 1999 1998
---- ---- ----
Equipment sales revenue $ 3,822,554 $ 6,784,879 $ 4,934,639
Cost of equipment sales (2,889,065) (5,597,793) (4,484,453)
----------- ----------- -----------
Equipment sales margin $ 933,489 $ 1,187,086 $ 450,186
=========== =========== ===========
-9-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
-------------
I. Results of Operations, continued
--------------------------------
Equipment Sales Margin, continued
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
released or sold to the lessee or third parties. Equipment sales margin
decreased for 2000 compared to 1999 primarily due to the composition of
equipment that was sold. The Partnership sold certain computer, manufacturing
and printing equipment at a lower fair market value than originally anticipated.
Interest Income
Interest income decreased due to a decrease in the amount of invested cash
during the twelve months ended December 31,2000 as compared to the twelve months
ended December 31, 1999. Interest income varies due to (1) the amount of cash
available for investment (pending distribution or equipment purchases) and (2)
the interest rate on such invested cash.
Expenses
Management fees are earned on gross rents received and will fluctuate due to
variances in cash flow. Management fees paid to general partner for the twelve
months ended December 31, 2000 were lower than the twelve months ended December
31, 1999 primarily due to a decrease in rents collected. Management fees are
expected to decline during the liquidation period of the Partnership. The
Partnership will no longer reinvest in additional equipment.
Direct services from general partner decreased for the twelve months ended
December 31, 2000 compared to the twelve months ended December 31, 1999
primarily due to a change in the method in which the general partner charges for
its asset management services that was implemented during the fourth quarter of
1999. The Partnership pays a refurbishing charge to the general partner at the
time computer equipment is returned by the lessee to the Partnership. The
refurbishing charge includes all services necessary to prepare the equipment for
re-sale. Computer equipment returned to the Partnership for the twelve months
ended December 31, 2000 generated refurbishing charges in the amount of $67,810.
General and administrative charges increased for the twelve months ended
December 31, 2000 compared to the twelve months ended December 31, 1999
primarily due to an increase in storage charges for equipment returned to the
Partnership at lease maturity, an increase in sales tax expense due to a change
in the way Michigan apportions multi-state companies, an increase in appraisal
fees, and the way expenses are apportioned to the fund by the General Partner.
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 is recorded as provision for losses.
-10-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
-------------
Provision for losses, continued
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
quarterly assessments of the estimated residual values of its assets to identify
any other-than-temporary losses in value.
The provision for losses recorded during 2000 related to the following:
o $293,807 related to the estimated decline in residual value of computer
equipment returned to the Partnership at lease maturity.
o $874,150 was recognized as a fair market value write-down of certain
transportation and industrial equipment, computer, furniture, fixtures and
equipment.
o $173,000 related to lessees who have filed for Chapter 11 bankruptcy
protection during 2000.
o $117,000 was accrued to recognize an anticipated loss on the sale of certain
computer equipment.
o $90,000 was recorded as a reserve for uncollectible accounts receivable.
o $277,165 was recorded due to the decline in the realizable values of leased
furniture, fixtures and other equipment.
o $300,000 was recorded as a reserve for a lessee that was placed on credit
watch in January 2001.
o $107,000 was recorded as reserve for estimated uncollectible accounts
receivable.
The provision for losses recorded during 1999 related to the following:
o $298,120 related to computer equipment that has been returned to the
Partnership with fair market values that are lower than the book values.
o $160,287 related to declines in the fair market value of forklifts returned
to the Partnership at lease maturity.
o $282,000 was recognized as losses on the sales of certain
telecommunications, computer, furniture, fixtures, forklift and aircraft
equipment.
o $262,000 was recognized as losses on sales of certain computer equipment.
o $501,000 and $186,898 related to anticipated declines of telecommunications
equipment and other miscellaneous equipment.
o $300,000 was recorded to cover a portion of the Receivable from Affiliates
balance.
The provision for losses recorded during 1998 related to the following:
o $286,000 was related to the estimated decline in residual value on computers
and furniture, fixtures and equipment returned to the Partnership at lease
maturity.
o $495,000 was recognized as losses on the sales of certain earth moving,
computer, manufacturing and printing equipment.
o $350,000 and $119,000 related to anticipated declines in the realizable
value of mining equipment and other miscellaneous equipment.
-11-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
-------------
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 2000, 1999 and 1998, the Partnership acquired equipment subject to leases
with a total equipment purchase price of approximately $11,649,000, $13,586,000,
and $15,381,000 respectively, net of non-recourse debt to lenders of $3,720,000,
$6,646,000, $4,759,000, respectively. Also, during 2000 and 1999 the Partnership
discounted future rental payments from certain leases to non-recourse lenders
and received proceeds of $897,000 and $206,000, 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 2000, 1999 and 1998 the Partnership declared distributions to the
partners of approximately $8,208,000, $5,271,000, and $5,275,000, 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 2001, to (1) meet current operating requirements,
(2) enable it to fund cash distributions to both the Class A limited partners in
accordance with the Partnership Agreement. Distributions during the liquidation
period will be based upon cash availability and may vary. All distributions are
expected to be a return of capital for economic purposes.
Until September 2000, the Partnership relied upon the services of Capital
Associates International, Inc. ("CAII"), its affiliate, for origination of
leases, administrative and accounting services and remarketing of leases and
equipment, among other services. The General Partner has terminated its
relationship with CAII and has contracted with MLC to provide billing,
administrative, remarketing and accounting services. Many of the management and
administrative personnel of MLC formerly worked for CAII and serviced the
Partnership leases.
-12-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
-------------
Liquidity and Capital Resources, continued
- -------------------------------
CAII owed the Partnership $370,324 for rents, remarketing proceeds and other
amounts (the "Prior Rents") collected by CAII on behalf of the Partnership
during the periods prior to February 1, 2000. On September 12, 2000, as part of
the Sale of the General Partnership interest owned by CAII to MLC, MLC repaid in
full the Prior Rents owed by CAII to the Partnership. Included in payables to
affiliates is $251,409 of administrative expenses that are reimbursable to the
General Partner. During the year CAII was preparing to liquidate, which it did
on December 15, 2000, CAII was unable to provide investment opportunities for
reinvestment to the Partnership and consequently the Partnership's cash balances
are higher than normal. Also during the same period, CAII did not keep up with
collections of accounts receivable, which are higher than normal. Both of these
events have adversely affected the Partnership's performance.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement 133").
Statement 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Statement 133 is effective
for fiscal years beginning after June 15, 1999, with earlier application
permitted. In June 1999, the Financial Accounting Standards Board issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement 133, an Amendment of FASB Statement 133.
Statement 137 effectively extends the required application of Statement 133 to
all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application permitted. The Partnership adopted Statement 133 in the
first quarter of 1999, and such adoption had no material impact on the
Partnership.
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 at fixed debt rate. The partnership's
other assets and liabilities are also at fixed rates. Consequently the
partnership has no interest rate risk or other market risk exposure.
-13-
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements and
Financial Statement Schedule
Page
Number
------
Financial Statements
--------------------
Independent Auditors' Report 15
Balance Sheets as of December 31, 2000 and 1999 16
Statements of Income for the years ended
December 31, 2000, 1999 and 1998 17
Statements of Partners' Capital for the years ended
December 31, 2000, 1999 and 1998 18
Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 19-20
Notes to Financial Statements 21-30
Financial Statement Schedule
----------------------------
Independent Auditors' Report 31
Schedule II - Valuation and Qualifying Accounts 32
Independent Auditor's 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, 2000 and 1999, and the related statements of
income, partners' capital, and cash flows for each of the years in the
three-year period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/KPMG LLP
-----------
KPMG LLP
Denver, Colorado
April 20, 2001
-15-
CAPITAL PREFERRED YIELD FUND-III, L.P.
BALANCE SHEETS
Years Ended December 31, 2000 and 1999
ASSETS
2000 1999
----------- -----------
Cash and cash equivalents $ 1,529,900 $ 4,382,378
Accounts receivable 967,890 1,404,792
Receivable from affiliates -- 715,524
Equipment held for sale 135,328 1,470,585
Net investment in direct finance leases 2,531,647 1,916,677
Leased equipment, net 27,276,407 32,213,785
----------- -----------
Total assets $32,441,172 $42,103,741
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 1,018,178 $ 2,337,411
Payables to affiliates 194,756 60,405
Rents received in advance 108,751 471,353
Distributions payable to partners 652,782 442,346
Discounted lease rentals 8,686,491 9,257,171
----------- -----------
Total liabilities 10,660,958 12,568,686
----------- -----------
Partners' capital:
General partner -- --
Limited partners:
Class A 500,000 units authorized; 492,145
and 493,410 units issued and outstanding
in 1998 and 1997, respectively 21,451,760 29,158,012
Class B 328,454 377,043
----------- -----------
Total partners' capital 21,780,214 29,535,055
----------- -----------
Total liabilities and partners' capital $32,441,172 $42,103,741
=========== ===========
See accompanying notes to financial statements.
-16-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
Revenue:
Operating lease rentals $14,073,931 $16,104,518 $17,367,092
Direct finance lease income 248,718 214,317 508,080
Equipment sales margin 933,489 1,187,086 450,186
Interest income 136,770 390,199 165,182
----------- ----------- -----------
Total revenue 15,392,908 17,896,120 18,490,540
----------- ----------- -----------
Expenses:
Depreciation 10,923,830 12,284,633 13,493,620
Management fees paid to general partner 317,680 348,688 419,816
Direct services from general partner 83,615 135,846 209,528
General and administrative 496,241 276,855 286,112
Interest on discounted lease rentals 866,284 659,115 1,085,904
Provision for losses 2,232,122 1,990,315 1,250,000
----------- ----------- -----------
Total expenses 14,919,772 15,695,452 16,744,980
----------- ----------- -----------
Net income $ 473,136 $ 2,200,668 $ 1,745,560
=========== =========== ===========
Net income allocated:
To the general partner $ 82,094 $ 52,712 $ 52,755
To the Class A limited partners 387,131 2,126,476 1,675,705
To the Class B limited partner 3,911 21,480 17,100
----------- ----------- -----------
$ 473,136 $ 2,200,668 $ 1,745,560
=========== =========== ===========
Net income per weighted average Class A limited
partner unit outstanding $ 0.79 $ 4.32 $ 3.40
=========== =========== ===========
Weighted average Class A limited partner
units outstanding 491,184 491,874 492,500
=========== =========== ===========
See accompanying notes to financial statements.
-17-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2000, 1999 and 1998
Class A
Limited Class A Class B
General Partner Limited Limited
Partner Units Partners Partner Total
-------- -------- -------- ------- -----
Partners' capital, January 1, 1998 $ -- 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 -- 2,126,476 21,480 2,200,668
Distributions declared to partners (52,712) -- (5,166,026) (52,500) (5,271,238)
--------- ------- ------------ --------- ------------
Partners' capital, December 31, 1999 -- 491,470 29,158 012 377,043 29,535,055
Redemptions -- (454) (19,963) -- (19,963)
Net income 82,094 -- 387,131 3,911 473,136
Distributions declared to partners (82,094) -- (8,073,419) (52,500) (8,208,013)
--------- ------- ------------ --------- ------------
Partners' capital, December 31, 2000 $ -- 491,016 $ 21,451,760 $ 328,454 $ 21,780,214
========= ======= ============ ========= ============
See accompanying notes to financial statements.
-18-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 473,136 $ 2,200,668 $ 1,745,560
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,923,830 12,284,633 13,493,620
Provision for losses 2,232,122 1,990,315 1,250,000
Cost of equipment sales 2,889,065 5,597,793 4,484,453
Recovery of investment in direct finance leases 1,151,837 1,934,798 2,297,749
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 539,758 45,254 (103,731)
(Increase) decrease in receivable from affiliates 715,524 (965,001) (43,998)
Increase in accounts payable and accrued liabilities (1,319,233) 828,792 820,892
Increase (decrease) in payables to affiliates 134,351 12,045 9,084
Increase (decrease) in rents received in advance (362,602) (83,471) (77,654)
------------ ------------ ------------
Net cash provided by operating activities 17,377,788 23,845,826 23,875,975
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment on operating leases from affiliate (6,832,595) (6,730,220) (8,336,063)
Investment in direct financing leases, acquired from affiliate (1,089,823) (209,885) (2,286,569)
------------ ------------ ------------
Net cash used in investing activities (7,922,418) (6,940,105) (10,622,632)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from discounted lease rentals 896,890 205,734 1,728,059
Principal payments on discounted lease rentals (5,187,197) (10,141,287) (9,710,829)
Redemptions of Class A limited partnership units (19,963) (41,553) (84,481)
Distributions to partners (7,997,578) (5,269,691) (5,276,324)
------------ ------------ ------------
Net cash used in by financing activities (12,307,848) (15,246,797) (13,343,575)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (2,852,478) 1,658,924 (90,232)
Cash and cash equivalents at beginning of year 4,382,378 2,723,454 2,813,686
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,529,900 $ 4,382,378 $ 2,723,454
============ ============ ============
-19-
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 860,742 $ 651,468 $1,084,481
Supplemental disclosure of noncash investing and
financing activities:
Discounted lease rentals assumed in equipment acquisitions 3,719,626 6,645,920 4,758,504
Discounted lease rentals for bankrupt lessee written-off
as uncollectible -- 57,104 --
Rents deducted from cash paid for equipment acquisitions 1,502 -- --
Miscellaneous deduction from equipment acquisitions 7,988 -- --
See accompanying notes to financial statements.
-20-
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 2001 and 2003. The general partner of the
Partnership is CAI Equipment Leasing IV Corp., a wholly owned subsidiary of
Mishawaka Leasing Company, Inc. ("MLC").
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.
MLC 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, 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:
-21-
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:
-22-
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.
-23-
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 all fiscal quarters of all fiscal years beginning after
June 15, 2000, with earlier application permitted. The Partnership adopted
Statement 133 in the first quarter of 1999, and such adoption had no
material impact on the Partnership.
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.
-24-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
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 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
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.
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.
-25-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
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.
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 $1,518,000 and $4,299,000 at December 31, 2000
and 1999, 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, 2000 and 1999 were:
2000 1999
----------- -----------
Minimum lease payments receivable $ 2,559,381 $ 1,574,987
Estimated residual values 415,146 644,553
Less unearned income (442,880) (302,863)
----------- -----------
Total $ 2,531,647 $ 1,916,677
=========== ===========
-26-
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, 2000 and 1999 were:
2000 1999
------------ ------------
Transportation and industrial equipment $ 24,138,413 $ 28,744,322
Computers and peripherals 12,861,053 11,919,735
Furniture, fixtures and equipment 14,927,965 16,203,136
Other 2,338,552 2,304,378
------------ ------------
54,265,983 59,171,571
Less accumulated depreciation (25,923,040) (26,737,041)
Allowance for losses (1,066,536) (220,745)
------------ ------------
$ 27,276,407 $ 32,213,785
============ ============
Depreciation expense for 2000, 1999 and 1998 was $10,923,830, $12,284,633
and $13,493,620, respectively.
4. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from noncancelable leases as of
December 31, 2000 are:
Years Ending December 31, Direct Finance Leases Operating Leases
------------------------- --------------------- ----------------
2001 $ 870,888 $ 8,536,485
2002 814,791 5,327,406
2003 528,894 2,753,729
2004 324,748 1,437,144
Thereafter 20,060 135,130
----------- ------------
Total $ 2,559,381 $ 18,189,894
=========== ============
-27-
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
5. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at December 31, 2000 bear interest at
rates primarily ranging between 6% and 11%. Aggregate maturities of such
non-recourse obligations are:
Years Ending December 31,
-------------------------
2001 $ 3,697,155
2002 2,498,317
2003 1,591,440
2004 876,043
Thereafter 23,536
------------
Total $ 8,686,491
============
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 $385,000, $415,000 and $516,000 in 2000, 1999 and
1998, 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 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 $318,000, $349,000, and $420,000
during 2000, 1999 and 1998, 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 $84,000,
$136,000, and $210,000 during 2000, 1999 and 1998, respectively.
-28-
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 $11,649,000, $13,583,000 and $15,381,000 (including
approximately $3,720,000, $6,646,000 and $4,759,000 of discounted lease
rentals) during 2000, 1999 and 1998, 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 $195,000 and $60,000 during 2000
and 1999, respectively, consists $24,000 for management fees paid to
general partner and $171,000 for reimbursable general and administrative
expenses for 2000 and $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.
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.
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,:
2000 1999 1998
---- ---- ----
Net income per financial statements $ 473,136 $ 2,200,668 $ 1,745,560
Direct finance leases 1,169,570 1,875,238 2,297,748
Depreciation (1,712,124) (1,555,692) (2,401,465)
Provision for losses 2,232,122 1,990,315 1,250,000
Gain (loss) on sale of equipment 222,475 550,629 362,981
Other (577,061) (124,300) 397,457
----------- ----------- -----------
Partnership income for federal income tax purposes $ 1,808,118 $ 4,936,858 $ 3,652,281
=========== =========== ===========
-29-
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,:
2000 1999 1998
---- ---- ----
Partners' capital per financial statements $ 21,780,214 $ 29,535,055 $ 32,647,177
Commissions and offering costs 7,184,603 7,184,603 7,184,603
Direct finance leases 10,205,293 9,035,723 7,160,485
Depreciation (20,853,515) (19,141,391) (17,585,699)
Provision for losses 6,047,436 3,815,314 1,825,000
Gain (loss) on sale of equipment 223,372 897 (549,732)
Other 235,138 818,080 947,953
------------ ------------ ------------
Partners' capital for federal income tax purposes $ 24,822,541 $ 31,248,281 $ 31,629,787
============ ============ ============
8. Concentration of Credit Risk
----------------------------
Approximately 67% 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. One
lessee and its affiliates accounted for more than 15% of total revenue of
Partnership during 2000.
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, 2000 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, 2000, discounted lease rentals of approximately
$8,686,000 had a fair value of approximately $9,036,000. The fair value was
estimated utilizing market rates of comparable debt having similar
maturities and credit quality as of December 31, 2000.
-30-
Independent Auditor's Report
----------------------------
The Partners
Capital Preferred Yield Fund-III, L.P.:
Under date of April 20, 2001, we reported on the balance sheets of Capital
Preferred Yield Fund-III, L.P. as of December 31, 2000 and 1999, and the related
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 2000 as contained in the Partnership's
annual report on Form 10-K for the year 2000. In connection with our audits of
the aforementioned financial statements, we also audited the related financial
statement Schedule II. 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
April 20, 2001
-31-
CAPITAL PREFERRED YIELD FUND-III, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 2000, 1999 and 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ---------- ------------- ----------
Balance at Additions Balance
Beginning Charged to at End
Classification of Period Expenses Deductions(1) of Period
- -------------- ----------- ----------- ------------- -----------
2000
----
Allowance for losses:
Accounts receivable $ 10,000 $ 107,000 $ -- $ 117,000
Receivable from affiliates 300,000 -- (300,000) --
Equipment on operating leases 220,745 2,232,122 (1,386,331) 1,066,536
----------- ----------- ----------- -----------
$ 530,745 $ 2,339,122 $(1,686,331) $ 1,183,536
=========== =========== =========== ===========
1999
----
Allowance for losses:
Accounts receivable 10,000 -- -- 10,000
Receivable from affiliates -- 300,000 -- 300,000
Equipment on operating leases 177,572 1,690,315 (1,647,142) 220,745
----------- ----------- ----------- -----------
$ 187,572 $ 1,990,315 $(1,647,142) $ 530,745
=========== =========== =========== ===========
1998
----
Allowance for losses:
Accounts receivable -- 10,000 -- 10,000
Equipment on operating leases 231,777 1,240,000 (1,294,205) 177,572
----------- ----------- ----------- -----------
$ 231,177 $ 1,250,000 $(1,294,205) $ 187,572
=========== =========== =========== ===========
(1) Principally charge-offs of assets against the established allowances.
See accompanying independent auditor's report
-32-
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
John F. Olmstead, age 57, is President of Mishawaka Leasing Co., Inc. since its
formation in September 2000. He was SeniorVice President of CAI from December,
1988 until June 2000. He has served as Chairman of the Board for Neo-kam
Industries, Inc., Matchless Metal Polish Company, Inc. and ACL, Inc. since 1983.
He has over 30 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.
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.
MLC 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:
-33-
Item 12. Security Ownership of Certain Beneficial Owners and Management,
continued
--------------------------------------------------------------
General Partner
---------------
CAI Equipment Leasing IV Corp.
2750 South Wadsworth
C-200
Denver, Colorado 80227
Class B Limited Partner
-----------------------
Mishawaka Leasing Company, Inc.
2750 South Wadsworth
C-200
Denver, Colorado 80227
(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, 2000.
(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 2000:
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 $385,000 in 2000, 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 $318,000 for 2000.
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
$171,000 during 2000.
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 $82,094 and $82,094, respectively, for 2000. Distributions and net
income allocated to the Class B limited partner totaled $52,500 and $3,911,
respectively, for 2000.
-35-
During 2000, 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
- ------ --------------------- ---------- ------------ --------- ---------
Alliant TechSystems PC's 96,198 99,532 74,338 30,211
American Honda Editing Equipment 44,680 46,228 - 15,107
BE Aerospace Semiconductor 301,478 311,924 131,478 148,576
Daimler Chrysler Pallet Trucks 58,463 60,489 - 11,463
EEX PC's 167,345 173,143 157,608 66,651
EMC Computer Equipment 490,184 507,169 423,575 241,956
EMC Servers 470,637 486,945 395,984 254,830
Geico Networking 10,970 11,350 - 4,059
Geico Servers 192,556 199,228 - 87,016
General Dynamics Computer 246,644 255,190 - 59,369
General Motors Die Handler 663,810 686,811 - 406,643
General Motors Fork Lift 57,234 59,217 - 19,159
General Motors Platform Truck 554,070 573,269 - 107,110
General Motors Rider Die Handler 282,215 291,994 - 53,555
General Motors Scrubber 42,351 43,819 - 14,177
General Motors Sweeper 107,149 110,862 - 33,825
General Motors Utility Carts 183,596 189,958 - 48,288
Honeywell Computer 961,788 993,335 - 368,094
Johnson Control Lift Truck 175,114 180,981 - 34,673
Louisiana Pacific Crawler 248,507 257,118 - 72,515
Louisiana Workers Copiers 119,409 123,546 - 54,372
Lucent Fork Lift 58,800 60,837 - 11,492
Magna Seating Computer 453,511 467,567 185,198 211,399
Matsushita Servers 191,910 198,560 171,640 84,084
McGraw Hill Computer Equipment 481,494 498,214 - 177,233
Nabisco Lift Truck 33,552 34,714 - 5,711
NBC Media Composer 84,000 86,911 - 23,813
New York Life Copiers 179,926 186,161 - 42,256
New York Presbyterian Hosp Medical Equipment 409,060 423,234 - 86,862
Northrop Grumman Computer 159,255 164,311 - 53,397
Otis Elevator Workstations 55,854 57,789 - 19,885
Ryder Fork Lift 55,057 56,964 - 15,732
Ryder Pallet Trucks 18,830 19,483 - 6,096
Ryder Wire Decks 7,801 8,071 - 3,330
Teachers Insurance Computer Equipment 262,082 271,163 213,996 116,661
The BOC Group Computer Equipment 1,457,517 1,508,019 1,162,412 518,952
Thompson Machine Tools 252,730 261,487 - 76,283
Thomson Industries Tool Cart 44,495 46,037 - 11,346
TXU Business Computer 265,634 274,056 - 67,658
U-Haul Servers 127,134 131,539 117,853 60,126
Unilever Fork Lift 100,800 104,293 - 21,179
Williams Sonoma POS 831,994 860,823 685,544 269,076
Xerox Computer Equipment 232,693 240,755 - 103,960
Xerox Lift Truck 24,582 25,434 - 5,748
11,263,109 11,648,530 3,719,626 4,123,928
* 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.
36
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").
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(b) The Partnership did not file any reports on Form 8-K during the
quarter ended December 31, 2000.
(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.
-37-
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: April 23, 2001 Capital Preferred Yield Fund-III, L.P.
By: CAI Equipment Leasing IV Corporation
By:
-------------------------------------
Susan M. Landi
Chief Accounting Officer
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 April 23, 2001.
Signature Title
--------- -----
- ----------------
John F. Olmstead President and Director
-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: April 23, 2001 Capital Preferred Yield Fund-III, L.P.
By: CAI Equipment Leasing IV Corporation
By: /s/Susan M. Landi
-------------------------------------
Susan M. Landi
Chief Accounting Officer
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 April 23, 2001.
Signature Title
--------- -----
/s/John F. Olmstead
- --------------------
John F. Olmstead President and Director