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, 2001
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 33-80849
Capital Preferred Yield Fund-IV, L.P.
-------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1331690
(State of organization) (I.R.S. Employer
Identification Number)
2750 South Wadsworth, C-200, Denver, Colorado 80227
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 963-9600
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-IV, L.P., a Delaware limited partnership (the
"Partnership"), was organized on December 18, 1995 and is engaged in the
business of owning and leasing equipment. CAI Equipment Leasing V Corp.
("CAIEL-V"), a Colorado corporation, is the general partner of the Partnership.
CAIEL-V was a wholly owned subsidiary of Capital Associates, Inc. ("CAI") until
September 12, 2000, the date it was purchased in its entirety by Mishawaka
Leasing Company, Inc. ("MLC"). CAI discontinued its operations on December 15,
2000 and filed Chapter 11 Bankruptcy on October 15, 2001.
Capital Associates International, Inc. ("CAII") was the Class B limited partner
of the Partnership prior to September 12, 2000. In exchange for its Class B
limited partner interest, CAII contributed $500,000 (i.e., $10,000 for each
$1,000,000 contribution to the Partnership made by the Class A limited partners)
to the Partnership making it the largest single investor in the Partnership. The
contributions of CAII were made simultaneously with the purchase of equipment by
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 (which was
reached on February 9, 1998); (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, 2003); (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 2001, the Partnership acquired equipment of various types under lease to
third parties on short-term leases (generally five years or less). All of the
equipment was arranged by MLC to be acquired by the Partnership from third
parties. The equipment is generally comprised of transportation and industrial
equipment, office furniture and equipment, and computer and peripheral
equipment, among others. See Item 13 of this report, "Certain Relationships and
Related Transactions" for the detail listing of equipment purchased during 2001.
The Partnership expects that a majority of the equipment purchased during 2002
will be similar in nature to the equipment acquired in 2001. The Partnership is
required to dissolve and distribute all of its assets no later than December 31,
2007. However, the general partner anticipates that all equipment will be sold
and the Partnership will be liquidated prior to that date.
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
The Partnership leases equipment to investment grade lessees in diverse
industries including the material handling, telecommunications and manufacturing
industries. Approximately 70% of the Partnership's total equipment under lease
was leased to investment grade lessees. 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. Prior to September 12, 2000, the Partnership
relied upon the services of CAII for origination of leases, administrative and
accounting services, and remarketing of leases and equipment, among other
services. Since September 12, 2000, the general partner has contracted with MLC
to provide the above services. Many of the management and administrative
personnel of MLC formerly worked for CAII and serviced the Partnership leases.
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".
The Partnership competes in the leasing marketplace as a lessor with a
significant number of other companies, including equipment manufacturers,
leasing companies and financial institutions. The Partnership competes mainly on
the basis of the expertise of its general partner in remarketing equipment,
terms offered in its transactions, pricing and service. Although the Partnership
does not account for a significant percentage of the leasing market, the general
partner believes that the Partnership's marketing strategies and financing
capabilities 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 lessee
accounted for more than 10% of total revenue of the Partnership during 2001.
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 "Business," of
this Report, 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, 2001.
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters
-------
(a) The Partnership's Class A limited partner units, Class B interest and
general partner interest are not publicly traded. There is no
established public trading market for such units and interests and none
is expected to develop.
(b) At December 31, 2001, there were 2,327 Class A limited partners.
4
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters, continued
--------
(c) Distributions
-------------
During 2001, 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, 2000 January 2001 $ 0.875 $ 483,045
January 31, 2001 February 2001 0.875 403,156
February 28, 2001 March 2001 0.875 403,157
March 31, 2001 April 2001 0.875 483,045
April 30, 2001 May 2001 0.875 403,157
May 31, 2001 June 2001 0.875 403,157
June 30, 2001 July 2001 0.875 483,045
July 31, 2001 August 2001 0.875 403,157
August 31, 2001 September 2001 0.875 402,938
September 30, 2001 October 2001 0.875 480,874
October 31, 2001 November 2001 0.875 400,985
November 30, 2001 December 2001 0.875 399,498
------- ----------
$ 10.50 $ 5,149,214
======= ===========
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
that 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 distribution for the month ended December 31, 2001, totaling
$479,387, was paid to the Class A limited partners during January
2002. Distributions to the general partner and Class B limited
partner during 2001 are discussed in Item 13 of this Report,
"Certain Relationships and Related Transactions."
The general partner believes 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 and Class B limited partners at
annualized rates of 10.5% of 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.
5
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
During 2000, 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, 1999 January 2000 $ 0.875 $ 484,938
January 31, 2000 February 2000 0.875 405,240
February 28, 2000 March 2000 0.875 404,816
March 31, 2000 April 2000 0.875 484,007
April 30, 2000 May 2000 0.875 404,119
May 31, 2000 June 2000 0.875 403,117
June 30, 2000 July 2000 0.875 483,025
July 31, 2000 August 2000 0.875 403,157
August 31, 2000 September 2000 0.875 403,156
September 30, 2000 October 2000 0.875 483,045
October 31, 2000 November 2000 0.875 403,157
November 30, 2000 December 2000 0.875 403,156
------- -----------
$ 10.50 $ 5,164,993
======= ===========
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)
----------- ------------------- ---------------------
1996 $ 7.72 11.0%
1997 10.50 10.5%
1998 10.50 10.5%
1999 10.50 10.5%
2000 10.50 10.5%
2001 10.50 10.5%
-----
$ 60.22
========
(1) Cumulative distributions, as described in note 1 to Notes to
Consolidated Financial Statements, began May 1996.
6
Item 6. Selected Financial Data
-----------------------
The following selected financial data relates to the years ended December 31,
1997 through 2001. 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,
-------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total revenue $ 19,133,203 $ 17,611,643 $ 19,046,666 $ 19,560,413 $ 11,907,740
Net income (loss) (112,651) 2,084,318 1,236,040 2,031,561 955,418
Net income (loss) per weighted average Class A
limited partner unit outstanding (0.33) 4.09 2.36 3.95 2.82
Total assets 46,912,390 48,673,300 48,130,657 54,877,835 56,161,440
Discounted lease rentals 20,141,516 16,264,856 13,452,270 15,708,835 17,633,047
Distributions declared to partners 5,250,559 5,268,284 5,315,888 5,293,514 3,310,427
Distributions declared per weighted average
Class A limited partner unit outstanding 10.50 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
---------------------
Critical Accounting Policies
Accounting for leases falls under guidelines that have been substantially
unchanged since at least 1975. For operating leases, revenue and depreciation
are recorded on a straight-line basis over the lease term. For direct finance
leases, revenue and amortization are recorded using the interest method (i.e.
similar to amortization of a home mortgage).
For both types of leases, two critical assumptions include the probability of
future contractual rent collections and an estimate of future residual value.
The Partnership must make judgments when evaluating both of these assumptions
before entering into a lease. The probability of future rent collection is
addressed during the credit evaluation process. When estimating future
residuals, 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.
Future reported results could differ considerably from expected results if
conditions arise that significantly affect these two critical assumptions.
However, the general partner believes the likelihood of materially different
reported results is minimized (but not removed) because in the normal course of
business the Partnership a) assigns future rents to financial institutions for
an up front cash payment and b) attempts to keep the Partnership's portfolio
diversified as to lessee and equipment type concentrations.
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
----------------------
Operating Results
Presented below are schedules (prepared solely to facilitate the discussion of
results of operations that follows) showing condensed categories and analyses of
changes in those condensed categories derived from the Statements of Operations:
Years Ended December 31, Years Ended December 31,
------------------------ ------------------------
2001 2000 Change 2000 1999 Change
----------- ----------- ----------- ----------- ------------ -----------
Leasing margin $ 2,817,676 $ 3,815,906 $ (998,230) $ 3,815,906 $ 3,398,704 $ 417,202
Equipment sales margin 830,591 192,190 638,401 192,190 245,626 (53,436)
Interest income 108,441 160,103 (51,662) 160,103 82,998 77,105
Management fees paid to general partner (404,684) (338,261) (66,423) (338,261) (401,008) 62,747
Direct services from general partner (251,812) (139,906) (111,906) (139,906) (208,672) 68,766
General and administrative (607,274) (339,714) (267,560) (339,714) (214,757) (124,957)
Provision for losses (2,605,589) (1,266,000) (1,339,589) (1,266,000) (1,666,851) 400,851
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (112,651) $ 2,084,318 $(2,196,969) $ 2,084,318 $ 1,236,040 $ 848,278
=========== =========== =========== =========== =========== ===========
Leasing Margin
Leasing margin consists of the following:
Years Ended December 31,
----------------------------------------------
2001 2000 1999
---- ---- ----
Operating lease rentals $ 17,498,191 $ 16,247,801 $ 18,443,275
Direct finance lease income 695,980 1,011,549 274,767
Depreciation (13,816,293) (12,306,698) (14,386,576)
Interest on discounted lease rentals (1,560,202) (1,136,746) (932,762)
------------ ------------ ------------
Leasing margin $ 2,817,676 $ 3,815,906 $ 3,398,704
============ ============ ============
Leasing margin ratio 15% 22% 18%
============ ============ ============
Leasing margin ratio fluctuates based upon (i) the mix of direct finance leases
and operating leases, (ii) remarketing activities, (iii) the method used to
finance leases added to the Partnership's lease portfolio, and (iv) the relative
age of lease types in the portfolio. Leasing margin and the related leasing
margin ratio for an operating lease financed with non-recourse debt increases
during the term of the lease since rents and depreciation are typically fixed
while interest expense declines as the related non-recourse debt principal is
repaid.
Operating lease rentals and depreciation increased for the year ended December
31, 2001 compared to the year ended December 31, 2000 primarily due to higher
average monthly rents and associated depreciation in the portfolio. Interest on
discounted lease rentals increased in 2001 compared to 2000 primarily due to an
increase in non-recourse debt. Direct finance lease income decreased for the
year ended December 31, 2001 compared to the same period of 2000 even though net
investment in direct finance leases increased. This is primarily due to a
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
combination of the addition of a large lease and an increase in remarketed
leases at the end of 1999 which resulted in increased direct finance lease
income during 2000.
Operating lease rentals and depreciation decreased for the year ended December
31, 2000 compared to the year ended December 31, 1999 due to a decrease in the
operating lease portfolio. Interest on discounted lease rentals increased in
2000 compared to 1999 primarily due to an increase in non-recourse debt. Direct
finance lease income increased for the year ended December 31, 2000 compared to
the same period of 1999 primarily due to the addition of a large lease at the
end of 1999 and an increase in remarketed leases.
The ultimate profitability of the Partnership's leasing transactions is
dependent in part on interest rates at the time the leases are originated,
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:
2001 2000 1999
---- ---- ----
Equipment sales revenue $ 2,746,707 $ 2,159,596 $ 3,118,572
Cost of equipment sales (1,916,116) (1,967,406) (2,872,946)
----------- ----------- -----------
Equipment sales margin $ 830,591 $ 192,190 $ 245,626
=========== =========== ===========
Equipment sales margin is affected by the volume and composition of equipment
that becomes available for sale. Some of the Partnership's initial leases have
expired, and the equipment is either being re-leased or sold to the lessee or to
third parties. Equipment sales margin increased for 2001 compared to 2000
primarily due to an increase in the expiration of leases within the portfolio
resulting in additional equipment sales.
Interest Income
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 and the size of the Partnership's portfolio. Management
fees paid to the general partner increased in 2001 compared to 2000 primarily
due to an increase in rents collected. Management fees paid to the general
partner decreased in 2000 compared to 1999 primarily due to a decrease in rents
collected.
Direct services from the general partner increased for 2001 compared to 2000
primarily due to increased efforts to collect receivables owed to the
Partnership. Direct services from the general partner decreased for 2000
compared to 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 had paid a
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
refurbishing charge to CAII at the time computer equipment was returned by the
lessee to the Partnership. The refurbishing charge included all services
necessary to prepare the equipment for re-sale. MLC does not provide such
services, which are now handled by independent third parties.
General and administrative expenses increased for 2001 compared to 2000 due to
an increase in insurance expense, data processing charges and audit fees. Also
contributing to the increase is a one-time charge for software and computer
equipment related to the change in ownership of the general partner. General and
administrative charges increased during 2000 compared to 1999 primarily due to a
one time remarketing fee on the renewal of a lease, additional costs associated
with the conversion from CAII, an increase in data processing costs, and an
increase in sales tax expense. The increase in sales tax expense is due to a
change by the State of Michigan in the method of apportions of multi-state
companies and an increase in appraised fees.
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 occurs when the equipment is remarketed subsequent to
initial lease termination) is recorded as provision for losses.
Residual values are established equal to the estimated value to be received from
the equipment following termination of the lease. In estimating such values, the
Partnership considers all relevant facts regarding the equipment and the lessee,
including, for example, the likelihood that the lessee will re-lease the
equipment. The nature of the Partnership's leasing activities is that it has
credit and residual value exposure and, accordingly, in the ordinary course of
business, it will incur losses from those exposures. The Partnership performs
on-going quarterly assessments of its assets to identify any
other-than-temporary losses in value.
The provision for losses recorded during 2001 related to the following:
o $440,000 related to a lessee that filed for Chapter 11 bankruptcy
protection on December 21, 2001.
o $300,000 for estimated uncollectible accounts receivable. The reserve
was recorded due to the uncertainty of collection. However, management
will continue its efforts to collect the receivables.
o $1,865,589 related to decreases in the estimated future value of
unguaranteed residual values on direct financing and operating leases.
The provision for losses recorded during 2000 related to the following:
o $158,000 related to a decline in the residual value of on-lease office
and computer equipment.
o $334,000 related primarily to computer equipment that has been
returned to the Partnership with fair market values that are lower
than the book values.
o $86,000 was recorded as a reserve for uncollectible accounts
receivable.
o $139,000 was accrued to recognize an anticipated loss on the sale of
forklifts and office furniture.
o $99,000 related to various forklifts and construction equipment that
has been returned to the Partnership with fair market values that are
lower than book values.
o $450,000 related to a lessee that filed for Chapter 11 bankruptcy
protection on October 5, 2000.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
The provision for losses recorded during 1999 related to the following:
o $293,568 related to a decline in the residual value of on-lease
computer equipment
o $31,602 related to anticipated declines in realizable values of
on-lease forklifts.
o $750,000 was recognized as losses on sales of certain computer
equipment. The Partnership has previously expected to realize the
carry value of that equipment through lease renewals and proceeds from
the sale of the equipment to the original lessees. The fair market
value of the equipment re-leased or sold to third parties was less
than anticipated.
o $103,000 was recognized as losses on the sale of various
semiconductor, forklifts, tractors and office furniture.
o $188,681 related primarily to equipment that has been returned to the
Partnership with fair market values that are lower than the book
values.
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 2001, 2000 and 1999, the Partnership acquired equipment subject to leases
with a total purchase price of $16,886,489, $15,061,881 and $15,019,045
(including $12,186,758, $7,994,602 and $7,386,009 of equipment acquired subject
to existing non-recourse debt), respectively. Non-recourse borrowing against
unleveraged leases in the Partnership's lease portfolio may occur in the future
as well, when the general partner, at its discretion, determines that such
non-recourse financing is in the best interest of the Partnership.
During 2001, 2000 and 1999, the Partnership declared distributions to the Class
A limited partners of $5,145,554, $5,163,101 and $5,209,435, respectively, of
which $479,387 was paid during January 2002. A portion of such distributions is
expected to constitute a return of capital. Distributions may be characterized
for tax, accounting and economic purposes as a return of capital, a return on
capital or a portion of both. The portion of each cash distribution by a
partnership that 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 sales 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 2002, 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% of 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.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
II. Liquidity and Capital Resources, continued
-------------------------------
Until September 2000, the Partnership relied upon the services of 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 (see discussion below) 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.
CAII owed the Partnership $406,144 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. During 2000, as 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 were higher than normal. Also
during the same period, CAII did not to keep up with collections of accounts
receivable, which were higher than normal. Both of these events have adversely
affected the Partnership's performance. CAII subsequently filed Chapter 11
Bankruptcy on October 15, 2001.
III. New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations" which requires the purchase method and eliminates the option of
using the pooling-of-interests method of accounting for all business
combinations. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001, and all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or later.
The Partnership does not believe the adoption of this statement will have a
material impact on the Partnership's financial position, results of operations
or cash flows.
In July 2001, FASB issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" which requires that all intangible assets
acquired, other than those acquired in business combination, be initially
recognized and measured based on the asset's fair value. In addition, the
intangible asset should be amortized based upon its useful life. If the
intangible asset is determined to have an indefinite useful life, it shall not
be amortized until its useful life can be determined. The Partnership does not
believe the adoption of this statement will have a material impact on the
Partnership's financial position, results of operations or cash flows.
In June 2001, FASB issued Statement of Financial Accounting Standards No. 143
("SFAS No. 143"), "Accounting for Asset Retirement Obligations", effective for
the Partnership on January 1, 2003. SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Partnership
does not believe the adoption of this statement will have a material impact on
the Partnership's financial position, results of operations or cash flows.
In August 2001, FASB issued Statement of Financial Accounting Standards No. 144
("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets", effective for the Partnership on January 1, 2002. SFAS No. 144
supercedes Statement of Financial Accounting Standards No. 121, "Accounting for
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and other related accounting guidance. The Partnership does not believe the
adoption of this statement will have a material impact on the Partnership's
financial position, results of operations or cash flows.
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 acquisitions; 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 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, 2001 and 2000 16
Statements of Operations for the years ended December 31,
2001, 2000 and 1999 17
Statements of Partners' Capital for the years ended December
31, 2001, 2000 and 1999 18
Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999 19-20
Notes to Financial Statements 21-30
Financial Statement Schedule
----------------------------
Independent Auditors' Report 31
Schedule II - Valuation and Qualifying Accounts 32
14
Independent Auditors' Report
----------------------------
The Partners
Capital Preferred Yield Fund-IV, L.P.:
We have audited the accompanying balance sheets of Capital Preferred Yield
Fund-IV, L.P. as of December 31, 2001 and 2000, and the related statements of
operations, partners' capital, and cash flows for each of the years in the
three-year period ended December 31, 2001. 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-IV, L.P. as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/KPMG LLP
------------
KPMG LLP
Denver, Colorado
March 22, 2002
15
Capital Preferred Yield Fund-IV, L.P.
BALANCE SHEETS
As of December 31, 2001 and 2000
ASSETS
2001 2000
----------- -----------
Cash and cash equivalents $ 3,917,475 $ 3,702,069
Accounts receivable, net of allowance for losses
of $366,000 in 2001 and $66,000 in 2000 1,944,681 1,122,640
Equipment held for sale 918,597 93,099
Net investment in direct finance leases 6,859,456 4,403,516
Leased equipment, net 33,272,181 39,351,976
----------- -----------
Total assets $46,912,390 $48,673,300
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 2,511,585 $ 2,078,880
Payables to affiliates 73,203 294,170
Rents received in advance 40,473 279,298
Distributions payable to partners 488,648 496,460
Discounted lease rentals 20,141,516 16,264,856
----------- -----------
Total liabilities 23,255,425 19,413,664
----------- -----------
Partners' capital:
General partner -- --
Limited partners:
Class A 500,000 units authorized; 486,563 and 490,744 units
issued and outstanding in 2001 and 2000, respectively 23,343,893 28,892,412
Class B 313,072 367,224
----------- -----------
Total partners' capital 23,656,965 29,259,636
----------- -----------
Total liabilities and partners' capital $46,912,390 $48,673,300
=========== ===========
See accompanying notes to financial statements.
16
Capital Preferred Yield Fund-IV, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ------------ ------------
Revenue:
Operating lease rentals $ 17,498,191 $ 16,247,801 $ 18,443,275
Direct finance lease income 695,980 1,011,549 274,767
Equipment sales margin 830,591 192,190 245,626
Interest income 108,441 160,103 82,998
------------ ------------ ------------
Total revenue 19,133,203 17,611,643 19,046,666
------------ ------------ ------------
Expenses:
Depreciation 13,816,293 12,306,698 14,386,576
Management fees paid to general partner 404,684 338,261 401,008
Direct services from general partner 251,812 139,906 208,672
General and administrative 607,274 339,714 214,757
Provision for losses 2,605,589 1,266,000 1,666,851
Interest on discounted lease rentals 1,560,202 1,136,746 932,762
------------ ------------ ------------
Total expenses 19,245,854 15,527,325 17,810,626
------------ ------------ ------------
Net income (loss) $ (112,651) $ 2,084,318 $ 1,236,040
============ ============ ============
Net income (loss) allocated:
To the general partner $ 52,505 $ 52,683 $ 53,953
To the Class A limited partners (163,504) 2,011,319 1,170,266
To the Class B limited partner (1,652) 20,316 11,821
------------ ------------ ------------
$ (112,651) $ 2,084,318 $ 1,236,040
============ ============ ============
Net income (loss) per weighted average Class A
limited partner unit outstanding $ (0.33) $ 4.09 $ 2.36
============ ============ ============
Weighted average Class A limited partner
units outstanding 489,577 491,320 496,258
============ ============ ============
See accompanying notes to financial statements.
17
Capital Preferred Yield Fund-IV, L.P.
STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 2001,
2000 and 1999
Class A
Limited Class A Class B
General Partners Limited Limited
Partner Units Partners Partner Total
-------- ---------- -------- ------- -----
Partners' capital, January 1, 1999 $ -- 496,844 $ 36,507,167 $ 440,087 $ 36,947,254
Redemptions -- (3,919) (264,854) -- (264,854)
Net income 53,953 -- 1,170,266 11,821 1,236,040
Distributions declared to partners (53,953) -- (5,209,435) (52,500) (5,315,888)
------------ ------------ ------------ ------------ ------------
Partners' capital, December 31, 1999 $ -- 492,925 $ 32,203,144 $ 399,408 $ 32,602,552
Redemptions -- (2,181) (158,950) -- (158,950)
Net income 52,683 -- 2,011,319 20,316 2,084,318
Distributions declared to partners (52,683) -- (5,163,101) (52,500) (5,268,284)
------------ ------------ ------------ ------------ ------------
Partners' capital, December 31, 2000 $ -- 490,744 $ 28,892,412 $ 367,224 $ 29,259,636
Redemptions -- (4,181) (239,461) -- (239,461)
Net income (loss) 52,505 -- (163,504) (1,652) (112,651)
Distributions declared to partners (52,505) -- (5,145,554) (52,500) (5,250,559)
------------ ------------ ------------ ------------ ------------
Partners' capital, December 31, 2001 $ -- 486,563 $ 23,343,893 $ 313,072 $ 23,656,965
============ ============ ============ ============ ============
See accompanying notes to financial statements.
18
Capital Preferred Yield Fund-IV, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------- ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (112,651) $ 2,084,318 $ 1,236,040
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 13,816,293 12,306,698 14,386,576
Provision for losses 2,605,589 1,266,000 1,666,851
Cost of equipment sales 1,916,116 1,967,406 2,872,946
Recovery of investment in direct finance leases 1,837,320 1,436,847 1,632,852
Purchases of equipment on operating leases from affiliates (4,164,847) (7,400,376) (6,439,871)
Investment in direct financing leases, acquired from affiliates (534,884) -- (1,062,247)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (1,312,513) (610,911) 72,465
(Increase) decrease in receivable from affiliates -- 413,249 (497,175)
Increase (decrease) in accounts payable
and accrued liabilities 432,705 1,031,676 (33,129)
Increase (decrease) in payables to affiliates (220,967) 210,125 37,393
Decrease in rents received in advance (238,825) (171,033) (147,084)
------------ ------------ ------------
Net cash provided by operating activities 14,023,336 12,533,999 13,725,617
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from discounted lease rentals 1,653,629 2,453,422 --
Principal payments on discounted lease rentals (9,963,727) (6,991,830) (9,642,575)
Redemptions of Class A limited partner units (239,461) (158,950) (264,854)
Distributions to partners (5,258,371) (5,268,330) (5,318,981)
------------ ------------ ------------
Net cash used in financing activities (13,807,930) (9,965,688) (15,226,410)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 215,406 2,568,311 (1,500,793)
Cash and cash equivalents at beginning of period 3,702,069 1,133,758 2,634,551
------------ ------------ ------------
Cash and cash equivalents at end of period $ 3,917,475 $ 3,702,069 $ 1,133,758
============ ============ ============
19
Capital Preferred Yield Fund-IV, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 1,560,202 $ 1,101,722 $ 923,898
Supplemental disclosure of noncash investing and
financing activities:
Rents deducted from cash paid for equipment acquisitions -- -- 130,918
Discounted lease rentals assumed in equipment acquisitions 12,186,758 7,623,018 7,386,009
See accompanying notes to financial statements.
20
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Organization
Capital Preferred Yield Fund-IV, L.P. (the "Partnership") was organized
on December 18, 1995 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, 2007 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 2003 and 2007. The
general partner of the Partnership is CAI Equipment Leasing V 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 2,345 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 accounting
principles generally accepted in the United States of America 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:
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.
21
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Partnership Allocations, continued
Cash Distributions, continued
------------------
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:
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.
22
Capital Preferred Yield Fund-IV, 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
-------------------------------------------
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 (loss) is allocated to the
partners in a manner consistent with the allocation of cash distributions.
Recently Issued Financial Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141 ("SFAS No. 141"),
"Business Combinations" which requires the purchase method and eliminates the
option of using the pooling-of-interests method of accounting for all
business combinations. The provisions of SFAS No. 141 apply to all business
combinations initiated after June 30, 2001, and all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. The Partnership does not believe the adoption of this
statement will have a material impact on the Partnership's financial
position, results of operations or cash flows.
In July 2001, FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" which requires that all
intangible assets acquired, other than those acquired in business
combination, be initially recognized and measured based on the asset's fair
value. In addition, the intangible asset should be amortized based upon its
useful life. If the intangible asset is determined to have an indefinite
useful life, it shall not be amortized until its useful life can be
determined. The Partnership does not believe the adoption of this statement
will have a material impact on the Partnership's financial position, results
of operations or cash flows.
In June 2001, FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS No. 143"), "Accounting for Asset Retirement Obligations",
effective for the Partnership on January 1, 2003. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible
23
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Recently Issued Financial Accounting Standards, continued
long-lived assets and the associated asset retirement costs. The Partnership
does not believe the adoption of this statement will have a material impact
on the Partnership's financial position, results of operations or cash flows.
In August 2001, FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective for the Partnership on January 1, 2002. SFAS
No. 144 supercedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" and other related accounting guidance. The Partnership
does not believe the adoption of this statement will have a material impact
on the Partnership's financial position, results of operations or cash flows.
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 lease 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 discount rate.
24
Capital Preferred Yield Fund-IV, 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 the Partnership's equipment
under lease. Direct finance leases are defined as those leases that 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 non-recourse 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 as determined by the general
partner. In estimating such values, the general partner considers all
relevant information regarding the equipment and the lessee.
25
Capital Preferred Yield Fund-IV, 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 statements of operations. 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.
Non-recourse Discounting of Rentals
The Partnership may assign the future rentals from leases to financial
institutions, or acquire leases subject to such assignments, at fixed
interest rates on a non-recourse basis. In return for such assigned future
rentals, the Partnership receives the discounted value of the rentals in
cash. In the event of default by a lessee, the financial institution has a
first lien on the underlying leased equipment, with no further recourse
against the Partnership. Cash proceeds from such financings, or the
assumption of such financings, are recorded on the balance sheet as
discounted lease rentals. As lessees make payments to financial institutions,
leasing revenue and interest expense are recorded.
Transactions Subsequent to Initial Lease Termination
After the initial term of equipment under lease expires, the equipment is
either sold or re-leased to the existing lessee or another third party. The
remaining net book value of equipment sold is removed and gain or loss
recorded when equipment is sold. The accounting for re-leased equipment is
consistent with the accounting described under "Net Investment in Direct
Financing Leases" and "Equipment on Operating Leases" discussed 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.
26
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
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 $3,873,000 and $3,649,000 at December 31, 2001
and 2000, 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.
Equipment Held for Sale
Equipment held for sale, recorded at the lower of cost or market value
expected to be realized, consists of equipment previously leased to end users
which has been returned to the Partnership following lease expiration.
Net Income (Loss) Per Class A Limited Partner Unit
Net income (loss) per Class A limited partner unit is computed by dividing
the net income (loss) 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, 2001 and 2000 were:
2001 2000
---- ----
Minimum lease payments receivable $ 6,739,161 $ 4,739,959
Estimated residual values 820,547 734,879
Unearned income (700,252) (1,071,322)
------------ -----------
Total $ 6,859,456 $ 4,403,516
============= ===========
3. Leased Equipment, net
---------------------
The Partnership's investment in equipment on operating leases by major
classes as of December 31, 2001 and 2000 were:
2001 2000
---- ----
Transportation and industrial equipment $ 44,421,752 $ 41,550,386
Computers and peripherals 7,565,165 18,162,011
Office furniture and equipment 4,361,327 5,910,960
Other 3,205,206 4,020,668
----------- ------------
59,553,450 69,644,025
Accumulated depreciation (26,281,269) (30,292,049)
----------- ------------
$ 33,272,181 $ 39,351,976
============ ============
Depreciation expense for 2001, 2000 and 1999 was $13,816,293, $12,306,698
and $14,386,576, respectively.
27
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
4. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from non-cancelable leases as of
December 31, 2001 are as follows:
Years Ending December 31, Direct Finance Leases Operating Leases
------------------------- --------------------- ----------------
2002 $ 2,669,337 $ 11,067,658
2003 2,373,754 6,203,530
2004 1,289,316 2,869,189
2005 340,175 1,089,541
Thereafter 66,579 223,863
----------- -------------
Total $ 6,739,161 $ 21,453,781
=========== =============
5. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at December 31, 2001 bear interest
at rates primarily ranging between 6% and 10%. Aggregate maturities of
such non-recourse obligations are:
Years Ending December 31,
-------------------------
2002 $ 9,570,240
2003 6,369,882
2004 2,970,373
2005 968,195
Thereafter 262,826
------------
$ 20,141,516
28
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
6. Transactions With the General Partner and Affiliates
----------------------------------------------------
Origination Fee and Evaluation Fee
----------------------------------
The general partner earns 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 creditworthiness of the lessees. Origination and evaluation fees
totaled approximately $586,000, $531,000 and $449,000 in 2001, 2000 and
1999, 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 $404,000, $338,000 and $401,000
of management fees during 2001, 2000, and 1999, 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 $252,000, $140,000 and $209,000 of direct services
from the general partner during 2001, 2000 and 1999, respectively.
Equipment Purchases
-------------------
The Partnership purchased equipment, with a total purchase price of
$16,886,489, $15,061,881, and $15,019,045 (including $12,186,758,
$7,623,018, and $7,386,009 of discounted lease rentals) during 2001,
2000, and 1999, respectively. The Partnership purchased the equipment at
its historical cost plus reimbursement of other net acquisition costs, as
provided for in the Partnership Agreement. All purchases arranged by MLC
were direct from independent third parties.
Payables to Affiliates
----------------------
Payables to affiliates of approximately $73,000 and $294,000 during 2001
and 2000, respectively, consist of $26,000 for direct services from
general partner, $27,000 for management fees paid to general partner, and
$20,000 for reimbursable general and administrative expenses in 2001; and
$7,000 for direct services from general partner, $24,000 for management
fees paid to general partner, and $263,000 for reimbursable general and
administrative expenses in 2000.
29
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
7. Tax Information (Unaudited)
---------------------------
The following reconciles net income (loss) for financial reporting
purposes to the income for federal income tax purposes for the periods
ended December 31:
2001 2000 1999
---- ---- ----
Net income (loss) per financial statements $ (112,651) $ 2,084,318 $ 1,236,040
Direct finance leases 2,057,197 1,295,587 1,632,855
Depreciation (2,309,118) (3,176,322) (2,641,615)
Provision for losses 2,605,589 1,266,000 1,666,851
Loss on sale of equipment (477,115) (274,551) (1,481,692)
Other 70,480 (505,555) 19,032
----------- ----------- -----------
Partnership income for federal income tax purposes $1,834,382 $ 689,477 $(1,329,042)
=========== =========== ===========
The following reconciles partners' capital for financial reporting
purposes to partners' capital for federal income tax purposes as of
December 31:
2001 2000 1999
---- ---- ----
Partners' capital per financial statements $ 23,656,965 $ 29,259,636 $ 32,602,552
Commissions and offering costs 7,304,048 7,304,048 7,304,048
Direct finance leases 7,808,827 5,751,680 4,456,093
Depreciation (17,902,885) (15,593,767) (12,417,445)
Provision for losses 5,643,438 3,037,849 1,771,849
Loss on sale of equipment (2,727,606) (2,250,491) (1,975,940)
Other 408,730 314,148 787,943
------------ ------------ ------------
Partners' capital for federal income tax purposes $ 24,191,517 $ 32,529,100 $ 37,661,174
============ ============ ============
8. Concentration of Credit Risk
----------------------------
Approximately 70% of the Partnership's equipment under lease was leased
to investment grade companies. Pursuant to the Partnership Agreement, an
investment grade lessee is a company (i) with a net worth in excess of
$100,000,000 (and no debt issues that are rated), or (ii) with a credit
rating of not less than Baa as determined by Moody's Investor Services,
Inc. or comparable credit rating as determined by another recognized
credit rating service; or (iii) a lessee, all of whose lease payments
have been unconditionally guaranteed or supported by a letter of credit
issued by a company meeting one of the above requirements.
No single lessee accounted for more than 10% of total revenue of the
Partnership during 2001.
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.
30
Independent Auditors' Report
- ----------------------------
The Partners
Capital Preferred Yield Fund-IV, L.P.:
Under date of March 22, 2002, we reported on the balance sheets of Capital
Preferred Yield Fund-IV, L.P. as of December 31, 2001 and 2000, and the related
statements of operations, partners' capital, and cash flows for each of the
years in the three-year period ended December 31, 2001, as contained in the
Partnership's annual report on Form 10-K for the year 2001. 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
March 22, 2002
31
CAPITAL PREFERRED YIELD FUND-IV, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the year ended December 31, 2001
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------- ---------- ---------- ---------- ---------
Balance at Additions Balance
Beginning Charged to at End
Classification of Year Expenses Deductions of Year
- -------------- ---------- ---------- ---------- ---------
2001
----
Allowance for losses:
Accounts receivable $ 66,000 $ 300,000 $ -- $ 366,000
2000
----
Allowance for losses:
Accounts receivable $ 30,000 $ 36,000 $ -- $ 66,000
Receivable from affiliates 300,000 -- (300,000) --
--------- --------- --------- ---------
$ 330,000 $ 36,000 $(300,000) $ 66,000
========= ========= ========= =========
1999
----
Allowance for losses:
Accounts receivable $ 30,000 $ -- $ -- $ 30,000
Receivable from affiliates -- 300,000 -- 300,000
--------- --------- --------- ---------
$ 30,000 $ 300,000 $ -- $ 330,000
========= ========= ========= =========
See accompanying independent auditors' 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 V Corp.
Name Positions Held
---- --------------
John F. Olmstead President and Director
John F. Olmstead, age 58, has been president of Mishawaka Leasing Company, Inc.
since its formation in September 2000. He was Senior Vice President of CAII 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 2001.
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 V Corp. is the general partner.
33
Item 12. Security Ownership of Certain Beneficial Owners and Management,
--------------------------------------------------------------
continued
The names and addresses of the general partner and the Class B limited
partner are as follows:
General Partner
---------------
CAI Equipment Leasing V 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,
2001.
(c) The Partnership knows of no arrangements, the operation of which may at
a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The general partner and its affiliates receive certain types of compensation,
fees or other distributions in connection with the operations of the
Partnership.
Following is a summary of the amounts paid or payable to the general partner and
its affiliates during 2001:
34
Item 13. Certain Relationships and Related Transactions, continued
----------------------------------------------
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 creditworthiness of the Lessee. Origination
and evaluation fees totaled $585,956 in 2001, 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 receives 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 $404,684 for 2001.
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 that are incurred in connection with the Partnership's
operations. Such reimbursable expenses totaled $251,812 during 2001.
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 $52,505 and $52,505, respectively, for 2001. Distributions and net loss
allocated to the Class B limited partner totaled $52,500 and $1,652,
respectively, during 2001.
During 2001, the Partnership acquired the equipment described below from
independent third parties as arranged by MLC:
Cost to
Partnership
Including
Acquisition Debt Annual
Lessee Equipment Description Fees* Assumed Rents
- ------ --------------------- -------------- ------------- -----------
Alliant Techsystems Telecommunications 33,619 - 18,396
American Water Works Computer Equipment 205,170 181,016 78,606
BE Aerospace Construction Equipment 769,821 573,040 148,296
Connecticut Natural Gas Computer Equipment 87,939 81,194 32,502
EMC Computer Equipment 2,030,224 - 929,964
Foodmaker, Inc. Forklifts 610,812 470,070 181,840
Georgia Power Construction Equipment 538,119 401,113 153,416
Georgia Power Industrial Equipment 197,556 160,592 39,397
Honeywell Computer Equipment 954,830 881,493 345,023
Johnson Controls Forklifts 1,658,658 1,252,627 419,110
Mayflower Forklifts 238,089 198,817 49,774
McKee Foods Computer Equipment 241,876 220,991 93,700
Michelin Forklifts 875,729 732,591 273,235
NBC Broadcasting Equipment 60,748 47,198 31,188
Pilsbury (Add-on) Forklifts - - 20,164
Pirelli Cables Forklifts 492,690 383,176 119,160
St. Gobain Containers Forklifts 433,401 352,886 131,749
Stoneridge Semiconductors 1,723,813 1,267,308 401,376
Texas Utilities Computer Equipment 2,307,942 2,032,433 779,716
Texas Utilities Industrial Equipment 353,947 325,359 132,000
Texas Utilities Printing Equipment 1,018,480 866,877 323,533
Texas Utilities Telecommunications 867,731 812,715 271,572
TRW Medical Equipment 127,288 102,714 42,418
TRW Placement Machine 1,058,006 842,548 330,769
------------ ----------- ----------
$ 16,886,488 $12,186,758 $5,346,904
============ =========== ==========
* 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 accounting
principles generally accepted in the United States of America, 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").
(b) The Partnership did not file any reports on Form 8-K during the
quarter ended December 31, 2001.
(c) Exhibits required to be filed.
Exhibit
Number Exhibit Name
------ ------------
4.1* Capital Preferred Yield Fund-IV Limited Partnership
Agreement
4.2* First Amendment to Limited Partnership Agreement dated
November 23, 1996 4.3* Amended and Restated Agreement of
Limited Partnership of Capital Preferred Yield Fund-IV,
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 11, 2002 Capital Preferred Yield Fund-IV, L.P.
By: CAI Equipment Leasing V Corporation
By:
Joseph F. Bukofski
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 11, 2002.
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 11, 2002 Capital Preferred Yield Fund-IV, L.P.
By: CAI Equipment Leasing V Corporation
By: /s/Joseph F. Bukofski
------------------------------------
Joseph F. Bukofski
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 11, 2002.
Signature Title
- --------- -----
/s/John F. Olmstead
- --------------------
John F. Olmstead President and Director
38