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, 2003
[ ] 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)
7901 Southpark Plaza, Ste. 107, Littleton, CO 80120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 268-6550
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 36
Page 1 of 41 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. ("CAIEL-IV"), a
Colorado corporation, is the general partner of the Partnership. CAIEL-IV 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"), a wholly owned subsidiary of
CAI, 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; (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 ended 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 during the
liquidation period (within approximately four years of the end of the
reinvestment period) and promptly distribute cash from sales thereof to the
partners.
Since its formation, 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 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 Partnership entered its liquidation period, as defined in the Partnership
Agreement, in July 2000. During the liquidation period, purchases of equipment
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 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
nonrecourse basis. The proceeds of this nonrecourse debt financing were utilized
to finance the purchase of equipment under lease or to invest in additional
equipment under lease. In the event of default by a lessee, the financial
institution has a first lien on the underlying leased equipment with no further
recourse against the Partnership. Cash proceeds from such financings, or
financings assumed in the acquisition of leases, are recorded on the balance
sheet as discounted lease rentals. As lessees make payments to financial
institutions, leasing revenue and interest expense are recorded.
2
Item 1. Business, continued
--------
The Partnership leases equipment to investment grade lessees in diverse
industries including the financial services, retail, telecommunications, energy
and manufacturing industries. The majority 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 nonrecourse 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 general
partner relied upon the services of CAII for origination of leases,
administrative and accounting services, and remarketing of leases and equipment,
among other services related to the Partnership's assets. From September 12,
2000 on, 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's leases. The general partner is
entitled to receive certain fees and expense reimbursements in connection with
the performance of these services and is responsible for paying MLC. 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, financing
capabilities, and remarketing expertise enable it to compete effectively in the
equipment leasing and remarketing markets.
The Partnership leases equipment to thirty nine lessees. General Motors
Corporation accounted for approximately 28% and E-Trade Group for 17% of total
revenue during 2003. These same two lessees accounted for approximately 23% and
15%, respectively, of total revenue during 2002.
3
Item 2. Properties
----------
Per the Partnership Agreement, the Partnership does not own or lease any
physical properties other than the equipment discussed in Item 1 of this Report,
"Business."
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, 2003.
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, 2003, there were 2,834 Class A limited partners.
(c) Distributions
-------------
During 2003, 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, 2002 January 2003 $ 0.733 $ 359,907
January 31, 2003 February 2003 0.805 395,381
February 28, 2003 March 2003 1.238 607,899
March 31, 2003 April 2003 0.571 280,255
April 30, 2003 May 2003 0.631 309,880
May 31, 2003 June 2003 0.509 250,079
June 30, 2003 July 2003 1.564 768,126
July 31, 2003 August 2003 0.846 415,150
August 31, 2003 September 2003 0.594 291,594
September 30, 2003 October 2003 0.089 43,676
October 31, 2003 November 2003 0.769 377,589
November 30, 2003 December 2003 0.411 201,941
----- -------
$ 8.76 $4,301,477
========= ==========
4
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or a portion of
both. The portion of each cash distribution by a partnership which
exceeds its net income for the fiscal period may be deemed a return of
capital for accounting purposes. However, the total percentage of a
leasing partnership's return on capital over its life can only be
determined after all residual cash flows (which include proceeds from
the re-leasing and sale of equipment) have been realized at the
termination of the Partnership.
Distributions for the month ended December 31, 2003, totaling $203,164,
were paid to the Class A limited partners in January, 2004.
Distributions to the general partner and Class B limited partner during
2003 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 2004, to (1) meet current
operating requirements, and (2) make 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 will vary. All distributions are expected to be a
return of capital for economic and accounting purposes.
During 2002, 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, 2001 January 2002 $ 1.584 $ 777,897
January 31, 2002 February 2002 1.491 731,955
February 28, 2002 March 2002 1.440 707,246
March 31, 2002 April 2002 0.884 434,119
April 30, 2002 May 2002 1.275 626,201
May 31, 2002 June 2002 1.883 924,684
June 30, 2002 July 2002 1.165 571,915
July 31, 2002 August 2002 1.501 736,897
August 31, 2002 September 2002 0.863 423,954
September 30, 2002 October 2002 0.826 405,360
October 31, 2002 November 2002 1.351 663,508
November 30, 2002 December 2002 0.637 312,846
----- -------
$ 14.90 $7,316,582
======== ==========
5
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
The following represents annual and cumulative distributions per Class A limited
partner unit, as described in note 1 to Notes to Consolidated Financial
Statements.
Distribution Amount Distribution %
per $100 Class A per $100 Class A
Limited Partner Unit Limited Partner Unit
Payment (computed on (computed on
Made During weighted average) weighted average) (1)
----------- ----------------- ---------------------
1994 $ 5.25 10.5%
1995 10.50 10.5%
1996 10.50 10.5%
1997 10.50 10.5%
1998 10.50 10.5%
1999 10.50 10.5%
2000 16.06 16.1%
2001 16.55 16.5%
2002 14.90 14.9%
2003 8.76 8.8%
------
$ 114.02
=========
(1) Cumulative distributions, as described in note 1 to Notes to
Consolidated Financial Statements, began July 1994.
Item 6. Selected Financial Data
-----------------------
The following selected financial data relates to the years ended December 31,
2003 through 1999. The data should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing with Item 8
herein.
Years Ended December 31,
------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total revenue $ 4,951,076 $ 8,339,368 $ 11,421,913 $ 15,392,908 $ 17,896,120
Net income (loss) 740,420 1,070,697 (366,977) 473,136 2,200,668
Net income (loss) per weighted average Class A
limited partner unit outstanding 1.41 2.02 (0.91) 0.79 4.32
Total assets 5,634,280 11,199,226 20,677,301 32,441,172 42,103,741
Discounted lease rentals 842,983 2,526,644 4,985,065 8,686,491 9,257,171
Distributions declared to partners 4,186,599 7,003,451 8,405,024 8,208,014 5,271,238
Distributions declared per weighted average
Class A limited partner unit outstanding 08.44 14.05 16.88 16.44 10.50
6
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operation
------------
I. Results of Operations
---------------------
Critical Accounting Policies
The Partnership's accounting for leases falls under guidelines that have been
substantially unchanged since at least 1975. For operating leases, revenue is
recorded on a straight-line basis over the lease term, and depreciation is
recorded on a straight-line basis over the lease term to an amount equal to the
estimated residual value at the lease termination date. For direct finance
leases, revenue and amortization to the estimated residual value at the lease
termination date 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 general partner must make judgments when evaluating both of these
assumptions before entering into a lease.
Additionally, the general partner performs quarterly assessments of the carrying
value of its assets, including future contractual rent collections and an
estimate of future residual value. Recovery of an asset is measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the asset. When estimating future contractual rent
collections, the general partner considers the then current credit quality of
the lessee. When estimating future residuals, the general partner considers all
relevant facts regarding the equipment and the lessee, including, for example,
the likelihood that the lessee will re-lease or purchase the equipment. If an
impairment loss is indicated, the loss recognized in the quarter is measured by
the amount the carrying value of an asset exceeds its estimated future net
discounted cash flows.
On a per lease basis, future reported results could differ considerably from
expected results as conditions arise that significantly affect these two
critical assumptions. However, the general partner believes that on a portfolio
basis, the likelihood of materially different reported results is minimized (but
not removed entirely) because in the normal course of business the Partnership
a) assigns certain future rents on a nonrecourse basis 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. Should the
contractual rents not be collected or estimated future residual values not be
realized, operating results would be directly impacted.
7
Item 7. Management's Discussion and Analysis of Financial Condition and 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,
------------------------ ------------------------
2003 2002 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Leasing margin $ 1,440,864 $ 2,071,620 $ (630,756) $ 2,071,620 $ 1,857,241 $ 214,379
Equipment sales margin 483,302 394,470 88,832 394,470 427,592 (33,122)
Interest income 6,566 20,849 (14,283) 20,849 54,127 (33,278)
Management fees paid to
general partner (101,662) (176,799) 75,137 (176,799) (245,156) 68,357
Direct services from
general partner (246,134) (265,908) 19,774 (265,908) (216,350) (49,558)
General and administrative (524,766) (453,035) (71,731) (453,035) (628,681) 175,646
Provision for losses (317,750) (520,500) 202,750 (520,500) (1,615,750) 1,095,250
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 740,420 $ 1,070,697 $ (330,277) $ 1,070,697 $ (366,977) $ 1,437,674
=========== =========== =========== =========== =========== ===========
The Partnership is in its liquidation period, as defined in the Partnership
Agreement, and is not purchasing additional equipment. Furthermore, initial
leases are expiring, and the amount of equipment being remarketed (i.e.,
re-leased or sold) is generally decreasing. As a result, both the size of the
Partnership's leasing portfolio and the amount of total revenue are decreasing
("portfolio runoff").
Leasing Margin
Leasing margin consists of the following:
Years Ended December 31,
---------------------------------------------
2003 2002 2001
---- ---- ----
Operating lease rentals $ 4,311,974 $ 7,681,545 $ 10,545,224
Direct finance lease income 149,234 242,504 394,970
Depreciation (2,882,035) (5,540,977) (8,531,511)
Interest expense on discounted lease rentals (138,309) (311,452) (551,442)
------------ ------------ ------------
Leasing margin $ 1,440,864 $ 2,071,620 $ 1,857,241
============ ============ ============
Leasing margin ratio 32 % 26% 17%
== == ==
All components of leasing margin decreased due to portfolio runoff.
Leasing margin and leasing margin ratio vary due to changes in the portfolio
including, among other things, the mix of operating leases versus direct finance
leases, the average maturity of operating leases in the portfolio, the
percentage of leases in the portfolio that have entered their remarketing stage,
and the amount of discounted lease rentals financing the portfolio. Leasing
margin decreased due to portfolio runoff, and leasing margin ratio increased
primarily due to increases in a) the percentage of leases in the portfolio that
have entered their remarketing stage, and b) the average maturity of operating
leases in the portfolio. Leasing margin and leasing margin ratio are generally
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
higher as leases enter their remarketing stage because typically the rate of
return on remarketed leases is higher. Leasing margin ratio for a direct finance
lease is fixed as the lease matures. However, leasing margin and leasing margin
ratio for an operating lease financed with discounted lease rentals increase as
the lease matures since rents and depreciation are typically fixed while
interest expense declines as the related discounted lease rentals principal is
repaid.
The ultimate rate of return on leases depends, in part, on interest rates at the
time the leases are originated, as well as future equipment values and on-going
lessee creditworthiness. Because leasing is an alternative to financing
equipment purchases with debt, lease rates tend to rise and fall with interest
rates (although lease rate movements generally lag interest rate changes in the
capital markets).
Equipment Sales Margin
Equipment sales margin from remarketing consists of the following:
Years Ended December 31,
-----------------------------------------
2003 2002 2001
---- ---- ----
Equipment sales revenue $ 1,540,794 $ 1,544,768 $ 1,889,127
Cost of equipment sales (1,057,492) (1,150,298) (1,461,535)
---------- ---------- ----------
Equipment sales margin $ 483,302 $ 394,470 $ 427,592
=========== =========== ===========
Equipment sales margin fluctuates based on the composition of equipment
available for sale. Currently, the Partnership is in its liquidation period (as
defined in the Partnership Agreement). Initial leases are expiring and the
equipment is either re-leased or sold to the lessee or a third party. Equipment
sales margin varies with the number and dollar amount of equipment leases that
mature in a particular period and the current market for specific equipment and
residual value estimates.
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 paid to the general partner 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 decreased
due to portfolio run-off.
Direct services from the general partner decreased in 2003 compared to 2002
primarily due to portfolio runoff. There are fewer leases which, therefore,
require less time for asset management services. Direct services from the
general partner increased in 2002 compared to 2001 primarily due to increased
costs related to management's efforts to collect receivables owed to the
Partnership.
General and administrative expenses were higher in 2003 compared to 2002
primarily due to an upgrade in computer hardware and software and the associated
consulting expenses for its set up as well as a sharp increase in Directors and
Officer's insurance premium. General and administrative expenses were higher in
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
2001 compared to 2002 because 2001 included charges for software and computer
equipment and charges for data processing and a computer conversion.
Provision for losses
The realization of greater than the carrying value of equipment (which occurs
when the equipment is remarketed subsequent to initial lease termination) 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.
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 or purchase
the equipment. The nature of the Partnership's leasing activities is such that
it has credit exposure and residual value exposure and will incur losses from
those exposures in the ordinary course of business. The Partnership performs
quarterly assessments of the estimated residual value of its assets to identify
any other-than-temporary losses in value that, if any, are also recorded as
provision for losses.
The provision for losses recorded during 2003 related to the following:
o $169,000 related to the estimated decline in residual value of various
equipment returned to the Partnership at lease maturity.
o $248,750 recognized for losses incurred on equipment sold subsequent to
lease maturity.
o ($100,000) to adjust the reserve for uncollectible accounts
The provision for losses recorded during 2002 related to the following:
o $256,000 related to the estimated decline in residual value of various
equipment returned to the Partnership at lease maturity.
o $264,500 recognized for losses incurred on equipment sold subsequent to
lease maturity.
The provision for losses recorded during 2001 related to the following:
o $109,960 related to the estimated decline in residual value of computer
equipment returned to the Partnership at lease maturity.
o $678,076 was recognized as a fair market value write-down of certain
transportation and industrial equipment, computer, furniture, fixtures and
equipment.
o $527,714 was recorded due to the decline in the realizable values of leased
furniture, fixtures, semiconductor and other equipment.
o $300,000 for estimated uncollectible accounts receivable. The reserve was
recorded due to the uncertainty of collection.
II. Liquidity and Capital Resources
-------------------------------
The Partnership is in its liquidation period, as defined in the Partnership
Agreement. The Partnership is not purchasing additional equipment and initial
leases are expiring. As a result, both the size of the Partnership's lease
portfolio and the amount of leasing revenue are declining.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
The Partnership funds its operating activities principally with cash from rents
and sales of off-lease equipment. Available cash and cash reserves of the
Partnership are invested in short-term government securities pending
distribution to the partners.
During July 2000, the Partnership entered its liquidation period, as defined in
the Partnership Agreement. Consequently, material purchases of equipment subject
to leases have ceased.
During 2003, 2002 and 2001, the Partnership declared distributions to the Class
A limited partners of $4,144,734, $6,898,416 and $8,285,974, respectively, of
which $203,164 was paid during January 2004. 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 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 general partner believes that the Partnership will generate sufficient cash
flows from operations during 2004 to (1) meet current operating requirements,
and (2) make 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 will vary. All distributions are expected to
be a return of capital for economic and accounting purposes.
III. New Accounting Pronouncements
-----------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145 ("SFAS 145"), "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS 145 updates, clarifies and simplifies existing
accounting pronouncements. SFAS 145 rescinds Statement 4, which required all
gains and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in APB Opinion 30 will now be used to classify those gains
and losses. Statement 64 amended Statement 4, and is no longer necessary because
Statement 4 has been rescinded. Statement 44 was issued to establish accounting
requirements for the effects of transition to the provisions of the Motor
Carrier Act of 1980. Because the transition has been completed, Statement 44 is
no longer necessary. SFAS 145 amends Statement 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
amendment is consistent with the FASB's goal of requiring similar accounting
treatment for transactions that have similar economic effects. SFAS 145 also
makes technical corrections to existing pronouncements. The adoption of SFAS 145
did not have a material impact on the Partnership's financial position, results
of operations or cash flows.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 ("SFAS 146"), "Accounting for Costs Associated With Exit or Disposal
Activities." SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities, and nullifies Emerging Issues Task
Force Issue No. 94-3 (EITF 94-3"), "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS 146 requires recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred, as opposed to being recognized at the date an entity
commits to an exit plan under EITF 94-3. SFAS 146 also establishes that fair
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
value is the objective for initial measurement of the liability. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002, with earlier application encouraged. The adoption of SFAS 146 did not have
a material impact on the Partnership's financial position, results of operations
or cash flows.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
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 a fixed debt rate. The Partnership's
other assets and liabilities are also at fixed rates. Consequently, the
Partnership has limited 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 at December 31, 2003 and 2002 16
Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 17
Statements of Partners' Capital for the years ended
December 31, 2003, 2002 and 2001 18
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 19-20
Notes to Financial Statements 21-30
Financial Statement Schedule
----------------------------
Independent Auditors' Report on Schedule 31
Schedule II - Valuation and Qualifying Accounts 32
14
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, 2003 and 2002, and the related statements of
operations, partners' capital, and cash flows for each of the years in the
three-year period ended December 31, 2003. 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, 2003 and 2002, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/KPMG LLP
-----------
KPMG LLP
Denver, Colorado
March 2, 2004
15
CAPITAL PREFERRED YIELD FUND-III, L.P.
BALANCE SHEETS
December 31, 2003 and 2002
ASSETS
2003 2002
---- ----
Cash and cash equivalents $ 704,176 $ 1,229,412
Accounts receivable, net of allowance for losses
of $28,074 in 2003 and $139,250 in 2002 45,210 158,424
Equipment held for sale 54,503 51,730
Net investment in direct finance leases 687,733 1,368,607
Leased equipment, net 4,142,658 8,391,053
----------- -----------
Total assets $ 5,634,280 $11,199,226
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 866,382 $ 1,076,491
Payables to affiliates 67,264 48,510
Rents received in advance 23,341 108,771
Distributions payable to partners 205,030 363,351
Discounted lease rentals 842,983 2,526,644
----------- -----------
Total liabilities 2,005,000 4,123,767
----------- -----------
Partners' capital:
General partner -- --
Limited partners:
Class A 500,000 units authorized; 491,016 units
issued and outstanding in 2003 and 2002 3,358,345 6,811,509
Class B 270,935 263,950
----------- -----------
Total partners' capital 3,629,280 7,075,459
----------- -----------
Total liabilities and partners' capital $ 5,634,280 $11,199,226
=========== ===========
See accompanying notes to financial statements.
16
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Revenue:
Operating lease rentals $ 4,311,974 $ 7,681,545 $ 10,545,224
Direct finance lease income 149,234 242,504 394,970
Equipment sales margin 483,302 394,470 427,592
Interest income 6,566 20,849 54,127
------------ ------------ ------------
Total revenue 4,951,076 8,339,368 11,421,913
------------ ------------ ------------
Expenses:
Depreciation 2,882,035 5,540,977 8,531,511
Management fees paid to general partner 101,662 176,799 245,156
Direct services from general partner 246,134 265,908 216,350
General and administrative 524,766 453,035 628,681
Interest on discounted lease rentals 138,309 311,452 551,442
Provision for losses 317,750 520,500 1,615,750
------------ ------------ ------------
Total expenses 4,210,656 7,268,671 11,788,890
------------ ------------ ------------
Net income (loss) $ 740,420 $ 1,070,697 $ (366,977)
============ ============ ============
Net income (loss) allocated:
To the general partner $ 41,865 $ 70,035 $ 84,050
To the Class A limited partners 691,570 990,655 (446,516)
To the Class B limited partner 6,985 10,007 (4,511)
------------ ------------ ------------
$ 740,420 $ 1,070,697 $ (366,977)
============ ============ ============
Net income (loss) per weighted average Class A limited
partner unit outstanding $ 1.41 $ 2.02 $ (0.91)
============ ============ ============
Weighted average Class A limited partner
units outstanding 491,016 491,016 491,016
============ ============ ============
See accompanying notes to financial statements.
17
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 2003, 2002 and 2001
Class A
Limited Class A Class B
General Partner Limited Limited
Partner Units Partners Partner Total
------- ------- -------- ------- -----
Partners' capital, January 1, 2001 $ -- 491,016 $ 21,451,760 $ 328,454 $ 21,780,214
Net income (loss) 84,050 -- (446,516) (4,511) (366,977)
Distributions declared to partners (84,050) -- (8,285,974) (35,000) (8,405,024)
--------- ------- ------------ ---------- ------------
Partners' capital, December 31, 2001 -- 491,016 12,719,270 288,943 13,008,213
Net income 70,035 -- 990,655 10,007 1,070,697
Distributions declared to partners (70,035) -- (6,898,416) (35,000) (7,003,451)
--------- ------- ------------ ---------- ------------
Partners' capital, December 31, 2002 -- 491,016 6,811,509 263,950 7,075,459
Net income 41,865 -- 691,570 6,985 740,420
Distributions declared to partners (41,865) -- (4,144,734) ( - ) 4,186,599)
--------- ------- ------------ ---------- ------------
Partners' capital, December 31, 2003 $ -- 491,016 3,358,345 270,935 3,629,280
========= ======= ============ =========== ============
See accompanying notes to financial statements.
18
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS For
the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 740,420 $ 1,070,697 $ (366,977)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,882,035 5,540,977 8,561,511
Provision for losses 317,750 520,500 1,615,750
Proceeds, net of gains on equipment sales 944,482 1,150,298 1,461,535
Recovery of investment in direct finance leases 688,376 793,508 915,388
Other (6,146) -- --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net 213,214 1,098,616 (686,625)
Increase (decrease) in accounts payable and accrued
liabilities (210,109) (728,550) 786,863
Increase (decrease) in payables to affiliates 18,754 (296) (145,950)
Increase (decrease) in rents received in advance (85,430) 68,566 (68,546)
------------ ------------ ------------
Net cash provided by operating activities 5,503,346 9,514,316 12,042,949
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on discounted lease rentals (1,683,661) (2,458,421) (3,701,426)
Distributions to partners (4,344,921) (7,430,071) (8,267,835)
------------ ------------ ------------
Net cash used in financing activities (6,028,582) (9,888,492) (11,969,261)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (525,236) (374,176) 73,688
Cash and cash equivalents at beginning of year 1,229,412 1,603,588 1,529,900
------------ ------------ ------------
Cash and cash equivalents at end of year $ 704,176 $ 1,229,412 $ 1,603,588
============ ============ ============
See accompanying notes to financial statements.
19
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS For
the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $ 138,309 $ 311,452 $ 551,421
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 during 2004. 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 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 and impairment, 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 (loss) 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 April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145 ("SFAS 145"),
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS 145 updates, clarifies
and simplifies existing accounting pronouncements. SFAS 145 rescinds
Statement 4, which required all gains and losses from extinguishments of
debt to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the criteria in APB
Opinion 30 will now be used to classify those gains and losses. Statement
64 amended Statement 4, and is no longer necessary because Statement 4 has
been rescinded. Statement 44 was issued to establish accounting
requirements for the effects of transition to the provisions of the Motor
Carrier Act of 1980. Because the transition has been completed, Statement
44 is no longer necessary. SFAS 145 amends Statement 13 to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with the FASB's
goal of requiring similar accounting treatment for transactions that have
similar economic effects. SFAS 145 also makes technical corrections to
existing pronouncements. The adoption of SFAS 145 did not have a material
impact on the Partnership's financial position, results of operations or
cash flows.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated With Exit or
Disposal Activities." SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities, and nullifies
Emerging Issues Task Force Issue No. 94-3 (EITF 94-3"), "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)".
SFAS 146 requires recognition of a liability for a cost associated with an
exit or disposal activity when the liability is incurred, as opposed to
being recognized at the date an entity commits to an exit plan under EITF
94-3. SFAS 146 also establishes that fair value is the objective for
initial measurement of the liability. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with
earlier application encouraged. The adoption of SFAS 146 did not 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. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
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-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Lease Accounting
Statement of Financial Accounting Standards No. 13, "Accounting for
Leases", requires that a lessor account for each lease by the direct
finance, sales-type or operating lease method. The Partnership currently
utilizes the direct financing and operating methods for all of the
Partnership's equipment under lease. Direct finance leases are defined as
those leases 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 nonrecourse basis (i.e., "nonrecourse 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
sheets. 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 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 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 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.
25
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Nonrecourse Discounting of Future Lease Rentals
The Partnership may assign the future lease rentals to financial
institutions, or acquire leases subject to such assignments, at fixed
interest rates on a nonrecourse 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 as discounted lease rentals on
the accompanying balance sheets. 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
Finance Leases" and "Equipment on Operating Leases" discussed above.
Income Taxes
No provision for income taxes has been made in the financial statements
because 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 $700,000 and $1,200,000 at December 31, 2003
and 2002, 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.
26
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
2. Net Investment in Direct Finance Leases
---------------------------------------
The components of the net investment in direct finance leases as of
December 31, were:
2003 2002
---- ----
Minimum lease payments receivable $ 536,041 $ 1,317,270
Estimated residual values 222,660 224,026
Unearned income (70,968) (172,689)
--------- -----------
Total $ 687,733 $ 1,368,607
========= ===========
3. Leased Equipment, net
---------------------
The Partnership's investment in equipment on operating leases by major
classes as of December 31, were:
2003 2002
---- ----
Transportation and industrial equipment $ 9,263,144 $ 13,601,424
Computers and peripherals 142,382 3,333,477
Furniture, fixtures and equipment 5,805,976 6,585,861
Other 592,557 1,002,194
------------- -------------
15,804,059 24,522,956
Accumulated depreciation (11,661,401) (16,131,903)
------------- -------------
$ 4,142,658 $ 8,391,053
------------- -------------
Depreciation expense for 2003, 2002 and 2001 was $2,882,035, $5,540,977 and
$8,531,511, respectively.
4. Future Minimum Lease Payments
-----------------------------
Future minimum lease payments receivable from noncancelable leases as of
December 31, 2003 are as follows:
Years Ending December 31, Direct Finance Leases Operating Leases
------------------------- --------------------- ----------------
2004 $ 505,831 $ 1,297,073
2005 30,210 127,781
2006 - 5,711
2007 - 1,428
Thereafter - -
--------- -----------
Total $ 536,041 $ 1,431,994
========= ===========
27
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
5. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at December 31, 2003 bear interest at
rates primarily ranging between 6% and 11%. Aggregate maturities of such
nonrecourse obligations are:
ears Ending December 31,
2004 $ 821,083
2005 21,900
2006 -
----------
Total $ 842,983
==========
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 purchase price of
equipment acquired by 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. No origination and evaluation fees
were paid during 2003, 2002 or 2001. All origination and evaluation fees
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 $102,000, $177,000, and $245,000
during 2003, 2002 and 2001, 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 $246,000,
$266,000, and $216,000 of direct services from the general partner during
2003, 2002 and 2001, 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 did not purchase any equipment during 2003 or 2002.
Payables to Affiliates
----------------------
Payables to affiliates of approximately $67,000 at December 31, 2003 and
$49,000 at December 31, 2002 consists of $7,000 for management fees paid to
the general partner, $35,000 for reimbursable general and administrative
expenses and $25,000 for direct services from general partner for 2003; and
$12,000 for management fees paid to general partner, $22,000 for
reimbursable general and administrative expenses and $15,000 for direct
services from general partner for 2002.
7. Tax Information (Unaudited)
---------------------------
The following reconciles net income (loss) for financial reporting purposes
to the income for federal income tax purposes for the year and period ended
December 31,:
2003 2002 2001
---- ---- ----
Net income (loss) per financial statements $ 740,420 $ 1,070,697 $ (366,977)
Direct finance leases 363,367 811,596 1,417,606
Depreciation 233,187 108,069 (1,273,495)
Provision for losses 317,750 520,500 1,615,750
Gain (loss) on sale of equipment (263,410) (448,144) (221,757)
Other 274,131 (118,167) 71,179
----------- ----------- -----------
Partnership income for federal income tax purposes $ 1,665,445 $ 1,944,551 $ 1,242,306
=========== =========== ===========
29
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
7. Tax Information (Unaudited), continued
--------------------------0
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,:
2003 2002 2001
---- ---- ----
Partners' capital per financial statements $ 3,629,280 $ 7,075,459 $ 13,008,213
Commissions and offering costs 7,184,603 7,184,603 7,184,603
Direct finance leases 12,797,862 12,434,495 11,622,899
Depreciation (21,785,754) (22,018,941) (22,127,010)
Provision for losses 8,501,436 8,183,686 7,663,186
Gain (loss) on sale of equipment (710,939) (447,529) 615
Other 515,114 240,982 307,319
------------ ------------ ------------
Partners' capital for federal income tax purposes $ 10,131,602 $ 12,652,755 $ 17,659,825
8. Concentration of Credit Risk
----------------------------
The majority of the Partnership's total 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 limits its
credit risk through selective use of nonrecourse debt financing of future
lease rentals, as described above.
The Partnership leases equipment to a significant number of lessees. Two
lessees accounted for approximately 28% and 17%, respectively, of total
revenue during 2003. These same two lessees accounted for approximately 23%
and 15%, respectively, of total revenue during 2002. One lessee and its
affiliates accounted for approximately 13% of total revenue 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 Auditor's Report on Schedule
----------------------------------------
The Partners
Capital Preferred Yield Fund-III, L.P.:
Under date of March 12, 2004, we reported on the balance sheets of Capital
Preferred Yield Fund-III, L.P. as of December 31, 2003 and 2002, and the related
statements of operations, partners' capital, and cash flows for each of the
years in the three-year period ended December 31, 2003 which are included in the
Partnership's annual report on Form 10-K for the year ended December 31, 2003.
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 2, 2004
31
CAPITAL PREFERRED YIELD FUND-III, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2003, 2002 and 2001
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------
Balance at Additions Balance
Beginning Charged (Reversed) at End
Classification of Period to Expenses Deductions(1) of Period
- -------------- --------- ----------- ------------- ---------
2003
----
Allowance for losses:
Accounts receivable $ 139,250 $(100,000) $ (11,176) $ 28,074
2002
----
Allowance for losses:
Accounts receivable $ 369,211 $ -- $(229,961) $ 139,250
2001
----
Allowance for losses:
Accounts receivable $ 117,000 $ 300,000 $ (47,789) $ 369,211
(1) Principally charge-offs against the established allowances
See accompanying independent auditor's report on schedule
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
Mary M. Ebele Principal Financial Officer
John F. Olmstead, age 60, is President of Mishawaka Leasing Co., Inc. since its
formation in September 2000. He was Senior Vice 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.
Mary M. Ebele, age 41, has been with Mishawaka Leasing Co. as a Lease Accountant
since its formation in September 2000. She worked in a similar capacity at CAI
from August 1999 until November 2000. She holds a Bachelor of Arts degree from
the State University of New York at Potsdam and is currently pursuing a second
degree from Metro State College in Denver, Colorado.
Item 11. Executive Compensation
----------------------
Joseph Bukofski provided services related to the Partnership's accounting as a
consultant to the general partner up until November 2003. The Partnership paid
$15,728 to Mr. Bukofski during 2003 and $12,267 during 2002 for such services.
No compensation was paid by the Partnership to any other officers or 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 2003.
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.
33
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:
General Partner
---------------
CAI Equipment Leasing IV Corp.
7901 Southpark Plaza
107
Littleton, Colorado 80120
Class B Limited Partner
-----------------------
Mishawaka Leasing Company, Inc.
7901 Southpark Plaza
107
Littleton, Colorado 80120
(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,
2003.
(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 2003:
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 $101,662 for 2003.
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 $246,134 during 2003.
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 $41,865, respectively, for 2003. Net income allocated to the Class B
limited partner totaled $6,985 for 2003.
Item 14. Controls and Procedures
-----------------------
Within 90 days prior to the date of this annual report, an evaluation was
performed under the supervision and with the participation of the general
partner's management, including the President and Director, and the Principal
Financial Officer, of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures. Based on that evaluation, the
general partner's management, including the President and Director, and the
Principal Financial Officer, concluded that the Partnership's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Partnership required to be included in the
Partnership's periodic SEC reports. There have been no significant changes in
the Partnership's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation.
35
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a)
and
(d) The following documents are filed as part of this Report:
1. Financial Statements: (Incorporated by reference to Item 8
of this Report, "Financial Statements and Supplementary
Data").
2. Financial Statement Schedule: (Incorporated by reference to
Item 8 of this Report, "Financial Statements and
Supplementary Data").
(b) The Partnership did not file any reports on Form 8-K during the
quarter ended December 31, 2003.
(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.
99.1 Certification by John F. Olmstead pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Mary M. Ebele pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* 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.
36
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: March 30, 2004 Capital Preferred Yield Fund-III, L.P.
By: CAI Equipment Leasing IV Corporation
By: /s/John F. Olmstead
-------------------
John F. Olmstead
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the general partner
of the Partnership and in the capacities indicated on March 30, 2003.
Signature Title
- --------- -----
/s/John F. Olmstead
- -------------------
John F. Olmstead President and Director
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: March 30, 2004 Capital Preferred Yield Fund-III, L.P.
By: CAI Equipment Leasing IV Corporation
By: /s/ Mary M. Ebele
-----------------
Mary M. Ebele
Principal Financial 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 March 30, 2004.
Signature Title
- --------- -----
/s/Mary M. Ebele
- -----------------
Mary M. Ebele Principal Financial Officer
38
CERTIFICATION
I, John F. Olmstead, President and Director of CAI Equipment Leasing IV
Corp., the General Partner of Capital Preferred Yield Fund-III, L.P. (the
"Partnership"), certify that:
1. I have reviewed this report on Form 10-K of the Partnership;
2. Based on my knowledge, this report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Partnership as of, and for, the periods presented in this
report;
4. The Partnership's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15-15(f)) for the Partnership and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Partnership, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report in being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the Partnership's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the Partnership's
internal control over financial reporting that occurred during the
Partnership's most recent fiscal quarter (the Partnership's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
Partnership's internal control over financial reporting; and
5. The Partnership's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Partnership's auditors and the audit committee of the
Partnership's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Partnership's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the Partnership's
internal controls over financial reporting.
/s/ John F. Olmstead
--------------------
John F. Olmstead
President and Director
(Principal Executive Officer)
March 30, 2004
39
CERTIFICATION
I, Mary M. Ebele, Principal Financial Officer of CAI Equipment Leasing IV
Corp., the General Partner of Capital Preferred Yield Fund-III, L.P. (the
"Partnership"), certify that:
1. I have reviewed this report on Form 10-K of the Partnership;
2. Based on my knowledge, this report does not contain any untrue statement
of material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Partnership as
of, and for, the periods presented in this report;
4. The Partnership's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15-15(f)) for the
Partnership and have:
b. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Partnership, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report in being
prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the Partnership's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Partnership's internal
control over financial reporting that occurred during the Partnership's
most recent fiscal quarter (the Partnership's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the Partnership's internal control over
financial reporting; and
5. The Partnership's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Partnership's auditors and the audit committee of the Partnership's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Partnership's ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Partnership's internal
controls over financial reporting.
/s/ Mary M. Ebele
-----------------
Mary M. Ebele
Principal Financial Officer
March 30, 2004
40