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 33-80849
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)
7901 Southpark Plaza, Ste.107, Littleton, Colorado 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 38
Page 1 of 43 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"), 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, 2002); (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 either (i) arranged by MLC to be acquired by the
Partnership from third parties, or (ii) purchased by CAII directly from
manufacturers or from other independent third parties and sold to the
Partnership. The equipment is generally comprised of transportation and
industrial equipment, office furniture and equipment, and computer and
peripheral equipment, among others. The Partnership entered its liquidation
period, as defined in the Partnership Agreement, in July 2002. During the
liquidation period, purchases of equipment will cease (other than for prior
commitments or for equipment upgrades). 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
nonrecourse basis. The proceeds of this nonrecourse 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. 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. 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'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 and financing
capabilities and remarketing expertise enable it to compete effectively in the
equipment leasing and remarketing markets.
The Partnership leases equipment to seventy five lessees. One lessee, General
Motors Corporation, accounted for approximately 18% of total revenue of the
Partnership in 2003. The same lessee accounted for approximately 10% of total
revenue of the Partnership 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 "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, 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 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 2,331 Class A limited partners.
4
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters, continued
-------
(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 $ 2.963 $ 1,436,708
January 31, 2003 February 2003 0.968 469,120
February 28, 2003 March 2003 0.825 399,528
March 31, 2003 April 2003 1.082 524,027
April 30, 2003 May 2003 0.844 408,800
May 31, 2003 June 2003 0.770 373,001
June 30, 2003 July 2003 2.347 1,136,979
July 31, 2003 August 2003 1.572 761,388
August 31, 2003 September 2003 0.920 445,914
September 30, 2003 October 2003 1.149 556,623
October 31, 2003 November 2003 0.450 218,048
November 30, 2003 December 2003 0.441 213,594
-------- -----------
$ 14.33 $ 6,943,730
======== ===========
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.
Distributions for the month ended December 31, 2003, totaling $262,248,
were paid to the Class A limited partners during 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 the Partnership will generate sufficient
cash flows from operations during 2004, to (1) meet current operating
requirements, and (2) make cash distributions to both the Class A and
Class B 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.
5
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
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 $ 0.875 $ 479,386
January 31, 2002 February 2002 0.875 399,368
February 28, 2002 March 2002 0.875 399,343
March 31, 2002 April 2002 0.875 479,232
April 30, 2002 May 2002 0.875 399,343
May 31, 2002 June 2002 0.875 399,146
June 30, 2002 July 2002 0.875 478,816
July 31, 2002 August 2002 0.875 398,752
August 31, 2002 September 2002 1.058 514,119
September 30, 2002 October 2002 1.317 639,756
October 31, 2002 November 2002 0.892 433,139
November 30, 2002 December 2002 2.022 982,286
------- -----------
$ 12.29 $ 6,002,686
======= ===========
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%
2002 12.29 17.0%
2003 14.33 14.0%
-----
$ 86.84
=======
(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,
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 $ 15,236,917 $ 18,312,824 $ 19,133,203 $17,611,643 $19,046,666
Net income (loss) 789,369 124,816 (112,651) 2,084,318 1,236,040
Net income (loss) per weighted average Class A
limited partner unit outstanding 1.49 0.11 (0.33) 4.09 2.36
Total assets 30,409,653 48,015,520 46,912,390 48,673,300 48,130,657
Discounted lease rentals 17,582,086 28,582,334 20,141,516 16,264,856 13,452,270
Distributions declared to partners 5,889,529 7,056,442 5,250,559 5,268,284 5,315,888
Distributions declared per weighted average
Class A limited partner unit outstanding 11.96 14.27 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
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.
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, continued
-------------
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.
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 $ 1,692,757 $ 2,103,930 $ (411,173) $ 2,103,930 $ 2,817,676 $ (713,746)
Equipment sales margin 563,679 1,362,774 (799,095) 1,362,774 830,591 532,183
Interest income 6,786 86,287 (79,501) 86,287 108,441 (22,154)
Management fees paid to general partner (354,944) (391,387) 36,443 (391,387) (404,684) 13,297
Direct services from general partner (279,544) (317,563) 38,019 (317,563) (251,812) (65,751)
General and administrative (506,365) (468,725) (37,640) (468,725) (607,274) 138,549
Provision for losses (333,000) (2,250,500) 1,917,500 (2,250,500) (2,605,589) 355,089
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 789,369 $ 124,816 $ 664,553 $ 124,816 $ (112,651) $ 237,467
=========== =========== =========== =========== =========== ===========
The Partnership entered its liquidation period in 2002, as defined in the
Partnership Agreement, and will not purchase significant amounts of equipment in
future periods. Furthermore, during future periods, initial leases will expire
and the equipment will be remarketed (i.e., re-leased or sold). As a result,
both the size of the Partnership's leasing portfolio and the amount of total
revenue will decline ("portfolio runoff").
Leasing Margin
Leasing margin consists of the following:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Operating lease rentals $ 14,215,088 $ 16,346,236 $ 17,498,191
Direct finance lease income 451,364 517,527 695,980
Depreciation (11,354,415) (13,000,144) (13,816,293)
Interest on discounted lease rentals (1,619,280) (1,759,689) (1,560,202)
------------ ------------ ------------
Leasing margin 1,692,757 $ 2,103,930 $ 2,817,676
========= ============ ============
Leasing margin ratio 12% 12% 15%
== == ==
Operating lease rentals and depreciation decreased for the year ended December
31, 2003 compared to the year ended December 31, 2002 primarily due to a
decrease in the average net book value of the operating lease portfolio.
Operating lease rentals and depreciation decreased for the year ended December
31, 2002 compared to the year ended December 31, 2001.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
Direct finance lease income decreased for the years ended December 31, 2003 and
2002 primarily due to portfolio runoff.
Interest expense on discounted lease rentals decreased due to a decrease in the
average balance of discounted lease rentals outstanding.
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 and its related components generally decreased due to portfolio runoff.
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:
2003 2002 2001
---- ---- ----
Equipment sales revenue $ 2,437,783 $ 3,934,743 $ 2,746,707
Cost of equipment sales (1,874,104) (2,571,969) (1,916,116)
----------- ----------- -----------
Equipment sales margin $ 563,679 $ 1,362,774 $ 830,591
=========== =========== ===========
Equipment sales margin fluctuates based upon 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 being 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 value 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 calculated as a percentage of
rents collected during the respective period.
Direct services from the general partner decreased in 2003 compared to 2002
primarily due to portfolio runoff. 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.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
General and administrative expenses increased in 2003 compared to 2002 primarily
due to the purchase of upgraded computer hardware and software and the related
consulting costs for the conversion as well as a sharp increase in Directors and
Officers Insurance premium. General and administrative expenses were higher in
2001 compared to 2002 primarily because 2001 included a) a one-time charge for
software and computer equipment, and b) charges for data processing and the
computer conversion described above, all of which were related to the change in
ownership of the general partner.
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 $288,500 related to decreases in the estimated future residual values
of on-lease equipment
o $224,500 related to the future residual value of equipment returned to
the Partnership
o ($180,000) adjustment made to reduce reserve for uncollectible
accounts
The provision for losses recorded during 2002 related to the following:
o $55,000 related to the future residual value of equipment on lease to
a lessee that filed for Chapter 11 bankruptcy protection.
o $1,063,000 related to a decrease in the estimated future residual
value of semiconductor manufacturing equipment subject to operating
leases.
o $589,500 related to decreases in the estimated future residual values
of other on-lease equipment.
o $543,000 related to equipment sold subsequent to lease maturity.
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.
o $1,865,589 related to a decline in the residual value of on-lease
equipment.
II. Liquidity and Capital Resources
During July 2002, the Partnership entered its liquidation period, as defined in
the Partnership Agreement. Consequently, material purchases of equipment subject
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
to leases (except for prior commitments or equipment upgrades) will cease. As a
result, during future periods, both the size of the Partnership's leasing
portfolio and the amount of leasing revenue will decline.
The Partnership funds its operating activities principally with cash from rents,
discounted lease rentals (nonrecourse 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 2002 and 2001, the Partnership acquired equipment subject to leases with
a total purchase price of $25,201,626 and $16,886,489 respectively (subject to
$18,945,462 and $12,186,758 respectively, of existing nonrecourse debt). Also
during 2002 and 2001, the Partnership discounted future rental payments from
certain leases with lenders on a nonrecourse basis and received proceeds of
$2,348,846 and $1,653,629, respectively. Nonrecourse 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
nonrecourse financing is in the best interest of the Partnership. During July
2002, 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 $5,795,900, $6,933,379 and $5,145,554, respectively, of
which $262,248 was paid during January 2004. 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 the Partnership will generate sufficient cash flows
from operations during 2004, to (1) meet current operating requirements, (2)
make cash distributions to both the Class A and Class B 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
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
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.
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.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
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 rate debt. 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 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, 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-IV, 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-IV, L.P.
BALANCE SHEETS
December 31, 2003 and 2002
ASSETS
2003 2002
---- ----
Cash and cash equivalents $ 820,121 $ 2,100,551
Accounts receivable, net of allowance for losses
of $16,607 in 2003 and $267,443 in 2002 205,574 267,087
Equipment held for sale 262,029 168,661
Net investment in direct finance leases 5,228,035 8,353,900
Leased equipment, net 23,893,894 37,125,321
---------- ----------
Total assets $30,409,653 $48,015,520
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ 830,414 $ 1,064,192
Payables to affiliates 166,243 208,798
Rents received in advance 37,596 97,418
Distributions payable to partners 261,635 1,425,083
Discounted lease rentals 17,582,086 28,582,334
---------- ----------
Total liabilities 18,877,974 31,377,825
---------- ----------
Partners' capital:
General partner -- --
Limited partners:
Class A 500,000 units authorized; 484,461 and 484,601 units
issued and outstanding in 2003 and 2002, respectively 11,298,258 16,376,581
Class B 233,421 261,114
---------- ----------
Total partners' capital 11,531,679 16,637,695
---------- ----------
Total liabilities and partners' capital $30,409,653 $48,015,520
=========== ===========
See accompanying notes to financial statements.
16
Capital Preferred Yield Fund-IV, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Revenue:
Operating lease rentals $ 14,215,088 $ 16,346,236 $ 17,498,191
Direct finance lease income 451,364 517,527 695,980
Equipment sales margin 563,679 1,362,774 830,591
Interest income 6,786 86,287 108,441
------------ ------------ ------------
Total revenue 15,236,917 18,312,824 19,133,203
------------ ------------ ------------
Expenses:
Depreciation 11,354,415 13,000,144 13,816,293
Management fees paid to general partner 354,944 391,387 404,684
Direct services from general partner 279,544 317,563 251,812
General and administrative 506,365 468,725 607,274
Provision for losses 333,000 2,250,500 2,605,589
Interest on discounted lease rentals 1,619,280 1,759,689 1,560,202
------------ ------------ ------------
Total expenses 14,447,548 18,188,008 19,245,854
------------ ------------ ------------
Net income (loss) $ 789,369 $ 124,816 $ 112,651)
============ ============ ============
Net income (loss) allocated:
To the general partner $ 58,629 $ 70,563 $ 52,505
To the Class A limited partners 723,433 53,711 (163,504)
To the Class B limited partner 7,307 542 (1,652)
------------ ------------ ------------
$ 789,369 $ 124,816 $ (112,651)
============ ============ ============
Net income (loss) per weighted average Class A
limited partner unit outstanding $ 1.49 $ 0.11 $ (0.33)
============ ============ ============
Weighted average Class A limited partner
units outstanding 484,493 485,718 489,577
============ ============ ============
See accompanying notes to financial statements.
17
Capital Preferred Yield Fund-IV, L.P.
STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 2003, 2002 and 2001
Class A
Limited Class A Class B
General Partners Limited Limited
Partner Units Partners Partner Total
------- ----- -------- ------- -----
Partners' capital, January 1, 2001 $ -- 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
Redemptions -- (1,962) (87,644) -- (87,644)
Net income 70,563 -- 53,711 542 124,816
Distributions declared to partners (70,563) -- (6,933,379) (52,500) (7,056,442)
--------- ------- ------------ --------- ------------
Partners' capital, December 31, 2002 $ -- 484,601 $ 16,376,581 $ 261,114 $ 16,637,695
Redemptions -- (140) (5,856) -- (5,856)
Net income 58,629 -- 723,433 7,307 789,369
Distributions declared to partners (58,629) -- (5,795,900) (35,000) (5,889,529)
--------- ------- ------------ --------- ------------
Partners' capital, December 31, 2003 $ -- 484,461 $ 11,298,258 $ 233,421 $ 11,531,679
========= ======== ============ ========= ============
See accompanying notes to financial statements.
18
Capital Preferred Yield Fund-IV, 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) $ 789,369 $ 124,816 $ (112,651)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 11,354,415 13,000,144 13,816,293
Provision for losses 333,000 2,250,500 2,605,589
Proceeds, net of gains on equipment sales 1,759,515 2,571,969 1,916,116
Recovery of investment in direct finance leases 2,991,903 2,462,373 1,837,320
Purchases of equipment on operating leases from affiliates -- (5,966,204) (4,164,847)
Investment in direct financing leases, acquired from affiliates -- (289,960) (534,884)
Other (70,312) -- --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net 241,513 1,677,594 (1,312,513)
Increase (decrease) in accounts payable
and accrued liabilities (233,778) (1,447,393) 432,705
Increase (decrease) in payables to affiliates (42,555) 135,595 (220,967)
Increase (decrease) in rents received in advance (59,822) 56,945 (238,825)
------------ ------------ ------------
Net cash provided by operating activities 17,063,248 14,576,379 14,023,336
============ ============ ============
Cash flows from financing activities:
Proceeds from discounted lease rentals -- 2,348,846 1,653,629
Principal payments on discounted lease rentals (11,284,845) (12,534,498) (9,963,727)
Redemptions of Class A limited partner units (5,856) (87,644) (239,461)
Distributions to partners (7,052,977) (6,120,007) (5,258,371)
------------ ------------ ------------
Net cash used in financing activities (18,343,678) (16,393,303) (13,807,930)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,280,430) (1,816,924) 215,406
Cash and cash equivalents at beginning of period 2,100,551 3,917,475 3,702,069
------------ ------------ ------------
Cash and cash equivalents at end of period $ 820,121 $ 2,100,551 $ 3,917,475
============ ============ ============
See accompanying notes to financial statements.
19
Capital Preferred Yield Fund-IV, 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 $ 1,619,280 $ 1,759,689 $ 1,560,202
Supplemental disclosure of noncash investing and
financing activities:
Discounted lease rental obligation relieved related to
bankrupt lessee 48,459 (318,992) --
Discounted lease rentals assumed in equipment acquisitions -- 18,945,462 12,186,758
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 2004 and 2006. 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 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:
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 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.
23
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
Recently Issued Financial Accounting Standards, continued
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-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 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.
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.
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
Financing 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.
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 $797,000 and $2,100,000 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.
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 $ 4,694,857 $ 8,134,831
Estimated residual values 954,430 1,041,057
Unearned income (421,252) (821,988)
------------ -----------
Total $ 5,228,035 $ 8,353,900
============ ===========
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 $ 36,519,880 $ 47,748,152
Computers and peripherals 3,302,803 5,182,532
Office furniture and equipment 2,907,355 2,934,478
Other 7,630,011 9,049,190
------------ ------------
50,360,049 64,914,352
Accumulated depreciation (26,466,155) (27,789,031)
------------ ------------
$ 23,893,894 $ 37,125,321
============ ============
Depreciation expense for 2003, 2002 and 2001 was $11,354,415, $13,000,144
and $13,816,293, 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, 2003 are as follows:
Years Ending December 31, Direct Finance Leases Operating Leases
------------------------- --------------------- ----------------
2004 $ 2,446,893 $ 8,258,005
2005 1,276,443 4,833,397
2006 892,354 2,793,406
2007 79,167 1,083,845
----------- ------------
Total $ 4,694,857 $ 16,968,653
=========== ============
5. Discounted Lease Rentals
------------------------
Discounted lease rentals outstanding at December 31, 2003 bear interest at
rates primarily ranging between 6% and 10%. Aggregate maturities of such
nonrecourse obligations are:
Years Ending December 31,
2004 $ 8,216,181
2005 5,055,644
2006 3,257,402
2007 1,052,859
------------
$ 17,582,086
============
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 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. Origination and evaluation fees totaled
approximately $212,000 and $586,000 in 2002 and 2001, 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.
28
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
6. Transactions With the General Partner and Affiliates (continued)
----------------------------------------------------
Management Fees Paid to General Partner
---------------------------------------
The general partner earns management fees for services performed in
connection with managing the Partnership's equipment equal to 2% of gross
rentals received as permitted under terms of the Partnership Agreement. The
general partner earned approximately $355,000, $391,000 and $405,000 of
management fees 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 $280,000,
$318,000 and $252,000 of direct services from the general partner during
2003, 2002 and 2001, respectively.
Equipment Purchases
-------------------
No equipment was purchased by the Partnership during 2003. The Partnership
purchased equipment, with a total purchase price of $25,201,626 and
$16,886,489,(including $18,945,462 and $12,186,758 of discounted lease
rentals) during 2002 and 2001, 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 $166,000 and $209,000 at December
31, 2003 and 2002, respectively, consist of $23,000 for direct services
from general partner, $18,000 for management fees paid to general partner,
and $125,000 for reimbursable general and administrative expenses in 2003;
and $30,000 for direct services from general partner, $28,000 for
management fees paid to general partner, and $151,000 for reimbursable
general and administrative expenses in 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 periods ended
December 31:
2003 2002 2001
---- ---- ----
Net income (loss) per financial statements $ 789,369 $ 124,816 $ (112,651)
Direct finance leases 2,961,379 2,820,146 2,057,197
Depreciation (3,082,719) (3,782,004) (2,309,118)
Provision for losses 333,000 2,250,500 2,605,589
Loss on sale of equipment (769,482) (919,841) (477,115)
Other 86,039 (119,042) 70,480
----------- ----------- -----------
Partnership income for federal income tax purposes $ 317,586 $ 374,575 $ 1,834,382
=========== =========== ===========
29
Capital Preferred Yield Fund-IV, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
7. Tax Information (Unaudited) (continued)
--------------------------
The following reconciles partners' capital for financial reporting purposes
to partners' capital for federal income tax purposes as of December 31:
2003 2002 2001
---- ---- ----
Partners' capital per financial statements $ 11,531,679 $ 16,637,695 $ 23,656,965
Commissions and offering costs 7,304,048 7,304,048 7,304,048
Direct finance leases 13,590,352 10,628,973 7,808,827
Depreciation (24,767,608) (21,684,889) (17,902,885)
Provision for losses 8,226,938 7,893,938 5,643,438
Loss on sale of equipment (4,416,929) (3,647,447) (2,727,606)
Other 445,584 333,367 408,730
------------ ------------ ------------
Partners' capital for federal income tax purposes $ 11,914,064 $ 17,456,685 $ 24,191,517
============ ============ ============
8. Concentration of Credit Risk
----------------------------
The majority of the Partnership's equipment under lease was leased to
investment grade companies. Pursuant to the Partnership Agreement, an
investment grade lessee is a company (i) with a net worth in excess of
$100,000,000 (and no debt issues that are rated), or (ii) with a credit
rating of not less than Baa as determined by Moody's Investor Services,
Inc. or comparable credit rating as determined by another recognized credit
rating service; or (iii) a lessee, all of whose lease payments have been
unconditionally guaranteed or supported by a letter of credit issued by a
company meeting one of the above requirements. The Partnership limits its
credit risk through selective use of nonrecourse discounting of future
lease rentals as discussed above.
The Partnership leases equipment to a significant number of lessees. One
lessee accounted for approximately 18% of total revenue during 2003 and 10%
in 2002. No lessees accounted for 10% or greater 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 Auditors' Report on Schedule
The Partners
Capital Preferred Yield Fund-IV, L.P.:
Under date of March 12, 2004, we reported on the balance sheets of Capital
Preferred Yield Fund-IV, 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-IV, 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 Year to Expenses Deductions (1) of Year
-------------- ------- ----------- -------------- -------
2003
----
Allowance for losses:
Accounts receivable $ 267,443 $(180,000) $ 70,836 $ 16,607
2002
----
Allowance for losses:
Accounts receivable $ 366,000 $ -- $ 98,557 $ 267,443
2001
----
Allowance for losses:
Accounts receivable $ 66,000 $ 300,000 $ -- $ 366,000
(1) Principally charge-offs against the established allowances.
See accompanying independent auditors' 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 V Corp.
Name Positions Held
---- --------------
John F. Olmstead President and Director
Mary M. Ebele Principal Financial Officer
John F. Olmstead, age 60, 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.
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 until November 2003. The Partnership paid
$15,728 to Mr. Bukofski during 2003 and $12,030 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 V 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 V Corp.
7190 Southpark Plaza 107
Littleton, Colorado 80120
Class B Limited Partner
Mishawaka Leasing Company, Inc.
7190 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.
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 2002:
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 purchase 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 lessees.
There were no origination and evaluation fees in 2003.
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 $354,944 for 2003.
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 $279,544 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 $58,629, respectively, for 2003. Distributions and net income allocated
to the Class B limited partner totaled $35,000 and $7,307, respectively, during
2003.
36
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.
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").
(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
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.
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.
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-IV, L.P.
By: CAI Equipment Leasing V 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, 2004.
Signature Title
--------- -----
/s/John F. Olmstead
- -------------------
John F. Olmstead President and Director
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
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, 2003 Capital Preferred Yield Fund-IV, L.P.
By: CAI Equipment Leasing V 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
40
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:
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/ Mary M. Ebele
-----------------
Mary M. Ebele
Principal Financial Officer
March 30, 2004
41