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, 2004
[ ] 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
- --- ---
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
Exhibit Index Appears on Page 33
Page 1 of 39 Pages
Item 1. Business
--------
Capital Preferred Yield Fund-III, L.P., a Delaware limited partnership (the
"Partnership"), was organized on November 2, 1993 and was 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 were 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 (which began in 2000) 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 was
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 was required to dissolve and distribute all of its assets no later
than December 31, 2011.
The Partnership could assign the rentals from leases to financial institutions,
or acquire leases subject to such assignments, at fixed interest rates on a
non-recourse basis. The proceeds of this non-recourse debt financing was
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 had 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, were recorded on the balance
sheet as discounted lease rentals. As lessees make payments to financial
institutions, leasing revenue and interest expense were recorded.
The Partnership leased 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
2
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 acquired equipment that was on lease at the time of
acquisition. After the initial term of its lease, each item of equipment was
expected to provide additional investment income from its re-lease or sale. Upon
expiration of the initial lease, the Partnership attempted to re-lease or sell
the equipment to the existing lessee. If a re-lease or sale to the lessee could
not be negotiated, the Partnership attempted to lease or sell the equipment to a
third party.
The Partnership's business was 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 distributions to the partners
depended, in part, on the movement of 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".
On December 16, 2004, the general partner approved a formal plan of liquidation
whereby the Partnership liquidated all of its net assets and distributed the
related proceeds to the partners. As part of the plan, the partnership received
cash from the general partner for the sale of assets to and the assumption of
liabilities by the general partner. It is the intent of the partner to settle
all assumed liabilities. Excess cash remaining after such settlement, if any, or
additional cash necessary for such settlement, if any, will be for the account
of the general partner or the general partner's obligation, respectively.
Subsequent to this transaction, the Partnership made a final distribution to its
Class A limited partners. The Partnership ceased operations on December 31,
2004.
The Partnership competed in the leasing marketplace as a lessor with a
significant number of other companies, including equipment manufacturers,
leasing companies and financial institutions. The Partnership competed 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
did 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 enabled it to compete effectively in the
equipment leasing and remarketing markets.
3
The Partnership leased equipment to 185 lessees. General Motors Corporation
accounted for approximately 31% and E-Trade Group for 45% of total revenue
during 2004. These same two lessees accounted for approximately 22% and 17%
respectively during 2003.
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, 2004.
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, 2004, the date the Partnership ceased operations, there
were 2,759 Class A limited partners. The partner units are considered
outstanding until the partnership files a certificate of cancellation
with the Secretary of State of the State of Delaware. The certificate of
cancellation was not filed as of December 31, 2004, and therefore, the
partner units are considered outstanding as of December 31, 2004.
(c) Distributions
-------------
During 2004, the Partnership made twelve (12) distributions (a portion
of which constituted a return of capital) to Class A limited partners as
follows:
4
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
Distributions Per
$100 Investment
For the Payment (computed on Total
Period Ended Made During weighted average) Distributions
------------ ----------- ----------------- -------------
December 31, 2003 January 2004 $ 0.414 $ 203,164
January 31, 2004 February 2004 0.230 112,980
February 28, 2004 March 2004 0.076 37,561
March 31, 2004 April 2004 0.289 141,771
April 30, 2004 May 2004 0.101 49,422
May 31, 2004 June 2004 0.101 49,423
June 30, 2004 July 2004 0.101 49,654
July 31, 2004 August 2004 0.101 49,423
August 31, 2004 September 2004 0.101 49,423
September 30, 2004 October 2004 0.101 49,654
October 31, 2004 November 2004 0.101 49,423
November 30, 2004 December 2004 0.101 49,423
December 15, 2004 December 2004 6.134 3,011,726
------- ----------
$ 7.95 $3,903,047
======= ==========
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 to the general partner and Class B limited partner during
2004 are discussed in Item 13 of this Report, "Certain Relationships and
Related Transactions."
The Partnership declared and paid a final distribution in December 2004.
In calculating the amount of such distribution, the general partner
considered the current as well as estimated exit liabilities incidental
to the liquidation of the Partnership.
During 2003, the Partnership made twelve (12) distributions (a portion
of which constituted a return of capital) to Class A limited partners as
follows:
5
Item 5. Market for the Partnership's Common Equity and Related Stockholder
------------------------------------------------------------------
Matters, continued
-------
(c) Distributions, continued
-------------
Distributions Per
$100 Investment
For the Payment (computed on Total
Period Ended Made During weighted average) Distributions
------------ ----------- ----------------- -------------
December 31, 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
======== ==========
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%
2004 7.95 8.0%
---------
$ 121.97
=========
(1) Cumulative distributions, as described in note 1 to Notes to
Consolidated Financial Statements, began July 1994.
6
Item 6. Selected Financial Data
-----------------------
The following selected financial data relates to the years ended December 31,
2004 through 2000. The data should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing with Item 8
herein.
Years Ended December 31,
------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total revenue $ 3,254,284 $ 4,951,076 $ 8,339,368 $ 11,421,913 $ 15,392,908
Net income (loss) 107,975 740,420 1,070,697 (366,977) 473,136
Net income (loss) per weighted average Class A
limited partner unit outstanding 0.14 1.41 2.02 (0.91) 0.79
Total assets - 5,634,280 11,199,226 20,677,301 32,441,172
Discounted lease rentals - 842,983 2,526,644 4,985,065 8,686,491
Distributions declared to partners 3,737,255 4,186,599 7,003,451 8,405,024 8,208,014
Distributions declared per weighted average
Class A limited partner unit outstanding 7.54 8.44 14.05 16.88 16.44
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
I. Results of Operations
---------------------
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,
------------------------ ------------------------
2004 2003 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
Leasing margin $ 1,330,691 $ 1,440,864 $ (110,173) $ 1,440,864 $ 2,071,620 $ (630,756)
Equipment sales margin 444,740 483,302 (38,562) 483,302 394,470 88,832
Interest income 13,586 6,566 7,020 6,566 20,849 (14,283)
Loss on liquidation of remaining
Assets (274,954) - (274,954) - - -
Management fees paid to
general partner (64,177) (101,662) 37,485 (101,662) (176,799) 75,137
Direct services from
general partner (213,966) (246,134) 32,168 (246,134) (265,908) 19,774
General and administrative (432,917) (524,766) 91,849 (524,766) (453,035) (71,731)
Exit Expense (599,359) - (599,359) - - -
Provision for losses (95,669) (317,750) 222,081 (317,750) (520,500) 202,750
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 107,975 $ 740,420 $ (632,445) $ 740,420 $ 1,070,697 $ (330,277)
=========== =========== =========== =========== =========== ===========
The Partnership has liquidated as defined in the Partnership Agreement. As a
result, both the size of the Partnership's leasing portfolio and the amount of
total revenue declined.
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
Leasing Margin
Leasing margin consists of the following:
Years Ended December 31,
2004 2003 2002
---- ---- ----
Operating lease rentals $ 3,033,442 $ 4,311,974 $ 7,681,545
Direct finance lease income 37,470 149,234 242,504
Depreciation (1,683,326) (2,882,035) (5,540,977)
Interest expense on discounted lease rentals (56,895) (138,309) (311,452)
----------- ----------- -----------
Leasing margin $ 1,330,691 $ 1,440,864 $ 2,071,620
=========== =========== ===========
Leasing margin ratio 43 % 32% 26%
== == ==
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/or have gone on month-to-month rental terms, and the amount of discounted
lease rentals financing the portfolio. Leasing margin decreased for the year
ending December 31, 2004 compared to 2003 and from December 2003 to 2002 due to
portfolio runoff.
The ultimate profitability of the Partnership's leasing transactions was
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.
As previously stated, the Partnership has liquidated as defined in the
Partnership Agreement. Initial leases have expired and all remaining equipment
has been sold As a result, both the size of the Partnership's leasing portfolio
and the amount of total revenue declined.
Equipment Sales Margin
Equipment sales margin from remarketing consists of the following:
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
Equipment sales revenue $ 1,715,196 $ 1,540,794 $ 1,544,768
Cost of equipment sales (1,270,456) (1,057,492) (1,150,298)
---------- ---------- ----------
Equipment sales margin $ 444,740 $ 483,302 $ 394,470
=========== =========== ===========
The Partnership ceased operations as of December 31, 2004. During the year, all
remaining equipment was sold to the original lessee, to third parties, or to the
general partner.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
Liquidation
On December 16, 2004, the general partner approved a formal plan of liquidation
whereby the Partnership liquidated all of its net assets and distributed the
related proceeds to the partners. As part of the plan, the partnership received
cash from the general partner for the sale of assets to and the assumption of
liabilities by the general partner. It is the intent of the partner to settle
all assumed liabilities. Excess cash remaining after such settlement, if any, or
additional cash necessary for such settlement, if any, will be for the account
of the general partner or the general partner's obligation, respectively.
Subsequent to this transaction, the Partnership made a final distribution to its
Class A limited partners. The Partnership ceased operations on December 31,
2004. The general partner solicited bids for the sale of partnership assets from
third parties and received one bid. The general partner, believing it to be in
the best interest of the limited partners, purchased the assets and assumed all
liabilities for an amount based on $10,000 in excess of the third-party bid
received.
Loss on liquidation of assets for the year ended December 31, 2004 consists of
the following:
Cash received from the general partner $ 167,679
Assets sold to the general partner (1,350,043)
Liabilities assumed by the general partner 907,410
----------
Loss on liquidation of assets $ 274,954
==========
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
from 2003 to 2004 and from 2002 to 2003 due to portfolio run-off.
Direct services from the general partner decreased in 2004 compared to 2003
primarily due to portfolio runoff. There were fewer leases which, therefore,
required less time for asset management services. Direct services from the
general partner decreased in 2003 compared to 2002 for the same reason.
General and administrative expenses decreased in 2004 compared to 2003 primarily
due to the purchase of upgraded computer hardware and software and the related
consulting costs for the conversion in 2003 and a reduction of state income
taxes being paid in 2004 due to portfolio runoff. General and administrative
expenses were higher in 2003 compared to 2002 primarily because 2003 included a)
a one-time charge for software and computer equipment, and b) charges for data
processing and the computer conversion described above.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
I. Results of Operations, continued
---------------------
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 2004 related to the following:
o $50,000 related to the estimated decline in residual value of various
equipment returned to the Partnership at lease maturity
o $70,449 recognized for losses incurred on equipment sold subsequent to
lease maturity
o ($24,780) to reduce the reserve for uncollectible accounts
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.
II. Liquidity and Capital Resources
-------------------------------
During 2004, 2003 and 2002, the Partnership declared distributions to the Class
A limited partners of $3,699,883, $4,144,734 and $6,898,416 respectively. A
substantial portion of such distributions 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.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations, continued
-------------
II. Liquidity and Capital Resources, continued
-------------------------------
As noted above, the Partnership liquidated (as defined in the Partnership
Agreement) and a final distribution was issued in December 2004. The Partnership
ceased operations on December 31, 2004.
Prior to the sale of its assets and related liabilities during the liquidation,
the Partnership estimated and recorded its exit liabilities at fair value in
accordance with Financial Accounting Standard No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The partnership recognized exit
expenses and related liabilities of approximately $599,000. The exit liabilities
were assumed by the general partner in the sale and were considered in the loss
on liquidation of assets of $274,954.
III. New Accounting Pronouncements
-----------------------------
The Partnership ceased operations as of December 31, 2004. Therefore, new
accounting pronouncements with an effective date subsequent to December 31, 2004
will not affect the Partnership.
IV. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act
--------------------------------------------------------------------------
of 1995
-------
The statements contained in this report which are not historical facts may be
deemed to contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, and are subject to factors
that could cause actual future results to differ both adversely and materially
from currently anticipated results, including, without limitation; the level of
lease originations; realization of residual values; customer credit risk;
competition from other lessors, specialty finance lenders or banks; and the
availability and cost of financing sources. Certain specific risks associated
with particular aspects of the Partnership's business are discussed in detail
throughout Parts I and II when and where applicable.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Partnership ceased operations as of December 31, 2004. Consequently, the
Partnership has no market risk exposure.
11
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements and
Financial Statement Schedule
Page
Number
------
Financial Statements
--------------------
Report of Independent Registered Public Accounting Firm 13
Balance Sheets at December 31, 2004 and 2003 14
Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 15
Statements of Partners' Capital for the years ended
December 31, 2004, 2003 and 2002 16
Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 17-18
Notes to Financial Statements 19-27
Financial Statement Schedule
----------------------------
Report of Independent Registered Public Accounting Firm 28
Schedule II - Valuation and Qualifying Accounts 29
12
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
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, 2004 and 2003, and the related statements of
operations, partners' capital, and cash flows for each of the years in the
three-year period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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.
As described in Note 1 to the financial statements, the general partner approved
a formal plan of liquidation on December 16, 2004, and the Company commenced
liquidation shortly thereafter. As a result, the company has changed its basis
of accounting for periods subsequent to December 16, 2004 from the going-concern
basis to a liquidation basis. The liquidation was completed by December 31,
2004.
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, 2004 and 2003, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America applied on the basis described in the
preceding paragraph.
/s/KPMG LLP
-----------
KPMG LLP
Denver, Colorado
March 11, 2005
13
CAPITAL PREFERRED YIELD FUND-III, L.P.
BALANCE SHEETS
December 31, 2004 and 2003
ASSETS
2004 2003
---- ----
Cash and cash equivalents $ - $ 704,176
Accounts receivable, net of allowance for losses
of $28,074 in 2003 - 45,210
Equipment held for sale - 54,503
Net investment in direct finance leases - 687,733
Leased equipment, net - 4,142,658
----- ----------
Total assets $ - $5,634,280
==== ==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities $ - $ 866,382
Payables to affiliates - 67,264
Rents received in advance - 23,341
Distributions payable to partners - 205,030
Discounted lease rentals - 842,983
----- ----------
Total liabilities - 2,005,000
----- ----------
Partners' capital:
General partner - -
Limited partners:
Class A 500,000 units authorized; 491,016 units
issued and outstanding in 2004 and 2003 - 3,358,345
Class B - 270,935
----- ----------
Total partners' capital - 3,629,280
----- ----------
Total liabilities and partners' capital $ - $5,634,280
==== ==========
See accompanying notes to financial statements.
14
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
---- ---- ----
Revenue:
Operating lease rentals $ 3,033,442 $ 4,311,974 $ 7,681,545
Direct finance lease income 37,470 149,234 242,504
Equipment sales margin 444,740 483,302 394,470
Interest income 13,586 6,566 20,849
Loss on liquidation of assets (274,954) -- --
---------- ----------- -----------
Total revenue 3,254,284 4,951,076 8,339,368
---------- ----------- -----------
Expenses:
Depreciation 1,683,326 2,882,035 5,540,977
Management fees paid to general partner 64,177 101,662 176,799
Direct services from general partner 213,966 246,134 265,908
General and administrative 432,917 524,766 453,035
Interest on discounted lease rentals 56,895 138,309 311,452
Exit expense 599,359 -- --
Provision for losses 95,669 317,750 520,500
---------- ---------- ----------
Total expenses 3,146,309 4,210,656 7,268,671
---------- ----------- -----------
Net income $ 107,975 $ 740,420 $ 1,070,697
=========== =========== ===========
Net income allocated:
To the general partner $ 37,372 $ 41,865 $ 70,035
To the Class A limited partners 69,898 691,570 990,655
To the Class B limited partner 705 6,985 10,007
---------- ----------- -----------
$ 107,975 $ 740,420 $ 1,070,697
=========== =========== ============
Net income per weighted average Class A limited
partner unit outstanding $ 0.14 $ 1.41 $ 2.02
=========== =========== ============
Weighted average Class A limited partner
units outstanding 491,016 491,016 491,016
=========== =========== ===========
See accompanying notes to financial statements.
15
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 2004, 2003 and 2002
Class A
Limited Class A Class B
General Partner Limited Limited
Partner Units Partners Partner Total
------- ----- -------- ------- -----
Partners' capital, January 1, 2002 $ - 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
Net income 37,372 - 69,898 705 107,975
Distributions declared to partners (37,372) - (3,699,883) - (3,737,255)
Final allocation under
partnership agreement - - 271,640 (271,640) -
--------- ------- ------------ ---------- ------------
Partners' capital, December 31, 2004 $ - 491,016 - - -
========= ======== ============ ========== ============
See accompanying notes to financial statements.
16
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS For
the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
---- ---- ----
Cash flows from operating activities:
Net income $ 107,975 $ 740,420 $ 1,070,697
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,683,328 2,882,035 5,540,977
Provision for losses 148,349 317,750 520,500
Proceeds, net of gains on equipment sales 1,229,391 944,482 1,150,298
Proceeds, net of losses on liquidation sale 442,630 - -
Recovery of investment in direct finance leases 468,361 688,376 793,508
Other - (6,146) -
Changes in assets and liabilities:
Decrease in accounts receivable, net 26,470 213,214 1,098,616
Increase (decrease) in accounts payable and accrued
liabilities 6,290 (210,109) (728,550)
Increase (decrease) in payables to affiliates (56,513) 18,754 (296)
Increase (decrease) in rents received in advance (21,380) (85,430) 68,566
----------- ----------- -----------
Net cash provided by operating activities 4,034,901 5,503,346 9,514,316
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on discounted lease rentals (796,792) (1,683,661) (2,458,421)
Distributions to partners (3,942,285) (4,344,921) (7,430,071)
----------- ----------- -----------
Net cash used in financing activities (4,739,077) (6,028,582) (9,888,492)
----------- ----------- -----------
Net decrease in cash and cash equivalents (704,176) (525,236) (374,176)
Cash and cash equivalents at beginning of yea 704,176 1,229,412 1,603,588
----------- ----------- -----------
Cash and cash equivalents at end of year $ - $ 704,176 $ 1,229,412
=========== =========== ===========
See accompanying notes to financial statements.
17
CAPITAL PREFERRED YIELD FUND-III, L.P.
STATEMENTS OF CASH FLOWS For
the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
---- ---- ----
Supplemental disclosure of cash flow information:
Interest paid on discounted lease rentals $56,895 $138,309 $311,452
See accompanying notes to financial statements.
18
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
a) 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 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.
On December 16, 2004, the general partner approved a formal plan of
liquidation whereby the Partnership liquidated all of its net assets and
distributed the related proceeds to the partners. As part of the plan,
the partnership received cash from the general partner for the sale of
assets to and the assumption of liabilities by the general partner. The
general partner solicited bids for the sale of partnership assets from
third parties and received one bid. The general partner, believing it to
be in the best interest of the limited partners, purchased the assets and
assumed all liabilities for an amount based on $10,000 in excess of the
third-party bid received. It is the intent of the general partner to
settle all assumed liabilities. Excess cash remaining after such
settlement, if any, or additional cash necessary for such settlement, if
any, will be for the account of the general partner or the general
partner's obligation, respectively. Subsequent to this transaction, the
Partnership made a final distribution to its Class A limited partners.
The Partnership ceased operations on December 31, 2004. As the
liquidation commenced and ended in December 2004, a statement of net
assets in liquidation and the related statement of changes in net assets
in liquidation has not been presented.
Loss on liquidation of assets for the year ended December 31, 2004
consists of the following:
Cash received from the general partner $ 167,679
Assets sold to the general partner 1,350,043)
Liabilities assumed by the general partner 907,410
---------
Loss on liquidation of assets $ 274,954
==========
19
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
b) 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.
c) 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.
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.
20
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
----------------------------------------------------------
Partnership Allocations, continued
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.
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).
21
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
Financial Reporting - Profits and Losses
----------------------------------------
For financial reporting purposes, net income (loss) is allocated to the
partners in a manner generally consistent with the allocation of cash
distributions. Differences between the allocation of net income (loss)
and cash distributions are considered in the final allocation under the
Partnership agreement.
d) Recently Issued Financial Accounting Standards
The Partnership ceased operations as of December 31, 2004. Therefore, new
accounting pronouncements with an effective date subsequent to December
31, 2004 will not affect the Partnership.
e) 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.
f) 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.
22
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
g) 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.
h) 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.
i) 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.
j) 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.
23
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
1. Organization and Summary of Significant Accounting Policies, continued
-----------------------------------------------------------
k) 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.
l) Cash Equivalents
The Partnership considers short-term, highly liquid investments that are
readily convertible to known amounts of cash to be cash equivalents.
m) 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.
n) 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.
o) Costs of Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities," which addresses
accounting for restructuring and similar costs. The Partnership adopted
the provisions as required by SFAS 146 for restructuring activities
initiated after December 31, 2002. SFAS 146 requires that the liability
for costs associated with an exit or disposal activity be recognized when
the liability is incurred. SFAS 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly,
SFAS 146 may affect the timing of recognizing exit and restructuring
costs, if any, as well as the amounts recognized.
During 2004, the Partnership liquidated and sold all remaining equipment.
Prior to the sale of its assets and related liabilities during the
liquidation, the Partnership recorded its exit liability at fair value.
The exit liability was assumed by the general partner in the sale and was
a component of the loss on the liquidation.
24
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, 2003 were:
Minimum lease payments receivable $ 536,041
Estimated residual values 222,660
Unearned income (70,968)
----------
Total $ 687,733
==========
3. Leased Equipment, net
---------------------
The Partnership's investment in equipment on operating leases by major
classes as of December 31, 2003 were:
Transportation and industrial equipment $ 9,263,144
Computers and peripherals 142,382
Furniture, fixtures and equipment 5,805,976
Other 592,557
------------
15,804,059
Accumulated depreciation (11,661,401)
------------
$ 4,142,658
============
Depreciation expense for 2004, 2003 and 2002 was $1,683,326, $2,882,035
and $5,540,977, respectively.
4. Transactions With the General Partner and Affiliates
----------------------------------------------------
Management Fees Paid to General Partner
---------------------------------------
The general partner earned 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 $64,000, $102,000, and $177,000
during 2004, 2003 and 2002, 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 $214,000, $246,000, and $266,000 of direct
services from the general partner during 2004, 2003 and 2002,
respectively.
25
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
4. Transactions With the General Partner and Affiliates, continued
----------------------------------------------------
Equipment Purchases
-------------------
The Partnership did not purchase any equipment during 2004 or 2003.
Payables to Affiliates
----------------------
Payables to affiliates of approximately $67,000 at December 31, 2003
consisted 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.
Sale of Assets to General Partner
---------------------------------
As discussed in footnote 1, in December 2004, the general partner
purchased all of the assets and assumed all of the liabilities of the
partnership. The fund received $167,679 of cash and recognized a loss on
liquidation of assets of $274,954. It is the intent of the general
partner to settle all assumed liabilities. Excess cash remaining after
such settlement, if any, or additional cash necessary for such
settlement, if any, will be for the account of the general partner or the
general partner's obligation, respectively.
5. 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,:
2004 2003 2002
---- ---- ----
Net income per financial statements $ 107,975 $ 740,420 $ 1,070,697
Direct finance leases 507,646 363,367 811,596
Depreciation 561,689 233,187 108,069
Provision for losses 95,669 317,750 520,500
Loss on sale of equipment (16,097) (263,410) (448,144)
Exit expense 599,359 - -
Other (14,726) 274,131 (118,167)
----------- ----------- -----------
Partnership income for federal income tax purposes $ 1,841,515 $ 1,665,445 $ 1,944,551
=========== =========== ===========
26
CAPITAL PREFERRED YIELD FUND-III, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
5. Tax Information (Unaudited), continued
---------------------------
The following reconciles partners' capital for financial reporting
purposes to partners' capital for federal income tax purposes for the
year and period ended December 31,:
2004 2003 2002
---- ---- ----
Partners' capital per financial statements -- $ 3,629,280 $ 7,075,459
Commissions and offering costs 7,184,603 7,184,603 7,184,603
Direct finance leases 13,305,508 12,797,862 12,434,495
Depreciation (21,224,065) (21,785,754) (22,018,941)
Provision for losses 8,597,105 8,501,436 8,183,686
Gain (loss) on sale of equipment (727,036) (710,939) (447,529)
Other - 515,114 240,982
Adjustment for final tax return (7,136,115) - -
------------ ------------ ------------
Partners' capital for federal tax return $ - $ 10,131,602 $ 12,652,755
============ ============ ============
6. 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 76% of total revenue during 2004 and
45% in 2003.
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.
27
Report of Independent Registered Pubic Accounting Firm
------------------------------------------------------
The Partners
Capital Preferred Yield Fund-III, L.P.:
Under date of March 11, 2005, we reported on the balance sheets of Capital
Preferred Yield Fund-III, L.P. as of December 31, 2004 and 2003, and the related
statements of operations, partners' capital, and cash flows for each of the
years in the three-year period ended December 31, 2004 which are included in the
Partnership's annual report on Form 10-K for the year ended December 31, 2004.
In connection with our audits of the aforementioned financial statements, we
also audited the related financial statement Schedule II - Valuation and
Qualifying Accounts. 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.
As described in Note 1 to the financial statements, the general partner approved
a formal plan of liquidation on December 16, 2004, and the Company commenced
liquidation shortly thereafter. As a result, the company has changed its basis
of accounting for periods subsequent to December 16, 2004 from the going-concern
basis to a liquidation basis. The liquidation was completed by December 31,
2004.
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 11, 2005
28
CAPITAL PREFERRED YIELD FUND-III, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2004, 2003 and 2002
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Balance at Additions Balance
Beginning Charged (Reversed) to at End
Classification of Period Expenses Deductions(1) of Period
- -------------- --------- -------- ------------- ---------
2004
----
Allowance for losses:
Accounts receivable $ 28,074 $ (24,780) $ 3,294 $ -
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
(1) Principally charge-offs against the established allowances, including
reduction due to sale of assets in accordance with the liquidation plan in
December 2004
See accompanying report of independent registered public accounting firm
29
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9a. 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 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 42, 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 assumed the position of Principal
Financial Officer in December 2003. 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.
30
Item 11. Executive Compensation
----------------------
No compensation was paid by the Partnership to any officers or directors of the
general partner. See Item 13 of this Report, "Certain Relationships and Related
Transactions" for a description of the compensation and fees paid to the general
partner and its affiliates by the Partnership during 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) As of the date hereof, no person is known by the Partnership to be the
beneficial owner of more than 5% of the Class A limited partner units
of the Partnership. The Partnership has no directors or officers, and
neither the general partner nor the Class B limited partner of the
Partnership own any Class A limited partner units.
MLC is the Class B limited partner.
CAI Equipment Leasing IV Corp. is the general partner.
The names and addresses of the general partner and the Class B
limited partner are as follows:
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, 2004.
(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.
31
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 2004:
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 $64,177 for 2004.
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 $213,966 during 2004.
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 $37,372, respectively, for 2004. Net income allocated to the Class B
limited partner totaled $705 for 2004.
Sale of Assets to General Partner
- ---------------------------------
As discussed in footnote 1, in December 2004, the general partner purchased all
of the assets and assumed all of the liabilities of the partnership. The fund
received $167,679 of cash and recognized a loss on liquidation of assets of
$274,954. It is the intent of the general partner to settle all assumed
liabilities. Excess cash remaining after such settlement, if any, or additional
cash necessary for such settlement, if any, will be for the account of the
general partner or the general partner's obligation, respectively.
Item 14. Principal Accounting Fees and Services
--------------------------------------
Fees paid to the principal accountant for the audit of the annual financial
statements and review of financial statements included in Form 10-Q totaled
$51,250 in 2004 and $33,750 in 2003.
Fees paid to the principal accountant for tax compliance, tax advice, and tax
planning totaled $55,925 in 2004 and $53,447 in 2003.
32
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, 2004.
(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.
33
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, 2005 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, 2005.
Signature Title
- --------- -----
/s/John F. Olmstead
- -------------------
John F. Olmstead President and Director
34
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, 2005 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, 2005.
Signature Title
- --------- -----
/s/Mary M. Ebele
- ----------------
Mary M. Ebele Principal Financial Officer
35
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)) 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. 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
c. 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, 2005
36
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)) 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. 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
c. 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, 2005
37