10-Q 1 cap310q_09-03.txt FORM 10-Q SEPTEMBER 30, 2003 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 -------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- 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 No.) 7901 Southpark Plaza, Suite 107 Littleton, Colorado 80120 ------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (303) 268-6550 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 . --- Exhibit Index appears on Page 14 Page 1 of 19 Pages CAPITAL PREFERRED YIELD FUND-III, L.P. Quarterly Report on Form 10-Q For the Quarter Ended September 30, 2003 Table of Contents ----------------- PART I. FINANCIAL INFORMATION PAGE - ---- Item 1. Financial Statements (Unaudited) Balance Sheets - September 30, 2003 and December 31, 2002 3 Statements of Income - Three and Nine Months Ended September 30, 2003 and 2002 4 Statements of Cash Flows - Nine Months Ended September 30, 2003 and 2002 5 Notes to Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Item 4. Controls and Procedures 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 Exhibit Index 14 Signatures 15 Certifications 16-19 2 CAPITAL PREFERRED YIELD FUND-III, L.P. BALANCE SHEETS ASSETS September 30, December 31, 2003 2002 ---- ---- (Unaudited) Cash and cash equivalents $ 587,693 $ 1,229,412 Accounts receivable, net 189,572 158,424 Equipment held for sale or re-lease 61,784 51,730 Net investment in direct finance leases 848,273 1,368,607 Leased equipment, net 5,002,680 8,391,053 ----------- ----------- Total assets $ 6,690,002 $11,199,226 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Liabilities: Accounts payable and accrued liabilities $ 692,736 $ 1,076,491 Payables to affiliates 67,704 48,510 Rents received in advance 64,179 108,771 Distributions payable to partners 43,929 363,351 Discounted lease rentals 1,272,340 2,526,644 ----------- ----------- Total liabilities 2,140,888 4,123,767 ----------- ----------- Partners' capital: General partner -- -- Limited partners: Class A 4,276,808 6,811,509 Class B 272,306 263,950 ----------- ----------- Total partners' capital 4,549,114 7,075,459 ----------- ----------- Total liabilities and partners' capital $ 6,690,002 $11,199,226 =========== =========== See accompanying notes to financial statements. 3 CAPITAL PREFERRED YIELD FUND-III, L.P. STATEMENTS OF INCOME (Unaudited)

See accompanying notes to financial statements. 4 CAPITAL PREFERRED YIELD FUND-III, L.P., STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, -------------------------- 2003 2002 ----------- ----------- Net cash provided by operating activities $ 4,328,005 $ 7,770,248 ----------- ----------- Cash flows from financing activities: Principal payments on discounted lease rentals (1,254,304) (2,017,831) Distributions to partners (3,715,420) (6,030,162) ----------- ----------- Net cash used in financing activities (4,969,724) (8,047,993) ----------- ----------- Net decrease in cash and cash equivalents (641,719) (277,745) Cash and cash equivalents at beginning of period 1,229,412 1,603,588 ----------- ----------- Cash and cash equivalents at end of period $ 587,693 $ 1,325,843 =========== =========== Supplemental disclosure of cash flow information: Interest paid on discounted lease rentals $ 117,041 $ 248,572 =========== =========== See accompanying notes to financial statements. 5 CAPITAL PREFERRED YIELD FUND-III, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation --------------------- The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the General Partner, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The balance sheet at December 31, 2002 was derived from the audited financial statements included in the Partnership's 2002 Form 10-K. For further information, refer to the financial statements of Capital Preferred Yield Fund-III, L.P. (the "Partnership"), and the related notes, included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2002, previously filed with the Securities and Exchange Commission. The Partnership is in its liquidation period, as defined in the Partnership Agreement. Even so, because the liquidation period extends over an undefined number of accounting periods, the accompanying financial statements have been prepared on a going concern basis that contemplates the realization of assets and payments of liabilities in the ordinary course of business, which is in accordance with accounting principles generally accepted in the United States of America. 6 CAPITAL PREFERRED YIELD FUND-III, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited) 2. Transactions With the General Partner and Affiliates ---------------------------------------------------- Management Fees to General Partner In accordance with the Partnership Agreement, the General Partner earns a management fee in connection with its management of the equipment, calculated as a percentage of the monthly gross rentals received, and paid monthly in arrears. Management fees of approximately $8,000 and $12,000 are included in payables to affiliates at September 30, 2003 and December 31, 2002, respectively. Direct Services from General Partner The General Partner and an affiliate 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. Direct services from the General Partner of approximately $22,000 and $15,000 are included in payables to affiliates at September 30, 2003 and December 31, 2002, respectively. General and Administrative Expenses The General Partner and an affiliate pay the allocated actual cost of administrative expenses incurred on behalf of the Partnership. The Partnership reimburses the General Partner for these expenses as permitted under terms of the Partnership Agreement. General and administrative costs of approximately $38,000 and $22,000 are included in payables to affiliates at September 30, 2003 and December 31, 2002, respectively. 7 CAPITAL PREFERRED YIELD FUND-III, L.P. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations --------------------- Presented below are schedules (prepared solely to facilitate the discussion of results of operations that follows) showing items of income and expense and changes in those items derived from the Statements of Income:

The Partnership is in its liquidation period, as defined in the Partnership Agreement, and is not purchasing additional equipment. Initial leases are expiring, and equipment is being remarketed (i.e. re-leased, renewed or sold). As a result, both the size of the Partnership's portfolio and the amount of total revenue are decreasing ("portfolio runoff"). Even so, because the liquidation period extends over an undefined number of accounting periods, the accompanying financial statements have been prepared on a going concern basis that contemplates the realization of assets and payments of liabilities in the ordinary course of business, which is in accordance with accounting principles generally accepted in the United States of America. Leasing Margin Leasing margin consists of the following:

8 CAPITAL PREFERRED YIELD FUND-III, L.P. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Results of Operations, continued --------------------- Leasing Margin, continued All of the components of leasing margin including operating lease rentals, direct finance lease income, depreciation on leased equipment and interest expense on discounted lease rentals decreased due to portfolio runoff. Because the Partnership is in its liquidation period, no additional equipment is being purchased. As a result, leasing margin and its components will decline over the remaining life of the related leases in the Partnership's portfolio. Leasing margin ratio increased for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002 primarily due to increases in a) the percentage of leases in the portfolio that have entered their remarketing stage, and b) the average maturity of operating leases in the portfolio. Leasing margin and leasing margin ratio are generally higher as leases enter their remarketing stage because typically depreciation expense is reduced since the related equipment is at or near the end of its useful life. Leasing margin and leasing margin ratio for an operating lease financed with discounted lease rentals increase as the lease matures since rents and depreciation are typically fixed while interest expense declines as the related discounted lease rentals principal is repaid. Leasing margin ratio for a direct finance lease is fixed over the term of the lease. The ultimate rate of return on leases depends, in part, on interest rates at the time the leases are originated, as well as future equipment values and on-going lessee creditworthiness. Because leasing is an alternative to financing equipment purchases with debt, lease rates tend to rise and fall with interest rates (although lease rate movements generally lag interest rate changes in the capital markets). Equipment Sales Margin Equipment sales margin consists of the following:

Equipment sales margin fluctuates based on the composition of equipment available for sale. Currently, the Partnership is in its liquidation period (as defined in the Partnership Agreement). Initial leases are expiring and the equipment is either 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 for specific equipment and residual value estimates. 9 CAPITAL PREFERRED YIELD FUND-III, L.P. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Results of Operations, continued --------------------- 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 for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002 due to portfolio run-off. Direct services from the General Partner decreased for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002 primarily because the three and nine months ended September 30, 2002 included increased costs related to the General Partner's efforts to collect receivables owed to the Partnership. General and administrative expenses increased for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 primarily due to a) increased insurance costs of approximately $65,000, and b) upgrades to computer equipment of approximately $52,000 needed to effectively and efficiently manage the Partnership's assets. General and administrative expenses increased for the three months ended September 30, 2003 compared to the three months ended September 30, 2002 primarily due to increased equipment storage costs of approximately $34,000. 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 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). Losses related to credit exposure, if any, and residual value exposure, if any, are recorded as provision for losses. Residual value exposure includes equipment returned to the Partnership subsequent to initial lease termination and equipment sold to the lessee subsequent to initial lease termination. 10 CAPITAL PREFERRED YIELD FUND-III, L.P. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Additionally, residual value exposure includes assets currently under lease. The Partnership performs quarterly assessments of the estimated net realizable value (NRV assessments) of its assets under lease to identify any other-than-temporary losses in value that, if any, are also recorded as provision for losses. The provision for losses of $125,250 recorded during the nine months ended September 30, 2003 related primarily to losses of approximately $154,000 related to equipment returned to the Partnership subsequent to initial lease termination, approximately $38,000 related to equipment sold to the lessee subsequent to initial lease termination and approximately $33,000 related to NRV assessments; offset by reversal of $100,000 of provision for losses. The General Partner reviewed the accounts receivable balances during the nine months ended September 30, 2003 and determined that the accounts receivable allowance was greater than the amount required because of the General Partner's efforts to collect receivables owed to the Partnership. Liquidity & Capital Resources ----------------------------- The Partnership is in its liquidation period, as defined in the Partnership Agreement. The Partnership is not purchasing additional equipment and initial leases are expiring with the equipment being remarketed (i.e., re-leased, renewed, or sold). As a result, the size of the Partnership's lease portfolio is decreasing, which results in a corresponding decrease in leasing revenue. Even so, because the liquidation period extends over an undefined number of accounting periods, the accompanying financial statements have been prepared on a going concern basis that contemplates the realization of assets and payments of liabilities in the ordinary course of business, which is in accordance with accounting principles generally accepted in the United States of America. The Partnership funds its operating activities principally with cash from rents and sales of off-lease equipment. Available cash and cash reserves of the Partnership are invested in short-term government securities (considered cash equivalents) pending distribution to the partners. During the nine months ended September 30, 2003, the Partnership declared distributions to the Class A limited partners of $3,362,040 ($42,570 of which was paid during October 2003). All such distributions are expected to constitute a return of capital for economic purposes. 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 that exceeds its net income for the fiscal period may be deemed a return of capital for accounting purposes. However, the total percentage of the partnership's return on capital over its life will only be determined after all residual cash flows (which include proceeds from the re-leasing and sale of equipment) have been realized at the termination of the Partnership. The General Partner believes that the Partnership will generate sufficient cash flows from operations during the remainder of 2003 to meet current operating requirements and fund cash distributions to partners in accordance with the Partnership Agreement. All distributions are expected to be a return of capital for economic and accounting purposes. Additionally, the General Partner anticipates that all equipment owned by the Partnership will be sold and the Partnership liquidated during 2004. 11 CAPITAL PREFERRED YIELD FUND-III, L.P. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued "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, the availability and cost of financing sources and the ultimate outcome of any contract disputes. Certain specific risks associated with particular aspects of the Partnership's business are discussed under Results of Operations in this report and under Results of Operations in the 2002 Form 10-K when and where applicable. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Partnership's leases with equipment users are non-cancelable and have lease rates which are fixed at lease inception. The partnership finances its leases, in part, with discounted lease rentals at a fixed debt rate. The Partnership's other assets and liabilities are also at fixed rates. Consequently, the Partnership has no interest rate risk or other market risk exposure. Item 4. Controls and Procedures The Partnership carried out an evaluation as of September 30, 2003, under the supervision and with the participation of the General Partner's management, including the President and Director, and the Chief Accounting Officer, of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, the President and Director, and the Chief Accounting 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 this Quarterly Report on Form 10-Q. There have been no changes in the Partnership's internal controls over financial reporting that occurred during the quarter ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. 12 CAPITAL PREFERRED YIELD FUND-III, L.P. PART II OTHER INFORMATION Item 1. Legal Proceedings The Partnership is involved in routine legal proceedings incidental to the conduct of its business. The General Partner believes none of these legal proceedings will have a material adverse effect on the financial condition or operations of the Partnership. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (b) The Partnership did not file any reports on Form 8-K during the quarter ended September 30, 2003. 13 Exhibit Index Exhibit Number Description ------ ----------- * 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 Joseph F. Bukofski pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith 14 CAPITAL PREFERRED YIELD FUND-III, L.P. Signatures Pursuant to the requirements 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. CAPITAL PREFERRED YIELD FUND-III, L.P. By: CAI Equipment Leasing IV Corp. Dated: November 14, 2003 By: /s/John F. Olmstead ------------------- John F. Olmstead President and Director (Principal Executive Officer) CAPITAL PREFERRED YIELD FUND-III, L.P. By: CAI Equipment Leasing IV Corp. Dated: November 14, 2003 By: /s/Joseph F. Bukofski --------------------- Joseph F. Bukofski Chief Accounting Officer (Principal Accounting and Financial Officer) 15 SECTION 302 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 of the Partnership on Form 10-Q for the quarterly period ended September 30, 2003; 2. Based on my knowledge, this report does not contain any untrue statement of a 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 as with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 is made known to us by others within this entity, particularly during the period in which this report is 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: a. all significant deficiencies and material weaknesses in the design or operation of internal controls 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) November 14, 2003 16 SECTION 302 CERTIFICATION I, Joseph F. Bukofski, Chief Accounting 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 of the Partnership on Form 10-Q for the quarterly period ended September 30, 2003; 2. Based on my knowledge, this report does not contain any untrue statement of a 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 as with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 is made known to us by others within this entity, particularly during the period in which this report is 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: a. all significant deficiencies and material weaknesses in the design or operation of internal controls 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/ Joseph F. Bukofski ---------------------- Joseph F. Bukofski Chief Accounting Officer (Principal Accounting and Financial Officer) November 14, 2003 17

CAPITAL PREFERRED YIELD FUND III L P 10-Q