PW WILLOW FUND, L.L.C.
FINANCIAL STATEMENTS
(UNAUDITED)
SEMI ANNUAL REPORT
FOR THE PERIOD FROM MAY 8, 2000
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 2000
<PAGE>
PW WILLOW FUND, L.L.C.
FINANCIAL STATEMENTS
(UNAUDITED)
SEMI ANNUAL REPORT
FOR THE PERIOD FROM MAY 8, 2000
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 2000
CONTENTS
Statement of Assets, Liabilities and Member's Capital......................1
Statement of Operations....................................................2
Statement of Changes in Member's Capital - Net Assets .....................3
Notes to Financial Statements..............................................4
Schedule of Portfolio Investments.........................................10
<PAGE>
PW WILLOW FUND, L.L.C.
STATEMENT OF ASSETS, LIABILITIES AND MEMBERS' CAPITAL
(UNAUDITED)
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (Cost $19,339,375) $19,507,125
Cash and cash equivalents 16,818,051
Due from broker 5,227,801
Interest and dividends receivable 930,290
--------------------------------------------------------------------------------
TOTAL ASSETS 42,483,267
--------------------------------------------------------------------------------
LIABILITIES
Securities sold, not yet purchased, at value
(Proceeds of sales $2,575,000) 2,572,500
Payables:
Investments purchased, not settled 3,150,000
Organizational costs 147,162
Interest due on securities sold, not yet purchased 44,597
Management fee 35,505
Professional fees 9,000
Administration expense 5,842
Miscellaneous 2,965
--------------------------------------------------------------------------------
TOTAL LIABILITIES 5,967,571
--------------------------------------------------------------------------------
NET ASSETS $36,515,696
--------------------------------------------------------------------------------
MEMBERS' CAPITAL - NET ASSETS
Represented by:
Capital contributions $36,278,912
Accumulated net investment income 96,534
Accumulated net realized loss from investments (30,000)
Accumulated net unrealized appreciation from investments 170,250
--------------------------------------------------------------------------------
TOTAL MEMBERS' CAPITAL - NET ASSETS $36,515,696
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
PW WILLOW FUND, L.L.C.
STATEMENT OF OPERATIONS
(UNAUDITED)
--------------------------------------------------------------------------------
FOR THE PERIOD FROM MAY 8, 2000 (COMMENCEMENT OF OPERATIONS) THROUGH JUNE 30,
2000
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividend $211,921
Interest 118,024
--------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 329,945
--------------------------------------------------------------------------------
EXPENSES
Organizational costs 150,000
Management fee 53,774
Professional fees 9,000
Administration expense 5,842
Miscellaneous 8,698
--------------------------------------------------------------------------------
Total Operating Expenses 227,314
Interest expense 6,097
--------------------------------------------------------------------------------
TOTAL EXPENSES 233,411
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 96,534
--------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
FROM INVESTMENTS
Net realized loss from investments (30,000)
Change in net unrealized appreciation from investments 170,250
--------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN FROM INVESTMENTS 140,250
--------------------------------------------------------------------------------
INCREASE IN MEMBERS' CAPITAL DERIVED FROM OPERATIONS $236,784
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PW WILLOW FUND, L.L.C.
STATEMENT OF CHANGES IN MEMBERS' CAPITAL - NET ASSETS
(UNAUDITED)
--------------------------------------------------------------------------------
FOR THE PERIOD FROM MAY 8, 2000 (COMMENCEMENT OF OPERATIONS) THROUGH JUNE 30,
2000
--------------------------------------------------------------------------------
FROM INVESTMENT ACTIVITIES
Net investment income $ 96,534
Net realized loss from investments (30,000)
Change in net unrealized appreciation from investments 170,250
--------------------------------------------------------------------------------
NET INCREASE IN MEMBERS' CAPITAL
DERIVED FROM OPERATIONS 236,784
--------------------------------------------------------------------------------
MEMBERS' CAPITAL TRANSACTIONS
Proceeds from Member subscriptions 34,778,912
Proceeds from Manager subscriptions 1,500,000
--------------------------------------------------------------------------------
INCREASE IN MEMBERS' CAPITAL DERIVED
FROM CAPITAL TRANSACTIONS 36,278,912
--------------------------------------------------------------------------------
MEMBERS' CAPITAL AT BEGINNING OF PERIOD --
--------------------------------------------------------------------------------
MEMBERS' CAPITAL AT END OF PERIOD $36,515,696
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PW WILLOW FUND, L.L.C.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
1. ORGANIZATION
PW Willow Fund, L.L.C. (the "Fund") was organized as a limited liability
company under the laws of Delaware on February 1, 2000. The Fund is
registered under the Investment Company Act of 1940 (the "1940 Act") as a
closed-end, non-diversified management investment company. The Fund's
investment objective is to maximize total return. The Fund pursues its
investment objective by investing primarily in debt securities and other
obligations and to a lesser extent equity securities of U.S companies that
are experiencing significant financial or business difficulties
(collectively, "Distressed Obligations"). The Fund also may invest in
Distressed Obligations of foreign issues denominated in U.S. dollars and
other privately held obligations. Operations of the Fund commenced on May 8,
2000.
The Manager of the Fund is PW Willow Management, L.L.C. (the "Manager"), a
Delaware limited liability company. The Manager's capital account balance at
June 30, 2000 was $1,509,488. The Manager is a joint venture between PW Fund
Advisor, L.L.C. ("PWFA") and Bond Street Capital, L.L.C. ("Bond Street").
PWFA is the managing Member of the Manager and is an indirect, wholly owned
subsidiary of Paine Webber Group Inc. and is registered as an investment
advisor under the Investment Advisers Act of 1940, as amended. Investment
professionals employed by Bond Street will manage the Fund's investment
portfolio on behalf of the Manager under the oversight of PWFA's personnel.
Bond Street is also registered as an investment advisor under the Investment
Advisers Act of 1940.
The Fund's Board of Directors (the "Directors"), has overall responsibility
to manage and control the business affairs of the Fund, including the
exclusive authority to oversee and to establish policies regarding the
management, conduct and operation of the Fund's business. The Directors have
engaged the Manager to provide investment advice to, and day-to-day
management of, the Fund.
Initial and additional subscriptions for interests by eligible members may be
accepted at such times as the Fund may determine and are generally accepted
monthly. The Fund reserves the right to reject any subscription for interests
in the Fund. The Fund from time to time may offer to repurchase interests
pursuant to written tenders to Members. These repurchases will be made at
such times and on such terms as may be determined by the Directors, in their
complete and exclusive discretion. The Manager expects that generally,
beginning in 2001, it will recommend to the Directors that the Fund offer to
repurchase interests from Members twice that year, in June and December and
then once each year thereafter, near year-end. Member's interests in the Fund
can only be transferred or assigned with the approval of the Manager.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Manager to
make estimates and assumptions that
4
<PAGE>
PW WILLOW FUND, L.L.C.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
affect the amounts reported in the financial statements and accompanying
notes. The Manager believes that the estimates utilized in preparing the
Fund's financial statements are reasonable and prudent; however, actual
results could differ from these estimates.
Securities transactions, including related revenue and expenses, are recorded
on a trade-date basis. Interest income is recorded on the accrual basis.
Realized gains and losses from security and foreign currency transactions are
calculated on the identified cost basis.
Cash and cash equivalents consist of monies invested in money market funds
and are accounted for at cost plus accrued interest as reported by the money
market funds.
a. PORTFOLIO VALUATION
Net asset value of the Fund will be determined as of the close of business at
the end of any fiscal period in accordance with the valuation principles set
forth below or as may be determined from time to time pursuant to policies
established by the Directors.
Domestic exchange traded securities and NASDAQ listed securities will be
valued at their last composite sales prices as reported on the exchanges
where such securities are traded. If no sales of such securities are reported
on a particular day, the securities will be valued based upon their composite
bid prices for securities held long, or their composite ask prices for
securities sold short, as reported by such exchanges. Securities traded on a
foreign securities exchange will be valued at their last sales prices on the
exchange where such securities are primarily traded, or in the absence of a
reported sale on a particular day, at their bid prices, in the case of
securities held long, or ask prices, in the case of securities sold short, as
reported by such exchange. Listed options will be valued using last sales
prices as reported by the exchange with the highest reported daily volume for
such options or, in the absence of any sales on a particular day, at their
bid prices as reported by the exchange with the highest volume on the last
day a trade was reported. Other securities for which market quotations are
readily available will be valued at their bid prices, or ask prices in the
case of securities sold short, as obtained from one or more dealers making
markets for such securities. If market quotations are not readily available,
securities and other assets will be valued at fair value as determined in
good faith by, or under the supervision of, the Directors.
Debt securities will be valued in accordance with the procedures described
above, which with respect to such securities may include the use of
valuations furnished by a pricing service which employs a matrix to determine
valuation for normal institutional size trading units. The Directors will
periodically monitor the reasonableness of valuations provided by any such
pricing service. Debt securities with remaining maturities of 60 days or
less, absent unusual circumstances, will be valued at amortized cost, so long
as such valuation is determined by the Directors to represent fair value.
5
<PAGE>
PW WILLOW FUND, L.L.C.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
a. PORTFOLIO VALUATION (CONTINUED)
All assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars using foreign exchange rates provided by a
pricing service compiled as of 4:00 p.m. London time. Trading in foreign
securities generally is completed, and the values of such securities are
determined, prior to the close of securities markets in the U.S. Foreign
exchange rates are also determined prior to such close.
On occasion, the values of such securities and exchange rates may be affected
by events occurring between the time which determination of such values or
exchange rates are made and the time that the net asset value of the Fund is
determined. When such events materially affect the values of securities held
by the Fund or its liabilities, such securities and liabilities will be
valued at fair value as determined in good faith by, or under the supervision
of, the Directors.
Foreign-denominated assets may involve more risks than domestic transactions,
including currency risk, political and economic risk, regulatory risk, and
market risk. Risks may arise from the potential inability of a counterparty
to meet the terms of a contract and from unanticipated movements in the value
of foreign currencies relative to the U.S. dollar.
The Fund does not isolate the portion of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from
changes in market prices of foreign securities held. Such fluctuations are
included in net realized and unrealized gain or loss from investments. Net
realized exchange gain or loss from foreign currency transactions represent
net foreign exchange gain or loss from forward foreign currency contracts,
disposition of foreign currencies, currency gain or loss realized between the
trade and settlement dates on security transactions, and the difference
between the amount of net investment income recorded on the Fund's accounting
records and the U. S. dollar equivalent amounts actually received or paid.
Net unrealized foreign exchange gain or loss arises from changes in value of
assets and liabilities, other than investments in securities, as a result of
changes in exchange rates.
b. FUND EXPENSES
The Fund will bear all expenses incurred in the business of the Fund,
including, but not limited to, the following: all costs and expenses related
to portfolio transactions and positions for the Fund's account; legal fees;
accounting and auditing fees; costs of insurance; registration expenses;
certain offering costs and organization costs; and expenses of meetings of
Directors and Members.
6
<PAGE>
PW WILLOW FUND, L.L.C.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c. INCOME TAXES
No provision for the payment of Federal, state or local income taxes has been
provided. Each Member is individually required to report on its own tax
returns its distributive share of the Fund's taxable income or loss.
3. MANAGEMENT FEE, INCENTIVE ALLOCATION, RELATED PARTY TRANSACTIONS AND OTHER
PWFA provides certain management and administrative services to the Fund,
including, among other things, providing office space and other support
services to the Fund. In consideration for such services, the Fund will pay
PWFA a monthly management fee at an annual rate of 1.25% of the Fund's net
assets for the month, excluding assets attributable to the Manager's capital
account (the "Fee"). The Fee is debited against the Members' capital
accounts, excluding the Manager. A portion of the fee will be paid by PWFA to
an affiliate of Bond Street.
PaineWebber Incorporated ("PWI", a wholly-owned subsidiary of Paine Webber
Group Inc.) acts as a placement agent for the Fund, without special
compensation from the Fund, and will bear its own costs associated with its
activities as placement agent. Placement fees, if any, charged on
contributions are debited against the contribution amounts, to arrive at a
net subscription amount.
The Fund may execute portfolio transactions through PWI. During the period
ended June 30, 2000, PWI did not earn brokerage commissions form portfolio
transactions executed on behalf of the Fund.
The increase (or decrease) in Member's capital derived from operations (net
profit) is initially allocated to the capital accounts of all Members on a
pro-rata basis. At the end of the twelve month period following the admission
of a Member to the Fund, and generally at the end of each fiscal year
thereafter, the Manager is entitled to an incentive allocation (the
"Incentive Allocation") of 20% of the net profits, if any, that would have
been credited to the Member's capital account for such period. The Incentive
Allocation will be made only with respect to net profits that exceed any net
losses previously charged to the account of such Member which have not been
offset by any net profits subsequently credited to the account of the Member.
There was no Incentive Allocation recorded in the financial statements for
the period ended June 30, 2000.
Each Director, who is not an "interested person" of the Fund, as defined by
the 1940 Act, receives an annual retainer of $5,000 plus a fee for each
meeting attended. Any Director who is an "interested person" does not receive
any annual or other fee from the Fund. All Directors are reimbursed by the
Fund for all reasonable out-of-pocket expenses incurred by them in performing
their duties.
7
<PAGE>
PW WILLOW FUND, L.L.C.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
3. MANAGEMENT FEE, INCENTIVE ALLOCATION, RELATED PARTY TRANSACTIONS AND OTHER
(CONTINUED)
PFPC Trust Company (an affiliate of PNC Bank, NA) serves as custodian of the
Fund's assets and provides custodial services for the Fund. PFPC Trust
Company entered into a service agreement whereby PNC Bank, NA provides
securities clearance functions.
PFPC Inc. (also an affiliate of PNC Bank, NA) serves as Administrator and
Accounting Agent to the Fund, and in that capacity provides certain
accounting, record keeping, tax and member related services. PFPC Inc.
receives a monthly fee primarily based upon aggregate net assets of the Fund.
4. SECURITIES TRANSACTIONS
Aggregate purchases and sales of debt securities for the period ended June
30, 2000, amounted to $19,759,375 and $390,000, respectively.
At June 30, 2000, the cost of investments for Federal income tax purposes was
substantially the same as the cost for financial reporting purposes. At June
30, 2000, accumulated net unrealized depreciation on investments was
$170,250, consisting of $408,125 gross unrealized appreciation and ($237,875)
gross unrealized depreciation.
5. SHORT-TERM BORROWINGS
The Fund has the ability to trade on margin and, in that connection, borrows
funds from brokers and banks for investment purposes. Trading in debt
securities on margin involves an initial cash requirement representing at
least 50% of the underlying security's value with respect to transactions in
U.S. markets and varying percentages with respect to transactions in foreign
markets. The 1940 Act requires the Fund to satisfy an asset coverage
requirement of 300% of its indebtedness, including amounts borrowed, measured
at the time the Fund incurs the indebtedness. The Fund pledges cash as
collateral for the margin borrowings, which are maintained in a segregated
account held by the Custodian. The Fund had no borrowings outstanding at June
30, 2000.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK OR CONCENTRATIONS OF CREDIT
RISK
In the normal course of business, the Fund may trade various financial
instruments and enter into various investment activities with off-balance
sheet risk. These financial instruments include forward and futures
contracts, options and sales of securities sold, not yet purchased.
Generally, these financial instruments represent future commitments to
purchase or sell other financial instruments at specific terms at specified
future dates.
8
<PAGE>
PW WILLOW FUND, L.L.C.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK OR CONCENTRATIONS OF CREDIT
RISK (CONTINUED)
Each of these financial instruments contains varying degrees of off-balance
sheet risk whereby changes in the market value of the securities underlying
the financial instruments may be in excess of the amounts recognized in the
Statement of Assets, Liabilities and Members' Capital.
Securities sold short, not yet purchased represents obligations of the
Membership to deliver specified securities and thereby creates a liability to
purchase such securities in the market at prevailing prices. Accordingly,
these transactions result in off-balance sheet risk as the Fund's ultimate
obligation to satisfy the sale of securities sold, not yet purchased may
exceed the amount indicated in the Statement of Assets, Liabilities and
Members' Capital. The cash due from broker is primarily related to securities
sold, not yet purchased; its use is therefore restricted until the securities
are purchased.
During the period ended June 30, 2000, the Fund did not trade any forward or
futures contracts, or options, but did have short sales amounting to
$2,575,000.
7. FINANCIAL HIGHLIGHTS
The following represents the ratios to average net assets and other
supplemental information for the period indicated:
FOR THE PERIOD
FROM MAY 8, 2000
TO JUNE 30, 2000
----------------
Ratio of net investment gain to average net assets 2.17%*
Ratio of operating expenses to average net assets 5.26%*
Ratio of operating expenses to average net assets
excluding interest expense 5.12%*
Portfolio turnover rate 3.20%
Total return .35%**
* Annualized.
** Total return assumes a purchase of an interest in the Fund at the
beginning of the period and a sale of the Fund interest on the last day of
the period noted, after incentive allocation to the Manager, and does not
reflect the deduction of placement fees, if any, incurred when subscribing
to the Fund. Total returns for a period of less than a full year are not
annualized.
8. SUBSEQUENT EVENTS
Effective July 1, 2000 the Fund received additional Member capital
contributions of approximately $7,324,475.
9
<PAGE>
PW WILLOW FUND, L.L.C.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
--------------------------------------------------------------------------------
JUNE 30, 2000
PAR MARKET VALUE
--------------------------------------------------------------------------------
CORPORATE BONDS(46.96%)
-----------------------
APPAREL MANUFACTURERS(4.16%)
2,000,000 Levi Strauss & Co. 7.00% 11/01/06 $ 1,518,000
-----------
FINANCE - LEASING COMPANY(2.44%)
1,000,000 Resource America, Inc. 12.00% 08/01/04 890,000
-----------
FINANCE - OTHER SERVICES(6.69%)
3,000,000 Lodgian Financing Corp. 12.25% 07/15/09 2,445,000
-----------
HOME DECORATION PRODUCTS(4.58%)
4,500,000 Franks Nursery & Crafts 10.25% 03/01/08 1,672,500
-----------
OIL & GAS DRILLING(2.44%)
2,000,000 Costilla Energy Inc. 10.25% 10/01/06 (a) 890,000
-----------
MISCELLANEOUS MANUFACTURING(4.22%)
4,000,000 Decorator Industries, Inc. 11.00% 05/01/05 1,540,000
-----------
REITS - HEALTH CARE(4.13%)
2,000,000 Meditrust 7.82% 09/10/26 1,510,000
-----------
REITS - SHOPPING CENTERS(4.63%)
1,000,000 JDN Realty Corp. 6.80% 08/01/04 830,000
1,000,000 JDN Realty Corp. 6.918% 03/31/03 * 860,000
-----------
1,690,000
-----------
RETAIL DRUG STORE(2.25%)
1,000,000 Rite Aid Corp. 10.5% 09/15/02 * 822,000
-----------
The preceeding notes are an integral part of these financial statements.
10
<PAGE>
PW WILLOW FUND, L.L.C.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
--------------------------------------------------------------------------------
JUNE 30, 2000
PAR MARKET VALUE
--------------------------------------------------------------------------------
CORPORATE BONDS (CONTINUED)
---------------------------
RETAIL - RESTAURANTS(5.83%)
2,000,000 Advantica Restaurant Group 11.25% 01/15/08 $ 1,329,000
1,750,000 Einstein Noah Bagel Corp. 7.25% 06/01/04 (a) 800,625
-----------
2,129,625
-----------
TEXTILE - PRODUCTS(5.59%)
4,500,000 Galey & Lord Inc. 9.125% 03/01/08 2,040,000
-----------
TOTAL CORPORATE BONDS (COST $16,979,375) 17,147,125
-----------
BANK LOANS(6.46%)
-----------------
2,000,000 U.S. Office Products 10.125% 06/09/06 1,470,000
1,000,000 Arch Paging Inc. 13.625% 6/30/06 ** 890,000
-----------
TOTAL BANK LOANS (COST $2,360,000) 2,360,000
-----------
SECURITIES SOLD, NOT YET PURCHASED((7.04)%)
-------------------------------------------
-----------
CONSULTING SERVICES((2.51)%)
1,000,000 Comdisco, Inc. 6.125% 01/15/03 (917,500)
-----------
FINANCE LEASING COMPANY((2.41)%)
1,000,000 Williams Scotsman, Inc. 9.875% 06/01/07 (880,000)
-----------
PHYSICAL THERAPY / REHABILITATION CENTERS((2.12%)
1,000,000 HEALTHSOUTH Corp. 3.25% 04/01/03 (775,000)
-----------
TOTAL SECURITIES SOLD, NOT YET PURCHASED (2,572,500)
(PROCEEDS ($2,575,000)) -----------
TOTAL INVESTMENTS--46.38% (COST $16,764,375) $16,934,625
-----------
LIABILITIES IN EXCESS OF ASSETS--53.62% 19,581,071
-----------
NET ASSETS--100.0% $36,515,696
===========
The preceeding notes are an integral part of these financial statements.
11
<PAGE>
PW WILLOW FUND, L.L.C.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
--------------------------------------------------------------------------------
JUNE 30, 2000
MARKET VALUE
--------------------------------------------------------------------------------
* Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. The 144A
restricted securities are 4.6% of the net assets.
** Variable rate security. Coupon rate disclosed is that which is in effect
at June 30, 2000.
(a) Security in default
The preceeding notes are an integral part of these financial statements.
12
