<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(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, 1997
-------------------------------
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 0-19166
PaineWebber Preferred Yield Fund, L.P.
(Exact name of registrant as specified in its charter)
Delaware 84-1130506
(State of organization) (IRS Employer)
(Identification No.)
7175 West Jefferson Avenue
Suite 3000
Lakewood, Colorado 80235
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (303) 980-1000
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 .
<PAGE> 2
PaineWebber Preferred Yield Fund, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1997
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets - September 30, 1997 and
December 31, 1996 2
Statements of Operations for the three months
ended September 30, 1997 and 1996 3
Statements of Income for the nine months
ended September 30, 1997 and 1996 4
Statements of Partners' Equity for the nine
months ended September 30, 1997 and 1996 5
Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
1
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PAINEWEBBER PREFERRED YIELD FUND, L.P.
BALANCE SHEETS --SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,574,817 $ 2,879,451
Rent and other receivables, net 453,158 685,850
Equipment held for sale or lease, net of
accumulated depreciation of
$3,715,607 and $780,011 at 1997 and
1996 and writedowns of
$116,225 and $83,922 at 1997 and 1996 1,003,165 206,624
Net investment in direct financing leases 2,039,408 2,970,314
Equipment on operating leases, net of
accumulated depreciation of $29,024,357
in 1997 and $30,258,762 in 1996 and
writedowns of $1,393,857 in
1997 and $459,134 in 1996 (Note 5) 23,773,674 34,346,204
Other assets, net 9,688 9,688
----------- -----------
Total assets $30,853,910 $41,098,131
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Prepaid rent (Note 4) $ 6,996,306 $ 8,531,925
Accounts payable and accrued liabilities 858,781 370,940
Payable to affiliates (Note 2) 648,193 773,335
Interest payable 8,514 13,081
Deferred rental income and deposits 425,517 730,591
Distributions payable to partners 1,196,867 1,688,938
Discounted lease rentals 1,859,421 2,802,710
----------- -----------
Total liabilities 11,993,599 14,911,520
----------- -----------
Commitments and contingencies (Notes 2,3,4 and 5)
PARTNERS' EQUITY:
General Partners 849,807 1,216,120
Limited Partners:
Class A (142,128 Units outstanding) 15,446,581 21,828,653
Class B 2,563,923 3,141,838
----------- -----------
Total Partners' equity 18,860,311 26,186,611
----------- -----------
Total liabilities and partners' equity $30,853,910 $41,098,131
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUE:
Rentals from operating leases $ 2,378,308 $ 3,637,307
Direct financing lease income 74,136 186,315
Gain on sale of equipment 18,717 165,439
Interest 45,635 43,127
Other income -- 36,385
----------- -----------
2,516,796 4,068,573
----------- -----------
EXPENSES:
Depreciation and amortization 1,659,833 2,366,097
Writedowns (Note 5) 1,000,000 200,000
Management and disposition fees (Note 2) 52,225 151,874
Subordinated disposition fees (Note 2) -- 32,308
General and administrative (Note 2) 59,819 90,357
Interest 201,944 235,348
----------- -----------
2,973,821 3,075,984
----------- -----------
NET (LOSS) INCOME $ (457,025) $ 992,589
=========== ===========
NET (LOSS) INCOME ALLOCATED:
To the General Partners $ (22,850) $ 143,030
To the Class A Limited Partners (374,813) 898,847
To the Class B Limited Partner (59,362) (49,288)
----------- -----------
$ (457,025) $ 992,589
=========== ===========
NET (LOSS) INCOME PER WEIGHTED AVERAGE
NUMBER OF UNITS OF CLASS A LIMITED
PARTNER INTEREST OUTSTANDING ($ 2.64) $ 6.32
=========== ===========
WEIGHTED AVERAGE NUMBER OF
UNITS OF CLASS A LIMITED PARTNER
INTEREST OUTSTANDING 142,128 142,128
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
3
<PAGE> 5
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUE:
Rentals from operating leases $ 8,384,289 $ 10,942,688
Direct financing lease income 346,477 563,786
Gain on sale of equipment 219,759 572,568
Interest 131,643 214,434
Other income -- 36,385
----------- ------------
9,082,168 12,329,861
----------- ------------
EXPENSES:
Depreciation and amortization 5,588,167 7,116,362
Writedowns (Note 5) 1,000,000 575,000
Management fees (Note 2) 310,824 451,289
Subordinated disposition fees (Note 2) -- 61,693
General and administrative (Note 2) 160,819 352,034
Interest 619,822 820,851
----------- ------------
7,679,632 9,377,229
----------- ------------
NET INCOME $ 1,402,536 $ 2,952,632
=========== ============
NET INCOME ALLOCATED:
To the General Partners $ 70,127 $ 241,032
To the Class A Limited Partners 1,221,776 2,734,006
To the Class B Limited Partner 110,633 (22,406)
----------- ------------
$ 1,402,536 $ 2,952,632
=========== ============
NET INCOME PER WEIGHTED AVERAGE
NUMBER OF UNITS OF CLASS A LIMITED
PARTNER INTEREST OUTSTANDING $ 8.59 $ 19.24
=========== ============
WEIGHTED AVERAGE NUMBER OF
UNITS OF CLASS A LIMITED PARTNER
INTEREST OUTSTANDING 142,128 142,128
=========== ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
4
<PAGE> 6
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
Class A Class B
General Limited Limited
Partners Partners Partner Total
-------- -------- ------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 1,216,120 $ 21,828,653 $ 3,141,838 $ 26,186,611
Net income 70,127 1,221,776 110,633 1,402,536
Distributions declared (436,440) (7,603,848) (688,548) (8,728,836)
----------- ------------ ----------- ------------
Balance, September 30, 1997 $ 849,807 $ 15,446,581 $ 2,563,923 $ 18,860,311
=========== ============ =========== ============
Balance, January 1, 1996 $ 1,612,447 $ 28,417,629 $ 4,083,120 $ 34,113,196
Net income 241,032 2,734,006 (22,406) 2,952,632
Distributions declared (525,812) (9,118,932) (871,487) (10,516,231)
----------- ------------ ----------- ------------
Balance, September 30, 1996 $ 1,327,667 $ 22,032,703 $ 3,189,227 $ 26,549,597
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
5
<PAGE> 7
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,402,536 $ 2,952,632
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,588,167 7,116,362
Writedowns 1,000,000 575,000
Gain on sale of equipment, including direct finance leases, net (219,759) (572,568)
Change in assets and liabilities:
Rent and other receivables (104,935) 290,584
Accounts payable and accrued liabilities 487,841 (209,021)
Payable to affiliates (125,142) 288,668
Interest payable (4,567) (10,538)
Deferred rental income and deposits (21,408) 38,743
Prepaid rent (1,535,619) (1,595,535)
Increase in other assets -- (17,208)
------------ ------------
Net cash provided by operating activities 6,467,114 8,857,119
CASH FLOWS FROM INVESTING ACTIVITIES:
Recovery of investment in direct financing leases 914,766 1,228,604
Proceeds from sale of equipment, net of prepaid rent 3,481,611 1,997,533
Purchase of equipment on operating leases (3,929) (8,649,624)
Investment in direct financing leases -- (90,912)
------------ ------------
Net provided by (cash used) in investing activities 4,392,448 (5,514,399)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of discounted lease rentals (943,289) (1,585,298)
Cash distributions paid to partners (9,220,907) (8,547,640)
------------ ------------
Net cash used in financing activities (10,164,196) (10,132,938)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 695,366 (6,790,218)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,879,451 9,235,759
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,574,817 $ 2,445,541
============ ============
Supplemental schedule of cash flow information:
Interest paid $ 624,389 $ 831,389
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NON CASH TRANSACTIONS
Equipment subject to operating leases
converted to direct financing leases at renewal $ 87,769 $ 958,724
========== ==========
Deferred rental income and deposits reclassified to
allowance for writedowns $ 283,666 --
========== ==========
Distributions declared but not paid to partners $1,196,867 $3,179,714
========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
7
<PAGE> 9
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
1. GENERAL
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles 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 generally accepted accounting principles for annual financial statements. In
the opinion of the General Partners, all adjustments (consisting solely of
normal recurring adjustments) considered necessary for a fair presentation have
been included. The balance sheet at December 31, 1996 has been derived from the
audited financial statements included in the Partnership's Annual Report on Form
10-K. For further information, refer to the financial statements of PaineWebber
Preferred Yield Fund, 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,
1996, previously filed with the Securities and Exchange Commission.
2. TRANSACTIONS WITH AFFILIATES
Management Fees The General Partners receive a quarterly fee in an
amount equal to 2.0% of gross rentals for Full Payout Leases, as defined in the
Partnership Agreement, and 5.0% of gross rentals for other leases (payable 55%
to the Managing General Partner and 45% to the Administrative General Partner)
as compensation for services rendered in connection with the management of the
equipment. Management fees of $52,225 and $310,824 were earned by the General
Partners with respect to the rental revenues earned by the Partnership during
the quarter and nine months ended September 30, 1997.
Disposition Fees The Managing General Partner was entitled to receive a
subordinated disposition fee in an amount equal to the lesser of (i) 50% of the
fee that would be charged by an unaffiliated party, or (ii) 3% of the gross
contract price relating to each sale of equipment as compensation for
negotiating and consummating sales of equipment. At December 31, 1996, the
Partnership reversed previously accrued subordinated disposition fees totaling
$422,828 because the Managing General Partner concluded that it is no longer
probable that these subordinated dispositions fees will ever be paid. Of such
amount $61,693 was incurred during the nine months ended September 30, 1996.
However, the Partnership will not accrue any future amounts unless and until the
payments of subordinated disposition fees by the Partnership becomes probable.
Accountable General and Administrative Expenses The General Partners
are entitled to reimbursement of certain expenses paid on behalf of the
Partnership which are incurred in connection with the Partnership's operations.
Such reimbursable expenses, all of which were
8
<PAGE> 10
paid to the Managing General Partner, amounted to $18,750 during the nine months
ended September 30, 1997.
3. LITIGATION
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title in re: PaineWebber Limited Partnership
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including the Administrative General Partner of the
Partnership.
The amended complaint in the New York Limited Partnership Actions
alleged that, in connection with the sale of interest in the Partnership,
PaineWebber and the Administrative General Partner (1) failed to provide
adequate disclosure of the risks involved with the Partnership; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs also that
following the sale of the Partnership investments PaineWebber and the
Administrative General Partner misrepresented financial information about the
partnership's value and performance. The amended complaint alleged that
PaineWebber and the Administrative General Partner violated the Racketeer
Influenced and Corrupt Organization Act ("RICO") and the federal securities
laws. The plaintiffs sought unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also sought treble damages under RICO.
On May 30, 1995, the U.S. District Court certified class action
treatment of the plaintiffs' claims in the class action entitled, in re:
PaineWebber Limited Partnerships Litigation.
In January 1996, PaineWebber signed a memorandum of understanding with
the plaintiffs in the class action outlining the terms under which the parties
agreed to settle the case. A definitive settlement agreement was signed in July
1996 and in March 1997 the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement, PaineWebber agreed to pay $125
million and additional consideration to class members. The investors who had
objected to the settlement have appealed the District Court's approval to the
United States Court of Appeals for the Second Circuit. In July 1997, the U.S.
Court of Appeals for the Second Circuit affirmed the District Court's approval
of the settlement.
In February 1996, approximately 230 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleged, among other things, that PaineWebber and its related entities committed
fraud and misrepresentation and breached fiduciary duties allegedly owed to the
9
<PAGE> 11
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understanding the
risks and failing to state material facts concerning the investments. The
complaint sought compensatory damages of $15 million plus punitive damages. In
September 1996, the California Superior Court dismissed many of the plaintiff's
claims as barred by the applicable statutes of limitation. In March 1997, a
settlement was reached in various cases, including the Abbate litigation.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner, were entitled to indemnification
from the Partnership for expenses and liabilities in connection with the above
litigation. PaineWebber and its affiliates have agreed to not seek any
indemnification from the Partnership for any amounts payable in connection with
the New York Limited Partnership Actions. Additionally, the General Partners
believe that the Abbate settlement will not have a material impact on the
Partnership's financial statements taken as a whole.
4. PREPAYMENT OF LEASES
On December 11, 1995, the Partnership entered into a lease (Master
Lease) with an unaffiliated third party (Master Lessee) for a term of
approximately 110 months. Under the terms of the Master Lease, the Partnership
assigned to the Master Lessee certain economic rights to certain user leases
(with remaining lease terms ranging from 10 to 55 months) originally acquired by
the Partnership for purchase prices aggregating $13,879,929 (including related
acquisition fees) (Master Lease Equipment) and which represented future minimum
lease rentals under non-cancelable leases totaling $7,563,186. The Master Lessee
prepaid ("Prepayment of Leases"), on a discounted basis at a rate of 8.25%, the
rent due to the Partnership under the Master Lease in the amount of $11,257,741
of which $6,996,306 and $8,531,925 remained outstanding at September 30, 1997
and December 31, 1996, respectively. The Prepayment of Leases is carried as
prepaid rent on the balance sheets at such dates and is accounted for as a
financing. The Master Lease term exceeds the related original user lease terms.
Additionally, at the inception of the Master Lease the amount of the Prepayment
of Leases approximated the aggregate of the remaining rental payments due under
the user leases and the residual (salvage) value estimates for the equipment
subject to the user leases.
The Partnership does not have any economic obligations relating to the
equipment subject to the Master Lease until such equipment is returned upon the
expiration of the Master Lease. Upon expiration of the Master Lease, the
economic benefits of all equipment (Master Lease equipment) still being leased
by third parties as well as a portion of the residual value of such equipment
based upon a formula will revert to the Partnership.
5. SUBSEQUENT EVENT
In October 1997, the Partnership entered into an agreement with an
unaffiliated third party to sell certain equipment subject to leases with
various unaffiliated lessees for an aggregate sale price of $15,338,420. The
equipment, which included printers, transportation, industrial, communication,
manufacturing and research equipment was originally purchased for purchase
prices aggregating $29,855,031 and had an aggregate net book value of
$16,323,645 at
10
<PAGE> 12
September 30, 1997. The equipment sold had generated aggregate rents of
approximately $19,000,000 for the Partnership. The Partnership recognized a
writedown of $1,000,000 at September 30, 1997 to reflect the difference between
the sale price and the depreciated value of the equipment. The sale was
consummated and the sales proceeds were received on October 30, 1997. Of the
proceeds received, $156,476 was utilized to repay related non-recourse debt and
the balance less any amount required for operations, will be available for
distribution to partners in January 1998. The equipment sold represented
approximately 47% of the Partnership's remaining equipment on an original cost
basis at September 30, 1997, and represented approximately 70% of the September
1997 monthly rental billings (approximately 82% of the current rent level being
generated for cash flow purposes (which excludes the amortization of the prepaid
rent associated with a prior financing transaction and rents assigned to repay
previous borrowings)). The Managing General Partner of the Partnership is
investigating sales opportunities with respect to the remaining portfolio of
equipment in order to complete the liquidation of the Partnership, which is
anticipated to occur by the end of 1998.
11
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Partnership completed its reinvestment phase in 1996 and is
currently distributing all cash generated from operations and sales, less
required reserves. As equipment leases expire, the leases will either be renewed
or the equipment remarketed or sold. Thus, it is anticipated that cash flow and
distributions to partners will decrease over time. In October 1997, the
Partnership completed the sale of 47% of its remaining equipment on an original
cost basis (representing approximately 82% of the current level of cashflow) for
proceeds aggregating approximately $15.3 million. The Partnership will
distribute such proceeds less related debt and expenses in January 1998. (See
Footnote 5, "Subsequent Event")
Proceeds from equipment sales including equipment accounted for as
direct financing leases, totaled approximately $3,143,984 during the nine months
ended September 30, 1997 (excluding $337,627 collected in 1997 with respect to
1996 sales). The equipment sold during the nine months ended September 30, 1997
had been purchased for original purchase prices aggregating approximately $7.3
million.
Rent and other receivables, net of the allowance for doubtful accounts,
decreased $232,692, from $685,850 at December 31, 1996 to $453,158 at September
30, 1997, due principally to the collection during 1997 of sales proceeds
receivable at December 31, 1996 of $337,627 partially offset by a slight
increase in rents receivable.
During the 1997 Quarter, the Partnership declared distributions of cash
flow received from operations and cash from sales in the aggregate amount of
$1,196,867. As of March 31, 1996, the Partnership ceased committing funds for
investment in additional equipment and is distributing cash flow generated, less
certain operating reserves. A substantial portion of each distribution
constitutes a return of capital. Future distributions will be determined based
upon cash flow and Partnership obligations.
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or both. The portion of
each distribution by a partnership, which exceeds its net income for the fiscal
period, may be deemed a return of capital. Based on the amount of net income
reported by the Partnership for accounting purposes, approximately 100% of the
annualized cash distributions to the Class A Limited Partners for the three
months ended September 30, 1997 constituted a return of capital (84% for the
nine months then ended). Also, based on the amount of net income reported by the
Partnership for accounting purposes, approximately 72% of the cash distributions
paid to the Class A Limited Partners from inception of the Partnership through
September 30, 1997 constituted a return of capital. However, the total actual
return on capital over the Partnership's life can only be determined at the
termination of the Partnership after all residual
12
<PAGE> 14
cash flows (which include proceeds from the re-leasing and sale of the equipment
after initial lease terms expire) have been realized.
LITIGATION
See Footnote 3, "Litigation", for a discussion of certain litigation to
which the Partnership is a party.
RESULTS OF OPERATIONS
Substantially all of the Partnership's revenue and cashflow during the
1997 Quarter was generated from the leasing of the Partnership's equipment to
unaffiliated third parties under triple net leases. The balance of the
Partnership's cashflow consisted of proceeds from the sale of equipment and
interest income from temporary investments.
Under the terms of the triple net leases, substantially all of the
expenses related to the ownership and operation of the equipment are paid for by
the lessees. For equipment subject to operating leases, the Partnership records
depreciation expense pertaining to the equipment and related management fees.
The Partnership also records general and administrative expenses consisting
primarily of warehouse costs, investor reporting expenses and transfer agent and
audit fees as well as interest expenses incurred in connection with discounted
transactions.
The Partnership performs ongoing assessments of the likelihood of
lessee defaults on existing leases and the effect that any such defaults may
have on the collectability of the Partnership's recorded accounts receivable,
and the recoverability of recorded equipment residual values based on
independent and internal evaluations of the estimated future value of equipment.
Provisions for losses are recorded when it is determined that it is probable
that the value of a recorded asset has declined on an other than temporary
basis.
13
<PAGE> 15
1997 Compared to 1996
The Partnership's net (loss) income was ($457,025) and $1,402,536 in
the 1997 Quarter and 1997 Period as compared to net income of $992,589 and
$2,952,632 for the quarter and nine months ended September 30, 1996("1996
Quarter" and "1996 Period", respectively). The principal reasons for the
decrease was the $1,000,000 provision for writedowns during the 1997 Quarter as
well as the expected decrease in rentals partly offset by decreases in related
expenses as leases expire in accordance with their terms and the related
equipment is sold.
Rentals from operating leases decreased by $1,258,999 and $2,558,399 or
35% and 23%, respectively, in the 1997 Quarter and 1997 Period as compared to
the 1996 Quarter and 1996 Period. The decrease is attributable to the expiration
of leases in accordance with their respective terms and either the sale of
equipment or the remarketing of the equipment at lower lease rates.
As discussed above, the Partnership performs ongoing assessments of
recorded equipment residual values based on actual sales of similar equipment
and other evaluations of estimated future equipment values and provides for
writedowns when the value of the equipment has been impaired on an other than
temporary basis. Based upon such assessments, the Partnership recorded
writedowns totaling $200,000 and $375,000 in the 1996 Quarter and 1996 Period.
In the 1997 Quarter, the Partnership provided writedowns aggregating $1,000,000
with respect to certain equipment sold in October 1997 (See Footnote 5,
"Subsequent Event")
Depreciation and amortization expense decreased by $706,264 and
$1,528,195 or 30% and 21% in the 1997 Quarter and 1997 Period as compared to the
1996 Quarter and 1996 Period. Such decreases were attributable to the continuing
sale of equipment at the end of the scheduled lease terms and were consistent
with the decreases in rents from operating leases.
Management fees incurred during the 1997 Quarter decreased by $99,649
and $140,465, or 66% and 31% respectively, in comparison to the 1996 Quarter and
1996 Period, respectively, based upon the leases in place and were consistent
with the decline in rental revenues.
The Managing General Partner was entitled to receive a subordinated
disposition fee in an amount equal to the lesser of (i) 50% of the fee that
would be charged by an unaffiliated party, or (ii) 3% of the gross contract
price relating to each sale of equipment as compensation for negotiating and
consummating sales of equipment. At December 31, 1996, the Partnership reversed
previously accrued subordinated disposition fees totaling $422,828 because the
Managing General Partner concluded that it is no longer probable that these
subordinated dispositions fees will ever be paid. Of such amount $61,693 was
incurred during the nine months ended September 30, 1996. However, the
Partnership will not accrue any future amounts unless and until the payments of
subordinated disposition fees by the Partnership becomes probable.
Interest expense incurred during the 1997 Quarter and 1997 Period
decreased by $33,404 and $201,029, or 14% and 24% respectively, as compared to
the 1996 Quarter and 1996 Period. Interest expense is composed of two
components; (i) interest expense incurred in connection with the discounting of
certain leases with unaffiliated lenders and (ii) interest incurred in
connection with the application of the prepaid rent received pursuant to the
Master Lease transaction. For accounting purposes, the prepaid rent is treated
as a financing. Income is recognized ratably over the terms of the leases and
the related interest is charged to operations. The decreases reflect the
14
<PAGE> 16
continued repayment of discounted leases, reducing outstanding balances, and the
continued amortization and recognition of the prepaid rent.
General and administrative expenses decreased by $30,538 and $191,215
or 34% and 54% respectively, in the 1997 Quarter and 1997 Period as compared to
the 1996 Quarter and 1996 Period. The decrease in the 1997 Quarter and 1997
Period is attributable to a reduction in state income taxes incurred at the
Partnership level and a decrease in insurance premiums incurred by the
Partnership in 1997 as compared to 1996.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1997, after the actions
were consolidated under the title in re: PaineWebber Limited Partnership
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including the Administrative General Partner of the
Partnership.
The amended complaint in the New York Limited Partnership Actions
alleged that, in connection with the sale of interest in the Partnership,
PaineWebber and the Administrative General Partner (1) failed to provide
adequate disclosure of the risks involved with the Partnership; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs also that
following the sale of the Partnership investments PaineWebber and the
Administrative General Partner misrepresented financial information about the
partnership's value and performance. The amended complaint alleged that
PaineWebber and the Administrative General Partner violated the Racketeer
Influenced and Corrupt Organization Act ("RICO") and the federal securities
laws. The plaintiffs sought unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also sought treble damages under RICO.
On May 30, 1995, the U.S. District Court certified class action
treatment of the plaintiffs' claims in the class action entitled, in re:
PaineWebber Limited Partnerships Litigation.
In January 1996, PaineWebber signed a memorandum of understanding with
the plaintiffs in the class action outlining the terms under which the parties
agreed to settle the case. A definitive settlement agreement was signed in July
1996 and in March 1997 the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement, PaineWebber agreed to pay $125
million and additional consideration to class members. The investors who had
objected to the
15
<PAGE> 17
settlement have appealed the District Court's approval to the United States
Court of Appeals for the Second Circuit. In July 1997, the US Court of Appeals
for the Second Circuit affirmed the District Court's approval of the settlement.
In February 1996, approximately 230 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleged, among other things, that PaineWebber and its related entities committed
fraud and misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understanding the
risks and failing to state material facts concerning the investments. The
complaint sought compensatory damages of $15 million plus punitive damages. In
September 1996, the California Superior Court dismissed many of the plaintiff's
claims as barred by the applicable statutes of limitation. In March 1997, a
settlement was reached in various cases, including the Abbate litigation.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner, were entitled to indemnification
from the Partnership for expenses and liabilities in connection with the above
litigation. PaineWebber and its affiliates have agreed to not seek any
indemnification from the Partnership for any amounts payable in connection with
the New York Limited Partnership Actions. Additionally, the General Partners
believe that the Abbate settlement will not have a material impact on the
Partnership's financial statements taken as a whole.
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) The Partnership did not file a Form 8-K during the third
quarter of the fiscal year ending December 31, 1997.
16
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PaineWebber Preferred Yield Fund, L.P.
(Registrant)
By: General Equipment Management, Inc.
A General Partner
Date: November 7, 1997 By: /s/Joseph P. Ciavarella
-----------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 OF PAINEWEBBER PREFERRED YIELD FUND LP
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,574,817
<SECURITIES> 0
<RECEIVABLES> 626,058
<ALLOWANCES> (172,900)
<INVENTORY> 0
<CURRENT-ASSETS> 4,027,975
<PP&E> 59,026,885
<DEPRECIATION> (34,250,046)<F3>
<TOTAL-ASSETS> 30,853,910
<CURRENT-LIABILITIES> 0
<BONDS> 1,859,421
0
0
<COMMON> 0
<OTHER-SE> 18,860,311<F2>
<TOTAL-LIABILITY-AND-EQUITY> 30,853,910
<SALES> 0
<TOTAL-REVENUES> 9,082,168
<CGS> 0
<TOTAL-COSTS> 6,898,991
<OTHER-EXPENSES> 160,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 619,822
<INCOME-PRETAX> 1,402,536
<INCOME-TAX> 0<F4>
<INCOME-CONTINUING> 1,402,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,402,536
<EPS-PRIMARY> 8.59<F1>
<EPS-DILUTED> 0
<FN>
<F1>REPRESENTS NET INCOME PER CLASS A LIMITED PARTNERSHIP UNIT OUTSTANDING
<F2>REPRESENTS AGGREGATE NET CAPITAL
<F3>INCLUDES PROVISION FOR WRITEDOWNS
<F4>INCOME TAXES ARE NOT PROVIDED FOR AS THEY ARE THE DIRECT OBLIGATIONS OF THE
PARTNERS
</FN>
</TABLE>
