<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
-----------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-19166
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PaineWebber Preferred Yield Fund, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 84-1130506
----------------------- ----------------
(State of organization) (I.R.S. Employer
Identification No.)
7175 West Jefferson Avenue
Suite 4000
Lakewood, Colorado 80235
-------------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (303) 980-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Class A Limited Partner Interest
-----------------------------------------
(Title of Class)
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
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. |X|
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: Not applicable.
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PaineWebber Preferred Yield Fund, L.P.
Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1997
Table of Contents
Page
----
Part I
Item 1 Business .......................................................... 1
Item 2 Properties ........................................................ 4
Item 3 Legal Proceedings ................................................. 5
Item 4 Submission of Matters to a Vote
of Security Holders ...................................... 6
Part II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters .......................... 7
Item 6 Selected Financial Data ........................................... 8
Item 7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations ................................ 9
Item 8 Financial Statements ............................................. F-1
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure .................................... 16
Part III
Item 10 Directors and Executive Officers
of the Registrant ....................................... 16
Item 11 Executive Compensation ........................................... 19
Item 12 Security Ownership of Certain
Beneficial Owners and Management ........................ 19
Item 13 Certain Relationships and
Related Transactions .................................... 20
Part IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ................................. 22
<PAGE> 3
PART I
Item 1. Business
General
PaineWebber Preferred Yield Fund, L.P. (the "Partnership" or the
"Registrant") is a limited partnership organized under the laws of the State of
Delaware on December 18, 1989. The general partners of the Partnership are CAI
Equipment Leasing II Corp., the Managing General Partner, a Colorado corporation
that is a wholly-owned subsidiary of Capital Associates, Inc. ("CAI"), and
General Equipment Management, Inc., the Administrative General Partner, a
Delaware corporation that is a wholly-owned subsidiary of Paine Webber Group
Inc. (The Managing General Partner and the Administrative General Partner are
sometimes hereinafter collectively referred to as the "General Partners".)
Capital Associates International, Inc. ("CAII"), an affiliate of the
Managing General Partner, is the Class B Limited Partner. The Class B Limited
Partner contributed equipment and capital for equipment acquisition to the
Partnership valued at an amount equal to 12.5% of the aggregate value of the
equipment purchased with the net offering proceeds received from the sale of the
Units of Class A Limited Partner Interest ("Units") and the equipment and
capital contributed by the Class B Limited Partner. The Class B Limited Partner
satisfied its contribution obligation during 1992.
On March 12, 1990, the General Partners each contributed $100 to the
capital of the Partnership. Between May 21, 1990 and April 19, 1991, 142,128
Units were sold at a price of $500 per Unit. Nine closings were held pursuant to
which the Partnership received $71,064,000 of gross offering proceeds, of which
$51,726,500 was received during 1990 and $19,337,500 was received during 1991.
The Partnership incurred $8,952,640 of commissions and other offering expenses
in connection with the sale of these Units, thus receiving $62,111,360 of net
offering proceeds.
Although the Partnership was organized on December 18, 1989, the
Partnership conducted no activities and recognized no revenues, profits or
losses prior to the initial closing of the Units on June 22, 1990, at which time
the Partnership commenced operations.
The Partnership acquired or committed itself to acquire through March 31,
1996, on an all-cash basis, a portfolio of equipment, subject to triple net
leases with unaffiliated third parties. The Partnership's portfolio of equipment
includes industrial, materials handling, mining, medical, research and
development, transportation equipment, store fixtures and manufacturing testing
and office technology equipment, including, computers and computer-related and
telecommunications equipment. Office technology equipment owned by the
Partnership cannot exceed 60% of the value of the Partnership's total equipment
portfolio.
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A substantial amount of the equipment held by the Partnership was
purchased by CAII directly from the manufacturer or from independent third
parties and resold or contributed to the Partnership. The balance of the
equipment was purchased directly from independent third parties by the
Partnership. The purchase price of the equipment acquired from CAII and the
value of the equipment contributed by the Class B Limited Partner were equal to
the lesser of the adjusted cost of the equipment or the appraised value of the
equipment at the time of its acquisition by the Partnership. The adjusted cost
of the equipment was equal to the price paid by CAII, plus the cost of an
appraisal, CAII's cost of interim financing for the equipment and any taxes paid
by CAII, less certain interim rentals received by CAII with respect to the
equipment.
The Partnership did not purchase an inventory of unleased equipment, but
acquired equipment that was already subject to short-term leases (generally, 5
years or less). The Partnership's business is not subject to seasonal
variations.
At least 65% of the Partnership's equipment acquired has been to lessees
which are investment grade lessees, or which are operating subsidiaries of
entities which are investment grade companies. An investment grade lessee is a
company with a credit rating of not less than Baa, as determined by Moody's
Investor Services, Inc. or comparable credit ratings, as determined by other
recognized credit rating services.
The Partnership is required to dissolve and distribute all of its assets
not later than December 31, 2005. A significant portion of the Partnerships
leased equipment was sold in October 1997. The General Partners currently
anticipate that all equipment will be sold and that the Partnership will be
liquidated by 1999.
During the reinvestment period, which ended on March 31, 1996,
distributable cash flow in excess of current distributions to the Class A
Limited Partners at an annualized distribution rate of 14% of their contributed
capital, to the Class B Limited Partner at an annualized distribution rate of
11% of its contributed capital and to the General Partners was reinvested in
additional equipment. Beginning in the second quarter of 1996, the net cash flow
generated, less necessary reserves, will be distributed to the partners.
The Partnership's principal investment objectives were:
(i) to generate current cash distributions to the Class A Limited
Partners from lease revenues (a portion of which will
constitute a return of capital);
(ii) to preserve and protect Partnership capital; and
(iii) to generate additional cash distributions through releasing,
remarketing and sales after the end of the reinvestment
period.
In order to achieve these objectives, the General Partners adopted the
following policies: (a) to achieve investment diversification, reduce the
average age of the Partnership's portfolio of equipment and enhance the overall
return to Class A Limited Partners through reinvestment up to
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March 31, 1996 in additional equipment during the reinvestment period; and (b)
to manage the Partnership's assets to maximize lease rentals and amounts
received from the sale of equipment in order to protect the Partnership's
capital.
New Accounting Pronouncements, Issued But Not Yet Effective
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances arising from non owner sources. The Partnership does not expect
this pronouncement to materially impact the reporting of its results of
operations.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. This could result in
a system failure or miscalculations in the year 2000 causing disruptions of
operations of the Partnership, its lessees, or general partners. As the
Partnership expects to be liquidated by 1999 the Partnership is not exposed to
financial risk from the Year 2000 issue.
Equipment Portfolio
The following table describes the Partnership's equipment portfolio as of
December 31, 1997.
Schedule of Remaining Equipment Investments
As of December 31, 1997
<TABLE>
<CAPTION>
Equipment Type(1) Original Cost(2) % of Portfolio
-------------- ------------- --------------
<S> <C> <C>
Industrial (Includes Forklifts) $ 8,912,765 43.43%
Manufacturing 3,346,462 16.31%
Transportation 2,308,297 11.25%
Furniture and Fixtures 1,538,134 7.50%
Communication 323,034 1.57%
PCs and Workstations 815,985 3.98%
Mining and Construction 1,382,447 6.74%
Peripherals and Printers 1,295,851 6.31%
Medical and Research 597,466 2.91%
----------- ------
Total $20,520,441(3) 100.00%
=========== ======
</TABLE>
- -------------------
(1) Includes equipment subject to direct financing leases.
(2) Such amounts include related acquisition fees.
(3) Excludes off lease equipment which had associated original cost of
$4,945,237. Substantially all of such equipment was computer related
equipment.
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Significant Lessees
The Partnership leases its equipment to a significant number of lessees.
One lessee, CMA, the lessee under the Master Lease consummated in late 1995,
accounted for more than 10% of the Partnership's leasing revenues during the
year ended December 31, 1997. The Master Lease was prepaid in December 1995.
As part of its investment objectives, the Partnership diversified its
equipment portfolio through the re-investment program. The Partnership will no
longer expend funds for equipment acquisitions.
Competition
The equipment leasing industry is highly competitive. Among the numerous
existing and potential competitors of the Partnership for leases are equipment
manufacturers, equipment dealers and brokers, leasing companies and financial
institutions, as well as other limited partnerships organized and managed
similarly to the Partnership. Many of these competitors have greater financial
resources than the Partnership and more experience in the industry than the
General Partners and their affiliates. Equipment manufacturers may present
particularly strong competition because they may also provide certain ancillary
services which the Partnership cannot offer directly, such as maintenance
services (including possible equipment substitution rights), warranty services,
purchase rights and trade-in privileges.
Employees
The Partnership has no employees. The officers, directors and employees of
the General Partners and their affiliates perform services on behalf of the
Partnership. The General Partners are entitled to certain fees and
reimbursements of certain out-of-pocket expenses incurred in connection with the
performance of these management services. See Item 10 of this Report, "Directors
and Executive Officers of the Registrant", and Item 13 of this Report, "Certain
Relationships and Related Transactions", which are incorporated herein by
reference.
Item 2. Properties
The Partnership does not own or lease any properties other than the
equipment which is discussed in Item 1 of this Report, "Business", which is
incorporated herein by reference.
4
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Item 3. 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 ("District Court") concerning PaineWebber
Incorporated's 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 interests in the Partnerships, PaineWebber
and the Administrative General Partner (1) failed to provide adequate disclosure
of the risks involved with the Partnerships; (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 alleged 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 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 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 certain 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. The District Court must still determine the amount
of attorney's fees to be awarded to the plaintiffs' counsel which will be paid
from the settlement fund so that the remainder of monies can be distributed to
class members.
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
alleges, among other things, that PaineWebber and its related entities committed
fraud and misrepresentation and breached fiduciary duties allegedly owed to the
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plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating the
risks and failing to state material facts concerning the investments. The
complaint seeks compensatory damages of $15 million plus punitive damages. In
September 1996, the California Superior Court dismissed many of the plaintiffs'
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, could be 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 litigation. Additionally, the General
Partners believe that if indemnification is sought, the Abbate settlement would
not have a material impact on the financial statements taken as a whole.
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 of the fiscal year ended December 31, 1997.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no organized trading market for the purchase and sale of the
Units and certain measures have been adopted and implemented to assure that no
organized trading market will develop.
As of March 1, 1998, the number of Class A Limited Partners was 3,461,
representing 142,128 Units.
The Partnership made the following monthly and quarterly distributions to
its Class A Limited Partners out of cash flows during 1997 and 1996:
<TABLE>
<CAPTION>
Period From Which Amount Of
Distributable Cash Distribution
Was Generated Per Unit Record Date Payment Date
------------- -------- ----------- ------------
<S> <C> <C> <C>
Quarter ended
March 31, 1997 17.50 April 1, 1997 April 25, 1997
Quarter ended
June 30, 1997 28.00 July 1, 1997 July 25, 1997
Quarter ended
September 30, 1997 8.00 October 1, 1997 October 24, 1997
Quarter ended
December 31, 1997 95.00 January 1, 1998 January 23, 1998
January 1996 5.83 February 1, 1996 February 25, 1996
February 1996 5.83 March 1, 1996 March 25, 1996
March 1996 5.84 April 1, 1996 April 23, 1996
April 1996 5.83 May 1, 1996 May 25, 1996
May 1996 5.83 June 1, 1996 June 25, 1996
June 1996 5.84 July 1, 1996 July 23, 1996
July 1996 5.83 August 1, 1996 August 25, 1996
August 1996 5.83 September 1, 1996 September 24, 1996
October 1996
and prior 17.50 October 1, 1996 October 25, 1996
Quarter ended
December 31, 1996 10.00 January 1, 1997 January 25, 1997
</TABLE>
During 1996 the Partnership changed its cash distribution convention from
monthly to quarterly for all partners.
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Total distributions to all partners for 1997 and 1996 were declared as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Class A Limited Partners $21,106,008 $10,540,212
Class B Limited Partners 2,929,016 1,035,177
General Partners 1,179,965 609,228
----------- -----------
$25,214,989 $12,184,617
=========== ===========
</TABLE>
Item 6. Selected Financial Data
The following selected financial data of the Partnership has been derived
from the audited financial statements for the indicated periods. The information
set forth below should be read in conjunction with the Partnership's financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Items 8 and 7,
respectively, of this Report, which are incorporated herein by reference.
<TABLE>
<CAPTION>
As of December 31
or Year Ended
December 31,
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues(1) $10,632,297 $16,059,351 $16,382,650 $18,149,798 $21,469,262
Net Income 2,072,522 4,258,032 3,957,086 2,670,613 2,686,038
Net Income per Class A Limited Partnership
Unit(2) 12.50 27.80 22.14 11.70 10.78
Total Assets 28,944,212 41,098,131 53,302,011 49,115,873 57,919,012
Discounted Lease Rentals 1,523,570 2,802,710 4,747,859 4,531,890 4,555,585
Partners' Equity 3,044,144 26,186,611 34,113,196 41,629,451 50,432,179
Distributions Declared to Partners 25,214,989 12,184,617 11,473,341 11,473,341 11,473,341
</TABLE>
(1) Includes net losses on disposition of equipment and other of $278,882 and
$223,353 for the years ended December 31, 1994 and 1993, respectively, and
net gains on disposition of equipment of $461,994, $789,154 and $179,352
for the years ended December 31, 1997, 1996 and 1995, respectively.
(2) Calculated based upon the weighted average number of units outstanding.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussions should be read in conjunction with the "Selected
Financial Data" and the Consolidated Financial Statements of the Partnership and
the Notes thereto. This report contains, in addition to historical information,
forward-looking statements that include risks and other uncertainties. The
Partnership's actual results may differ materially from those anticipated in
these forward-looking statements. Factors that might cause such a difference
include those discussed below, as well as general economic and business
conditions, competition and other factors discussed elsewhere in this report.
The Partnership undertakes no obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of anticipated or unanticipated events.
Liquidity and Capital Resources
The Partnership commenced operations on June 22, 1990.
Equipment acquisitions (including acquisition fees and expenses) since the
commencement of operations have been as follows:
<TABLE>
<CAPTION>
Purchased with Net
Proceeds from the Contributed by the Purchased Pursuant
Total Acquisition Sale of Class A Class B Limited to Reinvestment
Cost* Units Partner Program
----------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
1990 $ 45,278,316 $39,529,865 $5,470,464 $ 277,987
1991 27,997,203 19,292,333 2,723,225 5,981,645
1992 15,780,483 3,039,218 449,161 12,292,104
1993 16,937,818 -- -- 16,937,818
1994 11,388,058 -- -- 11,388,058
1995 14,347,283 -- -- 14,347,283
1996 8,740,536 -- -- 8,740,536
1997 3,929 -- -- 3,929(1)
------------ ----------- ---------- -----------
$140,473,626 $61,861,416 $8,642,850 $69,969,360
============ =========== ========== ===========
</TABLE>
* Includes investment in direct financing leases.
(1) Represents upgrade to an existing lease.
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From inception through December 31, 1997, the Partnership sold equipment
with an original cost as follows:
<TABLE>
<CAPTION>
Original Cost Associated
Year Ending with Equipment Sold
December 31, or Disposed of (1)(2)
----------------------- ---------------------------
<S> <C>
1991 $ 1,074,780
1992 3,928,788
1993 14,916,752
1994 13,247,784
1995 20,352,539
1996 12,500,250
1997 48,987,055
------------
$115,007,948
============
</TABLE>
(1) Includes investment in direct financing leases.
(2) See "Selected Financial Data", set forth elsewhere herein, for disclosure
of related gains and losses.
Rent and other receivables, net of the allowance for doubtful accounts,
decreased by $510,775 from $685,850 at December 31, 1996 to $175,075 at December
31, 1997. This decrease was primarily the result of the collection efforts
relating to rents receivable and the lease prepayment transaction discussed
below ("Prepayment of Leases") as well as $337,627 receivable from equipment
sales recorded at December 31, 1996 and collected in January 1997.
The Partnership invests working capital and cash flow from operations
prior to its distribution to the partners or its reinvestment in additional
equipment, in short-term highly liquid investments. These investments are
primarily short-term commercial paper issued by large domestic corporations.
In the year ended December 31, 1997, distributions of net cash flows
provided by operations declared and paid by the Partnership were $25.2 million
and $10.4 million, respectively. Distributions declared were $12.2 million and
$11.5 million, respectively in the years ended December 31, 1996 and 1995. Net
cash provided by operating activities was $7.2 million for 1997, $11.7 million
for 1996 and $15.7 million for 1995. In the aggregate, for this three-year
period net cash provided by operating activities totaled $34.6 million and cash
distributions declared by the Partnership totaled $48.9 million ($33.6 million
paid). Additionally, the Partnership generated proceeds from the sale of
equipment of $20.0 million, $2.8 million and $2.6 million during 1997, 1996 and
1995, respectively, and repaid discounted lease rentals in the amount of $1.3
million, $1.9 million and $2.3 million in 1997, 1996 and 1995, respectively.
Equipment Sale
In October 1997, the Partnership entered into an agreement with an
unaffiliated third party to sell certain equipment subject to leases 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
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<PAGE> 13
and had an aggregate net book value of $16,323,645 at September 30, 1997. The
equipment had generated aggregate rents of approximately $19,000,000 for the
Partnership through the date of sale. The Partnership recorded 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 57% of
the Partnership's remaining equipment on a net book value basis at September 30,
1997, and approximately 70% of the September 1997 monthly rental billings. The
Managing General Partner of the Partnership has determined that such sale
represents a dissolution event, as defined and is investigating sales
opportunities with respect to the remaining portfolio of equipment in order to
complete the expeditious liquidation of the Partnership.
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
$6,072,331 and $8,531,925 remained unamortized at December 31, 1997 and 1996,
respectively, and which is carried as prepaid rent on the balance sheets at such
dates. The Master Lease term exceeds the related original user lease terms.
Additionally, at the inception of the Master Lease the Prepayment of Leases
exceeded 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, on an undiscounted basis. 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 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. Substantially all of the proceeds from the Prepayment of Leases was
invested in additional equipment prior to the expiration of the reinvestment
period.
Partnership equity declined by $23,142,467, or 88%, from December 31, 1996
to December 31, 1997 as a result of the declaration of cash distributions to the
partners in excess of the Partnership's net income. This resulted from the fact
that, unlike net income, cash flow from operating activities and proceeds from
sales of equipment, after deducting the related repayment of discounted lease
rentals, is the source of funds utilized to make cash distributions to partners,
and is not reduced by depreciation expense, cost of equipment sold, and
provisions for equipment impairment attributable to the Partnership's equipment.
The Partnership completed the sale of a significant portion of its remaining
portfolio in October 1997. A substantial portion of the proceeds from the
October sale were included in the distribution declared for the fourth quarter
of 1997.
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<PAGE> 14
Distributions may be characterized for tax, financing reporting and
economic purposes as a return of capital, a return on capital or both. The
portion of each distribution by the 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 financial reporting purposes,
approximately 92%, 63%, and 68%, respectively, of the annual cash distributions
to the Class A Limited Partners for the years ended December 31, 1997, 1996 and
1995 constituted a return of capital. Also, based on the amount of net income
reported by the Partnership for financial reporting purposes, approximately 70%
of the cash distributions paid to the Class A Limited Partners from inception of
the Partnership through December 31, 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 cash
flows (which include proceeds from the re-leasing and sale of the equipment
after initial lease terms expire) have been realized.
As of December 31, 1997, the Partnership had sold a substantial portion of
its assets and the Managing General Partner is exploring opportunities to sell
the remaining portfolio of equipment. In January 1998 the Partnership
distributed a substantial portion of the proceeds generated by the October 1997
equipment sale discussed above. Future distributions (after the $95.00 per unit
distribution in January 1998) will be made based upon cash generated by the sale
and lease of remaining equipment which is not expected to be significant.
Litigation
See Item 3, "Legal Proceedings" for a discussion of certain class action
lawsuits.
Results of Operations
Substantially all of the Partnership's revenue since the inception of the
Partnership has been generated from the leasing of the Partnership's equipment
to unaffiliated third parties under triple net leases most of which were in
effect at the time the equipment was acquired by the Partnership. The balance of
the Partnership's revenue consisted of interest income from temporary
investments and gains realized on the sale of equipment. The Partnership
collected approximately $133,000 in final settlement of claims in a bankruptcy
case, which was included in other income on the 1995 Statement of Income. The
related equipment had been disposed of in prior years.
Under the terms of the Partnership's triple net leases, all expenses
related to the ownership and operation of the equipment from inception through
December 31, 1997 have been paid by the lessees. The Partnership records
depreciation expense pertaining to the equipment and incurs management fees and
certain general and administrative expenses in connection with the operation of
the Partnership. General and administrative expenses consist primarily of
investor reporting expenses and transfer agent and audit fees.
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 collectibility 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. Impairment
losses are recognized when expected future cash flows are less than the assets'
carrying value. Accordingly, when indicators of impairment are present, the
Company evaluates the carrying value of property, plant and equipment and
intangibles in relation to the operating performance and future undiscounted
cash flows of the underlying business. The Company adjusts the net book value of
the underlying assets if the sum of expected future cash flows is less than book
value.
12
<PAGE> 15
1997 Compared to 1996
The Partnership's net income was $2,072,522 in the year ended December 31,
1997 ("1997 Period") as compared to net income of $4,258,032 for the year ended
December 31, 1996 ("1996 Period"). The principal reason for the decrease was
that components of income (including rent, direct financing lease income and
gains on disposition of equipment) decreased by a greater percentage than
depreciation expense due to the expiration of leases, additional writedowns and
increases to interest expense. Additionally in 1996, the net income included a
reversal of certain fees previously accrued. Generally these decreases are
consistent with expectations based upon the expiration of the reinvestment phase
in 1996 and the continued sale of equipment upon lease expirations as well as
the October 1997 sale.
Rentals from operating leases decreased by $4,894,066 or 34%, in the 1997
Period as compared to the 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
accounts receivable and 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 managements assessments as noted
above, the Partnership recorded writedowns totaling $1,000,000 in the 1997
Period. In the 1996 Period, the Partnership provided writedowns aggregating
$775,000 and wrote off an uncollectible receivable of $27,854.
Depreciation and amortization expense decreased by $3,096,866, or 30% in
the 1997 Period as compared to the 1996 Period. The decrease was attributable to
the continued sale of equipment at the end of the scheduled lease terms.
Management fees during the 1997 Period decreased by $355,966, or 60%, in
comparison to the 1996 Period, based upon the deduction of leases in place and
was 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 3, 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 would be paid. Of such amount $61,693 was
incurred during the nine months ended September 30, 1996.
Interest expense incurred during the 1997 Period decreased by $234,055 or
22%, as compared to the 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
13
<PAGE> 16
================================================================================
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 continued repayment of discounted leases, reducing outstanding balances, and
the continued amortization and recognition of the prepaid rent.
General and administrative expenses decreased by $94,464 or $21%, in the
1997 Period as compared to the 1996 Period. The decrease in the 1997 Period is
attributable principally to a decrease in insurance premiums incurred by the
Partnership in the 1997 Period as compared to the 1996 Period.
1996 Compared to 1995
The Partnership's net income was $4,258,032 in the year ended December
31, 1996 ("1996 Period") as compared to net income of $3,957,086 for the year
ended December 31, 1995 ("1995 Period").
Rentals from operating leases decreased by $976,342, or 6%, in the 1996
Period, as compared to the 1995 Period. The decrease in the 1996 Period compared
to the 1995 Period 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 the lower lease rates, partially offset by rents generated
by equipment acquired during 1996.
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
losses when the value of the equipment has been impaired on an other than
temporary basis. Based upon such assessments, the Partnership recorded write
downs totaling $775,000 in the 1996 Period, as compared to $275,000 for the 1995
Period. The Partnership recorded bad debt expense of $27,854 in the 1996 Period
as compared to $172,900 in the 1995 Period.
Depreciation and amortization expense decreased by $1,515,442, or 14%, in
the 1996 Period, as compared to the 1995 Period which was consistent with the
decrease in rental income and the equipment subject to depreciation.
Management fees increased by $41,037 or 7% in the 1996 Period as compared
to the 1995 Period based principally on the leases in place during the
respective periods (full payment and operating leases, as defined in the
Partnership Agreement) which serve as the base upon which the fees are
calculated and their related fee structures.
14
<PAGE> 17
At December 31, 1996, the Partnership reversed previously accrued
subordinated disposition fees composed of $61,693 recorded during the first nine
months of 1996 and $342,661 recorded in prior years because the Managing General
Partner concluded that it is no longer probable that these subordinated
disposition fees will ever be paid. At December 31, 1996, including $18,474
accrued for the fourth quarter of 1996, the subordinated disposition fees
totaled $422,828.
Interest expense incurred during the 1996 Period increased substantially
as compared to the 1995 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 financial reporting 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 Master Lease was entered into in
December 1995 and did not materially impact 1995 operating results.
General and administrative expenses increased by $170,357 or 59% in the
1996 Period as compared to the 1995 Period. The increase in the 1996 Period is
attributable to state income taxes incurred at the Partnership level and an
increase in insurance premiums incurred by the Partnership.
Inflation and Changing Prices
Inflation has not had any material impact on the operations or financial
condition of the Partnership from inception through December 31, 1997. However,
inflation and changing prices, in addition to other factors, may affect the
eventual selling price of the Partnership's equipment.
FASB 130
Risks and Uncertainties
As discussed in Note 7, the Partnership has sold a substantial portion of
its assets during 1997 and the Managing General Partner is exploring
opportunities to sell the remaining portfolio of equipment. As the General
Partners have not yet adopted a formal plan of liquidation, including a
measurement date, the accompanying financial statements have been prepared on a
going concern basis. Accordingly it is reasonably possible that the liquidation
basis of accounting will be adopted in the near term. It cannot presently be
determined whether the amounts realizable from the disposition of the remaining
assets will differ materially from the amounts shown in the accompanying
financial statements.
15
<PAGE> 18
PAINEWEBBER PREFERRED YIELD FUND, L.P.
Item 8. Financial Statements and Supplementary Data
List of Financial Statements
- ----------------------------
Page
----
Report of Independent Accountants F-2
Balance Sheets - December 31, 1997 and 1996 F-3
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 F-4
Statements of Partners' Equity for the years
ended December 31, 1997, 1996, and 1995 F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Financial Statements F-8
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since
(1) the information required is disclosed in the financial statements and notes
thereto, (2) schedules are not required under the related instructions; or (3)
the schedules are inapplicable.
F-1
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
PaineWebber Preferred Yield Fund, L.P.
We have audited the financial statements as listed in the index on page
F-1 herein. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PaineWebber Preferred Yield
Fund, L.P. as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years ended December 31, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
March 30, 1998.
F-2
<PAGE> 20
PAINEWEBBER PREFERRED YIELD FUND, L.P.
BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
Cash and cash equivalents (Note 4) $19,606,352 $ 2,879,451
Rent and other receivables, net of allowances for
bad debts of $172,900 at each of
December 31, 1997 and 1996 (Note 5) 175,075 685,850
Equipment held for sale or lease, net of accumulated
depreciation of $4,103,002 and $780,011 in 1997 and 1996,
respectively and allowances for losses of $112,754 and
$83,922 at December 31,1997 and 1996, respectively (Note 7) 729,481 206,624
Net investment in direct financing leases (Note 6) 170,230 2,970,314
Equipment on operating leases, net of accumulated
depreciation of $11,966,110 and $30,258,762 at December
31, 1997, and 1996, respectively, and write downs
of $300,945 and $459,134 at December 31, 1997 and 1996,
respectively (Note 7) 8,253,386 34,346,204
Other assets 9,688 9,688
----------- -----------
Total Assets $28,944,212 $41,098,131
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
LIABILITIES:
Prepaid rent (Note 7) $6,072,331 $8,531,925
Accounts payable and accrued liabilities 1,299,791 370,940
Payables to affiliates (Note 10) 263,591 773,335
Interest payable 7,792 13,081
Deferred rental income and deposits 246,840 730,591
Distributions payable to partners 16,486,153 1,688,938
Discounted lease rentals (Note 8) 1,523,570 2,802,710
----------- -----------
Total Liabilities 25,900,068 14,911,520
----------- -----------
Commitments and Contingencies (Notes 10 and 12)
PARTNERS' EQUITY:
General Partners 110,227 1,216,120
Limited Partners:
Class A (142,128 Units outstanding at December 31,
1997 and 1996) 2,498,859 21,828,653
Class B 435,058 3,141,838
----------- -----------
Total Partners' Equity 3,044,144 26,186,611
----------- -----------
Total Liabilities and Partners' Equity $28,944,212 $41,098,131
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-3
<PAGE> 21
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Rentals from operating leases $ 9,378,829 $14,272,895 $15,249,237
Direct finance lease income 351,997 696,247 602,486
Gain on sale of equipment 461,994 789,154 179,352
Interest income 302,541 255,463 202,126
Other income 136,936 45,592 149,449
----------- ----------- -----------
10,632,297 16,059,351 16,382,650
----------- ----------- -----------
EXPENSES:
Depreciation and amortization 6,151,920 9,248,786 10,764,228
Provision for losses on equipment
and bad debts 1,000,000 802,854 447,900
Interest (Notes 7 and 8) 809,618 1,043,673 276,427
Management fees (Note 10) 234,851 590,817 549,780
Disposition fees (Note 10) - (342,661) 99,736
General and administrative (Note 10) 363,386 457,850 287,493
----------- ----------- -----------
8,559,775 11,801,319 12,425,564
----------- ----------- -----------
NET INCOME $ 2,072,522 $ 4,258,032 $ 3,957,086
=========== =========== ===========
NET INCOME ALLOCATED:
To the General Partners $ 74,072 $ 212,901 $ 732,387
To the Class A Limited Partners 1,776,214 3,951,236 3,146,637
To the Class B Limited Partner 222,236 93,895 78,062
----------- ----------- -----------
$ 2,072,522 $ 4,258,032 $ 3,957,086
=========== =========== ===========
NET INCOME PER WEIGHTED
AVERAGE NUMBER OF UNITS
OF CLASS A LIMITED PARTNER
INTERESTS OUTSTANDING $ 12.50 $ 27.80 $ 22.14
=========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF UNITS OF CLASS A LIMITED
PARTNER INTERESTS
OUTSTANDING 142,128 142,128 142,128
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-4
<PAGE> 22
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Class A Class B
General Limited Limited
Partners Partners Partner Total
-------- -------- ------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 1,453,727 $ 35,219,952 $ 4,955,772 $ 41,629,451
Net income 732,387 3,146,637 78,062 3,957,086
Distributions declared to partners (573,667) (9,948,960) (950,714) (11,473,341)
----------- ------------ ----------- ------------
Balance, December 31, 1995 1,612,447 28,417,629 4,083,120 34,113,196
Net income 212,901 3,951,236 93,895 4,258,032
Distributions declared to partners (609,228) (10,540,212) (1,035,177) (12,184,617)
----------- ------------ ----------- ------------
Balance, December 31, 1996 1,216,120 21,828,653 3,141,838 26,186,611
Net income 74,072 1,776,214 222,236 2,072,522
Distributions declared to partners (1,179,965) (21,106,008) (2,929,016) (25,214,989)
----------- ------------ ----------- ------------
Balance, December 31, 1997 $ 110,227 $ 2,498,859 $ 435,058 $ 3,044,144
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-5
<PAGE> 23
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,072,522 $ 4,258,032 $ 3,957,086
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,151,920 9,248,786 10,764,228
Provision for losses and bad debts 1,000,000 802,854 447,900
Gain on sale of equipment (461,994) (789,154) (179,352)
Decrease in rent and other receivables 222,148 461,303 400,056
Increase (decrease) in accounts payable and
accrued liabilities 928,851 (160,518) 122,571
(Decrease) increase in payables to affiliates (509,744) 476,150 229,775
Reversal of subordinated disposition fees (Note 10) -- (342,661) --
(Decrease) increase in accrued interest payable (5,289) (9,207) 447
(Decrease) increase in deferred rental income
and deposits (483,751) (180,926) 8,907
Decrease (increase) in other assets -- 9,718 (19,406)
Decrease in prepaid rent (1,731,189) (2,116,612) --
------------ ------------ ------------
Net cash provided by operating activities 7,183,474 11,657,765 15,732,212
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Recovery of investment in direct financing leases 1,281,404 1,606,599 1,518,138
Proceeds from sale of equipment including direct
financing leases 19,962,866 2,771,818 2,594,979
Purchases of equipment on operating leases (3,929) (8,649,624) (13,747,672)
Investment in direct financing leases -- (90,912) (599,611)
------------ ------------ ------------
Net cash provided by (used in) investing activities 21,240,341 (4,362,119) (10,234,166)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Prepaid rent -- 11,124,724
Proceeds from discounted lease rentals -- -- 2,508,339
Repayment of discounted lease rentals (1,279,140) (1,945,149) (2,292,370)
Cash distributions paid to partners (10,417,774) (11,706,805) (11,473,341)
------------ ------------ ------------
Net cash used in financing activities (11,696,914) (13,651,954) (132,648)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 16,726,901 (6,356,308) 5,365,398
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,879,451 9,235,759 3,870,361
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 19,606,352 $ 2,879,451 $ 9,235,759
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-6
<PAGE> 24
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Supplemental schedule of cash flow information:
Interest paid $ 814,907 $1,052,880 $ 275,980
=========== ========== ==========
NON-CASH TRANSACTIONS
Distribution to partners accrued but not paid $16,486,153 $1,688,938 $1,211,123
=========== ========== ==========
Equipment subject to operating leases
converted to direct financing leases at renewal $ 87,769 $ 958,724 $ 879,978
=========== ========== ==========
Prepaid rent applied in equipment sales $ 728,405 $ 476,187 $ --
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-7
<PAGE> 25
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation PaineWebber Preferred Yield Fund, L.P. (the
"Partnership"), a Delaware limited Partnership, maintains its accounting records
and prepares financial statements on the accrual basis of accounting. The
preparation of financial statements in conformity with generally accepted
accounting principles 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 dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates by management relate to the allowance for losses and
estimated residual or salvage values. Actual results could differ from these
estimates.
Risks and Uncertainties As discussed in Note 7, the Partnership has sold a
substantial portion of its assets during 1997 and the Managing General Partner
is exploring opportunities to sell the remaining portfolio of equipment. As the
General Partners have not yet adopted a formal plan of liquidation, including a
measurement date. The accompanying financial statements have been prepared on a
going concern basis. Accordingly it is reasonably possible that the liquidation
basis of accounting will be adopted in the near term. It cannot presently be
determined whether the amounts realizable from the disposition of the remaining
assets will differ materially from the amounts shown in the accompanying
financial statements. Accordingly, no adjustments that might be necessary to
record the assets at their net realizable value have been made.
Cash and Cash Equivalents The Partnership invests working capital and cash
flow from operations prior to its distribution to the partners or its
reinvestment in additional equipment in short-term highly liquid investments.
These investments are recorded at cost which approximates fair market value.
For purposes of the balance sheets and the statements of cash flows, the
Partnership considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Direct Financing Leases At lease commencement, the Partnership records the
lease receivable, estimated residual value of the equipment and unearned income.
The original unearned income is equal to the receivable plus the estimated
residual value less the cost of the equipment, including the acquisition fees
paid to the Managing General Partner and is recognized as revenue over the lease
term at a constant rate of return on the net investment in the lease. Residual
values are recorded at lease inception equal to the estimated value of the
Partnership's leased equipment at lease termination. In estimating such values,
independent appraisals and other circumstances regarding the equipment and the
lessee are considered. Thereafter, residual estimates are re-evaluated each
quarter.
F-8
<PAGE> 26
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Equipment on Operating Leases Rentals from operating leases are recognized
on a straight-line basis over the term of the lease. Equipment on operating
leases is stated at cost, including the acquisition fees paid to the Managing
General Partner, less accumulated depreciation. Depreciation is calculated on a
straight-line basis over the lease terms, ranging from two to seven years, to an
amount equal to the equipments estimated fair market value at the lease
termination date. In estimating such values, independent appraisals and other
circumstances regarding the equipment and the lessee are considered. Thereafter,
residual estimates are re-evaluated each quarter. Impairment losses are
recognized when expected future cash flows are less than the assets' carrying
value. Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of property, plant and equipment and intangibles
in relation to the operating performance and future undiscounted cash flows of
the underlying business. The Company adjusts the net book value of the
underlying assets if the sum of expected future cash flows is less than book
value.
Non-recourse Discounting of Rentals The Partnership has assigned the
rentals from leases to financial institutions at fixed interest rates on a
non-recourse basis. In return for such future lease payments, the Partnership
receives the discounted value of the rental payments in cash. The notes are
collateralized by the lease, the related lease payments and the underlying
equipment. Cash proceeds from such financings are recorded on the balance sheet
as discounted lease rentals. As lessees make payments to the financial
institutions, interest expense is recorded and the outstanding balance of
discounted lease rentals is reduced.
Disposition of Equipment When equipment is sold or disposed of, the asset
and related accumulated depreciation and write down for loss, if any, are
removed from the accounts and a gain or loss is recognized.
Deferred Rental Income Lease revenues received but not yet earned are
deferred and recognized as income when earned.
Income Taxes No provision for income taxes has been made in the financial
statements since taxes on Partnership income are the responsibility of the
individual partners rather than the Partnership.
Net Income Per Unit of Class A Limited Partner Interest The net income per
Unit of Class A Limited Partner Interest is computed by dividing the net income
allocated to the Class A Limited Partners by the weighted average number of
Units of Class A Limited Partner Interest outstanding during the period.
Reclassifications Certain reclassifications have been made to the 1995
financial statements to conform to the classifications used in 1996.
Statement 128 FASB 128 had no impact on the Partnership's computation of
per unit values in any year presented.
New Accounting Pronouncements, Issued But Not Yet Effective
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances arising from non owner sources. The Partnership does not expect
this pronouncement to materially impact the reporting of its results of
operations.
F-9
<PAGE> 27
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. ORGANIZATION OF THE PARTNERSHIP
The Partnership was formed on December 18, 1989 for the purpose of
acquiring and leasing general equipment and office technology equipment. The
Partnership acquired a portfolio of equipment subject to triple net leases (e.g.
repairs, insurance and taxes are paid by the lessees) with unaffiliated third
parties.
The Managing General Partner of the Partnership is CAI Equipment Leasing
II Corp., a wholly-owned subsidiary of Capital Associates, Inc., and the
Administrative General Partner is General Equipment Management, Inc., a
wholly-owned subsidiary of Paine Webber Group Inc. (The Managing General Partner
and the Administrative General Partner are hereinafter collectively referred to
as the "General Partners")
Capital Associates International, Inc. ("CAII"), an affiliate of the
Managing General Partner, is the Class B Limited Partner. The Class B Limited
Partner contributed equipment to the Partnership having a fair market value
equal to 12.5% of the aggregate acquisition value of the equipment purchased
with the offering proceeds received from the sale of the Units of Class A
Limited Partner Interest ("Units") and the equipment contributed by the Class B
Limited Partner. The Class B Limited Partner satisfied its contribution
obligation during 1992.
On March 12, 1990, the General Partners each contributed $100 to the
capital of the Partnership. Between May 21, 1990 and April 19, 1991, 142,128
Units were sold at a price of $500 per Unit. Nine closings were held pursuant to
which the Partnership received $71,064,000 of gross offering proceeds, of which
$51,726,500 was received during 1990 and $19,337,500 was received during 1991.
The Partnership incurred $8,952,640 of commissions and other offering expenses
in connection with the sale of these Units, thus receiving $62,111,360 of net
offering proceeds.
The Partnership commenced operations on June 22, 1990 and acquired a total
of $140,473,626 of leased equipment, of which $3,929 (for an upgrade),
$8,740,536 and $14,347,283 was acquired during 1997, 1996 and 1995,
respectively. The Partnership will no longer commit funds for reinvestment.
F-10
<PAGE> 28
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. PARTNERSHIP ALLOCATIONS
Cash Distributions
Cash distributions, which are based upon the results of operations and
cash generated from operations other than liquidating distributions, are
distributed 5% to the General Partners and 95% to the Class A Limited Partners
and the Class B Limited Partner (collectively, the "Limited Partners"). The 95%
distributed to the Limited Partners is generally allocated between the Class A
Limited Partners and the Class B Limited Partner in the manner set forth in the
table below.
<TABLE>
<CAPTION>
1. During the reinvestment period (ended March 31, 1996).
------------------------------------------------------
Class A Class B
Limited Limited
Partners Partner Reinvested
-------- ------- ----------
<S> <C> <C> <C>
(A) Until the Class A Limited Partners
have received a 3.5% quarterly
(14% annualized), cumulative distribution
on their capital contributions 100.0% -- --
(B) Cash remaining after (A) above and
until the Class B Limited Partner
has received a 2.75% quarterly
(11% annualized) distribution on its
capital contributions -- 100.0% --
(C) Cash remaining after (B) above
is to be reinvested in additional
equipment -- -- 100.0%
2. After the reinvestment period:
-----------------------------
(A) Until the Class A Limited Partners have
received a 3.5% quarterly (14% annualized),
cumulative distribution on their capital
contributions 100.0% -- --
(B) Cash remaining after (A) above and
until the Class B Limited Partner
has received a 2.75% quarterly
(11% annualized) distribution on its
capital contributions -- 100.0% --
(C) Cash remaining after (B) above and until the
Class A Limited Partners receive a return of
their capital contributions, plus a 10% annual,
cumulative distribution compounded quarterly on
their adjusted capital contributions ("Payout") 87.5% 12.5% --
</TABLE>
F-11
<PAGE> 29
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Class A Class B
Limited Limited
Partners Partner Reinvested
-------- ------- ----------
<S> <C> <C> <C>
(D) Cash remaining after (C) above and until
the Class B Limited Partner has received
any previously undistributed portion of
its 2.75% quarterly (11% annualized)
distribution on its capital contributions -- 100.0% --
(E) Cash remaining after (D) above and until
the Class B Limited Partner achieves Payout 12.5% 87.5% --
(F) Cash remaining after (E) above 70.0% 30.0%* --
</TABLE>
*subject to certain specified limitations.
In 1997, the Partnership sold a substantial portion of its portfolio
thereby triggering, an event of dissolution as defined in the Partnership
Agreement. As a result, the fourth quarter distribution and all future
distributions will be based on accordance with the respective partners' capital
accounts after all allocations of profits and losses, as provided for in the
Partnership Agreement.
Profits and Losses
Profits (not including the special allocations discussed below) are first
allocated to offset prior year losses, if any. Remaining profits are then
allocated among the partners in the same manner that cash distributions are
allocated, or would be allocated (as set forth above) if cash distributions were
equal to the allocable profits.
Losses (not including the special allocations discussed below) are first
allocated to offset prior year profits and then 1% to the General Partners and
99% to the Limited Partners. The 99% allocated to the Limited Partners is shared
87.5% for the Class A Limited Partners and 12.5% for the Class B Limited
Partner.
There are several special allocation provisions included in the
Partnership Agreement of which the two most significant are as follows: First,
commissions and expenses paid in connection with the sale of Units are allocated
1% to the General Partners and 99% to the Limited Partners. The 99% allocated to
the Limited Partners is shared 87.5% for the Class A Limited Partners and 12.5%
for the Class B Limited Partner. Second, depreciation with respect to the
equipment and any losses resulting from the sale of equipment was allocated 1%
to the General Partners and 99% to the Limited Partners, until the cumulative
amount of depreciation and losses so allocated to the Limited Partners equaled
their aggregate capital contributions, net of the commissions and other expenses
paid in connection with the sale of the Units. The 99%
F-12
<PAGE> 30
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
allocated to the Limited Partners is shared by the Class A Limited Partners and
the Class B Partner in proportion to their respective net capital contributions.
The General Partners were also specially allocated items of income to offset
their 1% allocation of these two items.
4. CASH AND CASH EQUIVALENTS
Cash equivalents are primarily short-term commercial paper issued by large
domestic corporations. At December 31, 1997, the Partnership held short-term
commercial paper issued as follows:
At December 31, 1997, the Partnership held short-term commercial paper
issued as follows: Ford Motor Company purchased on various dates in December
1997 for prices aggregating $6,563,733 (Par Value 6,600,000), commercial paper
issued by Associates Corp. of North America purchased on December 12, 1997 for a
purchase price of $6,308,291 (Par Value $6,350,000), commercial paper issued by
Prudential Funding Corp. purchased on December 19, 1997 for a price of
$5,678,340 (Par Value $5,700,000), and commercial paper issued by American
Express Inc. purchased on December 31, 1997 for a price of $497,511 (Par Value
$500,000).
5. RENTS AND OTHER RECEIVABLES
Rents and other receivables consist primarily of accrued rents, accrued
interest receivable, and property taxes billed but not collected. The
Partnership provided allowances for uncollectible accounts of $172,900 at each
of December 31, 1997 and 1996, respectively, with respect to such receivables.
6. NET INVESTMENT IN DIRECT FINANCING LEASES
The investment in direct financing leases at December 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Minimum lease payments receivable $144,121 $3,016,804
Estimated unguaranteed residual values 57,961 611,639
Unearned lease income (31,852) (658,129)
-------- ----------
$170,230 $2,970,314
======== ==========
</TABLE>
F-13
<PAGE> 31
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Direct financing lease receivables at December 31, 1997 are due in
installments as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ --------
<S> <C>
1998 $ 78,588
1999 64,455
2000 1,078
--------
$144,121
========
</TABLE>
7. EQUIPMENT ON OPERATING LEASES
The following schedule provides an analysis of the Partnership's
investment in equipment on operating leases as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Office technology and
communications equipment $ 2,434,870 $ 15,372,523
General equipment 18,085,571 49,691,577
------------ ------------
20,520,441 65,064,100
Less: Accumulated depreciation (11,966,110) (30,258,762)
Allowances for losses (300,945) (459,134)
------------ ------------
$ 8,253,386 $ 34,346,204
============ ============
</TABLE>
Additionally, equipment with original costs aggregating $4,945,237 and
$1,070,557 (net book values of $729,481 and $206,624), was off-lease at December
31, 1997 and 1996, respectively.
a.) Minimum Future Rentals
The following is a schedule by years of minimum future rentals on
operating leases as of December 31, 1997:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ----------
<S> <C>
1998 $2,680,518
1999 1,993,693
2000 1,153,231
2001 993,071
2002 775,231
Thereafter 690,965
----------
$8,286,709
==========
</TABLE>
F-14
<PAGE> 32
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The rentals in the table substantially represent the rentals associated
with the prepayment of leases discussed below ($7,118,148) (for which the cash
has already been received) and rentals assigned to repay the discounted lease
rentals ($1,153,660).
b.) 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
$6,072,331 and $8,531,925 remained unamortized at December 31, 1997 and 1996 and
which is carried as prepaid rent on the balance sheets at such dates and
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 exceeded the aggregate of the remaining rental
payment due under the user leases and the residual (salvage) value estimates for
the equipment subject to the user leases, on an undiscounted basis. 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.
c.) Equipment Sale
In October 1997, the Partnership entered into an agreement with an
unaffiliated third party to sell certain equipment subject to leases 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 September 30, 1997. The equipment had
generated aggregate rents of approximately $19,000,000 for the Partnership
through the date of sale. The Partnership recorded 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 57% of the
Partnership's remaining equipment on a net book value basis at September 30,
1997, and approximately 70% of the September 1997 monthly rental billings. The
Managing General Partner of the Partnership has determined that
F-15
<PAGE> 33
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
such sale represents a dissolution event, as defined and is investigating sales
opportunities with respect to the remaining portfolio of equipment in order to
complete the expeditious liquidation of the Partnership.
8. DISCOUNTED LEASE RENTALS
Discounted lease rentals outstanding at December 31, 1997 and 1996 were
$1,523,570 and $2,802,710, respectively. Only one obligation remained
outstanding at December 31, 1997, which carried interest at 10.83%. The
non-recourse obligation matures as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998 $ 554,166
1999 (including balloon 969,404
of $570,441)
----------
$1,523,570
==========
</TABLE>
9. CONCENTRATION OF CREDIT RISK
Approximately 65% of the Partnership's equipment acquired since inception
based upon original cost was leased to lessees which were investment grade
lessees, or entities which were operating subsidiaries of investment grade
companies. An investment grade lessee is a company with a credit rating of not
less than Baa, as determined by Moody's Investor Services, Inc. or comparable
credit ratings, as determined by other recognized credit rating services.
The following table (which includes equipment accounted for as direct
financing leases) describes the Partnership's equipment portfolio as of December
31, 1997 and 1996 by significant equipment industry type. This table excludes
equipment held for sale or lease at December 31, 1997 and 1996 respectively.
<TABLE>
<CAPTION>
December 31 1997 December 31 1996
---------------- ----------------
Equipment Type(1) % of Portfolio % of Portfolio
----------------- -------------- --------------
<S> <C> <C>
Industrial (Includes Forklifts) 43.43% 27.23%
Manufacturing 16.31 17.34
Transportation 11.25 14.11
Furniture and Fixtures 7.50 8.51
Communication 1.57 7.65
PCs and Workstations 3.98 7.74
Mining and Construction 6.74 6.54
Peripherals and Printers 6.31 6.53
Medical and Research 2.91 4.35
------ ------
Total 100.00% 100.00%
====== ======
</TABLE>
*Includes equipment subject to direct financing leases.
F-16
<PAGE> 34
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. TRANSACTIONS WITH AFFILIATES
Acquisition and Operating Stages
Acquisition of Equipment The Partnership acquired, on an all-cash basis,
equipment from CAII, an affiliate of the Managing General Partner, at purchase
prices aggregating $2,542,028 and $9,148,443 (not including acquisition fees)
during 1996 and 1995, respectively. During 1996 and 1995, the Partnership also
acquired equipment subject to lease for purchase prices aggregating $5,944,610
and $4,782,289, respectively, from unaffiliated third parties.
The purchase price of the equipment acquired from CAII and the value of
the equipment contributed by CAII, the Class B Limited Partner, were equal to
the lesser of the adjusted cost of the equipment or the appraised value of the
equipment at the time of its acquisition by the Partnership. The adjusted cost
of the equipment was equal to the price paid by CAII, plus the cost of an
appraisal, CAII's cost of interim financing for the equipment and any taxes paid
by CAII, less certain interim rentals received by CAII with respect to the
equipment.
Acquisition Fee The Managing General Partner receives a fee equal to (i)
2.25% of the purchase price of equipment purchased with gross offering proceeds
from the sale of Units, and (ii) 3.0% of the purchase price of equipment
purchased with reinvested Partnership income as compensation for evaluating,
selecting, negotiating and consummating the acquisition of the equipment. There
is no acquisition fee payable with respect to the equipment contributed by the
Class B Limited Partner. The Managing General Partner earned $253,898 and
$416,551 of acquisition fees attributable to the acquisition of equipment during
1996 and 1995, respectively. No acquisition fees were earned during the year
ended December 31, 1997. Acquisition fees are capitalized in the cost of
equipment and depreciated with the related equipment for equipment subject to
operating leases and are capitalized and amortized as a part of the investment
in direct financing leases for equipment subject to such leases.
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 $234,851, $590,817 and $549,780 were earned by the
General Partners with regard to the rentals earned by the Partnership during
1997, 1996 and 1995, respectively.
F-17
<PAGE> 35
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 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 of
$422,828 because the Managing General Partner concluded that it was no longer
probable that these subordinated disposition fees would be paid.
Accountable General and Administrative Expenses The General Partners are
entitled to reimbursement of certain expenses, up to $25,000 per year, paid on
behalf of the Partnership which are incurred in connection with the
administration and management of the Partnership. The Managing General Partner,
billed, for administrative services, $25,000 for each of the years ended
December 31, 1997, 1996 and 1995.
As part of the class action settlement, (see Footnote 12, "Litigation"),
beginning January 1996, all fees and distribution payable to the Administrative
General Partner and all future fees and distributions earned by the
Administrative General Partner have been assigned by an affiliate to an escrow
account for the benefit of class members.
11. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
The following is a reconciliation of the net income as shown in the
accompanying financial statements to the taxable income reported for federal
income tax purposes:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income per financial statements $ 2,072,522 $ 4,258,032 $ 3,957,086
Increase (decrease) resulting from:
Depreciation (491,034) (2,012,678) (2,129,473)
Direct financing leases 929,406 1,272,639 1,175,166
Prepaid rental income and deposits (556,911) 180,926 8,907
Provisions for losses and bad debts 1,000,000 802,854 447,900
Gain on sale of equipment 5,859,007 259,071 639,453
Prepaid rent (2,328,505) (2,592,799) 11,124,724
Other (78,167) (155,367) (4,361)
---------- ----------- -----------
Taxable income per federal
income tax return $ 6,406,318 $ 2,012,678 $15,219,402
========== =========== ===========
</TABLE>
F-18
<PAGE> 36
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The following is a reconciliation of the amount of the Partnership's net
equity as shown in the accompanying financial statements to the tax bases of the
Partnership's net assets:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Partnership equity per financial
statements $ 3,044,144 $ 26,186,611 $ 34,113,196
Increase (decrease) resulting from:
Commission and expenses paid
in connection with the sale
of Class A limited partner units 8,952,640 8,952,640 8,952,640
Distributions payable to partners 16,485,153 1,688,938 1,211,123
Direct financing lease income
and other 119,165 5,728,510 3,274,645
Deferred rental income and deposits 153 483,904 664,830
Writedowns 586,599 715,956 876,439
Accumulated depreciation (5,029,304) (17,688,688) (15,990,348)
Basis of contributed equipment -- (290,785) (290,785)
Prepaid rent 6,072,331 8,531,925 11,124,724
----------- ------------ ------------
Tax bases of net assets $30,230,881 $ 34,309,011 $ 43,936,464
=========== ============ ============
</TABLE>
12. 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 ("District Court") concerning PaineWebber
Incorporated's 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 interests in the Partnerships, PaineWebber
and the Administrative General Partner (1) failed to provide adequate disclosure
of the risks involved with the Partnerships; (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 alleged 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
F-19
<PAGE> 37
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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 certain additional consideration to class members. 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
plaintiffs' purchases of various limited partnership interests. The complaint
alleges, 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 seeks compensatory damages of $15 million plus punitive damages. In
September 1996, the California Superior Court dismissed many of the plaintiffs'
claims as barred by the applicable statutes of limitation. In March 1997, a
settlement was reached in various cases, including the Abbate litigation. The
District Court must still determine the extent of attorney's fees to be awarded
to plaintiffs' counsel which will be paid from the settlement fund so that the
remainder of monies can be distributed to class members.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber and its affiliates, including the
Administrative General Partner, could be 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 if indemnification is sought, the Abbate settlement would not have
a material impact on the financial statements taken as a whole.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value of certain financial instruments, whether or
not reported in the balance sheet. Where quoted market prices are unavailable
the values are based on estimates using present value or other valuation
techniques. The results are significantly affected by the assumptions used
including the discount rate and estimates of future cash flows. In addition,
because SFAS No. 107 excludes certain assets such as leased equipment owned by
the Partnership, the aggregate fair value amounts discussed below do not
purport to represent and should not be considered representative of the
underlying market value of the Partnership.
The methods and assumptions used to estimate the fair value of each class
of the financial instruments are described below.
Cash equivalents and rents and other receivables. For these balances,
carrying value approximates fair value due to their short-term nature.
Prepaid rent. For prepaid rent, the carrying value approximates the
unearned balance of the master lease prepayment based upon the terms of the
master lease, discounted at 8.25%.
Discounted lease rentals. For discounted lease rentals, carrying value
approximates fair value based upon current rate offered for a note of similar
maturity.
Accounts payable and accrued expenses, payable to affiliates, and accrued
interest payable. For these balances carrying value approximates fair value due
to its short-term nature.
F-20
<PAGE> 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in accountants or disagreements with accountants
with respect to accounting or financial disclosure issues during 1997 or 1996.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no officers and directors. The General Partners
jointly manage and control the affairs of the Partnership and have general
responsibility and authority in all matters affecting its business. Information
concerning the directors and executive officers of the General Partners is as
follows:
CAI Equipment Leasing II Corp.
------------------------------
<TABLE>
<CAPTION>
Name Positions Held
---- --------------
<S> <C>
John F. Olmstead President and Director
Dennis J. Lacey Senior Vice President and Director
Anthony M. DiPaolo Senior Vice President and Director
John A. Reed Vice President, Assistant Secretary and Director
Mick Meyers Director
Robert A. Golden Director
David J. Anderson Chief Accounting Officer and Secretary
Joe Bukofski Vice President and Director
</TABLE>
John F. Olmstead, age 53, joined CAII as Vice President in December 1988.
He is responsible for overseeing and directing CAII's equity department
programs, including all of its public and private investor sales. Mr. Olmstead
has a Bachelor of Science degree in Accounting from Indiana University, has
completed the CPA Exam and received a Juris Doctorate from Indiana Law School.
He has been involved in the equipment leasing business since 1969, as a
co-founder of Finalco, Incorporated, for which he served as President from 1976
through March 1983. From 1983 to 1988 he operated his own leasing company as
well as several manufacturing companies.
Dennis J. Lacey, age 44, became associated with CAII as Vice President,
Operations in October of 1989. Mr. Lacey has served as Treasurer and Chief
Financial Officer of CAI and currently serves as its President and Chief
Executive Officer and is a Director of CAII. Mr. Lacey was formerly an audit
partner with Coopers & Lybrand. Mr. Lacey holds a degree in Accounting and
Finance from the University of West Florida.
16
<PAGE> 39
Anthony M. DiPaolo, age 38, joined CAII in July 1990 as an Assistant
Treasurer and is currently Senior Vice President/Director for the company. He
has held financial management positions as Chief Financial Officer for Mile High
Kennel Club, Inc. from 1988 to 1990 and was Vice President/Controller for VICORP
Restaurants, Inc. from 1986 to 1988. Mr. DiPaolo holds a Bachelor of Science
degree in Accounting from the University of Denver.
Robert A. Golden, age 52, is Vice President and the National Sales Manager
of the Company. Mr. Golden joined the Company in 1993 as a Branch Manager. He
was promoted to his current position in September 1994. Prior to joining the
Company, he was an Executive Vice President with the U.S. Funds Group, President
of BoCon Capital Group and Vice President with Ellco/GE Capital for fifteen
years. Mr. Golden is an officer, but not a director, of CAII.
Richard H. Abernethy, age 43, joined CAII in April 1992 as Equipment
Valuation Manager and currently serves as Vice President of Asset Management.
Mr. Abernethy has 13 years experience in the leasing industry, including prior
positions with Barclays Leasing Inc., from November 1986 to February 1992, and
Budd Leasing Corporation, from January 1981 to November 1986. Mr. Abernethy
holds a Bachelor of Arts in Business Administration from the University of North
Carolina at Charlotte.
John A. Reed, age 42, joined CAII in January 1990 as the Tax Director and
Assistant Secretary. Mr. Reed is currently the Vice President of Marketing and
is responsible for all lease documentation and management of transaction
structuring and processing. Prior to joining the Marketing Department, Mr. Reed
was Vice President of Credit and Debt Administration. He spent seven and one
half years with Coopers & Lybrand in the Tax Department and served on CAII's tax
consulting engagement during that time. Mr. Reed obtained degrees Bachelor of
Arts in Social Sciences and Masters of Science in Accounting, from Colorado
State University.
David J. Anderson, age 44, joined CAII in August 1990 as Manager of
Billing & Collections and currently serves as Assistant Vice-President/Chief
Accounting Officer. Prior to joining CAII, Mr. Anderson was Vice
President/Controller for Systems Marketing, Inc., from 1985 to 1990, and
previous to that working in several senior staff positions at the Los Alamos
National Laboratory and with Ernst & Whinney. Mr. Anderson holds a Bachelor of
Business Administration degree in Accounting from the University of Wisconsin.
Joseph F. Bukofski, age 43, joined CAII in June 1990 as a Financial
Analyst. Mr. Bukofski is currently the Vice President of Marketing and is
responsible for all lease documentation and management of transaction
structuring and processing. Prior to joining the Company, he was a geologist
with Barringer Geoservices, Inc. for eleven years. Mr. Bukofski holds a Bachelor
of Science degree in Secondary Education - Earth Science from Bloomsburg
University and a Masters of Science in Accounting from the University of
Colorado.
17
<PAGE> 40
General Equipment Management, Inc.
----------------------------------
<TABLE>
<CAPTION>
Name Positions Held
---- --------------
<S> <C>
Gerald F. Goertz, Jr. Chairman of the Board
Stephen R. Dyer President and Director
Joseph P. Ciavarella Vice President, Secretary, Treasurer, Chief
Financial and Accounting Officer
Clifford B. Wattley Vice President, Assistant Secretary and Director
</TABLE>
Gerald F. Goertz, Jr., age 40, is Chairman of the Board of Directors of
the Administrative General Partner. Mr. Goertz joined PaineWebber Incorporated
in December 1990 and holds the position of Senior Vice President and Director of
Specialized Investment Services. Prior to joining PaineWebber Incorporated, Mr.
Goertz was associated with CG Realty Advisors and The Freeman Company. He
received his Bachelor of Arts degree in Business Administration in 1979 from
Vanderbilt University and his Juris Doctorate and Masters of Business
Administration from Memphis State University in 1982.
Stephen R. Dyer, age 38, is President and a Director of the Administrative
General Partner. He joined PaineWebber Incorporated in June 1988 as a Divisional
Vice President and is currently a Corporate Vice President and Director of
Private Investments. Prior to joining PaineWebber Incorporated, Mr. Dyer had
been employed, since June 1987, as an Assistant Vice President in the Retail
National Products Group of L.F. Rothschild & Co. Incorporated. Prior to joining
L.F. Rothschild, he was employed, beginning in January 1985, as an Associate in
the Real Estate Department of Thomson McKinnon Securities Inc. From July 1981 to
August 1983, Mr. Dyer was on the audit staff of the accounting firm of Arthur
Young & Company. He received his Bachelor of Science degree in Accounting in
1981 from Boston College and a Masters of Business Administration from Indiana
University in December 1984. Mr. Dyer is a Certified Public Accountant.
Joseph P. Ciavarella, age 42, is Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer of the Administrative General Partner. He
joined PaineWebber Incorporated in May 1995 as a Corporate Vice President.
Immediately prior to joining PaineWebber Incorporated, he was associated from
August 1993 to May 1995 with the Aviation Capital Group. From 1983 to 1993, he
was a financial officer of Integrated Resources Inc. and a senior officer in the
Equipment Leasing Division, Aircraft Finance and capital market areas. He is a
graduate of Hofstra University and is a Certified Public Accountant.
Clifford B. Wattley, age 48, is a Vice President, Assistant Secretary and
a Director of the Administrative General Partner. Mr. Wattley is a Corporate
Vice President with PaineWebber Incorporated, having joined the firm in 1986. He
also was employed previously by Paine, Webber, Jackson & Curtis from 1979 to
1980. From 1986 to 1992, Mr. Wattley participated in PaineWebber's Principal
Transactions Group. From 1992, Mr. Wattley has been a member of the
18
<PAGE> 41
Private Investment Department. He holds a Bachelor of Science degree in
engineering from Columbia University and a Masters in Business Administration
from Harvard University.
Item 11. Executive Compensation
No compensation was paid by the Partnership to the officers and directors
of the General Partners. See Item 13 of this Report, "Certain Relationships and
Related Transactions", which is incorporated herein by reference, for a
description of the compensation and fees paid to the General Partners and their
affiliates by the Partnership during 1997.
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 Units of the
Partnership. The Partnership has no directors or officers, and
neither the General Partners nor the Class B Limited Partner
of the Partnership own any Units. ATL, Inc. an affiliate of
the Administrative General Partner, owns 1,551 Units purchased
pursuant to legal settlements with certain partnerships.
CAII, an affiliate of the Managing General Partner, owns 100%
of the Partnership's Class B Units.
The names and addresses of the General Partners and the Class
B Limited Partner are as follows:
Managing General Partner:
CAI Equipment Leasing II Corp.
7175 W. Jefferson Avenue
Suite 3000
Lakewood, CO 80235
Administrative General Partner:
General Equipment Management, Inc.
1200 Harbor Boulevard, 5th Floor
Weehawken, NJ 07087
19
<PAGE> 42
Class B Limited Partner:
Capital Associates International, Inc.
7175 W. Jefferson Avenue
Suite 3000
Lakewood, CO 80235
(b) No directors or officers of the Managing General Partner, the
Administrative General Partner or the Class B Limited Partner
owned any Units as of March 1, 1998.
(c) The Partnership knows of no arrangements, the operation of the
terms of which may at a subsequent date result in a change in
control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners and their affiliates have received or will receive
certain types of compensation, fees, or other distributions in connection with
the operations of the Partnership. The fees and compensation were determined in
accordance with the applicable provisions of the Partnership Agreement.
Following is a summary of the amounts paid or payable to the General
Partners and their affiliates during 1997.
Acquisition and Operating Stages
Acquisition of Equipment The Partnership did not acquire any equipment
from CAII during 1997. The Partnership ceased committing funds for reinvestment
as of March 31, 1996. There were no acquisition fees earned by the Managing
General Partner during the year ended December 31, 1997.
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 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 $234,851
were earned by the General Partners with regard to the rentals earned by the
Partnership during 1997.
Disposition Fees At December 31, 1996, the Partnership reversed previously
accrued subordinated disposition fees of $422,828 recorded in prior years
because the Managing General Partner concluded that it is no longer probable
that these subordinated disposition fees would be paid.
20
<PAGE> 43
Accountable General and Administrative Expenses The General Partners are
entitled to reimbursement of certain expenses, up to $25,000 per year, paid on
behalf of the Partnership which are incurred in connection with the
administration and management of the Partnership. The Managing General Partner
billed $25,000 for administrative services during 1997.
As part of the class action settlement (see Footnote 12, "Litigation"),
beginning January 1996, all fees and distribution payable to the Administrative
General Partner and all future fees and distributions earned by the
Administrative General Partner have been assigned by an affiliate to an escrow
account for the benefit of class members.
21
<PAGE> 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) and (d) The following documents are filed as part of this Report:
1. Financial Statements: (Incorporated by reference to Item 8 of
this Report, "Financial Statements and Supplementary Data").
(b) The Partnership did not file any reports on Form 8-K during
the quarter ended December 31, 1997.
(c) Exhibits required to be filed.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
4.1 Amended and Restated Agreement of
Limited Partnership of PaineWebber
Preferred Yield Fund, L.P. dated
June 22, 1990. Filed as Exhibit 4.1
to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended
June 30, 1990.(1,2)
4.2 Amendment No. 7 to the Amended and
Restated Agreement of Limited
Partnership of PaineWebber Preferred
Yield Fund, L.P., dated February 7,
1991. Filed as Exhibit 4.2 to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1990.*
4.3 Amendment No. 8 to the Amended and
Restated Agreement of Limited
Partnership of PaineWebber Preferred
Yield Fund L.P., dated August 31,
1992. Filed as Exhibit 4(d) to the
Registrant's Quarterly Report on
Form 10-Q for the quarter ended
September 30, 1992.*
4.4 Amendment No. 11 to the Amended and
Restated Agreement of Limited
Partnership of PaineWebber Preferred
Yield Fund, L.P., dated April 30,
1993. Filed as Exhibit 4.4 to the
Registrant's Quarterly Report on
Form 10-Q for the quarter ended June
30, 1993.*
10.1 Net Worth Maintenance Agreement,
dated March 1, 1990, by and among
Capital Associates, Inc., CAI
Equipment Leasing II Corp. and the
Registrant. Filed as Exhibit 10(c)
to Amendment No. 2 to the
Registrant's Registration Statement
on Form S-1 (Commission File No.
33-33025) on March 16, 1990.*
11 Partnership's policy regarding
requests for partner lists.
</TABLE>
- ----------
(1)
(2) 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 which is
incorporated herein by reference.
22
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Dated: March 31, 1998
PaineWebber Preferred Yield Fund, L.P.
By: General Equipment Management, Inc.
Administrative General Partner
By: /s/ Stephen R. Dyer
-------------------------------------
Stephen R. Dyer
President and Director
By: /s/ Joseph P. Ciavarella
-------------------------------------
Joseph P. Ciavarella
Vice President, Secretary,
Treasurer, Chief Financial
and Accounting Officer
By: CAI Equipment Leasing II Corp.
Managing General Partner
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
Registrant and in the capacities indicated on March 31, 1998.
Signature Title
- --------- -----
/s/ John F. Olmstead President and Director of
- ------------------------------------ CAI Equipment Leasing II Corp.
John F. Olmstead
23
<PAGE> 46
/s/ Dennis J. Lacey Senior Vice President
- ------------------------------------ and Director of CAI
Dennis J. Lacey Equipment Leasing II Corp.
/s/ Anthony M. DiPaolo Senior Vice President, Assistant
- ------------------------------------ Secretary and Director of CAI
Anthony M. DiPaolo Equipment Leasing II Corp.
/s/ Richard H. Abernethy Vice President and Director of
- ------------------------------------ CAI Equipment Leasing II Corp.
Richard H. Abernethy
/s/ John A. Reed Vice President, Assistant Secretary
- ------------------------------------ and Director of CAI Equipment
John A. Reed Leasing II Corp.
/s/ Daniel J. Waller Director of CAI Equipment
- ------------------------------------ Leasing II Corp.
Daniel J. Waller
/s/ Gerald F. Goertz, Jr. Chairman of the Board of General
- ------------------------------------ Equipment Management, Inc.
Gerald F. Goertz, Jr.
/s/ Stephen R. Dyer President and Director of General
- ------------------------------------ Equipment Management, Inc.
Stephen R. Dyer
/s/ Joseph P. Ciavarella Vice President, Secretary, Treasurer,
- ------------------------------------ Chief Financial and Accounting
Joseph P. Ciavarella Officer and Director of General
Equipment Management, Inc.
/s/ Clifford B. Wattley Vice President, Assistant Secretary
- ------------------------------------ Director of General Equipment
Clifford B. Wattley Management, Inc.
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REPORT ON
FORM 10-K FOR PAINEWEBBER PREFERRED YIELD FUND LP.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19606352
<SECURITIES> 0
<RECEIVABLES> 347975
<ALLOWANCES> (172900)
<INVENTORY> 0
<CURRENT-ASSETS> 19781427
<PP&E> 20520441
<DEPRECIATION> (12267055)<F1>
<TOTAL-ASSETS> 28944212
<CURRENT-LIABILITIES> 18304167<F2>
<BONDS> 1523570
0
0
<COMMON> 0
<OTHER-SE> 3044144<F3>
<TOTAL-LIABILITY-AND-EQUITY> 28944212
<SALES> 0
<TOTAL-REVENUES> 10632297
<CGS> 7386771
<TOTAL-COSTS> 7386771
<OTHER-EXPENSES> 363386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 809618
<INCOME-PRETAX> 2072522
<INCOME-TAX> 0
<INCOME-CONTINUING> 2072522
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2072522
<EPS-PRIMARY> 12.50<F4>
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES WRITEDOWNS
<F2>EXCLUDES PREPAID RENT ACCOUNTED FOR AS A FINANCING
<F3>REPRESENTS PARTNERSHIP EQUITY
<F4>PER WEIGHT AVERAGE CLASS A LIMITED PARTNERSHIP UNIT OUTSTANDING.
</FN>
</TABLE>
