FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19166
PAINEWEBBER PREFERRED YIELD FUND, L.P.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1130506
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(State of organization) (IRS Employer Identification No.)
7175 West Jefferson Avenue, Suite 4000
Lakewood, Colorado 80235
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 980-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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Exhibit Index Appears on Page 11
Page 1 of 12 Pages
<PAGE>
PAINEWEBBER PREFERRED YIELD FUND, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - June 30, 1998 and December 31, 1997 3
Statements of Income - Three and Six Months Ended
June 30, 1998 and 1997 4
Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
2
<PAGE>
PAINEWEBBER PREFERRED YIELD FUND, L.P.
BALANCE SHEETS
(unaudited)
ASSETS
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
Cash and cash equivalents $ 2,517,833 $19,606,352
Rent and other receivables, net 51,662 175,075
Receivables from related party 50,628 -
Equipment held for sale or lease, net of
accumulated depreciation of $3,525,620
and $4,103,002 at 1998 and 1997 and
write-downs of $471,138 and $112,754
at 1998 and 1997 322,410 729,481
Net investment in direct financing leases 140,710 170,230
Equipment on operating leases, net of
accumulated depreciation of $8,995,764 in
1998 and $11,966,110 in 1997 and write downs
of $226,281 in 1998 and $300,945 in 1997 6,503,839 8,253,386
Other assets, net 9,688 9,688
----------- -----------
Total assets $ 9,596,770 $28,944,212
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Prepaid rent $ 5,359,533 $ 6,072,331
Accounts payable and other liabilities 729,326 1,307,583
Payables to affiliates 327,627 263,591
Deferred rental income and deposits 231,794 246,840
Distributions payable to partners - 16,486,153
Discounted lease rentals 1,253,954 1,523,570
----------- -----------
Total liabilities 7,902,234 25,900,068
----------- -----------
Partners' Equity:
General Partners 58,652 110,227
Limited Partners:
Class A 1,388,965 2,498,859
Class B 246,919 435,058
----------- -----------
Total partners' equity 1,694,536 3,044,144
----------- -----------
Total liabilities and partners' equity $ 9,596,770 $28,944,212
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rentals from operating leases $ 864,255 $ 2,811,652 $ 1,564,347 $ 6,005,981
Direct financing lease income 5,367 166,980 11,311 272,341
Gain on sale of equipment 176,220 147,326 363,160 201,042
Other, principally interest 33,686 46,128 129,792 86,008
----------- ----------- ----------- -----------
1,079,528 3,172,086 2,068,610 6,565,372
----------- ----------- ----------- -----------
Expenses:
Depreciation 459,002 1,889,298 969,482 3,928,334
Management fees 27,271 123,892 50,215 258,599
Interest 159,598 202,539 325,923 417,878
General and administrative 79,863 50,400 137,460 101,000
Provision for losses on equipment 550,000 - 550,000 -
----------- ----------- ----------- -----------
1,275,734 2,266,129 2,033,080 4,705,811
----------- ----------- ----------- -----------
Net income (loss) $ (196,206) $ 905,957 $ 35,530 $ 1,859,561
=========== =========== =========== ===========
Net income (loss) allocated:
To the General Partners $ (9,810) $ 45,297 $ (1,419) $ 92,977
To the Class A Limited Partners (163,096) 700,969 27,130 1,596,589
To the Class B Limited Partner (23,300) 159,691 9,819 169,995
----------- ----------- ----------- -----------
$ (196,206) $ 905,957 $ 35,530 $ 1,859,561
=========== =========== =========== ===========
Net income (loss) per weighted average
number of units of Class A limited
partner interest outstanding $ (1.15) $ 4.93 $ .19 $ 11.23
=========== =========== =========== ===========
Weighted average number of units of
Class A limited partner interest
outstanding 142,128 142,128 142,128 142,128
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PAINEWEBBER PREFERRED YIELD FUND, L.P.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 33,030 $ 4,886,841
------------ ------------
Cash flows from investing activities:
Recovery of investment in direct financing leases 29,520 693,918
Proceeds from sales of equipment 989,838 2,647,842
Purchase of equipment on operating leases - (3,929)
------------ ------------
Net cash provided by investing activities 1,019,358 3,337,831
------------ ------------
Cash flows from financing activities:
Repayment of discounted lease rentals (269,616) (646,970)
Cash distributions paid to partners (17,871,291) (4,557,272)
------------ ------------
Net cash used in financing activities (18,140,907) (5,204,242)
------------ ------------
Net (decrease) increase in cash and cash equivalents (17,088,519) 3,020,430
Cash and cash equivalents at beginning of period 19,606,352 2,879,451
------------ ------------
Cash and cash equivalents at end of period $ 2,517,833 $ 5,899,881
============ ============
Supplemental schedule of cash flow information:
Interest paid $ 74,965 $ 417,459
============ ============
Non cash transactions:
Equipment subject to operating leases
converted to direct financing leases at renewal $ - $ 87,769
============ ============
Distributions declared but not paid to partners $ - $ 4,663,635
============ ============
Prepaid rent applied in equipment sale $ 44,964 $ 48,253
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for annual
financial statements. In the opinion of the General Partners, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. The balance sheet at
December 31, 1997, has been derived from the audited financial statements
included in the Partnership's Annual Report on Form 10-K. For further
information, refer to the financial statements of PaineWebber Preferred
Yield Fund, L.P. (the "Partnership"), and the related notes, included in
the Partnership's Annual Report on Form 10-K for the year ended December
31, 1997, previously filed with the Securities and Exchange Commission.
New Accounting Pronouncement: In March 1998 the partnership adopted SFAS
No. 130, "Reporting Comprehensive Income", which establishes 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 nonowner
sources. The adoption of this pronouncement does not impact the reporting
of the Partnership's results of operations.
2. TRANSACTIONS WITH AFFILIATES
Management Fees
The General Partners receive a quarterly fee in an amount equal to 2.0% of
gross rentals for Full Payout Leases, as defined in the Partnership
Agreement, and 5.0% of gross rentals for other leases (payable 55% to the
Managing General Partner and 45% to the Administrative General Partner) as
compensation for services rendered in connection with the management of the
equipment. Management fees of $27,271 and $50,215 were earned by the
General Partners with respect to the rental revenues earned by the
Partnership during the three and six months ended June 30, 1998.
Accountable General and Administrative Expenses
The General Partners are entitled to reimbursement of certain expenses paid
on behalf of the Partnership which are incurred in connection with the
Partnership's operations. Such reimbursable expenses, all of which were
paid to the Managing General Partner, amounted to $12,500 during the six
months ended June 30, 1998.
6
<PAGE>
PAINEWEBBER PREFERRED YIELD FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
3. 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 $5,359,533 and $6,072,331 remained outstanding at June
30, 1998 and December 31, 1997, respectively. The Prepayment of Leases is
carried as prepaid rent on the balance sheets at such dates and is
accounted for as a financing. The Master Lease term exceeds the related
original user lease terms. Additionally, at the inception of the Master
Lease the amount of the Prepayment of Leases approximated the aggregate of
the remaining rental payments due under the user leases and the residual
(salvage) value estimates for the equipment subject to the user leases. The
Partnership does not have any economic obligations relating to the
equipment subject to the Master Lease until such equipment is returned upon
the expiration of the Master Lease. Upon expiration of the Master Lease,
the economic benefits of all equipment (Master Lease equipment) still being
leased by third parties as well as a portion of the residual value of such
equipment based upon a formula will revert to the Partnership.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES
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.
Rent and other receivables, net of the allowance for doubtful accounts,
decreased $123,413 from $175,075 at December 31, 1997 to $51,662 at June 30,
1998 primarily due to the settlement of a bankruptcy claim relating to one
lessee.
The Partnership is in its liquidation period (as defined in the Partnership
Agreement). During the liquidation period, the Partnership no longer acquires
new leases and the existing lease portfolio is in the process of running-off. As
of December 31, 1997, the Partnership had sold a substantial portion of its
assets and the Managing General Partner was exploring opportunities to sell the
balance of equipment. In January the Partnership distributed $95 per Class A
Unit and in April, 1998 distributed an additional $8 per Class A Unit. A
substantial portion of each distribution constitute a return of capital. Future
distributions will be based upon cash generated by the sale and lease of the
remaining equipment and cash used in operations.
Distributions may be characterized for tax, accounting and economic purposes as
a return of capital, a return on capital or both. The portion of each
distribution by a partnership, which exceeds its net income for the fiscal
period, may be deemed a return of capital. The Partnership declared no
distributions to the Class A Limited Partners for the three months ended June
30, 1998. Based on the amount of net income reported by the Partnership for
accounting purposes, approximately 68% of the cash distributions paid to the
Class A Limited Partners from inception of the Partnership through June 30, 1998
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.
RESULTS OF OPERATIONS
Substantially all of the Partnership's revenue during the quarter ended June 30,
1998 was generated from the leasing of the Partnership's equipment to
unaffiliated third parties under triple net leases and from proceeds from the
sale of equipment. Interest income from temporary investments comprised the
balance of the Partnership's cash flow.
Under the terms of the triple net leases, substantially all of the expenses
related to the ownership and operation of the equipment are paid for by the
lessees. For equipment subject to operating leases, the Partnership records
depreciation expense pertaining to the equipment and related management fees.
The Partnership also records general and administrative expenses consisting
primarily of warehouse costs, investor reporting expenses and transfer agent and
audit fees as well as interest expense incurred in connection with discounted
transactions.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES, continued
The Partnership performs ongoing assessments of the likelihood of lessee
defaults on existing leases and the effect that any such defaults may have on
the collectability of the Partnership's recorded accounts receivable, and the
recoverability of recorded equipment residual values based on independent and
internal evaluations of the estimated future value of equipment. Residual values
are established equal to the estimated value to be received from the equipment
following termination of the lease. In estimating such values, the Partnership
considers all relevant facts regarding the equipment and the lessee, including,
for example, the likelihood that the lessee will re-lease the equipment. The
nature of the Partnership's leasing activities is that it has credit and
residual value exposure and, accordingly, in the ordinary course of business, it
will incur losses from those exposures. The Partnership performs on-going
quarterly assessments of its assets to identify any other-than-temporary losses
in value.
Accordingly, a provision for loss of $550,000 was recorded for the three months
ended June 30, 1998. Of this amount, $350,000 is related to the estimated
decline in residual value on manufacturing and mining equipment returned to the
partnership at lease maturity and $200,000 is primarily related to losses
recorded as a provision and later realized on the sale of certain material
handling and office equipment at a lower fair market value than originally
anticipated.
1998 Compared to 1997
The Partnership's net (loss) income was $(196,206) and $35,530 for the three and
six months ended June 30, 1998 ("1998 Quarter" and "1998 Period", respectively)
as compared to net income of $905,957 and $1,859,561 for the three and six
months ended June 30, 1997 ("1997 Quarter" and "1997 Period", respectively). Net
income was lower in 1998 as compared to 1997 primarily as a result of the sale
of a significant amount of equipment in October 1997 and the provision for
losses.
Rentals from operating leases declined by $1,947,397 and $4,441,634 or 69% and
74%, respectively in the 1998 Quarter and 1998 Period as compared to the 1997
Quarter and 1997 Period due principally to the equipment sale discussed above.
All of the equipment sold in October, 1997 was earning rent during the 1997
Quarter and 1997 Period.
Interest income increased by $43,784 or 51% in the 1998 Period as compared to
the 1997 Period due to the increase in amounts available for short-term interest
bearing investments. However, interest income decreased by $12,422 or 27% for
the 1998 Quarter as compared to the 1997 Quarter due to the distribution to the
partners of available cash.
Depreciation expense decreased by approximately $1,430,296 and $2,958,852 or 76%
and 75% in the 1998 Quarter and 1998 Period as compared to the 1997 Quarter and
1997 Period, principally due to the continued sale of equipment upon the
scheduled expiration of leases (principally, the October, 1997 equipment sale)
which was consistent with the reduction in rentals from operating leases.
Management fees incurred during the 1998 Quarter and the 1998 Period decreased
by $96,621 and $208,384 or 78% and 81% in comparison to the 1997 Quarter and
1997 Period which was consistent with the decline in rentals from both operating
and direct finance leases which serve as the base upon which such fees are
calculated.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES, continued
General and administrative expenses increased in the 1998 Quarter and the 1998
Period by $29,463 and $36,460 or 58% and 36% in comparison to the 1997 Quarter
and 1997 Period. The increase is primarily attributable to an increase in 1997
state withholding tax paid on behalf of the limited partners in the second
quarter of 1998.
Interest expense incurred during the 1998 Quarter and 1998 Period decreased by
$42,941 and $91,955 or 21% and 22% as compared to the 1997 Quarter and 1997
Period. Interest expense is composed of two components; (i) interest expense
incurred in connection with the discounting of certain leases with unaffiliated
lenders and (ii) interest incurred in connection with the application of the
prepaid rent received pursuant to the Master Lease transaction. For accounting
purposes, the prepaid rent is treated as a financing. Income is recognized
ratably over the terms of the leases and the related interest is charged to
operations.
Year 2000 Issues
An affiliate provides accounting and other administrative services, including
data processing services to the Partnership. The affiliate has conducted a
comprehensive review of its computer systems to identify systems that could be
affected by the Year 2000 issue. The Year 2000 issue results from computer
programs being written using two digits rather than four to define the
applicable year. Certain computer programs which have time-sensitive software
could recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in major system failures or miscalculations. Certain of the
affiliates's software have already been updated to software which correctly
accounts for the Year 2000. In addition, the affiliate is engaged in a system
conversion, whereby the affiliates's main lease tracking and accounting software
is being replaced with new systems which will account for the Year 2000
correctly. The general partners do not expect any other changes required for the
Year 2000 to have a material effect on the financial position or results of
operations of the Partnership. In addition, the general partners do not expect
any Year 2000 issues relating to customers and vendors will have a material
effect on its financial position or results of operations of the Partnership.
Costs incurred by the Partnership to address the Year 2000 issue have been
immaterial.
10
<PAGE>
PAINEWEBBER PREFERRED YIELD FUND, L.P.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 5. Other Information
On May 15, 1998 Joseph P. Ciavarella, Vice President, Treasurer and Chief
Financial Officer of the Administrative General Partner resigned.
On May 15, 1998, Paul L. Novello was named Vice President, Chief Financial
Officer, Secretary and Treasurer of the Administrative General Partner.
Paul L. Novello, age 45, is a Vice President, Chief Financial Officer, Secretary
and Treasurer of the Administrative General Partner. He joined PaineWebber
Incorporated in March 1994 and currently holds the position of Corporate Vice
President. Prior to joining PaineWebber Incorporated, Mr. Novello was employed
as a consultant to Chase Manhattan Bank's Corporate International Real Estate
Department. Prior to that time, Mr. Novello was employed by Stratagem Group,
Inc. as a Vice President of Acquisitions and Investments. From 1981 to 1989, Mr.
Novello was employed by Shearson Lehman Hutton and its predecessor E.F. Hutton
and Co. in the Direct Investments Department. From 1976 to 1981, Mr. Novello was
employed by Revlon, Inc. He holds a Bachelor of Arts degree in economics from
Rutgers University and a Masters in Business Administration from Rutgers
University.
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) The Partnership did not file any reports on Form 8-K during the three
months ended June 30, 1998.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PaineWebber Preferred Yield Fund, L.P. (Registrant)
By: CAI Equipment Leasing II Corporation
A General Partner
Date: August 14, 1998 By: /s/Anthony M. DiPaolo
---------------------
Anthony M. DiPaolo
Senior Vice President, Treasurer and Chief
Administrative Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,517,833
<SECURITIES> 0
<RECEIVABLES> 102,290
<ALLOWANCES> 0
<INVENTORY> 322,410
<CURRENT-ASSETS> 0
<PP&E> 6,503,839
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,596,770
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,694,536
<TOTAL-LIABILITY-AND-EQUITY> 9,596,770
<SALES> 363,160
<TOTAL-REVENUES> 2,068,610
<CGS> 0
<TOTAL-COSTS> 2,033,080
<OTHER-EXPENSES> 50,215
<LOSS-PROVISION> 550,000
<INTEREST-EXPENSE> 325,923
<INCOME-PRETAX> 35,530
<INCOME-TAX> 0
<INCOME-CONTINUING> 35,530
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,530
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
