<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) May 23, 1996
-----------------------------
PW Preferred Yield Fund II, L.P.
- -----------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-22300 84-1180783
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(State or Other Juristiction (Commission (IRS Employer
of Incorporation) File Number) Identification No)
98 North Washington Street, Boston, Massachusetts 02114
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-------------------------
- -----------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS
On May 23, 1996, the Partnership mailed its 1995 Annual Report to
holders of limited partnership interest {See Exhibit 7(c)(19)}.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
(19) Annual Report for the year ended December 31, 1995 provided to
owners of limited partnership interests.
<PAGE> 4
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.
PW Preferred Yield Fund II, L.P. (Registrant)
By: General Equipment Management, Inc.
A General Partner
Date: May 23, 1996 By: /s/ Joseph P. Ciavarella
--------------------------
Joseph P. Ciavarella
Vice President, Secretary,
Treasurer and Chief Financial
and Accounting Officer
<PAGE> 5
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
19 Annual Report for the year ended December 31, 1995
<PAGE> 1
PW
PREFERRED
YIELD
FUND II,
L.P.
- ANNUAL REPORT 1995 -
<PAGE> 2
P W PREFERRED YIELD FUND II, L.P.
CONTENTS
Message to Class A Limited Partners
TWO
Financial Highlights
THREE
The Year in Review
FOUR
Looking Ahead
SIX
Answers to Frequently Asked Questions
SEVEN
Schedule of Type of Equipment Investments
EIGHT
Financial Statements
NINE
Management's Discussion and Analysis of
Financial Condition and Results of Operations
TWENTY-ONE
Partnership Directory
TWENTY-FOUR
<PAGE> 3
PW PREFERRED YIELD FUND II, L.P.
MESSAGE TO CLASS A LIMITED PARTNERS
APRIL 15, 1996
Dear Limited Partner:
Enclosed is the Annual Report for the year ended December 31, 1995 for PW
Preferred Yield Fund II, L.P. Following this letter, you will find highlights of
the financial statements, an overview of the industry, a review of the
Partnership's performance and audited financial statements for the year ended
December 31, 1995.
As of year-end 1995, the Partnership's portfolio consisted of equipment with
original purchase prices (including acquisition fees) totalling approximately
$35.7 million. All equipment is subject to triple net leases with unaffiliated
third party lessees. Based on original acquisition cost, since inception
approximately 84% of the equipment acquired has been leased to investment grade
companies. At year-end 1995, appraised values for the Partnership's equipment
totalled approximately $22.9 million, as determined by an independent equipment
appraisal firm. Based upon the Partnership's liquidation methodology, the
appraised value of the Partnership's equipment plus the remaining net assets of
the Partnership resulted in a year-end estimated annual valuation of $375 per
$500 Unit, which is less than the 1994 estimated value of $425 per $500 Unit.
The Partnership plans to continue to purchase equipment pursuant to its
reinvestment program and, during 1995, acquired approximately $4.7 million in
additional equipment (including acquisition fees). The objective of the
reinvestment program is to purchase equipment with the cash generated from
existing leases and sales of equipment that is in excess of the Partnership's
distribution objective. By successfully reinvesting in additional equipment, the
Partnership increases its diversification and maintains a base of newer
equipment to offset initial leases expiring and equipment being sold. As of
December 31, 1995, the Partnership had acquired approximately $12.5 million of
equipment through the reinvestment program. Although the Partnership has not yet
acquired any equipment in 1996, new equipment reinvestment is expected.
During 1995, investors received distributions totalling $55 per $500 Unit.
Assuming an investor was admitted in the Partnership's first closing, cumulative
cash distributions received through year-end 1995 totalled approximately $172
per $500 Unit. These distributions have been substantially tax-deferred,
primarily as a result of deductions for depreciation. The capital equipment
owned by the Partnership are depreciating assets and the ultimate value received
at the time of the sale of the equipment will be less than the original cost.
Therefore, a portion of each distribution during the life of the Partnership
will constitute a return of capital. While cash distributions have met the
Partnership's original distribution objective of 11%, the overall return is
highly correlated to both lease rates and the ultimate value of the equipment at
the time of sale. Consequently, an investor's total return on investment can
only be calculated at the completion of the Partnership after all cash flows
from the re-leasing and sale of the equipment are received.
We believe that in 1996 the Partnership will generate sufficient cash flow from
operations and sales of equipment upon lease expiration to meet the
Partnership's distribution objective as well as generate cash for reinvestment
in additional equipment.
Please feel free to call the Partnership at (800) 877-2394 with any questions
you have regarding your investment.
Very truly yours,
/s/ Gary D. Engle /s/ Stephen R. Dyer
Gary D. Engle Stephen R. Dyer
Director President
AFG Leasing VII, Inc., General Partner of General Equipment Management II, Inc.
Pembroke Financial Limited Partnership
TWO
<PAGE> 4
PW PREFERRED YIELD FUND II, L.P.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
As of December 31, 1992 or for
the Period from the Commencement
As of December 31 or of Operations (November 16, 1992)
For the Year Ended December 31 through December 31, 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS 1995 1994 1993
Total Rental Revenue(1) $ 8,272 $ 8,304 $ 6,158 $ 509
Net Income 684 1,247 1,050 113
Distributions 3,474 3,437 2,800 202
PER UNIT RESULTS
Net Income(2) 3.31 13.96 15.32 3.20
Distributions(3) 55.00 55.00 55.00 6.87
FINANCIAL POSITION
Total Assets 21,067 23,852 23,979 16,938
Total Partners' Equity(4) 20,221 23,012 23,298 16,691
</TABLE>
(1) Total Rental Revenue includes net loss on sales and dispositions of
equipment of $101,317 and $50,498 for the years ended December 31, 1995 and
1994, respectively, and net gain on sale of equipment of $14,428 for the
year ended December 31, 1993.
(2) Net income is calculated based upon the weighted average number of Units of
Class A limited partnership interest outstanding.
(3) Distribution amounts are reflected during the period in which the cash for
the distributions was generated and a substantial portion of each
distribution is a return of capital. Distribution amounts shown are
applicable to limited partners admitted in the initial closing.
(4) Total Partners' Equity is increased by net income and capital contributions
to the Partnership, net of syndication costs, and is reduced by
distributions to the partners.
Total rental revenue for 1995 was $8.27 million, a decrease of approximately
$48,000, or 1%, from 1994 revenues. Revenues decreased primarily as a result of
the equipment whose leases expired (and that were either sold, renewed at lower
rates or returned) not being fully replaced by revenues from new equipment
leases. The Partnership generated net income of approximately $684,000 in 1995,
as compared to approximately $1.25 million from the prior year. The principal
reason for the decrease in net income was the provisions for equipment
impairment ($716,000) and bad debts ($75,000) provided during 1995, which
exceeded the amount provided during 1994. As a result of these provisions total
expenses for 1995 increased $532,000, or 7.5% to approximately $7.59 million.
THREE
<PAGE> 5
PW PREFERRED YIELD FUND II, L.P.
THE YEAR IN REVIEW
INDUSTRY OVERVIEW
The equipment leasing industry continues to be highly competitive. Among the
many existing and potential competitors are equipment manufacturers, equipment
dealers and brokers, leasing companies and financial institutions. Many offer
additional services such as maintenance services, warranty services, purchase
rights and trade-in privileges. On January 3, 1996, American Finance Group
("AFG"), the Equipment Manager of the Partnership and an affiliate of the
Managing General Partner, executed an agreement with PLMInternational, Inc.
("PLM"), a Delaware corporation, whereby PLM purchased (i) AFG's lease
origination business and associated contracts, (ii) the rights to the name
"American Finance Group" and associated logo and (iii) certain furniture,
fixtures and computer software. Accordingly AFG and its affiliates, now
operating under the name of Equis Financial Group, retain ownership and control
and all authority and rights with respect to each of the general partners of the
Partnership and all other equipment leasing programs managed by AFG. The
affiliates of the Equis Financial Group will continue to provide asset
management services to the Partnership.
In addition to industry competition, the ultimate rate of return on leasing
equipment is dependent in part on the general level of interest rates at the
time the leases are originated. Because leasing is an alternative to financing
equipment purchases with debt, lease rental rates tend to move with, but lag,
interest rates. Interest rates of U.S. Treasury Notes generally increased during
1994, creating a slight increase in lease rental rates during this period.
However, interest rates generally declined in 1995, although the rate of decline
slowed in the second half of the year. Because of the interest rate/lease rate
correlation mentioned above, lease rental rates on new acquisitions in 1995
reflected this declining interest rate environment.
INTEREST RATE MOVEMENTS: HISTORICAL YIELD OF U.S. TREASURE NOTES
TWO AND FIVE YEAR MATURITIES
[Customer must supply copy.
Not enough information to complete table]
FOUR
<PAGE> 6
PW PREFERRED YIELD FUND II, L.P.
EQUIPMENT PORTFOLIO
As of December 31, 1995, the Partnership owned equipment with original
acquisition prices (including acquisition fees) totalling approximately $35.7
million. The Partnership acquired approximately $4.7 million of such equipment
in the year ended December 31, 1995 from cash generated from operations and
sales in excess of the Partnership's distribution objective (i.e., through the
reinvestment program). Reinvestment in additional equipment increases the size
and diversity, while reducing the average age, of the equipment portfolio. Since
inception, the Partnership has purchased approximately $39.5million in
equipment, of which approximately $12.5 million of such equipment was acquired
pursuant to the reinvestment program.
One of the objectives of the Partnership is to continue to diversify its lessee
base. The Partnership is not dependent on any one of its existing lessees for
future business and, at year-end 1995, the Partnership's most significant lessee
constituted 12% of total rental revenue. At year-end 1995, the Partnership had
leased equipment to 37 different companies.
The credit quality of the portfolio remains strong. Approximately 84% of the
Partnership's equipment since inception was leased to investment grade lessees
or lessees that are operating subsidiaries of entities that are investment grade
companies. An investment grade lessee is a company with a credit rating of no
less than Baa, as determined by Moody's Investment Services, Inc., or a
comparable credit rating as determined by another nationally recognized credit
rating agency.
CUMULATIVE EQUIPMENT ACQUISITIONS AND DISPOSITIONS
IN MILLIONS
[Customer must supply copy.
Not enough information to complete table]
ESTIMATED ANNUAL VALUATION
The estimated annual valuation is based upon an independent appraisal, which
takes the present value of both the future contracted lease payments and the
projected residual values of the equipment. Once the appraised value is provided
to the General Partners, the General Partners calculate an estimated annual
value per Unit by taking into account the remaining net assets from the balance
sheet plus the allocation and distribution provisions of the Partnership
Agreement. As of December 31, 1995, the estimated annual valuation was $375 per
$500 Unit. Because the equipment are depreciating assets, the estimated value of
Units is expected to continue to decrease each year as distributions are paid to
partners and the equipment portfolio matures.
FIVE
<PAGE> 7
PW PREFERRED YIELD FND II, L.P.
It is important to note, however, that the estimated annual valuation of $375
per $500 Unit does not necessarily represent a price that actually could be
realized if interests in the Partnership were sold today, or, because of the
appraisal methodology, the total benefits available if a limited partner holds
his Units through the life of the Partnership. Similarly, this value does not
necessarily represent the amount an investor would have received if the
Partnership had liquidated at year-end, nor does it take into account any
discount to reflect that there is no public market for Units.
CUMULATIVE CASH DISTRIBUTIONS AND ESTIMATED ANNUAL VALUATIONS
[Customer must supply copy.
Not enough information to complete table]
As you are aware, the Partnership Units were designed for long-term investment.
While the values for most other securities are generally obtained by looking at
market trading prices as quoted on the stock exchanges, the Units are not traded
on any organized stock exchange and only a limited number of shares change hands
during the year. As a result, prices obtained from isolated secondary market
transactions, if any, may not be a reliable indicator of the value of a Unit in
the Partnership.
The General Partners are aware that, pursuant to the regulations of the Internal
Revenue Service (the "IRS"), custodians of Individual Retirement Accounts
("IRAs") annually provide to the IRSand IRA holders year-end estimated values
for securities held in their clients' IRAs. Some custodians may choose to meet
this obligation by obtaining estimated values of limited partnership interests
from a third party valuation firm, which estimates may differ from the estimated
annual valuation reported in this Annual Report due to, among other things,
differences in methodology. Further, independent valuation firms may discount
their values to account for a lack of marketability, lack of control and other
relevant factors to arrive at their third party estimated values. Investors
should discuss with their custodian any questions about estimates of value
communicated by that custodian.
LOOKING AHEAD
The General Partners believe that the Partnership will generate sufficient cash
flow from operations during 1996 to enable the Partnership to meet current
operating requirements, to fund monthly cash distributions to the Class A
limited partners at an annualized rate of 11% on their capital contributions, to
fund cash distributions to the Class B limited partner at an annualized rate of
10% on its capital contributions and to provide excess cash for reinvestment.
The Partnership plans to acquire additional equipment during the Reinvestment
Period (which will end no later than 2000). Reinvestment impacts the ultimate
performance of the Partnership by increasing the diversity, reducing the average
age of the equipment portfolio and helps to offset the effects of equipment
sales.
SIX
<PAGE> 8
PW PREFERRED YIELD FUND II, L.P.
ANSWERS TO FREQUENTLY ASKED QUESTIONS
1. WHY IS AN INVESTOR'S ORIGINAL CAPITAL RETURNED CONTINUOUSLY AND NOT AT THE
TERMINATION OF THE PARTNERSHIP AS IT WOULD AT THE MATURITY OF A BOND?
Since the equipment owned by the Partnership are depreciating assets and
will be sold for less than their acquisition cost, lease payments to the
Partnership reflect both a return on and return of capital. The Partnership
is reinvesting a portion of the capital returned and distributing a portion,
which is included in each monthly distribution. Thus, principal is returned
continuously throughout the life of the Partnership with each monthly cash
distribution and not in total upon termination.
2. DO YOU ANTICIPATE A REDUCTION IN THE 11% CASH DISTRIBUTION DURING THE NEXT
YEAR?
No, the General Partners believe that a reduction in the distribution rate
is remote. The Partnership will continue to generate sufficient cash flow
from operations to pay cash distributions (comprised of income and capital)
to the Class A limited partners at an annualized rate of 11% during the next
year. In 1995, for example, cash distributions declared by the Partnership
were approximately $3.5 million while net cash provided by operating
activities was approximately $7.6 million and cash from the sale of
equipment was approximately $746,000. As discussed in this Annual Report,
the excess cash flow is anticipated to be utilized by the Partnership to
acquire additional equipment pursuant to the reinvestment program, which
will end no later than 2000.
3. WHY IS MY INVESTMENT IN THE PARTNERSHIP APPRAISED AT A LOWER AMOUNT THAN
LAST YEAR?
The equipment owned by the Partnership are depreciating assets, since the
equipment will over time be worth less as it is utilized by the lessee. As
discussed above, distributions generated from the rental payments of the
assets include a return of an investor's original capital as well as a
return on investment. At the end of every year the Partnership has the
equipment appraised and this valuation is used to calculate the estimated
annual valuation per Unit. As of December 31, 1995, the estimated annual
valuation was $375 per $500 Unit, which is down from $425 per $500 Unit at
the end of 1994.
4. WHEN IS THE PARTNERSHIP LIKELY TO TERMINATE?
While the Partnership is required to dissolve and distribute all of its
assets no later than December 31, 2005, the General Partners anticipate that
all equipment will be sold and the Partnership will be liquidated by late
2003. During the reinvestment period (which will end no later than 2000),
the Partnership acquires additional equipment with available cash flow in
excess of the current distribution rate (11% and 10%, respectively, of
contributed capital to the Class A and Class B limited partners). After the
reinvestment period ends, all available cash flow in excess of the current
distribution rate will be distributed to the limited partners in accordance
with the allocation provisions of the Partnership Agreement.
SEVEN
<PAGE> 9
PW PREFERRED YIELD FUND II, L.P.
SCHEDULE OF TYPE OF EQUIPMENT INVESTMENTS
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
EQUIPMENT TYPE ORIGINAL COST % OF PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Materials Handling $12,640,501 35%
Construction and Mining 4,870,081 14
Transportation 3,445,627 10
Medical, Research and Testing 2,164,566 6
Manufacturing Testing 611,600 2
Computers and Printers 6,355,667 18
Retail Sales 2,893,144 8
Tele-Communication 1,953,611 5
Furniture and Fixtures 739,632 2
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TOTAL $35,674,429 100.00%
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</TABLE>
EIGHT
<PAGE> 10
PW PREFERRED YIELD FUND II, L.P.
FINANCIAL STATEMENTS
BALANCE SHEETS
TEN
STATEMENTS OF INCOME
ELEVEN
STATEMENTS OF PARTNERS' EQUITY
TWELVE
STATEMENTS OF CASH FLOWS
THIRTEEN
NOTES TO FINANCIAL STATEMENTS
FOURTEEN
REPORT OF INDEPENDENT ACCOUNTANTS
TWENTY
NINE
<PAGE> 11
PW PREFERRED YIELD FUND II, L.P.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,141,970 $ 906,848
Rent and other receivables, net of allowance for doubtful
accounts of $75,000 at December 31, 1995 678,135 418,308
Equipment subject to operating leases, net of accumulated depreciation of
$15,875,879 and $11,362,651 at December 31, 1995 and 1994, respectively, and
allowances for equipment impairment of $568,737 and $100,000 at December
31, 1995 and 1994, respectively. (Note 4) 19,229,813 22,500,484
Organization costs 17,233 26,633
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Total Assets $ 21,067,151 $ 23,852,273
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LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 84,590 $ 57,428
Payables to affiliates (Note 5) 308,658 181,066
Deferred rental income 133,476 283,177
Distributions payable to partners 319,084 319,084
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Total Liabilities 845,808 840,755
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Commitments and Contingencies (Note 9)
Partners' Equity:
General Partners 530,336 281,500
Limited Partners
Class A (54,027 Units outstanding at December 31, 1995
and 1994, respectively) 17,381,975 20,174,448
Class B 2,309,032 2,555,570
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Total Partners' Equity 20,221,343 23,011,518
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Total Liabilities and Partners' Equity $ 21,067,151 $ 23,852,273
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</TABLE>
The accompanying notes are an integral part of these financial statements.
TEN
<PAGE> 12
PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
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<S> <C> <C> <C>
REVENUE:
Rentals from operating leases $ 8,273,480 $ 8,321,093 $ 6,110,416
Net (loss) gain on sale of equipment (101,317) (50,498) 14,428
Interest income 99,613 33,243 33,461
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8,271,776 8,303,838 6,158,305
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EXPENSES:
Depreciation and amortization 6,326,322 6,510,212 4,768,534
Management and disposition fees (Note 5) 369,160 361,259 273,877
Provisions for equipment impairment and bad debts 791,000 100,000 -
General and administrative (Note 5) 101,763 84,964 65,746
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7,588,245 7,056,435 5,108,157
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NET INCOME $ 683,531 $ 1,247,403 $ 1,050,148
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NET INCOME ALLOCATED:
To the General Partners $ 422,521 $ 350,087 $ 265,638
To the Class A Limited Partners 179,012 745,880 667,810
To the Class B Limited Partner 81,998 151,436 116,700
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$ 683,531 $ 1,247,403 $ 1,050,148
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NET INCOME PER WEIGHTED AVERAGE NUMBER
OF UNITS OF CLASS A LIMITED PARTNER
INTEREST OUTSTANDING $ 3.31 $ 13.96 $ 15.32
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WEIGHTED AVERAGE NUMBER OF UNITS OF
CLASS A LIMITED PARTNER INTEREST
OUTSTANDING 54,027 53,447 43,604
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</TABLE>
The accompanying notes are an integral part of these financial statements.
ELEVEN
<PAGE> 13
PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
CLASS A CLASS B ORIGINAL
GENERAL LIMITED LIMITED LIMITED
PARTNERS PARTNERS PARTNER PARTNER TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ (10,391) $14,930,182 $1,771,520 $ 100 $16,691,411
Withdrawal of Original
Limited Partner - - - (100) (100)
Capital contributions - 8,314,500 1,022,543 - 9,337,043
Commissions and expenses
paid in connection with the
sale of Class A Limited
Partnership Units (9,811) (849,887) (121,413) - (981,111)
Net income 265,638 667,810 116,700 - 1,050,148
Distributions declared to partners (139,984) (2,396,067) (263,618) - (2,799,669)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 105,452 20,666,538 2,525,732 - 23,297,722
Capital Contributions - 1,895,500 231,098 - 2,126,598
Commissions and expenses
paid in connection with the
sale of Class A Limited
Partnership Units (2,237) (193,753) (27,679) - (223,669)
Net income 350,087 745,880 151,436 - 1,247,403
Distributions declared to partners (171,802) (2,939,717) (325,017) - (3,436,536)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 281,500 20,174,448 2,555,570 - 23,011,518
Net income 422,521 179,012 81,998 - 683,531
Distributions declared to partners (173,685) (2,971,485) (328,536) - (3,473,706)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31,1995 $ 530,336 $17,381,975 $2,309,032 $ - $20,221,343
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
TWELVE
<PAGE> 14
PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 683,531 $ 1,247,403 $ 1,050,148
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,326,322 6,510,212 4,768,534
Provision for equipment impairment 716,000 100,000 -
Provision for bad debts 75,000 - -
Loss (gain) on sale of equipment 101,317 50,498 (14,428)
Change in assets and liabilities:
Rent and other receivables (286,327) 275,781 (613,478)
Accounts payable and accrued liabilities 27,162 15,035 15,895
Payables to affiliates 127,592 136,616 8,990
Deferred rental income (149,701) (14,986) 256,277
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,620,896 8,320,559 5,471,938
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and disposition of equipment 746,371 235,079 315,736
Purchases of equipment on operating leases (4,658,439) (6,926,079) (11,188,939)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,912,068) (6,691,000) (10,873,203)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' capital contributions - 2,126,598 9,337,043
Withdrawal of Original Limited Partner - - (100)
Commissions and expenses paid in connection
with the sale of Class A Limited Partner Units - (223,669) (981,111)
Cash distributions paid to partners (3,473,706) (3,413,848) (2,646,567)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (3,473,706) (1,510,919) 5,709,265
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 235,122 118,640 308,000
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 906,848 788,208 480,208
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,141,970 $ 906,848 $ 788,208
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
THIRTEEN
<PAGE> 15
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION OF THE PARTNERSHIP
PW Preferred Yield Fund II, L.P., a Delaware limited partnership (the
"Partnership"), was formed on October 1, 1991 for the purpose of acquiring and
leasing equipment. The Partnership is acquiring, on an all-cash basis, a
portfolio of equipment subject to triple net leases (i.e. repairs, insurance and
taxes are paid by the lessees) with unaffiliated third parties.
Pembroke Financial Limited Partnership, a Massachusetts limited partnership (the
"Managing General Partner") and General Equipment Management II, Inc., a
Delaware corporation (the "Administrative General Partner") are the General
Partners of the Partnership. The Managing General Partner is affiliated with
American Finance Group ("AFG"), a Massachusetts general partnership, which acts
as Equipment Manager for the Partnership. The Administrative General Partner is
a wholly-owned subsidiary of Paine Webber Group Inc. PYB Limited Partnership, a
Massachusetts limited partnership, is the Class B Limited Partner ("Class B
Limited Partner"). AFG acquired all of the equity ownership interest in PYB
Limited Partnership as of November 1, 1993.
Upon formation of the Partnership, the General Partners each contributed $500 to
the capital of the Partnership. On September 10, 1992, the Partnership commenced
a "best efforts" offering of 200,000 Units of Class A Limited Partner Interest
("Units") at $500 per Unit ($100,000,000). The Partnership held its sixth and
final closing on July 26, 1994 and the offering was terminated. Pursuant to the
offering, the Partnership received $27,013,500 of gross offering proceeds from
the sale of 54,027 Units of which $1,895,500, $8,314,500 and $16,803,500 were
received during 1994, 1993 and 1992, respectively. The Partnership incurred
$3,260,594 of commissions and other offering expenses in connection with the
sale of these Units, thus receiving $23,752,906 of net offering proceeds.
The Class B Limited Partner was required to contribute cash to the Partnership
in an amount equal to 12.5% of the aggregate purchase price of the equipment
purchased with the net offering proceeds received from the sale of Units and the
cash contributed by the Class B Limited Partner. The Class B Limited Partner
contributed $231,098, $1,022,543 and $2,031,736 during 1994, 1993 and 1992,
respectively, to fulfill its obligation.
The Partnership conducted no activities and recognized no profits or losses
prior to the initial closing for the sale of Units on November 16, 1992, at
which time the Partnership commenced operations. The Partnership used the
contributed capital and reinvested cash flow to purchase a total of $4,658,439,
$6,926,079 and $11,188,939 of equipment during 1995, 1994 and 1993, respectively
(inclusive of related acquisition fees, structuring fees and expense
allowances). Additional equipment will be acquired by the Partnership during
1996 and in future years during the reinvestment period (which will end in
either 1999 or 2000, at the General Partners' discretion).
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The Partnership maintains its accounting records, prepares
financial statements and files its tax returns 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 revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
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 amortized 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.
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 and structuring fees paid to the General
Partners (see Note 5), less accumulated depreciation. Depreciation is calculated
on a straight-line basis over the lease term, ranging from two to seven years,
to an amount equal to the equipment's estimated residual value at the lease
termination date. Residual values are determined at lease inception based on the
estimated value of the Partnership's leased equipment at lease termination, as
determined by the Managing General Partner. In estimating residual values, the
Managing General Partner considers independent appraisals and other
circumstances regarding the equipment and the lessee. Thereafter, the Managing
General Partner re-evaluates residual estimates each accounting period. Any
declines in the residual estimates are generally recorded through prospective
additional depreciation charges during the remaining lease term. Additionally,
if the Managing General Partner believes the value of an item of equipment has
been other than temporarily impaired, an
FOURTEEN
<PAGE> 16
PW PREFERRED YIELD FUND II, L.P.
allowance for equipment impairment will be provided to the extent of such loss
in value.
IMPACT OF FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS The Financial
Accounting Standards Board recently issued FASB 121, "Accounting for the
Impairment of Long-lived Assets and Long-lived Assets to be Disposed of " ("FAS
121"). FAS 121 requires companies to review their long-lived assets, such as the
Partnership's leased equipment, and certain identifiable intangibles for
impairment whenever events and changes in circumstances indicate that the
carrying value of a long-lived asset may not be recoverable. The Partnership
will be required to adopt the provisions of FAS 121 as of January 1996. The
Partnership believes that based upon current operations and current methods used
to evaluate declines in market value, the future adoption of FAS 121 will not
have a material impact on the Partnership's financial position or results of
operations.
ORGANIZATION COSTS Organization costs are being amortized using the
straight-line method over a period of five years.
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 because 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.
3. PARTNERSHIP ALLOCATIONS
CASH DISTRIBUTIONS
Cash distributions, other than liquidating distributions, will be 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 will generally be allocated between the Class A Limited
Partners and the Class B Limited Partner in the manner set forth in the
following table.
<TABLE>
<CAPTION>
CLASS A CLASS B
LIMITED LIMITED
PARTNERS PARTNER REINVESTED
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1. DURING THE REINVESTMENT
PERIOD (WHICH WILL END IN
1999 OR 2000):
(A)Until the Class A Limited
Partners have received an
11% 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 10% annualized distri-
bution 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 an
11% 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 10% 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 9%
annual, cumulative
distribution compounded
quarterly on their adjusted
capital contributions ("Payout") 87.5% 12.5% --
(D)Cash remaining after (C)
above and until the Class B
Limited Partner has received
any previously undistributed
portion of its 10% 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 75.0% 25.0% --
</TABLE>
FIFTEEN
<PAGE> 17
PW PREFERRED YIELD FUND II, L.P.
Upon liquidation of the Partnership, cash available for distribution will be
distributed in accordance with the partners' capital accounts after all
allocations of profits and losses.
PROFITS AND LOSSES
Profits (not including the special allocations discussed below) are first
allocated to offset current and 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 current and prior year profits and then 1% to the General
Partners and 99% to the Limited Partners. The 99% allocated to the Limited
Partners will be shared 87.5% to the Class A Limited Partners and 12.5% to 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 ("Offering Costs") are
allocated 1% to the General Partners and 99% to the Limited Partners. The 99%
allocated to the Limited Partners will be shared 87.5% to the Class A Limited
Partners and 12.5% to the Class B Limited Partner. Second, depreciation with
respect to the equipment and any losses resulting from the sale of equipment are
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 equal their aggregate capital contributions, net of allocated Offering
Costs. The 99% allocated to the Limited Partners will be shared by the Class A
Limited Partners and the Class B Limited Partner in proportion to their
respective capital contributions net of allocated Offering Costs. The General
Partners will also be specially allocated items of income to offset their 1%
allocation of these two items.
4. EQUIPMENT ON OPERATING LEASES
The following schedule provides an analysis of the Partnership's investment in
equipment on operating leases as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Industrial equipment $ 23,732,375 $ 22,368,121
Business equipment 11,942,054 11,595,014
- -------------------------------------------------------------------------------
35,674,429 33,963,135
Less: Accumulated depreciation (15,875,879) (11,362,651)
Allowance for equipment
impairment (568,737) (100,000)
- -------------------------------------------------------------------------------
$ 19,229,813 $ 22,500,484
- -------------------------------------------------------------------------------
</TABLE>
Industrial equipment includes materials handling (approximately 35%),
construction and mining (approximately 14%), transportation (approximately 10%),
medical and research (approximately 6%) and manufacturing testing equipment
(approximately 2%). Business equipment includes computers and computer-related
equipment (approximately 18%) retail sales equipment (approximately 8%) and
telecommunications equipment (approximately 5%) and furniture and fixtures
(approximately 2%), (all percentages based upon total original equipment
purchase price). Business equipment owned by the Partnership is limited to
approximately 60% of the value of the Partnership's total equipment.
Activity relating to the allowance for equipment impairment was as follows:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Allowance, beginning of period $ 100,000 $ -
Provision for equipment
impairment 716,000 100,000
Dispositions (247,263) -
- -------------------------------------------------------------------------------
Balance, end of period $ 568,737 $ 100,000
- -------------------------------------------------------------------------------
</TABLE>
SIGNIFICANT LESSEES
The Partnership's equipment is primarily leased to lessees that are investment
grade lessees or are operating subsidiaries of entities that are investment
grade companies. Revenue from major individual lessees, which accounted for
greater than 10% of the Partnership's total rental revenue during 1995, 1994 and
1993 is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL RENTAL REVENUE
LESSEE 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
General Motors 12.0% 11.5% -%
New York Life Insurance Co. - - 12.03
Diamond Shamrock - - 11.04
Ford Motor Company - - 10.04
</TABLE>
MINIMUM FUTURE RENTALS
The following is a schedule by years of minimum future rentals on operating
leases as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-----------------------------------
<S> <C>
1996 $ 6,295,514
1997 4,215,285
1998 2,020,775
1999 1,122,128
2000 225,228
Thereafter 34,647
-----------------------------------
$ 13,913,577
-----------------------------------
</TABLE>
SIXTEEN
<PAGE> 18
PW PREFERRED YIELD FUND II, L.P.
5. TRANSACTIONS WITH AFFILIATES
ORGANIZATIONAL AND OFFERING STAGE
SALES COMMISSIONS The Sales Agent, an affiliate of the Administrative General
Partner, received sales commissions of 7.0% of gross offering proceeds from the
sale of Units, which aggregated, $132,685 and $582,015 during 1994 and 1993,
respectively. $1,280 was reimbursed by the Sales Agent to investors who made
investments of more than $250,000 and to employees of the Sales Agent during
1993. No sales commissions were paid or accrued during 1995.
FINANCIAL ADVISORY Fee The Sales Agent, an affiliate of the Administrative
General Partner, received a fee of 1.5% of gross offering proceeds from the sale
of Units as compensation for financial advisory services rendered in connection
with the offering of the Units. Fees of $28,433 and $124,718 were paid during
1994 and 1993, respectively. No financial advisory fees were paid or accrued in
1995.
NON-ACCOUNTABLE ORGANIZATIONAL AND OFFERING EXPENSES REIMBURSEMENT The Managing
General Partner received $62,551 and $274,378 as a reimbursement for expenses
incurred in connection with the organization of the Partnership and the offering
of the Units during 1994 and 1993, respectively. Of these amounts, $16,629 was
paid to the Sales Agent as a marketing fee in 1993. No such amounts were paid or
accrued during 1995.
ACQUISITION AND OPERATING STAGES
ACQUISITION OF EQUIPMENT The Partnership acquired, on an all-cash basis,
equipment from AFG, an affiliate of the Managing General Partner, at aggregate
purchase prices of $4,522,756, $6,728,462 and $10,889,799 (not including the
acquisition and structuring fees and the acquisition expense allowance discussed
below) during 1995, 1994 and 1993, respectively.
The purchase price of the equipment acquired from AFG is 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 is equal to the price paid by AFG, plus the cost of an appraisal,
AFG's cost of interim financing for the equipment and any taxes paid by AFG,
less certain interim rentals received by AFG with respect to the equipment.
ACQUISITION FEE The Managing General Partner, or its affiliates, receives a fee
equal to (i) 2.25% of the purchase price of equipment purchased with net
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
purchased with the Class B Limited Partner's cash contributions. The Managing
General Partner, or its affiliates, earned $135,683, $184,562 and $242,112 of
acquisition fees attributable to the acquisition of equipment during 1995, 1994
and 1993, respectively.
NON-ACCOUNTABLE ACQUISITION EXPENSE ALLOWANCE AFG, an affiliate of the Managing
General Partner, received $1,720 and $7,611 as a reimbursement of expenses
incurred in connection with the acquisition of equipment purchased with the
Class B Limited Partner's cash contributions during 1994 and 1993, respectively.
No such allowance was paid or accrued in 1995.
STRUCTURING FEE The Administrative General Partner received a fee of 0.7% of the
purchase price of equipment purchased with net offering proceeds as compensation
for evaluation and advisory services relating to acquisition of equipment and
the approval of all equipment acquisitions. Structuring fees of $11,335 and
$50,158 were paid during 1994 and 1993, respectively. No such fee was paid or
accrued in 1995.
MANAGEMENT FEES The General Partners receive a monthly fee in an amount equal to
2.0% of gross rentals for Full Payout Leases, as defined in the Partnership
Agreement (in general, leases for which rent due over the non-cancelable lease
term exceeds the Partnership's cost of the equipment), and 5.0% of gross rentals
for other leases (payable 66.67% to the Managing General Partner and 33.33% to
the Administrative General Partner) as compensation for services rendered in
connection with the management of the equipment. Management fees of $345,314,
$353,700 and $264,405 were earned by the General Partners with regard to the
rentals earned by the Partnership during 1995, 1994 and 1993, respectively.
DISPOSITION FEES The General Partners are entitled to receive a subordinated
disposition fee in an amount equal to the lesser of (i) 50.0% of the fee that
would be charged by an unaffiliated party, or (ii) 3.0% of the gross contract
price relating to each sale of equipment (payable 50.0% to the Managing General
Partner and 50.0% to the Administrative General Partner) as compensation for
negotiating and consummating sales of equipment. Subordinated disposition fees
aggregating $40,877 are payable to the General Partners at December 31, 1995 of
which $23,846, $7,559 and $9,472 were incurred in 1995, 1994 and 1993,
respectively. These fees, which were charged to operations, are not currently
payable since their payment is subordinated to the Class A Limited Partners
having received cash distributions equal to their capital contributions, plus an
8.0% annual cumulative return (as defined in the Partnership Agreement).
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. There were
no such reimbursable expenses during 1995, 1994 and 1993.
SEVENTEEN
<PAGE> 19
PW PREFERRED YIELD FUND II, L.P.
6. 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>
1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income per financial
statements $ 683,531 $ 1,247,403 $ 1,050,148
Increase (decrease)
resulting from:
Provisions for
equipment
impairment 716,000 100,000 --
Provisions for bad
debt 75,000 -- --
Depreciation (484,722) (100,048) (928,423)
Gain on sale of
equipment &
other (214,107) 29,080 7,136
Deferred rental
income (149,701) (14,986) 256,277
Subordinated
disposition fee
payable (40,877) 18,066 16,972
- ---------------------------------------------------------------------------------
Taxable income per
federal income tax return $ 585,124 $ 1,279,515 $ 402,110
- ---------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the Partnership's net assets as shown in
the accompanying financial statements to the tax bases of the Partnership's net
assets:
<TABLE>
<CAPTION>
1995 1994
- ----------------------------------------------------------------------
<S> <C> <C>
Net assets per financial
statements $ 20,221,343 $ 23,011,518
Increase (decrease) resulting
from:
Commissions and
expenses paid in
connection with the
sale of Class A Limited
Partner Units 3,260,594 3,260,594
Distributions payable to
partners 319,084 319,084
Deferred rental income 133,476 283,177
Accumulated depreciation (1,756,676) (1,125,564)
Allowance for equipment
impairment and allowance
for doubtful accounts 643,737 100,000
Other 202,477 63,810
- ----------------------------------------------------------------------
Tax bases of net assets $ 23,024,035 $ 25,912,619
- ----------------------------------------------------------------------
</TABLE>
7. PARTNERSHIP EQUITY
The Partnership had its final admission of Class A Limited Partners on July 26,
1994, accepting subscriptions for 857 Units totaling $428,500, at which time the
offering terminated. In total the offering generated proceeds aggregating
$27,013,500 for the sale of 54,027 Units. The Class B Limited Partner
contributed an aggregate of $3,285,377 in connection with the offering. The
General Partners also contributed $1,000 to the Partnership.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," ("SFAS
No. 107") requires disclosure of fair value of certain financial instruments,
whether or not reported on the balance sheet. SFAS No. 107 excludes certain
items from its disclosure requirements such as the Partnership's equipment
subject to operating leases.
The methods and assumptions used to estimate the fair value of each class of the
financial instruments are described below.
CASH EQUIVALENTS. For cash equivalents, the carrying value approximates fair
value.
RENTS AND OTHER RECEIVABLES, NET. For accounts receivable net, the carrying
value approximates fair value.
LIABILITIES, INCLUDING DISTRIBUTIONS PAYABLE TO PARTNERS AND DEFERRED INCOME.
For liabilities, the carrying value approximates fair value.
9. SUBSEQUENT EVENTS
a. AFG AGREEMENT
On January 1, 1995, AFG entered into a series of agreements with PLM
International, Inc., a Delaware corporation headquartered in San Francisco,
California ("PLM"), whereby PLM would: (i) purchase in multi-step transactions,
certain of AFG's assets and (ii) provide accounting, asset management and
investor services to AFG and certain of AFG's affiliates, including the
Partnership and all other equipment leasing programs managed by AFG (the
"Investment Programs").
On January 3, 1996, AFG and PLM executed an amendment to the 1995 agreements
whereby PLM purchased: (i) AFG's lease origination business and associated
contracts, (ii) the rights to the name "American Finance Group" and associated
logo, and (iii) certain furniture, fixtures and computer software. Effective
January 1, 1996, PLM hired AFG's marketing force and certain other support
personnel in connection with the transaction and relinquished its
responsibilities under the 1995 agreements to provide accounting, asset
management and investor services to AFG, its affiliates and the Investment
Programs after December 31, 1995. Accordingly, AFG and its affiliates retain
ownership and control and all authority and rights with respect to each of the
general partners or managing
EIGHTEEN
<PAGE> 20
PW PREFERRED YIELD FUND II, L.P.
trustees of the Investment Programs; and AFG, as Manager, will continue to
provide asset management services to the Partnership.
Pursuant to the 1996 amendment to the 1995 agreements, AFG and certain of its
affiliates agreed not to compete with the lease origination business sold to PLM
for a period of five years. AFG reserved the right to satisfy all equipment
needs of the Partnership and all other Investment Programs and reserved certain
other rights not material to the Partnership. AFG also agreed to change its
name, except where it is used in connection with the Investment Programs. AFG's
management considers the amendment to the 1995 agreements to be in the best
interests of AFG and the Partnership.
b. LEGAL MATTERS
In November 1994, a series of purported class actions (the "New York Limited
Partnership Actions") were filed in the United States District Court for the
Southern District of New York concerning PaineWebber Incorporated sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber Limited Partnerships
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 Partnership, PaineWebber and the
Administrative General Partner (1) failed to provide adequate disclosure of the
risks involved with the Partnership; (2) made false and misleading
representations about the safety of the investments and the Partnership's
anticipated performance; and (3) marketed the Partnership to investors for whom
such investments were not suitable. The plaintiffs also alleged that following
the sale of the Partnership, 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
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the Partnership, as well as disgorgement of all fees and other income
derived by PaineWebber from the Partnership. In addition, the plaintiffs also
sought treble damages under RICO.
On May 30, 1995, the US 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 have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and a plan of allocation, which the parties expect to
submit to the court for its consideration and approval within the next several
months. Until a definitive settlement and plan of allocation is approved by the
court, there can be no assurance what, if any, payment or non-monetary benefits
will be made available to unitholders in the Partnership.
In February 1996, approximately 150 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
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.
Under certain limited circumstances, pursuant to the Partnership Agreement and
other contractual obligations, PaineWebber and certain affiliates including the
Administrative General Partner could be entitled to indemnification from the
Partnership for expenses and liabilities in connection with this litigation. The
General Partners are unable to determine the impact, if any, that these actions
will have on the Partnership's financial statements, taken as a whole.
NINETEEN
<PAGE> 21
PW PREFERRED YIELD FUND II, L.P.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of PW Preferred Yield Fund II, L.P.:
We have audited the accompanying balance sheets of PW Preferred Yield Fund II,
L.P. (a Delaware limited partnership), as of December 31, 1995 and 1994, and the
related statements of income, partners' equity and cash flows for the years
ended December 31, 1995, 1994 and 1993. 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
a reasonable assurance about whether the financial statements are free from
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 PW Preferred Yield Fund II,
L.P. as of December 31, 1995 and 1994 and the results of its operations and its
cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN L.L.P.
New York, New York
March 8, 1996
TWENTY
<PAGE> 22
PW PREFERRED YIELD FUND II, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Upon formation of the Partnership, the General Partners each contributed $500 to
the capital of the Partnership. On September 10, 1992, the Partnership commenced
a "best efforts" offering of 200,000 Units at $500 per Unit ($100,000,000).
The Partnership had its final admission of Class A Limited Partners on July 26,
1994 receiving gross proceeds of $428,500 from the sale of 857 units. In total,
the Partnership received gross offering proceeds of $27,013,500 from the sale of
54,027 Units, of which $1,895,500 was received during 1994, $8,314,500 was
received during 1993 and $16,803,500 was received during 1992. The Partnership
incurred $3,260,594 of aggregate sales commissions and other offering expenses
in connection with the sale of these Units, thus receiving $23,752,906 of net
offering proceeds.
The Class B Limited Partner was required to contribute cash to the Partnership
in an amount equal to 12.5% of the aggregate purchase price of the equipment
purchased with the offering proceeds received from the sale of Units and the
cash contributed by the Class B Limited Partner. The Class B Limited Partner
contributed $231,098, $1,022,543 and $2,031,736 during 1994, 1993 and 1992,
respectively.
The Partnership conducted no activities and recognized no profits or losses
prior to the initial closing for the sale of Units on November 16, 1992, then at
this time the Partnership commenced operations. The Partnership purchased
portions of its equipment portfolio following each of the six closings for the
sale of Units, which were held during 1994, 1993 and 1992 and additional
equipment pursuant to the reinvestment program. The Partnership used the
contributed capital from Class A and Class B investors to purchase a total of
$1,898,275, $8,415,175 and $16,689,014 of equipment during 1994, 1993 and 1992,
respectively (not including equipment purchased pursuant to the Partnership's
reinvestment program) and the balance of $35,819 was retained as working
capital.
The Partnership commenced its equipment reinvestment phase during 1993 by
investing excess cash flows available after the payment of the distributions to
the partners in additional equipment. As of December 31, 1995, equipment
purchased pursuant to the reinvestment program totaled $12,460,748 of which
$4,658,439 was acquired in the year ended December 31, 1995. At December 31,
1995, the Partnership had approximately $785,000 of cash flow from operations
and sales of equipment in excess of distributions and accrued distributions
which is available for reinvestment in additional equipment. Additional
equipment will be purchased pursuant to the reinvestment program during 1996 and
in future years during the reinvestment period (which will end in either 1999 or
2000, at the General Partners' discretion).
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. At March 1,
1996, the Partnership's cash of approximately $1.6 million was primarily
invested in commercial paper.
During 1995, 1994 and 1993, the Partnership declared distributions of cash flow
received from operations and sales in the amount of $3,473,706, $3,436,536 and
$2,799,669 respectively. All distributions to the Class A Limited Partners
represent an annualized distribution rate of 11% of their contributed capital
and all distributions to the Class B Limited Partner represent an annualized
distribution rate of 10% of its contributed capital.
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 cash
distribution by a partnership, which exceeds its net income for the fiscal
period, may be deemed a return of capital. Based upon the amount of net income
reported by the Partnership for accounting purposes, approximately 94%, 75% and
72% of the 11% cash distributions to the Class A Limited Partners for the years
ended December 31, 1995, 1994, and 1993, respectively, constituted a return of
capital. However, the total actual return on capital over a leasing
partnership's life can only be determined upon termination of a partnership
after all residual cash flows (which include proceeds from the re-leasing and
sale of equipment after initial lease terms expire) have been realized.
The General Partners believe that the Partnership will generate sufficient cash
flow from operations during 1996 to enable the Partnership to meet current
operating requirements, to continue to fund cash distributions to the Class A
Limited Partners at an annualized rate of 11% on their capital contributions and
to the Class B Limited Partner at an annualized rate of 10% on its capital
contributions (substantial portions of which will constitute returns of capital)
and to provide excess cash for reinvestment in additional leased equipment.
LITIGATION
In November 1994, a series of purported class actions (the "New York Limited
Partnership Actions") were filed in the United States District Court for the
Southern District of New York concerning PaineWebber Incorporated sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber
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Limited Partnerships Litigation, the plaintiffs amended their complaint to
assert claims against a variety of other defendants, including General Equipment
Management II, Inc., an affiliate of PaineWebber and the Administrative General
Partner in the Partnership ("Administrative General Partner").
The amended complaint in the New York Limited Partnership Actions alleged that,
in connection with the sale of interests in the Partnership, PaineWebber and the
Administrative General Partner (1) failed to provide adequate disclosure of the
risks involved with the Partnership; (2) made false and misleading
representations about the safety of the investments and the Partnership's
anticipated performance; and (3) marketed the Partnership to investors for whom
such investments were not suitable. The plaintiffs also alleged that following
the sale of the Partnership, PaineWebber and the Administrative General Partner
misrepresented financial information about the Partner-ship's value and
performance. The amended complaint alleged that PaineWebber and the
Administrative General Partner violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the Partnership, as well as disgorgement of all fees and other income
derived by PaineWebber from the Partnership. In addition, the plaintiffs also
sought treble damages under RICO.
On May 30, 1995, the US 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 have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and a plan of allocation, which the parties expect to
submit to the court for its consideration and approval within the next several
months. Until a definitive settlement and plan of allocation is approved by the
court, there can be no assurance what, if any, payment or non-monetary benefits
will be made available to unitholders in the Partnership.
In February 1996, approximately 150 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
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.
Under certain limited circumstances, pursuant to the Partnership Agreement and
other contractual obligations, PaineWebber and certain affiliates including the
Administra-tive General Partner could be entitled to indemnification from the
Partnership for expenses and liabilities in connection with this litigation. The
General Partners are unable to determine the impact, if any, that these actions
will have on the Partnership's financial statements, taken as a whole.
IMPACT OF FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued FASB 121, "Accounting
for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of"
("FAS 121"). FAS 121 requires companies to review their long-lived assets, such
as the Partnership's leased equipment, and certain identifiable intangibles for
impairment whenever events and changes in circumstances indicate that the
carrying value of a long-lived asset may not be recoverable. The Partnership
will be required to adopt the provisions of FAS 121 as of January 1996. The
Partnership believes that based upon current operations and current methods used
to evaluate declines in market value, the future adoption of FAS 121 will not
have a material impact on the Partnership's financial position or results of
operations.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
The Partnership reported net income of $683,531 for the year ended December 31,
1995 ("1995 Period") as compared to net income of $1,247,403 for the year ended
December 31, 1994 ("1994 Period").
The principal reasons for the decrease in net income in the 1995 Period as
compared to the 1994 Period were the provisions for equipment impairment and the
provision for bad debt provided during the 1995 Period, which exceeded the
amount provided in the 1994 Period.
Rental income decreased by $47,613, or approximately 1%, in the 1995 Period as
compared to the 1994 Period, principally because the rents generated in the 1995
Period by equipment purchased subsequent to the 1994 Period was more than offset
by equipment whose leases expired subsequent to the 1994 Period and which were
either sold, renewed at lower rates or returned.
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PW PREFERRED YIELD FUND II, L.P.
Interest income increased substantially, in the amount of $66,370 in the 1995
Period as compared to the 1994 Period due to an increase in funds available for
reinvestment. These funds are invested in short-term, highly liquid investments
until utilized to purchase additional equipment.
Depreciation and amortization expense decreased by $183,890, or approximately
3%, in the 1995 Period compared to the 1994 Period. These variances were
consistent with the variances in rental income as well as the related estimated
useful lives of equipment subject to leases in the respective periods.
Management fees and subordinated disposition fees increased by $7,901, or
approximately 2%, in the 1995 Period. Disposition fees incurred in the 1995
Period totaled $23,846 as compared to $7,559 in the 1994 Period. Management fees
decreased by $8,386 or 2% in the 1995 Period as compared to the 1994 Period
which is consistent with the equipment leases in place and their related fee
structures and rental income recognized.
General and administrative expenses increased by $16,799, or approximately 20%,
in the 1995 Period as compared to the 1994 Period which was the result of
certain first quarter 1995 administrative costs reflected in the 1995 Period.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
Net income was $1,247,403 for the year ended December 31, 1994 ("1994") as
compared to $1,050,148 for the Partnership's first full year of operations which
ended December 31, 1993 ("1993"). Substantially all of the Partnership's revenue
was generated from the leasing of the equipment to unaffiliated third parties
under triple net leases that 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 losses and gains from the sale
of equipment.
The Partnership's rental revenue increased by 36% during 1994 as compared to
1993. The principal reason for the increase was the continued acquisition of
leased equipment during 1994. During 1994, contributed capital was used to
acquire equipment with purchase prices aggregating $1,898,275 and cash generated
from operations in excess of distribution requirements was utilized to buy
equipment pursuant to the reinvestment program with purchase prices aggregating
$5,027,804. Further, because $11,188,939 of leased equipment was acquired
throughout 1993, 1994 was the first full year of operations for such equipment.
Management and disposition fees increased by approximately 32% in 1994 as
compared to 1993. Management fees increased due to the increase in rental
revenue, upon which such fees are based. Disposition fees (which remain unpaid),
which payment is subordinated to the receipt of an 8% annual cumulative return
as defined (the "Partnership Agreement") by the Class A Limited Partners,
decreased slightly because proceeds from sales decreased in 1994 as compared to
1993. Depreciation expenses increased by approximately 37% in 1994 as compared
to 1993. Such increase was consistent with the increase in rental revenue based
upon when equipment was put into service.
General and administrative expenses increased by 29% in 1994 as compared to
1993, which was consistent with the increase in level of activity. Investor
relations and transfer fees, which are a significant part of such expenses,
increased based on the increase in the investor base and the full year effect of
last year's increases.
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, 1995. However,
inflation and changing prices, in addition to other factors, may affect
subsequent leasing rates and the eventual selling price of the Partnership's
equipment.
TWENTY-THREE
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PW PREFERRED YIELD FUND II, L.P.
PARTNERSHIP DIRECTORY
PW Preferred Yield Fund II, L.P.
--------------------
2424 South 130th Circle
Omaha, Nebraska 68144-2596
(800) 877-2394
MANAGING GENERAL PARTNER
--------------------
Pembroke Financial Limited Partnership
ADMINISTRATIVE GENERAL PARTNER
--------------------
General Equipment Management II, Inc.
INDEPENDENT PUBLIC ACCOUNTANTS
--------------------
Arthur Andersen L.L.P.
New York, New York
LEGAL COUNSEL
--------------------
Peabody & Brown
Boston, Massachusetts
TRANSFER AGENT
--------------------
Service Data Corporation
Omaha, Nebraska
Form 10-K Availability
--------------------
A copy of the Annual Report on Form 10-K, as
filed with the Securities and Exchange
Commission,will be furnished without charge
to Class A limited partners upon request.
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PW PREFERRED YIELD FUND II, L.P. ---------------
BULK RATE
2424 South 130th Circle U.S. POSTAGE
Omaha Nebrasks 68144-2596 PAID
(800) 877-2394 L.I. CITY. N.Y.
PERMIT #198
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