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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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-2300
PW PREFERRED YIELD FUND II, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1180783
(State of organization) (IRS Employer
Identification No.)
98 North Washington Street
Boston, Massachusetts 02114
(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617)854-5800
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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PW PREFERRED YIELD FUND II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Balance Sheets - March 31, 1998 and December 31,
1997 (unaudited) 2
Statements of Income for the three months ended
March 31, 1998 and 1997 (unaudited) 3
Statements of Partners' Equity for the three
months ended March 31, 1998 and 1997 (unaudited) 4
Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PW PREFERRED YIELD FUND II, L.P.
BALANCE SHEETS -- MARCH 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,251,799 $ 4,215,247
Rent and other receivables, net 1,169,429 958,509
Equipment on operating leases, net of accumulated
depreciation of $17,307,693 and $17,565,961, at March 31, 1998
and December 31, 1997 respectively and writedowns of $745,711
at both March 31, 1998 and December 31, 1997, respectively 12,450,905 11,735,752
Equipment held for sale or lease, net of
accumulated depreciation of $792,493 at both March 31,
1998 and December 31, 1997 and write downs of $25,000 145,575 145,575
at both March 31, 1998 and December 31, 1997, respectively
Other assets, net 17,572 17,572
----------- -----------
Total Assets $17,035,280 $17,072,655
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 145,898 $ 120,377
Payable to affiliates (Note 2) 436,827 269,482
Deferred rental income 63,491 63,491
Distributions payable to partners 327,523 327,523
----------- -----------
Total Liabilities 973,739 780,873
=========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 2)
PARTNERS' EQUITY:
General Partners 787,703 799,215
Limited Partners:
Class A (54,027 Units outstanding) 13,363,852 13,555,240
Class B 1,909,986 1,937,327
----------- -----------
Total Partners' Equity 16,061,541 16,291,782
----------- -----------
Total Liabilities and Partners' Equity $17,035,280 $17,072,655
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
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PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUE:
Rentals from operating leases $ 1,673,987 $ 1,819,239
Interest 40,671 20,983
Gain (loss) on disposition of equipment, net 80,167 (9,729)
----------- -----------
1,794,825 1,830,493
----------- -----------
EXPENSES:
Depreciation and amortization 1,050,000 1,395,815
Management fees and disposition fees (Note 2) 77,252 97,675
General and administrative (Note 2) 29,388 25,775
----------- -----------
1,156,640 1,519,265
----------- -----------
NET INCOME $ 638,185 $ 311,228
=========== ===========
NET INCOME ALLOCATED:
To the General Partners $ 31,909 $ 94,378
To the Class A Limited Partners 551,483 184,552
To the Class B Limited Partner 54,793 32,298
----------- -----------
$ 638,185 $ 311,228
=========== ===========
NET INCOME PER WEIGHTED AVERAGE
NUMBER OF UNITS OF CLASS A LIMITED
PARTNER INTEREST OUTSTANDING $ 10.21 $ 3.42
=========== ===========
WEIGHTED AVERAGE NUMBER OF
UNITS OF CLASS A LIMITED PARTNER
INTEREST OUTSTANDING 54,027 54,027
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
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PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
(unaudited)
<TABLE>
<CAPTION>
CLASS A CLASS B
GENERAL LIMITED LIMITED
PARTNERS PARTNERS PARTNER TOTAL
-------- -------- ------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $ 799,215 $ 13,555,240 $ 1,937,327 $ 16,291,782
Net income 31,909 551,483 54,793 638,185
Distributions declared
to partners (43,421) (742,871) (82,134) (868,426)
------------ ------------ ------------ ------------
Balance, March 31, 1998 $ 787,703 $ 13,363,852 $ 1,909,986 $ 16,061,541
============ ============ ============ ============
Balance, January 1, 1997 $ 653,082 $ 14,978,906 $ 2,095,535 $ 17,727,523
Net income 94,378 184,552 32,298 311,228
Distributions declared (43,421) (742,871) (82,134) (868,426)
to partners
------------ ------------ ------------ ------------
Balance, March 31, 1997 $ 704,039 $ 14,420,587 $ 2,045,699 $ 17,170,325
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
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PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 638,185 $ 311,228
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,050,000 1,395,815
Loss on disposition of equipment, net (80,167) 9,729
Change in assets and liabilities:
Rent and other receivables (124,266) 158,285
Accounts payable and accrued liabilities 25,521 16,921
Payable to affiliates 167,345 (38,323)
Deferred rental income -- 18,000
----------- -----------
Net cash provided by operating activities 1,676,618 1,871,655
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment on operating leases (2,010,438) (3,256,955)
Proceeds from sales of equipment 238,798 369,372
----------- -----------
Net cash used in investing activities: (1,771,640) (2,887,583)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners (868,426) (859,742)
----------- -----------
Net cash used in financing activities (868,426) (859,742)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (963,448) (1,875,670)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,215,247 2,524,801
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,251,799 $ 649,131
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
1. GENERAL
The accompanying unaudited interim financial statements include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of the General Partners, necessary to fairly present the financial
position of the Partnership as of March 31, 1998 and the results of its
operations, changes in partners' equity and cash flows for the three months then
ended.
These financial statements should be read in conjunction with the
Significant Accounting Policies and other Notes to Financial Statements included
in the Partnership's audited financial statements for the year ended December
31, 1997.
New Accounting Pronouncement: In March 1998, the Partnership adopted
the FASB issued 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 did not impact the
reporting of the Partnership's results of operations.
2. TRANSACTIONS WITH AFFILIATES
ACQUISITION AND OPERATING STAGES
Acquisition of Equipment Pursuant to its investment objectives, the
Partnership acquires, on an all-cash basis, certain leased equipment from Equis
Financial Group L.P. ("EFG") (formerly American Finance Group or AFG), an
affiliate of the Managing General Partner.
The purchase price of the equipment acquired from EFG 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 ("EFG carrying
value"). The adjusted cost of the equipment is equal to the price paid by EFG,
plus the cost of an appraisal, EFG's cost of interim financing for the equipment
and any taxes paid by EFG, less certain interim rentals received by EFG with
respect to the equipment.
Acquisition Fee The Managing General Partner, or its affiliates,
receives or is entitled to receive 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 cash flow as compensation for evaluating, selecting, negotiating and
consummating the acquisition of the equipment. The Partnership paid acquisition
fees totaling $58,556 during the three months ended March 31, 1998.
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
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of the equipment. Management fees of $67,488 were earned by the General Partners
with respect to the rentals earned by the Partnership during the three months
ended March 31, 1998.
Disposition Fees The General Partners, or their affiliates, are
entitled to receive a subordinated disposition fee in an amount equal to the
lesser of (i) 50% of the fee that would be charged by an unaffiliated party, or
(ii) 3% of the gross contract price relating to each sale of equipment (payable
50% to the Managing General Partner or its affiliates and 50% to the
Administrative General Partner) as compensation for negotiating and consummating
sales of equipment. Subordinated disposition fees payable with respect to sales
and dispositions during the quarter ended March 31, 1998 aggregated $9,764.
Cumulative subordinated disposition fees totaled $116,726 at such date. 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% annual cumulative
return (as defined in the Partnership Agreement).
ITEM 2. 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 of Class A
Limited Partner Interest ("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,
at which time the Partnership commenced operations. The Partnership acquired a
portion of its equipment portfolio following each of the five closings which
have been held for the sale of Units. The Partnership used the net contributed
capital to purchase
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$27,002,464 of equipment, of which $1,898,275, $8,415,175 and $16,689,014 was
purchased 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 March 31, 1998, equipment
purchased pursuant to the reinvestment program including acquisition fees and
expenses totaled $20,724,252, of which $2,010,438 was acquired during the
quarter ended March 31, 1998. As of March 31, 1998, the Partnership had
approximately $2.9 million of cash generated from operating activities and sales
of equipment in excess of accrued distributions which is available for
reinvestment in additional equipment. Additional equipment will be purchased
pursuant to the reinvestment program during 1998 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. Theses investments are
primarily short-term commercial paper issued by large domestic corporations.
Cash and cash equivalents decreased $963,448 from $4,215,247 at
December 31, 1997 to $3,251,799 at March 31, 1998. This was due primarily to the
purchase of equipment subject to lease pursuant to the reinvestment program
totaling $1,941,790, offset by cash generated during the quarter.
Rent and other receivables net increased $210,920 from $958,509 at
December 31, 1997 to $1,169,429 at March 31, 1998. The primary reason for the
increase was a net increase in receivables from equipment sales.
During the three months ended March 31, 1998, the Partnership sold
equipment originally purchased for purchase prices aggregating $1,553,000 for
amount totaling $325,000.
During the three months ended March 31, 1998, the Partnership declared
distributions of cash flow received from operations in the amount of $868,426.
Distributions to the Class A Limited Partners represented an annualized
distribution rate of 11% of their contributed capital and all distributions to
the Class B Limited Partner represented an annualized distribution rate of 10%
of its contributed capital.
The General Partners believe that the Partnership will generate
sufficient cash flow from operations during 1998 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.
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 26%
of the 11% cash
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distributions to the Class A Limited Partners for the quarter ended March 31,
1998 constituted a return of capital. Additionally, since inception,
approximately 71% of the Class A Limited Partner's 11% cash distributions
constituted a return of capital. However, the total actual return on capital
over a leasing 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 equipment after initial lease terms expire) have been
realized.
RESULTS OF OPERATIONS
Substantially all of the Partnership's revenue during the three months
ended March 31, 1998 was generated from the leasing of the equipment to
unaffiliated third parties under triple net leases which were in effect at the
time the equipment was acquired by the Partnership. The balance of the
Partnership's revenue consisted of interest income from temporary investments
and net gain on sales and dispositions of equipment.
Under the terms of the triple net leases, all expenses related to the
ownership and operation of the equipment during the three months ended March 31,
1998 were paid for by the lessees. The Partnership recorded depreciation expense
pertaining to the equipment and incurred management fees and certain general and
administrative expenses in connection with the operations of the Partnership.
General and administrative expenses consisted primarily of investor reporting
expenses and transfer agent and audit fees.
1998 COMPARED TO 1997
The Partnership reported net income of $638,185 for the three months
ended March 31, 1998 ("1998 Quarter") as compared to $311,228 for the three
months ended March 31, 1997 ("1997 Quarter"). The increase was attributable to
the Partnership recognizing net gains on disposition of equipment in the 1998
Quarter as opposed to the net losses 1997 Quarter as well as greater percentage
decrease in depreciation as compared to rent in the relative quarters.
Rental income decreased by 8% or $145,252 during the 1998 Quarter as
compared to the 1997 Quarter, principally due to the sale of equipment upon
lease expiration subsequent to the 1997 Quarter (which was earning rental
revenue in the 1997 Quarter) and the renewal of certain equipment at lower
rates, partially offset by rentals from equipment purchased on or after March
31, 1997.
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Interest income increased by 94% or $19,688 in the 1998 Quarter as
compared to the 1997 Quarter 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 25% or $345,815 in
the 1998 Quarter as compared to the 1997 Quarter due to a decrease in equipment
subject to operating leases (attributable to equipment sold subsequent to the
1997 Quarter offset by equipment purchased subsequent to the 1997 Quarter), as
well as the greater percentage decrease in depreciation attributable to
remarketed or sold equipment.
Management fees and subordinated dispositions fees decreased by 21% or
$20,423 in the 1998 Quarter as compared to the 1997 Quarter. Management fees
decreased by $5,066 from $72,554 to $67,488 or 7% due to a decrease in rental
revenues on which such fees are based. Subordinated disposition fees were $9,764
in the 1998 Quarter as compared to $25,121 in the 1997 Quarter, a decrease of
$15,357, which were based upon the sales proceeds generated (including
receivables) in the respective periods.
General and administrative expenses increased by 14% or $3,613 in the
1998 Quarter as compared to the 1997 Quarter which reflected the Partnership's
level of operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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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 first quarter of the fiscal year ending December 31, 1998.
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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 II, Inc.
A General Partner
Date: May 12, 1998 By: /s/ Joseph P. Ciavarella
Joseph P. Ciavarella
Vice President, Secretary,
Treasurer and Chief Financial
and Accounting Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1998 FOR PW PREFERRED YIELD FUND II, L.P. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,251,799
<SECURITIES> 0
<RECEIVABLES> 1,369,429
<ALLOWANCES> (200,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,438,800
<PP&E> 31,467,372
<DEPRECIATION> 18,870,897<F3>
<TOTAL-ASSETS> 17,035,280
<CURRENT-LIABILITIES> 973,739
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,061,541<F2>
<TOTAL-LIABILITY-AND-EQUITY> 17,035,280
<SALES> 0
<TOTAL-REVENUES> 1,794,825
<CGS> 0
<TOTAL-COSTS> 1,127,252
<OTHER-EXPENSES> 29,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 638,185
<INCOME-TAX> 0
<INCOME-CONTINUING> 638,185
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 638,185
<EPS-PRIMARY> 10.21<F1>
<EPS-DILUTED> 0
<FN>
<F1>INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST.
<F2>INCLUDES PARTNERS CAPITAL AND ACCUMULATED EARNINGS AND DISTRIBUTION TO
PARTNERS.
<F3>INCLUDES WRITEOFFS.
</FN>
</TABLE>
