<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-22300
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PW Preferred Yield Fund II, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 84-1180783
----------------------- ----------------
(State of organization) (I.R.S. Employer
Identification No.)
88 Broad Street
Boston, Massachusetts 02110
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (617) 854-5800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Class A Limited Partner Interest
-----------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: Not applicable.
<PAGE> 2
PW Preferred Yield Fund II, L.P.
Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1997
Table of Contents
Page
----
Part I
- ------
Item 1 Business......................................................... 1
Item 2 Properties....................................................... 5
Item 3 Legal Proceedings................................................ 6
Item 4 Submission of Matters to a Vote
of Security Holders.......................................... 7
Part II
- -------
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters.............................. 8
Item 6 Selected Financial Data ......................................... 10
Item 7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations.................................... 11
Item 8 Financial Statements............................................. F-1
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure......................................... 15
Part III
- --------
Item 10 Directors and Executive Officers
of the Registrant............................................ 15
Item 11 Executive Compensation........................................... 17
Item 12 Security Ownership of Certain
Beneficial Owners and Management............................. 17
Item 13 Certain Relationships and
Related Transactions......................................... 18
Part IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K...................................... 20
<PAGE> 3
PART I
Item 1. Business
General
PW Preferred Yield Fund II, L.P. (the "Partnership" or the "Registrant")
is a limited partnership organized under the laws of the State of Delaware on
October 1, 1991. The general partners of the Partnership are Pembroke Financial
Limited Partnership, the Managing General Partner, a Massachusetts limited
partnership, and General Equipment Management II, Inc., the Administrative
General Partner, a Delaware corporation that is a wholly-owned subsidiary of
Paine Webber Group Inc. The Managing General Partner is owned by Equis Financial
Group Limited Partnership ("EFG") formerly American Finance Group ("AFG"), a
Massachusetts limited partnership, which acts as Equipment Manager for the
Partnership. (The Managing General Partner and the Administrative General
Partner are sometimes hereinafter collectively referred to as the "General
Partners".)
PYB Limited Partnership, a Massachusetts limited partnership, is the Class
B Limited Partner ("Class B Limited Partner"). AFG originally acquired all of
the equity ownership interest in PYB Limited Partnership as of November 1, 1993.
The Class B Limited Partner contributed 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 the Units of Class A Limited
Partner Interest ("Units") and the cash contributed by the Class B Limited
Partner.
Upon formation of the Partnership, the General Partners each contributed
$500 to the Partnership. On September 10, 1992, the Partnership commenced a
"best efforts" offering of 200,000 Units at $500 per Unit ($100,000,000).
Through December 31, 1993 the Partnership had received gross proceeds of
$25,118,000 representing 50,236 units. The Partnership's fifth closing for the
sale of Units was held on January 13, 1994, at which time the Partnership
received $1,467,000 of gross offering proceeds from the sale of 2,934 Units and
$178,858 of capital contributions from the Class B Limited Partner. The
Partnership had its final closing for the sale of units on July 26, 1994 at
which time it received $428,500 of gross offering proceeds from the sale of 857
units and $52,240 of capital contributions from the Class B Limited Partner. The
Partnership's six closings representing gross proceeds of $27,013,500 are
summarized below:
<TABLE>
<CAPTION>
Number Gross
of Offering
Date Units Proceeds
---- ----- --------
<S> <C> <C>
November 16, 1992 23,086 $11,543,000
December 23, 1992 10,521 5,260,500
March 31, 1993 9,958 4,979,000
August 19, 1993 6,671 3,335,500
January 13, 1994 2,934 1,467,000
July 26, 1994 857 428,500
------ -----------
54,027 $27,013,500
====== ===========
</TABLE>
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The Partnership incurred $3,260,594 of sales commissions and other offering
expenses in connection with the sale of these Units, thus receiving $23,752,906
of net offering proceeds.
In the aggregate, the Class B Limited Partner contributed $231,098,
$1,022,543 and $2,031,736 during 1994, 1993 and 1992, respectively.
The Partnership acquired, on an all-cash basis, a portfolio of equipment
subject to triple net leases with unaffiliated third parties. The equipment
purchased by the Partnership consists of industrial equipment, including, but
not limited to, materials-handling, mining, transportation and manufacturing
testing equipment, and business equipment, including, but not limited to,
computers and computer-related and telecommunications equipment. The Partnership
expects that the equipment purchased in the future will be similar equipment.
Business equipment owned by the Partnership is limited to 60% of the value of
the Partnership's total equipment.
The equipment is purchased by AFG directly from the manufacturer's or from
independent third parties and resold to the Partnership. The Partnership's
purchase price for the equipment 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 EFG plus the cost of an appraisal and EFG's interim financing
plus any taxes, less certain interim rentals received by EFG. However, if in the
future there are delays in identifying transactions for reinvestment, the
Partnership could develop alternative sources for transactions including outside
brokers. This may make it more difficult to find transactions that fit the
Partnership's investment objectives because generally brokers will either charge
a fee or mark up the price of equipment for sale. (See below for further
discussion regarding the purchase of AFG's lease origination business by PLM.)
The Partnership only acquires equipment that is already subject to
short-term leases (generally, 5 years or less). The Partnership's business is
not subject to seasonal variations.
At least 65% of the Partnership's initial equipment has been leased to
lessees which are investment-grade lessees, or which are operating subsidiaries
of entities which are investment-grade companies. An investment-grade lessee is
a company with a credit rating of not less than Baa, as determined by Moody's
Investor Services, Inc. or comparable credit ratings, as determined by other
recognized credit-rating services. No more than 15% of the equipment will be
leased to a single lessee or its affiliates.
The Partnership is required to dissolve and distribute all of its assets
no later than December 31, 2005. However, the General Partners anticipate that
all equipment will be sold and that the Partnership will be liquidated between
2000 and 2003.
During the reinvestment period (which will end in either 1999 or 2000, at
the General Partners' discretion) distributable cash flows in excess of current
distributions to the Class A Limited Partners at an annualized distribution rate
of 11% of their contributed capital, to the Class B Limited Partner at an
annualized distribution rate of 10% of its contributed capital and to the
General Partners, if any, will be reinvested in additional leased equipment.
See Item 7, "Management Discussion and Analysis of Financial Condition and
Results of Operations." Upon the termination of the
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reinvestment period, all available cash flows will be distributed to the
partners.
The Partnership's principal investment objectives are:
(i) to generate current cash distributions to the Class A Limited
Partners from lease revenues (a substantial portion of which
will constitute a return of capital);
(ii) to preserve and protect Partnership capital; and
(iii) to generate additional cash distributions after the end of the
reinvestment period (which will end in either 1999 or 2000, at
the General Partners' discretion) from sales of equipment.
In order to achieve these objectives, the General Partners have adopted the
following policies: (a) to achieve investment diversification, reduce the
average age of the Partnership's portfolio of equipment and enhance the overall
return to Class A Limited Partners through reinvestment in additional equipment
during the reinvestment period; and (b) to manage the Partnership's assets to
maximize lease rentals and amounts received from the sale of equipment in order
to protect the Partnership's capital.
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 a multi-step transaction,
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 managerial control with respect to each of the general partners
(including the Managing General Partner of the Partnership) or managing
trustees of the Investment Programs; and AFG, as Manager, will continue to
provide acquisition and 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
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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. In early 1996, AFG changed its
name to EFG (see above description).
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. This could result in
a system failure or miscalculations in the year 2000 causing disruptions of
operations of the Partnership, its lessees, or general partners.
The Partnership has already reviewed and identified its computer systems
that are subject to Year 2000 risk. Accordingly, the Partnership has commenced
the remediation of all systems not Year 2000 compliant. Remediation and testing
of such systems will be completed in advance of Year 2000. The costs of such
remediation is expensed as incurred and will not be material to the
Partnership's financial position or results of operations.
The Partnership has also initiated communication with lessees and vendors
to determine the extent to which the Partnership is vulnerable to those third
parties' failures to remediate their own Year 2000 issues. The Partnership has
not yet completed its communication with its lessees and vendors. As a result,
the Partnership can not determine at this time the extent, if any, to which the
Partnership may be exposed to financial risk from the inability of the
Partnership's lessees and vendors to repediate their own year 2000 issues.
New Accounting Pronouncements, Issued But Not Yet Effective
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances arising from nonower sources. The Partnership does not expect this
pronouncement to materially impact the reporting of its results of operations.
Equipment Portfolio
The following table describes the Partnership's equipment portfolio as of
December 31, 1997:
<TABLE>
<CAPTION>
Type Original Cost(1)
---- ----------------
<S> <C>
Materials Handling $13,101,195
Construction and Mining 3,350,059
Transportation 3,445,627
Medical, Research and Testing 1,870,521
Manufacturing Testing 611,600
Computers and Printers 2,637,321
Retail Sales 2,893,144
Tele-Communication 1,599,193
Furniture and Fixtures 1,501,832
-----------
$31,010,492
===========
</TABLE>
(1) Includes related acquisition fees.
The above table includes computers and printers with original purchase prices
aggregating $280,666 and materials handling equipment with original purchase
prices aggregating $682,402 which were off lease at December 31, 1997.
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Significant Lessees
The Partnership leases its equipment to a significant number of lessees.
Revenue from each of four lessees which accounted for 10% or more of total
rentals from leases for the year ended December 31, 1997 as follows:
<TABLE>
<CAPTION>
<S> <C>
Chrysler Corporation 13%
Collection Services Inc. 13% (A)
AT&T Corporation 10%
General Motors 10%
</TABLE>
(A) Includes the lease termination payment of all of the related leases in
1997 and the sale of the related equipment thereunder.
The Partnership is not dependent on any one or more of these lessees for
future business. The Managing General Partner believes that alternative lessees
are available in the event current lessees decide no longer to do business with
EFG or the Partnership. As part of its investment objectives, the Partnership
intends to further diversify its equipment portfolio in the future.
Competition
The equipment leasing industry is highly competitive. Among the numerous
existing and potential competitors of the Partnership for leases are equipment
manufacturers, equipment dealers and brokers, leasing companies and financial
institutions, as well as other limited partnerships and/or trusts organized and
managed similarly to the Partnership. Many of these competitors have greater
financial resources than the Partnership and more experience in the industry
than the General Partners and their affiliates. Equipment manufacturers may
present particularly strong competition because they may also provide certain
ancillary services which the Partnership cannot offer directly, such as
maintenance services (including possible equipment substitution rights),
warranty services, purchase rights and trade-in privileges.
Employees
The Partnership has no employees. The officers, directors and employees of
the General Partners and their affiliates perform services on behalf of the
Partnership. The General Partners are entitled to certain fees and
reimbursements of certain out-of-pocket expenses incurred in connection with the
performance of these management services. See Item 10 of this Report, "Directors
and Executive Officers of the Registrant", and Item 13 of this Report, "Certain
Relationships and Related Transactions", which are incorporated herein by
reference.
Item 2. Properties
The Partnership does not own or lease any properties other than the
equipment which is discussed in Item 1 of this Report, "Business", which is
incorporated herein by reference.
5
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Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning Paine Webber Incorporated's sale
and sponsorship of various limited partnership investments, including those
offered by the Partnership. The lawsuits were brought against Paine Webber
Incorporated and Paine Webber Group, Inc. (together, "Paine Webber"), among
others, by allegedly dissatisfied partnership investors. In March 1995, after
the actions were consolidated under the title [In re: Paine Webber 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, Paine Webber
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 interests Paine Webber and the Administrative
General Partner misrepresented financial information about the Partnership's
value and performance. The amended complaint alleged that Paine Webber and the
Administrative General Partner violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, reimbursement for all sums invested by them in the
partnerships, as well as disgorgement of all fees and other income derived by
Paine Webber from the Limited Partnerships. In addition, the plaintiffs also
sought treble damages under RICO.
On May 30, 1995, the U.S. District Court certified class action treatment
of the plaintiff's claims in the class action entitled, In re: Paine Webber
Limited Partnerships Litigation.
In January 1996, Paine Webber signed a memorandum of understanding with
the plaintiffs in the class action outlining the terms under which the parties
agreed to settle the case. A definitive settlement agreement was signed in July
1996 and in March 1997, the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement, Paine Webber agreed to pay $125
million and certain additional consideration to class members. The investors
who had objected to the settlement have appealed the District Court's approval
to the United States Court of Appeals for the Second Circuit. In July 1997, the
U.S. Court of Appeals for the Second Circuit affirmed the District Court's
approval of the settlement. The District Court must still determine the extent
of attorneys fees to be awarded to plaintiffs' counsel which will be paid from
the settlement fund, so that the remainder of the monies can be distributed to
class members.
Under certain circumstances, pursuant to the Partnership Agreement and
other contractual obligations, Paine Webber and its affiliates, including the
Administrative General Partner were entitled to indemnification from the
Partnership for expenses and liabilities in connection with the above
litigation. Paine Webber and the affiliates have agreed to not seek
indemnification from the
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Partnership for any amounts payable in connection with the aforementioned
litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Limited Partners of the
Partnership, through the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year ended December 31, 1997.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no organized trading market for the purchase and sale of the
Units and certain measures have been adopted and implemented to assure that no
organized trading market will develop.
As of March 1, 1998, the number of Limited Partners was approximately
1,315.
The Partnership declared the following distributions to its Class A
Limited Partners out of cash flows received from operations during 1997 and
1996:
<TABLE>
Period During
Which Amount Of
Distribution Cash Distribution
Was Generated Per Unit Record Date Payment Date
------------- -------- ----------- ------------
<S> <C> <C> <C>
January 1997 4.58 February 1, 1997 February 25, 1997
February 1997 4.58 March 1, 1997 March 25, 1997
March 1997 4.59 April 1, 1997 April 25, 1997
April 1997 4.58 May 1, 1997 May 25, 1997
May 1997 4.58 June 1, 1997 June 25, 1997
June 1997 4.59 July 1, 1997 July 25, 1997
July 1997 4.58 August 1, 1997 August 25, 1997
August 1997 4.58 September 1, 1997 September 25, 1997
September 1997 4.59 October 1, 1997 October 25, 1997
October 1997 4.58 November 1, 1997 November 27, 1997
November 1997 4.58 December 1, 1997 December 23, 1997
December 1997 4.59 January 1, 1998 January 23,1998
January 1996 4.58 February 1, 1996 February 25, 1996
February 1996 4.58 March 1, 1996 March 25, 1996
March 1996 4.59 April 1, 1996 April 25, 1996
April 1996 4.58 May 1, 1996 May 25, 1996
May 1996 4.58 June 1, 1996 June 25, 1996
June 1996 4.59 July 1, 1996 July 25, 1996
July 1996 4.58 August 1, 1996 August 25, 1996
August 1996 4.58 September 1, 1996 September 26, 1996
September 1996 4.59 October 1, 1996 October 24, 1996
October 1996 4.58 November 1, 1996 November 25, 1996
November 1996 4.58 December 1, 1996 December 27, 1996
December 1996 4.59 January 1, 1997 January 24, 1997
</TABLE>
All distributions above were paid to all Class A Limited Partners.
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Total distributions declared to all partners for 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Class A Limited Partners $2,971,485 $2,971,485
Class B Limited Partner 328,536 328,536
General Partners 173,685 173,685
---------- ----------
$3,473,706 $3,473,706
========== ==========
</TABLE>
Distributions may be characterized for tax, financial reporting 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 financial reporting purposes,
approximately 48% and 81%, respectively, of the cash distributions to the Class
A Limited Partners for the years ended December 31, 1997 and 1996 constituted a
return of capital. Additionally, since inception approximately 74% of the cash
distributions to the Class A Limited Partners 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.
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Item 6. Selected Financial Data
The following selected financial data of the Partnership has been derived
from the financial statements for the indicated period. The information set
forth below should be read in conjunction with the Partnership's financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Items 8 and 7,
respectively, of this Report, which are incorporated herein by reference.
<TABLE>
<CAPTION>
As of As of As of As of As of
December 31, December 31, December 31, December 31, December 31,
1997 or Year 1996 or Year 1995 or Year 1994 or Year 1993 or Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Revenue(1) $ 7,907,694 $ 7,536,793 $ 8,271,776 $ 8,303,838 $ 6,158,305
Net Income 2,037,965 979,886 683,531 1,247,403 1,050,148
Net income per Class A Limited
Partnership Unit(2) 28.65 10.52 3.31 13.96 15.32
Total Assets 17,072,655 18,597,031 21,067,151 23,852,273 23,979,124
Total Partners' Equity 16,291,782 17,727,523 20,221,343 23,011,518 23,297,722
Distributions Declared to Partners 3,473,706 3,473,706 3,473,706 3,436,536 2,799,669
</TABLE>
- ----------
(1) Includes net loss on sales and dispositions of equipment of $105,180,
$101,317 and $50,498 for the years ended December 31, 1996, 1995 and 1994,
respectively, and net gain on sale of equipment of $72,408 and $14,428 for
the years ended December 31, 1997 and 1993, respectively.
(2) Based upon the weighted average number of Class A Units outstanding.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discusion should be read in conjunction with the "Selected
Financial Data" and the Consolidated Financial Statements of the Partnership
and the Notes thereto this Report contains, in addition to historical
information, forward-looking statements that include risks and other
uncertainties. The Partnership's actual results may differ materially from
those anticipated in these forward-looking statements. Factors that might
cause such a difference include those discussed below, as well as general
economic and business conditions, competition and other factors discussed
elsewhere in this report. The Partnership undertakes no obligation to release
publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of anticipated
or unanticipated events.
Liquidity and Capital Resources
Rents and other receivables, net decreased by $216,900 from $1,175,409 at
December 31, 1996 to $958,509 at December 31, 1997. Rent receivables were down
slightly and the Partnership provided an allowance for bad debt at December 31,
1997, which was partially offset by an increase in receivables relating to
equipment sales.
Accounts payable and accrued liabilities decreased by $8,904 from $129,281
at December 31, 1996 to $120,377 at December 31, 1997 which was consistent with
the Partnership's level of operations.
Payable by affiliates increased by $8,486; from $260,996 at December 31,
1996 to $269,482 at December 31, 1997 which reflected an increase in
subordinated disposition fees payable partially offset by a reduction in
management fees payable.
Deferred income decreased by $62,009 from $125,500 at December 31, 1996 to
$63,491 at December 31, 1997 which reflects the number amount of advance
payments received by the Partnership at the end of each period.
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,
when the Partnership commenced operations.
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, 1997, equipment
purchased pursuant to the reinvestment program totaled $18,713,814 of which
$4,210,206 was acquired in the year ended December 31, 1997. At December 31,
1997, the Partnership had approximately $3,850,000 of cash flows from operations
and sales of equipment in excess of distributions and accrued distributions
which is available for reinvestment in additional equipment of which
approximately $2.5 million was expended or committed in the first quarter of
1998. 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 flows from operations
prior to their distribution to the partners or their reinvestment in additional
equipment in short-term highly liquid investments. These investments are
primarily short-term commercial paper issued by large domestic corporations.
During each of 1997, 1996 and 1995, the Partnership declared distributions
of cash flow received from operations and sales in the amount of $3,473,706. 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.
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<PAGE> 14
Distributions may be characterized for tax, financial reporting 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 financial reporting purposes,
approximately 48%, 81%, and 75%, respectively, of the 11% cash distributions to
the Class A Limited Partners for the years ended December 31, 1997, 1996, and
1995 constituted a return of capital. However, the total actual return on
capital over a leasing partnership's life can be determined only 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 rentals from firm-term non-cancelable leases in place for 1998 are
less than the cash distribution objectives and expected related operating
expenses. Thus, without cash from sales and month-to-month leases (leases which
stay in place beyond the firm-term expiration date) or the cash flow generated
from additional reinvestments, the Partnership may not be able to meet
distribution objectives, potentially resulting in the early termination of the
reinvestment period and commencement of the liquidation of the Partnership.
Litigation
See Item 3, "Legal Proceedings" for a discussion of certain class action
lawsuits.
Results of Operations
1997 Compared to 1996
The Partnership reported net income of $2,037,965 for the year ended
December 31, 1997 ("1997 Period") as compared to $979,886 for the year ended
December 31, 1996 ("1996 Period"). The principal reasons for the increase in net
income in the 1997 Period as compared to the 1996 Period was the lease
termination payment and related sale of equipment pursuant to six equipment
schedules during the 1997 Period and the difference between gains and losses on
dispositions of equipment generated during the comparative periods, as well as a
decrease in depreciation expense.
Rental income increased by $159,796, or 2% during the 1997 Period as
compared to the 1997 Period, principally due to the lease termination payment
received in 1997, partially offset by the rentals attributable to equipment
sold upon originally scheduled lease expiration and the renewal of certain
equipment at lower rates, partially offset by rentals from equipment purchased
subsequent to December 31, 1996.
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<PAGE> 15
Interest income increased by $33,517 or 32% in the 1997 Period as compared
to the 1996 Period due principally to increased amounts and investments of
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 $1,330,038 or 23% in
the 1997 Period as compared to the 1996 Period due to a decrease in equipment
subject to operating leases (attributable to equipment sold subsequent to the
1996 Period offset by equipment purchased subsequent to the 1996 Period).
Based upon the evaluation of equipment owned, the Partnership provided for
writedowns of $875,000 in the 1997 Period and $325,000 in the 1996 Period to
reflect the loss in value of certain equipment. In 1997 the Partnership
provided allowances for bad debt of $75,000 as compared to $50,000 in 1996.
Management fees and subordinated disposition fees increased by $66,322 or
21% in the 1997 Period as compared to the 1996 Period. Management fees increased
$13,618, or 4%, which was consistent with the increase in rental revenues, on
which service fees are based.
Subordinated disposition fees increased $52,704 in the 1997 Period as
compared to the 1996 Period. The increase is attributable to an increase in
equipment sales and equipment sales proceeds generated which is the basis for
such fee.
General and administrative expenses increased by $1,538 or 1% decrease in
partnership level income taxes in the 1997 Period as compared to the 1996 Period
which was consistent with the Partnerships level of experience.
1996 Compared to 1995
The Partnership reported net income of $979,886 for the year ended
December 31, 1996 ("1996 Period") as compared to $683,531 for the year ended
December 31, 1995 ("1995 Period"). While rental income and depreciation
decreased proportionately in the 1996 period the principal reason for the change
in net income was the reduced provision for equipment impairment with the 1996
Period as compared to the 1995 Period.
Rental income decreased by $736,983 or 9%, during the 1996 Period as
compared to the 1995 Period, principally due to the sale of equipment upon lease
expiration subsequent to the 1995 Period (which was earning rental revenue in
the 1995 Period) and the renewal of certain equipment at lower rates, partially
offset by rental from equipment purchased in 1996.
Interest income increased by $5,863, or 6%, in the 1996 Period as compared
to the 1995 Period due principally to the balances of 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 $570,568 or 9% in the
1996 Period as compared to the 1995 Period which was consistent with the
decrease in rental income.
13
<PAGE> 16
Management fees and subordinated dispositions fees decreased by 16%, or
$57,915, in the 1996 Period as compared to the 1995 Period. Management fees
decreased by $40,760 or 12% in the 1996 Period as compared to the 1995 Period
which was consistent with the decrease in rental income as well as the leases in
place in the respective periods. Subordinated disposition fees decreased by
$17,155 in the 1996 Period as compared to the 1995 Period due to a decrease in
equipment sales proceeds.
General and administrative expenses increased by $13,145, or 13%, in the
1996 Period as compared to the 1995 Period, which was consistent with the
Partnership's level of operations.
Results of Operations
Inflation and Changing Prices
Inflation has not had any material impact on the operations or financial
condition of the Partnership from inception through December 31, 1997. However,
inflation and changing prices, in addition to other factors, may affect
subsequent leasing rates and the eventual selling price of the Partnership's
equipment.
14
<PAGE> 17
Item 8. Financial Statements
PW PREFERRED YIELD FUND II, L.P.
List of Financial Statements
Page
----
Report of Independent Public Accountants F-2
Balance Sheets - December 31, 1997 and 1996 F-3
Statements of Income for the Years ended
December 31, 1997 and 1996 and 1995 F-4
Statements of Partners' Equity for the Years
ended December 31, 1997 and 1996 and 1995 F-5
Statements of Cash Flows for the Years ended
December 31, 1997 and 1996 and 1995 F-6
Notes to Financial Statements F-7
All Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since;
(1) the information required is disclosed in the financial statements and notes
therein; (2) schedules are not required under the related instructions; or (3)
the schedules are inapplicable.
F-1
<PAGE> 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of PW Preferred Yield Fund II, L.P.:
We have audited the financial statements as listed in the accompanying Index on
Page F-1 therein. 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 audits to obtain
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, 1997 and 1996, and the results of its operations and its
cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
March 25, 1998
F-2
<PAGE> 19
PW PREFERRED YIELD FUND II, L.P.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents $ 4,215,247 $ 2,524,801
Rent and other receivables, net of allowance for bad debt
of $200,000 and $125,000 at December 31, 1997
and 1996, respectively 958,509 1,175,409
Equipment subject to operating leases, net of accumulated
depreciation of $17,565,961 and $19,793,564 at December
31, 1997 and 1996, respectively, and writedowns of
$745,711 and $775,154 at December 31, 1997 and 1996,
respectively. (Note 4) 11,735,752 14,736,716
Equipment available for sale or lease, net of accumulated
depreciation of $792,493 and $512,405 at December 31,
1997 and 1996, respectively and writedowns of $25,000
at December 31, 1997 145,575 134,700
Other assets 17,572 25,405
----------- -----------
Total Assets $17,072,655 $18,597,031
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
LIABILITIES:
Accounts payable and accrued liabilities $ 120,377 $ 129,281
Payable to affiliates (Note 5) 269,482 260,996
Deferred rental income 63,491 125,500
Distributions payable to partners 327,523 353,731
----------- -----------
Total Liabilities 780,873 869,508
----------- -----------
Commitments and contingencies (Note 8)
PARTNERS' EQUITY:
General Partners 799,215 653,082
Limited Partners:
Class A (54,027 Units outstanding at
December 31, 1997 and 1996) 13,555,240 14,978,906
Class B 1,937,327 2,095,535
----------- -----------
Total Partners' Equity 16,291,782 17,727,523
----------- -----------
Total Liabilities and Partners' Equity $17,072,655 $18,597,031
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 20
PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Rentals from operating leases $7,696,293 $7,536,497 $8,273,480
Net gain (loss) on sale of equipment 72,408 (105,180) (101,317)
Interest income 138,993 105,476 99,613
---------- ---------- ----------
7,907,694 7,536,793 8,271,776
---------- ---------- ----------
EXPENSES:
Depreciation and amortization 4,425,716 5,755,754 6,326,322
Writedowns and bad debts 950,000 375,000 791,000
Management and subordinated disposition fees
(Note 5) 377,567 311,245 369,160
General and administrative (Note 5) 116,446 114,908 101,763
---------- ---------- ----------
5,869,729 6,556,907 7,588,245
---------- ---------- ----------
NET INCOME $2,037,965 $ 979,886 $ 683,531
========== ========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 319,818 $ 296,431 $ 422,521
To the Class A Limited Partners 1,547,819 568,416 179,012
To the Class B Limited Partner 170,328 115,039 81,998
---------- ---------- ----------
$2,037,965 $ 979,886 $ 683,531
========== ========== ==========
NET INCOME PER WEIGHTED AVERAGE
NUMBER OF UNITS OF CLASS A LIMITED
PARTNER INTERESTS OUTSTANDING $ 28.65 $ 10.52 $ 3.31
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF UNITS
OF CLASS A LIMITED PARTNER
INTERESTS OUTSTANDING 54,027 54,027 54,027
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 21
PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Class A Class B
General Limited Limited
Partners Partners Partner Total
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 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
Net income 296,431 568,416 115,039 979,886
Distributions declared to partners (173,685) (2,971,485) (328,536) (3,473,706)
--------- ----------- ---------- -----------
Balance, December 31, 1996 653,082 14,978,906 2,095,535 17,727,523
Net income 319,818 1,547,819 170,328 2,037,965
Distributions declared to partners (173,685) (2,971,485) (328,536) (3,473,706)
--------- ----------- ---------- -----------
Balance, December 31, 1997 $ 799,215 $13,555,240 $1,937,327 $16,291,782
========= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 22
PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,037,965 $ 979,886 683,531
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,425,716 5,755,754 6,326,322
Writedowns 875,000 325,000 716,000
Provision for bad debts 75,000 50,000 75,000
(Gain) loss on sale of equipment (72,408) 105,180 101,317
Change in assets and liabilities:
Rent and other receivables 154,153 (578,900) (286,327)
Accounts payable and accrued liabilities (8,904) 44,691 27,162
Payable to affiliates 8,486 (47,662) 127,592
Deferred rental income (62,009) (7,976) (149,701)
Other assets -- (17,572) --
----------- ----------- -----------
Net cash provided by operating activities 7,432,999 6,608,401 7,620,896
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 1,967,567 256,348 746,371
Purchases of equipment on operating leases (4,210,206) (2,042,859) (4,658,439)
----------- ----------- -----------
Net cash used in investing activities (2,242,639) (1,786,511) (3,912,068)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners (3,499,914) (3,439,059) (3,473,706)
----------- ----------- -----------
Net cash used in financing activities (3,499,914) (3,439,059) (3,473,706)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,690,446 1,382,831 235,122
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,524,801 1,141,970 906,848
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR 4,215,247 $ 2,524,801 $ 1,141,970
=========== =========== ===========
Distribution declared but unpaid 327,523 $ 353,731 $ 319,084
=========== =========== ===========
Equipment subject to operating lease, and transferred
to equipment available for sale or lease, net 115,236 134,700 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 23
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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"), doing business as Equis Financial Group
Limited ("EFG") 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. 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 contributed 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 flows to purchase a total of $4,210,206,
$2,042,859 and $4,658,439 of equipment during 1997, 1996 and 1995, respectively
(inclusive of related acquisition fees, structuring fees and expense
allowances). Additional equipment will be acquired by the Partnership during
1998 and in future years during the reinvestment period (which will end in
either 1999 or 2000, at the General Partners' discretion).
F-7
<PAGE> 24
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The Partnership maintains its accounting records,
and prepares financial statements on the accrual basis of accounting. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods. The
most significant estimates by management relate to estimated residual or
salvage values. Actual results could differ from those estimates.
Cash and Cash Equivalents The Partnership invests working capital and cash
flows from operations, prior to their distribution to the partners or their
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 terms of the leases. Equipment on operating leases
is stated at cost, including the acquisition and structuring fees paid to the
General Partners (see Note 5 "Transaction with Affiliates"), 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 a item of equipment has been other than temporarily impaired, a
writedown will be provided to the extent of such loss in value.
Organization Costs Organization costs were amortized using the
straight-line method over a period of five years and are fully amortized at
December 31, 1997.
F-8
<PAGE> 25
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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.
Statement 128 FASB 128 had no impact on the partnership computation of
per unit values in any year presented.
New Accounting Pronouncements, Issued But Not Yet Effective
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances arising from nonowner sources. The Partnership does not expect
this pronouncement to materially impact the reporting of its results of
operations.
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 is generally allocated between the Class A
Limited Partners and the Class B Limited Partner in the manner set forth in the
table below.
<TABLE>
<CAPTION>
1. During the reinvestment period (which will end in 1999 or 2000):
---------------------------------------------------------------
Class A Class B
Limited Limited
Partners Partner Reinvested
-------- ------- ----------
<S> <C> <C> <C>
(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% --
</TABLE>
F-9
<PAGE> 26
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Class A Class B
Limited Limited
Partners Partner Reinvested
-------- ------- ----------
<S> <C> <C> <C>
(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>
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.
F-10
<PAGE> 27
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 equals 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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Industrial equipment $ 21,696,600 $ 23,154,521
Business equipment 8,350,824 12,150,913
------------ ------------
30,047,424 35,305,434
Less: Accumulated depreciation (17,565,961) (19,793,564)
Writedowns (745,711) (775,154)
------------ ------------
$ 11,735,752 $ 14,736,716
============ ============
</TABLE>
Excluded from industrial equipment and business equipment is the
depreciated cost of $145,575 and $134,700 respectively of equipment available
for sale or lease at December 31, 1997 and 1996.
Industrial equipment includes materials handling (approximately 42%),
construction and mining (approximately 11%), transportation (approximately 11%),
medical and research (approximately 6%), and manufacturing testing equipment
(approximately 2%), and business equipment includes computers and
computer-related equipment (approximately 9%), retail sales equipment
(approximately 9%), and telecommunications equipment (approximately 5%); and
furniture and fixtures (approximately 5%) at December 31, 1997 (all percentages
are 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.
F-11
<PAGE> 28
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Activity relating to the allowance for equipment impairment was as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Beginning of period $ 775,154 $ 568,737
Writedowns 875,000 325,000
Dispositions (879,443) (118,583)
--------- ---------
Balance, end of period $ 770,711(1) $ 775,154
========= =========
</TABLE>
(1) Includes impairments relating to equipment held for sale or lease.
Significant Lessees
The Partnership's equipment is primarily leased to lessees which are
investment grade lessees or which are operating subsidiaries of entities which
are investment grade companies. Revenue from major individual lessees which
accounted for greater than 10% of the Partnership's total rental revenue during
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Lessee Percentage of Total Rental Revenue
- -------------------------- ------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Chrysler Corporation 13%(A) -- --
Collection Services, Inc. 13% -- --
AT&T Corp. 10% 12% --
General Motors 10% 10% 12.0%
</TABLE>
(A) Includes the lease termination payment of all of the related leases in
1997 and the sale of the related equipment thereunder.
Minimum Future Rentals
The following is a schedule by years of minimum future rentals from
operating leases as of December 31, 1997:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1998 $3,681,832
1999 1,992,019
2000 1,139,726
2001 824,568
Thereafter 141,696
----------
$7,779,841
==========
</TABLE>
F-12
<PAGE> 29
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. TRANSACTIONS WITH AFFILIATES
Acquisition and Operating Stages
Acquisition of Equipment The Partnership acquired, on an all-cash basis,
equipment from EFG, an affiliate of the Managing General Partner, at aggregate
purchase prices of $3,160,470, $1,983,358, $4,522,756 (not including the
acquisition and structuring fees and the acquisition expense allowance discussed
below) during 1997, 1996 and 1995, respectively.
The purchase price of the equipment acquired from EFG was 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 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 Fees 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. The Managing General Partner, or its affiliates, earned $122,627,
$59,501 and $135,683 of acquisition fees attributable to the acquisition of
equipment during 1997, 1996 and 1995, respectively.
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 $318,172, $304,554 and $345,314 were earned by the General Partners with
regard to the rentals earned by the Partnership during 1997, 1996 and 1995,
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
F-13
<PAGE> 30
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
$106,962 are payable to the General Partners at December 31, 1997 of which
$59,394, $6,691 and $23,846 were incurred in 1997, 1996 and 1995, respectively.
These fees, 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).
As part of the class action settlement (see Footnote 8, "Litigation"),
beginning January 1996, all fees and distributions payable to the Administrative
General Partner and all future fees and distributions earned by the
Administrative General Partner have been assigned by an affiliate to an escrow
account for the benefit of class members.
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income per financial statements $2,037,965 $ 979,886 $ 683,531
Increase (decrease) resulting from:
Writedowns 875,000 325,000 716,000
Provisions for bad debts 75,000 50,000 75,000
Depreciation (872,878) (881,374) (484,722)
Gain on sale of equipment and other 320,715 (160,108) (214,107)
Deferred rental income (62,009) (67,274) (149,701)
Subordinated disposition fee payable 59,394 6,691 23,846
Other 74,819 (54,259) (64,723)
---------- ---------- ----------
Taxable income per federal income tax return $2,508,006 $ 198,562 $ 585,124
========== ========== ==========
</TABLE>
F-14
<PAGE> 31
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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>
1997 1996
----------- -----------
<S> <C> <C>
Net assets per financial statements $16,291,782 $17,727,523
Increase (decrease) resulting from:
Commisions and expenses paid
in connection with the sale
of Class A Limited Partner Units 3,260,594 3,260,594
Distributions payable to partners 327,523 353,731
Deferred rental income 63,491 125,500
Accumulated depreciation (2,386,876) (2,683,908)
Writedowns and allowance for
doubtful accounts 970,711 900,154
Subordinated disposition fees payable 106,962 47,568
Other 175,057 43,782
----------- -----------
Tax bases of net assets $18,809,244 $19,774,944
=========== ===========
</TABLE>
7. 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 management control with respect to each of the general partners
(including the general partner of the Partnership) or managing trustees of the
Investment Programs; and AFG, as Manager, will continue to provide asset
management services to the Partnership.
F-15
<PAGE> 32
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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. AFG also agreed to change its name, except where it is used in
connection with the Investment Programs. In early 1996, AFG changed its name to
Equis Financial Group.
8. 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 Paine Webber Incorporated's sale
and sponsorship of various limited partnership investments, including those
offered by the Partnership. The lawsuits were brought against Paine Webber
Incorporated and Paine Webber Group, Inc. (together, "Paine Webber"), among
others, by allegedly dissatisfied partnership investors. In March 1995, after
the actions were consolidated under the title [In re: Paine Webber 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, Paine Webber
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 investments Paine Webber and the Administrative
General Partner misrepresented financial information about the Partnership's
value and performance. The amended complaint alleged that Paine Webber and the
Administrative General Partner violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, reimbursement for all sums invested by them in the
partnerships, as well as disgorgement of all fees and other income derived by
Paine Webber from the Limited Partnerships. In addition, the plaintiffs also
sought treble damages under RICO.
On May 30, 1995, the U.S. District Court certified class action treatment
of the plaintiff's claims in the class action entitled, In re: Paine Webber
Limited Partnerships Litigation.
F-16
<PAGE> 33
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
In January 1996, Paine Webber signed a memorandum of understanding with
the plaintiffs in the class action outlining the terms under which the parties
agreed to settle the case. A definitive settlement agreement was signed in July
1996 and in March 1997, the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement, Paine Webber agreed to pay $125
million and certain additional consideration to class members. The investors who
had objected to the settlement have appealed the District Court's approval to
the United States Court of Appeals for the Second Circuit. In July 1997, the
U.S. Court of Appeals for the Second Circuit affirmed the District Court's
approval of the settlement. The District Court must still determine the extent
of attorneys fees to be awarded to Plaintiff's counsel which will be paid to the
settlement fund so that the remainder of monies can be distributed to class
members.
Under certain circumstances, pursuant to the Partnership Agreement and
other contractual obligations, Paine Webber and its affiliates, including the
Administrative General Partner are entitled to indemnification from the
Partnership for expenses and liabilities in connection with the above
litigation. Paine Webber and the affiliates have agreed not to seek
indemnification from the Partnership for any amounts payable in connection with
the aforementioned litigation.
9. IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. This could result in
a system failure or miscalculations in the year 2000 causing disruptions of
operations of the Partnership, its lessees, or general partners.
The Partnership has already reviewed and identified its computer systems
that are subject to Year 2000 risk. Accordingly, the Partnership has commenced
the remediation of all systems not Year 2000 compliant. Remediation and testing
of such systems will be completed in advance of Year 2000. The costs of such
remediation are being expensed as incurred and will not be material in any
period to the Partnership's financial position or results of operations.
The Partnership has also initiated communication with lessees and vendors
to determine the extent to which the Partnership is vulnerable to those third
parties' failures to remediate their own Year 2000 issues. The Partnership has
not yet completed its communication with its lessees and vendors. As a result,
the Partnership cannot determine at this time the extent, if any, to which the
Partnership may be exposed to financial risk from the inability of the
Partnership's lessees and vendors to remediate their own Year 2000 issues.
F-17
<PAGE> 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no officers and directors. The General Partners
jointly manage and control the affairs of the Partnership and have general
responsibility and authority in all matters affecting its business. Information
concerning the directors and executive officers of the General Partners is as
follows:
Pembroke Financial Limited Partnership
(a Massachusetts limited partnership, of which
AFG Leasing VII Incorporated is the sole general partner)
<TABLE>
<CAPTION>
Name Positions Held
---- --------------
<S> <C>
Geoffrey A. MacDonald Chairman and a member of the Executive Committee of
EFG and President and Director of AFG Leasing VII
Incorporated
Gary D. Engle President and Chief Executive Officer and member of
the Executive Committee of EFG and Vice President and
Director of AFG Leasing VII Incorporated
Gary M. Romano Executive Vice President and Chief Operating Officer
of EFG and AFG Leasing VII Incorporated
</TABLE>
Geoffrey A. McDonald, age 49, is a co-founder, member of the Executive
Committee and Chairman. Mr. MacDonald served as co-founder, Director and Senior
Vice President of EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald
is President and a Director of AFG Leasing VII Incorporated and Vice-President
of American Finance Group Securities Corp. Prior to co-founding EFG's
predecessor, Mr. MacDonald held various executive and management positions in
the leasing and pharmaceutical industries. Mr. MacDonald holds an Masters in
Business Administration from Boston College and a Bachelor of Arts degree from
the University of Massachusetts (Amherst).
Gary D. Engle, age 49, is President, Chief Executive Officer and a member
of the Executive Committee of EFG and Vice President and Director of AFG Leasing
VII Incorporated. Mr. Engle is Vice President and Director of certain of EFG's
affiliates. On December 16, 1996, Mr. Engle acquired control of EFG, the General
Partner and Subsidiaries of EFG From 1987 to 1990, Mr. Engle was a principal and
co-founder of Cobb Partners Development, Inc., a real estate and mortgage
banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and
Chief Financial Officer of Arvida Disney Company. Prior to 1980, Mr. Engle
served in various management consulting and institutional brokerage capacities.
Mr. Engle has a Masters of Business
15
<PAGE> 35
Administration from Harvard University and a Bachelor of Science degree from the
University of Massachusetts (Amherst).
Gary M. Romano, age 38, is Executive Vice President and Chief Operating
Officer of EFG and certain of its affiliates. Mr. Romano joined AFG in November
1989 and was appointed Vice President and Controller in April 1993 and Executive
Vice President and Chief Operating Officer in April 1996. Prior to joining AFG,
Mr. Romano was Assistant Controller for a privately held real estate development
and management company which he joined in 1987. Mr. Romano held audit staff and
manager positions at Ernst & Whinney from 1982 to 1986. Mr. Romano is a
Certified Public Accountant and holds a Bachelor of Science degree from Boston
College.
General Equipment Management II, Inc.
<TABLE>
<CAPTION>
Name Positions Held
---- --------------
<S> <C>
Gerald F. Goertz, Jr. Chairman of the Board
Stephen R. Dyer President and Director
Clifford B. Wattley Vice President, Assistant Secretary and Director
Joseph P. Ciavarella Vice President, Secretary, Treasurer, Chief Financial
and Accounting Officer and Director
</TABLE>
Gerald F. Goertz, Jr., age 40, is Chairman of the Board of Directors of
the Administrative General Partner. Mr. Goertz joined Paine Webber Incorporated
in December 1990 and holds the position of Senior Vice President and Director of
Specialized Investment Services. Prior to joining Paine Webber Incorporated, Mr.
Goertz was associated with CG Realty Advisors and The Freeman Company. He
received his Bachelor of Arts degree in Business Administration in 1979 from
Vanderbilt University and his Juris Doctorate and Masters of Business
Administration from Memphis State University in 1982.
Stephen R. Dyer, age 38, is President and a Director of the Administrative
General Partner. He joined Paine Webber Incorporated in June 1988 as a
Divisional Vice President and is currently a Corporate Vice President and
Director of Private Investments. Prior to joining Paine Webber Incorporated, Mr.
Dyer had been employed, since June 1987, as an Assistant Vice President in the
Retail National Products Group of L.F. Rothschild & Co. Incorporated. Prior to
joining L.F. Rothschild, he was employed, beginning in January 1985, as an
Associate in the Real Estate Department of Thomson McKinnon Securities Inc. From
July 1981 to August 1983, Mr. Dyer was on the audit staff of the accounting firm
of Arthur Young & Company. He received his Bachelor of Science degree in
Accounting in 1981 from Boston College and a Masters of Business Administration
from Indiana University in December 1984. Mr. Dyer is a Certified Public
Accountant.
16
<PAGE> 36
Clifford B. Wattley, age 48, is a Vice President, Assistant Secretary and
Director of the Administrative General Partner. Mr. Wattley is a Corporate Vice
President with Paine Webber Incorporated, having joined the firm in 1986. He
also was employed previously by Paine, Webber, Jackson & Curtis from 1979 to
1980. From 1986 to 1992, Mr. Wattley participated in Paine Webber's Principal
Transactions Group. Mr. Wattley has been a member of the Private Investment
Department since 1992. He holds a Bachelor of Science degree in engineering from
Columbia University and a Masters in Business Administration from Harvard
University.
Joseph P. Ciavarella, age 42, is Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer and Director of the Administrative
General Partner. He joined Paine Webber Incorporated in May 1994 as a Corporate
Vice President. Immediately prior to joining Paine Webber Incorporated, he was
associated from August 1993 to May 1994 with the Aviation Capital Group. From
1983 to 1993, he was a financial officer of Integrated Resources Inc. and a
senior officer in the Equipment Leasing division, aircraft finance and capital
markets areas. He is a graduate of Hofstra University and is a Certified Public
Accountant.
Item 11. Executive Compensation
No compensation was paid by the Partnership to the officers and directors
of the General Partners. See Item 13 of this Report, "Certain Relationships and
Related Transactions", which is incorporated herein by reference, for a
description of the compensation and fees paid to the General Partners and their
affiliates by the Partnership during 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of the date hereof, no person is known by the Partnership
to be the beneficial owner of more than 5% of the Units of the
Partnership. The Partnership has no directors or officers, and
neither the General Partners nor the Class B Limited Partner
of the Partnership owns any Units. At December 31, 1996, ATL,
Inc., an affiliate of the Administrative General Partner,
owned 260 Units pursuant to legal settlements with certain
limited partners.
PYB Limited Partnership owns 100% of the Partnership's Class B
Units. AFG acquired all of the equity ownership interest in
PYB Limited Partnership as of November 1, 1993.
17
<PAGE> 37
The names and addresses of the General Partners and the Class
B Limited Partner are as follows:
Managing General Partner:
Pembroke Financial Limited Partnership
88 Broad Street
Boston, MA 02110
Administrative General Partner:
General Equipment Management II, Inc.
1200 Harbor Boulevard, 5th Floor
Weehawken, NJ 07087
Class B Limited Partner:
PYB Limited Partnership
88 Broad Street
Boston, MA 02110
(b) No directors or officers of the Managing General Partner, the
Administrative General Partner or the Class B Limited Partner
owned any Units as of March 1, 1998.
(c) The Partnership knows of no arrangements, the operation of the
terms of which may at a subsequent date result in a change in
control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners and their affiliates have received or will receive
certain types of compensation, fees, or other distributions in connection with
the operations of the Partnership. The fees and compensation were determined in
accordance with the applicable provisions of the Partnership Agreement.
Following is a summary of the amounts paid or payable to the General
Partners and their affiliates during 1997.
18
<PAGE> 38
Acquisition and Operating Stages
Acquisition of Equipment During 1997, the Partnership acquired, on an
all-cash basis, equipment from EFG, an affiliate of the Managing General
Partner, at a purchase price of $3,160,470 (not including the related
acquisition fees discussed below).
The purchase price of the equipment acquired from EFG was 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 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
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 $122,627 of acquisition fees
attributable to the acquisition of equipment during 1997.
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, 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 $318,172 were earned by the General
Partners with respect to the rentals earned by the Partnership during 1997.
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 of $59,394 are payable to the General Partners with respect to
1996. 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 1997.
Distributive Interests The General Partners received or accrued an
aggregate of $173,685 of cash distributions in 1997.
19
<PAGE> 39
As part of the class action settlement (see footnote 8, "Litigation")
beginning January 1996, all fees and distributions payable to the Administrative
General Partner and all future fees and distributions earned by the
Administrative General Partner have been assigned by an affiliate to an escrow
account for the benefit of class members.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
and
(d)
1. Financial Statements: (Incorporated by reference to Item 8 of
this Report, "Financial Statements and Supplementary Data").
(b) None.
(c) Exhibits required to be filed.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
4.1 Amended and Restated Agreement of Limited
Partnership of PW Preferred Yield Fund II, L.P.,
dated as of September 10, 1992. Filed as Exhibit 4.1
to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992.*
10.1 Sales Agency Agreement, dated September 15, 1992,
among PW Preferred Yield Fund II, L.P., Pembroke
Financial Limited Partnership, General Equipment
Management II, Inc., AFG Leasing VII Incorporated,
American Finance Group and Paine Webber
Incorporated. Filed as Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.*
10.2 Escrow Agreement, dated as of September 17, 1992,
among PW Preferred Yield Fund II, L.P., Paine Webber
Incorporated and First National Bank of Omaha. Filed
as Exhibit 10.2 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992.*
10.3 Reporting Agent Agreement, dated as of September 17,
1992, by and among PW Preferred Yield Fund II, L.P.,
Paine Webber Incorporated and Service Data
Corporation. Filed as Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.*
11 Partnership's policy regarding requests for partner
lists.
- ----------
* Not filed herewith. In accordance with Rule 12b-32 of the General Rules
and Regulations under the Securities Exchange Act of 1934, reference is
made to the document previously filed with the Commission which is
incorporated herein by reference.
</TABLE>
20
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1998
PW Preferred Yield Fund II, L.P.
By: General Equipment Management II, Inc.
Administrative General Partner
By: /s/ Stephen R. Dyer
----------------------------------------
Stephen R. Dyer
President and Director
By: /s/ Joseph P. Ciavarella
----------------------------------------
Joseph P. Ciavarella
Vice President, Secretary,
Treasurer, Chief Financial and
Accounting Officer and Director
By: Pembroke Financial Limited Partnership
Managing General Partner
By: /s/ Geoffrey A. MacDonald
----------------------------------------
Geoffrey A. MacDonald
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 1998.
Signature Title
- --------- -----
/s/ Geoffrey A. MacDonald President and Director of AFG Leasing VII
- ------------------------------ Incorporated, the sole General Partner of
Geoffrey A. MacDonald Pembroke Financial Limited Partnership
/s/ Gary D. Engle Vice President and Director of AFG Leasing
- ------------------------------ VII Incorporated, the sole General Partner of
Gary D. Engle Pembroke Financial Limited Partnership
21
<PAGE> 41
/s/ Gerald F. Goertz, Jr. Chairman of the Board of General
- ------------------------------ Equipment Management II, Inc.
Gerald F. Goertz, Jr.
/s/ Stephen R. Dyer President and Director of General
- ------------------------------ Equipment Management II, Inc.
Stephen R. Dyer
/s/ Clifford B. Wattley Vice President, Assistant Secretary
- ------------------------------ and Director of General Equipment
Clifford B. Wattley Management II, Inc.
/s/ Joseph P. Ciavarella Vice President, Secretary, Treasurer,
- ------------------------------ Chief Financial and Accounting Officer
Joseph P. Ciavarella and Director of General Equipment
Management II, Inc.
22
<PAGE> 42
Exhibit Index
- -------------
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
4.1 Amended and Restated Agreement of Limited Partnership *
of PW Preferred Yield Fund II, L.P., dated as of
September 10, 1992. (Incorporated by Reference.)
10.1 Sales Agency Agreement, dated September 15, 1992, *
among PW Preferred Yield Fund II, L.P., Pembroke
Financial Limited Partnership, General Equipment
Management II, Inc., AFG Leasing VII Incorporated,
American Finance Group and Paine Webber Incorporated.
(Incorporated by Reference.)
10.2 Escrow Agreement, dated as of September 17, 1992, *
among PW Preferred Yield Fund II, L.P., Paine Webber
Incorporated and First National Bank of Omaha.
(Incorporated by Reference.)
10.3 Reporting Agent Agreement, dated as of September 17, *
1992, by and among PW Preferred Yield Fund II, L.P.,
Paine Webber Incorporated and Service Data
Corporation. (Incorporated by Reference.)
</TABLE>
- --------
* See Item 14(c) for statement of location of exhibits incorporated by
reference.
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REPORT
ON FORM 10-K FOR PW PREFERRED YIELD FUND II L.P.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4215247
<SECURITIES> 0
<RECEIVABLES> 1158509
<ALLOWANCES> (200000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 30047424
<DEPRECIATION> (18311672)<F1>
<TOTAL-ASSETS> 17072655
<CURRENT-LIABILITIES> 780873
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16291782<F2>
<TOTAL-LIABILITY-AND-EQUITY> 17072655
<SALES> 0
<TOTAL-REVENUES> 7907694
<CGS> 5678283
<TOTAL-COSTS> 5678283
<OTHER-EXPENSES> 116446
<LOSS-PROVISION> 75000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2037965
<INCOME-TAX> 0
<INCOME-CONTINUING> 2037965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2037965
<EPS-PRIMARY> 28.65<F3>
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES PROVISIONS FOR EQUIPMENT IMPAIRMENT
<F2>REPRESENTS PARTNERSHIP EQUITY
<F3>PER WEIGHTED AVERAGE CLASS A LIMITED PARTNERSHIP UNIT OUTSTANDING
</FN>
</TABLE>
