<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22300
PW PREFERRED YIELD FUND II, L.P.
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1180783
(State of organization) (IRS Employer
Identification No.)
88 BROAD STREET
BOSTON, MASSACHUSETTS 02110
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (617)854-5800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
<PAGE>
PW PREFERRED YIELD FUND II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - March 31, 1999 and December 31, 1998
(unaudited) 3
Statements of Income for the three months ended
March 31, 1999 and 1998 (unaudited) 4
Statements of Partners' Equity for the three
months ended March 31, 1999 and 1998 (unaudited) 5
Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited) 6
Notes to Financial Statements (unaudited) 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PW PREFERRED YIELD FUND II, L.P.
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,344,147 $ 3,629,653
Rents and other receivables, net of allowance for
doubtful accounts of $47,000 452,864 558,579
Equipment at cost, net of accumulated depreciation of
$15,532,584 and $18,645,275 at March 31, 1999 and
December 31, 1998, respectively 8,767,384 9,863,976
---------------- ---------------
Total Assets $ 13,564,395 $ 14,052,208
---------------- ---------------
---------------- ---------------
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 42,500 $ 32,500
Payable to affiliates 103,679 109,562
Deferred rental income 53,058 53,855
Distributions payable to partners 319,375 318,785
---------------- ---------------
Total Liabilities 518,612 514,702
---------------- ---------------
PARTNERS' EQUITY:
General Partners 636,917 661,502
Limited Partners:
Class A (54,027 Units outstanding) 10,857,003 11,265,748
Class B 1,551,863 1,610,256
---------------- ---------------
Total Partners' Equity 13,045,783 13,537,506
---------------- ---------------
Total Liabilities and Partners' Equity $ 13,564,395 $ 14,052,208
---------------- ---------------
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
3
<PAGE>
PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1999 1998
----------- -----------
REVENUE:
Lease revenue $ 1,244,137 $ 1,673,987
Gain on sale of equipment 39,720 80,167
Interest income 36,578 40,671
----------- -----------
Total Revenue 1,320,435 1,794,825
----------- -----------
EXPENSES:
Depreciation 863,676 1,050,000
Management fees (Note 2) 52,371 67,488
Subordinated disposition fees (Note 2) -- 9,764
General and administrative 27,685 29,388
----------- -----------
Total Expenses 943,732 1,156,640
----------- -----------
NET INCOME $ 376,703 $ 638,185
----------- -----------
----------- -----------
NET INCOME ALLOCATED:
To the General Partners $ 18,836 $ 31,909
To the Class A Limited Partners 334,126 551,483
To the Class B Limited Partner 23,741 54,793
----------- -----------
$ 376,703 $ 638,185
----------- -----------
----------- -----------
NET INCOME PER WEIGHTED AVERAGE
NUMBER OF UNITS OF CLASS A LIMITED
PARTNER INTEREST OUTSTANDING $ 6.18 $ 10.21
----------- -----------
----------- -----------
WEIGHTED AVERAGE NUMBER OF
UNITS OF CLASS A LIMITED PARTNER
INTEREST OUTSTANDING 54,027 54,027
----------- -----------
----------- -----------
The accompanying notes are an integral part of
these financial statements.
4
<PAGE>
PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B
GENERAL LIMITED LIMITED
PARTNERS PARTNERS PARTNER TOTAL
-------- -------- ------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1999 $ 661,502 $ 11,265,748 $ 1,610,256 $ 13,537,506
Net income 18,836 334,126 23,741 376,703
Distributions declared to partners (43,421) (742,871) (82,134) (868,426)
--------- ------------ ----------- ------------
Balance, March 31, 1999 $ 636,917 $ 10,857,003 $ 1,551,863 $ 13,045,783
--------- ------------ ----------- ------------
--------- ------------ ----------- ------------
Balance, January 1, 1998 $ 799,215 $ 13,555,240 $ 1,937,327 $ 16,291,782
Net income 31,909 551,483 54,793 638,185
Distributions declared to partners (43,421) (742,871) (82,134) (868,426)
--------- ------------ ----------- ------------
Balance, March 31, 1998 $ 787,703 $ 13,363,852 $ 1,909,986 $ 16,061,541
--------- ------------ ----------- ------------
--------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
5
<PAGE>
PW PREFERRED YIELD FUND II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 376,703 $ 638,185
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 863,676 1,050,000
Gain on sale of equipment (39,720) (80,167)
Change in assets and liabilities:
Rents and other receivables 105,715 (124,266)
Accounts payable and accrued liabilities 10,000 25,521
Payable to affiliates (5,883) 167,345
Deferred rental income (797) --
----------- ------------
Net cash from operating activities 1,309,694 1,676,618
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment -- (2,010,438)
Proceeds from equipment sales 272,636 238,798
----------- ------------
Net cash from (used in) investing activities 272,636 (1,771,640)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to partners (867,836) (868,426)
----------- ------------
Net cash used in financing activities (867,836) (868,426)
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 714,494 (963,448)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,629,653 4,215,247
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,344,147 $ 3,251,799
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
6
<PAGE>
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. GENERAL
The financial statements presented herein are prepared in conformity
with generally accepted accounting principles and the instructions for
preparing Form 10-Q under Rule 10-01 of Regulation S-X of the Securities and
Exchange Commission and are unaudited. As such, these financial statements do
not include all information and footnote disclosures required under generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in
conjunction with the footnotes presented in the 1998 Annual Report. Except as
disclosed herein, there has been no material change to the information
presented in the footnotes to the 1998 Annual Report.
In the opinion of management, all adjustments (consisting of normal
and recurring adjustments) considered necessary to present fairly the
financial position at March 31, 1999 and December 31, 1998 and results of
operations for the three month periods ended March 31, 1999 and 1998 have
been made and are reflected.
2. TRANSACTIONS WITH AFFILIATES
ACQUISITION AND OPERATING STAGES
ACQUISITION OF EQUIPMENT Pursuant to its investment objectives, the
Partnership has acquired, on an all-cash basis, certain leased equipment from
Equis Financial Group L.P. ("EFG") (formerly American Finance Group or AFG),
an affiliate of the Managing General Partner.
The purchase price of the equipment acquired from EFG is equal to
the lesser of the adjusted cost of the equipment or the appraised value of
the equipment at the time of its acquisition by the Partnership ("EFG
carrying value"). The adjusted cost of the equipment is equal to the price
paid by EFG, plus the cost of an appraisal, EFG's cost of interim financing
for the equipment and any taxes paid by EFG, less certain interim rentals
received by EFG with respect to the equipment.
ACQUISITION FEE The Managing General Partner, or its affiliates,
receives or is entitled to receive a fee equal to (i) 2.25% of the purchase
price of equipment purchased with net offering proceeds from the sale of
Units, and (ii) 3% of the purchase price of equipment purchased with
reinvested Partnership cash flow as compensation for evaluating, selecting,
negotiating and consummating the acquisition of the equipment.
7
<PAGE>
PW PREFERRED YIELD FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
MANAGEMENT FEES The General Partners are entitled to receive a
monthly fee in an amount equal to 2% of gross rentals for Full Payout Leases,
as defined in the Partnership Agreement and 5% 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 $52,371
were earned by the General Partners during the three months ended March 31,
1999.
DISPOSITION FEES The General Partners, or their affiliates, were
entitled to receive a subordinated disposition fee in an amount equal to the
lesser of (i) 50% of the fee that would be charged by an unaffiliated party,
or (ii) 3% of the gross contract price relating to each sale of equipment
(payable 50% to the Managing General Partner or its affiliates and 50% to the
Administrative General Partner) as compensation for negotiating and
consummating sales of equipment. During the fourth quarter of 1998, the
Partnership reversed previously accrued subordinated disposition fees because
the General Partners concluded that it was no longer probable that these
subordinated disposition fees would be paid. The Partnership has not accrued
for subordinated disposition fees during the three months ended March 31,
1999.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with 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.
YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer
programming logic to correctly identify the calendar year. Many companies
utilize computer programs or hardware with date sensitive software or
embedded chips that could interpret dates ending in "00" as the year 1900
rather than the year 2000. In certain cases, such errors could result in
system failures or miscalculations that disrupt the operations of the
affected businesses. The Partnership uses information systems provided by EFG
and has no information systems of its own. EFG has adopted a plan to address
the Year 2000 Issue that consists of four phases: assessment, remediation,
testing, and implementation and has elected to utilize principally internal
resources to perform all phases. EFG completed substantially all of its Year
2000 project by March 31, 1999 at an aggregate cost of less than $50,000,
none of which was incurred by the Partnership. All costs incurred in
connection with EFG's Year 2000 project have been expensed as incurred.
EFG's primary information software was coded by IBM at the point of
original design to use a four digit field to identify calendar year. All of
the Partnership's lease billings, cash receipts and equipment remarketing
processes are performed using this proprietary software. In addition, EFG has
gathered information about the Year 2000 readiness of significant vendors and
third party servicers and continues to monitor developments in this area. All
of EFG's peripheral computer technologies, such as its network operating
system and third-party software applications, including payroll, depreciation
processing, and electronic banking, have been evaluated for potential
programming changes and have required only minor modifications to function
properly with respect to dates in the year 2000 and thereafter. EFG
understands that each of its and the Partnership's significant vendors and
third-party servicers are in the process, or have completed the process, of
making their systems Year 2000 compliant. Substantially all parties queried
have indicated that their systems are Year 2000 compliant.
Presently, EFG is not aware of any outside customer with a Year 2000
Issue that would have a material effect on the Partnership's results of
operations, liquidity, or financial position. The Partnership's equipment
leases were structured as triple net leases, meaning that the lessees are
responsible for, among other things, (i) maintaining and servicing all
equipment during the lease term, (ii) ensuring that all equipment functions
properly and is returned in good condition, normal wear and tear excepted,
and (iii) insuring the assets against casualty and other events of loss.
Non-compliance with lease terms on the part of a lessee, including failure to
address Year 2000 Issues, could potentially result in lost revenues and
impairment of residual values of the Partnership's equipment assets.
9
<PAGE>
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year
2000 Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Partnership's business operations. However, EFG has no means of ensuring that
all customers, vendors and third-party servicers will conform ultimately to
Year 2000 standards and, therefore, the effect of this risk to the
Partnership can not be determined.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership commenced its equipment reinvestment phase during 1993
by investing excess cash flows available after the payment of the
distributions to the partners in additional equipment. As of March 31, 1999,
equipment purchased pursuant to the reinvestment program, including
acquisition fees and expenses, totaled $22,874,202. Additional equipment will
be purchased pursuant to the reinvestment program which will end in either
1999 or 2000, at the General Partners' discretion.
The Partnership invests working capital and cash flow from operations
prior to its distribution to the partners or its reinvestment in additional
equipment in short-term highly liquid investments. These investments are
primarily short-term commercial paper issued by large domestic corporations.
At March 31, 1999, the Partnership had approximately $3 million invested in
commercial paper and a fund that invests in such instruments.
Cash and cash equivalents increased $714,494 from $3,629,653 at December
31, 1998 to $4,344,147 at March 31, 1999. This increase primarily represents
the amount by which cash generated by operating activities and equipment
sales exceeded distributions to partners.
During the three months ended March 31, 1999, the Partnership declared
distributions of cash flow received from operations in the amount of
$868,426. All distributions to the Class A Limited Partners represented an
annualized distribution rate of 11% of their contributed capital and all
distributions to the Class B Limited Partner represented an annualized
distribution rate of 10% of its contributed capital.
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or both. The portion of
each cash distribution by a partnership, which exceeds its net income for the
fiscal period, may be deemed a return of capital. Based upon the amount of
net income reported by the Partnership for accounting purposes, approximately
55% of the 11% cash distributions to the Class A Limited Partners for the
three month ended March 31, 1999 constituted a return of capital.
Additionally, since inception, approximately 74% of the Class A Limited
Partner's 11% cash distributions constituted a return of capital. However,
the total actual return on capital over a leasing partnership's life can only
be determined at the termination of the Partnership after all residual cash
flows (which include proceeds from the re-leasing and sale of equipment after
initial lease terms expire) have been realized.
10
<PAGE>
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, the Partnership recognized
lease revenue of $1,244,137 compared to $1,673,987 for the same period in
1998. The overall decrease in lease revenue from 1998 to 1999 was expected
and resulted principally from primary lease term expirations and the sale of
equipment. The Partnership also earns interest income from temporary
investments of rental receipts and equipment sales proceeds in short-term
instruments.
During the three months ended March 31, 1999, the Partnership sold
equipment having a net book value of $232,916 to existing lessees and third
parties. These sales resulted in a net gain, for financial statement
purposes, of $39,720 compared to a net gain in 1998 of $80,167 on equipment
having a net book value of $245,287.
It cannot be determined whether future sales of equipment will result in
a net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount
of accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological
advances, and many other events can converge to enhance or detract from asset
values at any given time. EFG attempts to monitor these changes in order to
identify opportunities which may be advantageous to the Partnership and which
will maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset
is comprised of all primary lease term revenues generated from that asset,
together with its residual value. The latter consists of cash proceeds
realized upon the asset's sale in addition to all other cash receipts
obtained from renting the asset on a re-lease, renewal or month-to-month
basis. The Partnership classifies such residual rental payments as lease
revenue. Consequently, the amount of gain or loss reported in the financial
statements is not necessarily indicative of the total residual value the
Partnership achieved from leasing the equipment.
Depreciation expense was $863,676 and $1,050,000 for the three months
ended March 31, 1999 and 1998, respectively. For financial reporting
purposes, to the extent that an asset is held on primary lease term, the
Partnership depreciates the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset on a straight-line basis over
such term. For purposes of this policy, estimated residual values represent
estimates of equipment values at the date of primary lease expiration. To the
extent that an asset is held beyond its primary lease term, the Partnership
continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life.
Management fees were approximately 4.2% and 4% of lease revenue during
the three months ended March 31, 1999 and 1998, respectively. Management fees
are based on 5% of gross lease revenue generated by operating leases and 2%
of gross lease revenue generated by full payout leases.
11
<PAGE>
The General Partners, or their affiliates, were entitled to receive a
subordinated disposition fee in an amount equal to the lesser of (i) 50% of
the fee that would be charged by an unaffiliated party, or (ii) 3% of the
gross contract price relating to each sale of equipment (payable 50% to the
Managing General Partner or its affiliates and 50% to the Administrative
General Partner) as compensation for negotiating and consummating sales of
equipment. During the fourth quarter of 1998, the Partnership reversed
previously accrued subordinated disposition fees because the General Partners
concluded that it was no longer probable that these subordinated disposition
fees would be paid. The Partnership has not accrued for subordinated
disposition fees during the three months ended March 31, 1999.
General and administrative expenses consisted primarily of investor
reporting expenses and transfer agent and audit fees.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) On February 3, 1999 the Registrant notified
PricewaterhouseCoopers LLP ("PwC") that they were dismissed as
the Registrant's independent auditor and appointed Ernst &
Young LLP as its independent auditor. The Registrant filed
Form 8-K on February 4, 1999.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PW Preferred Yield Fund II, L.P.
(Registrant)
By: General Equipment Management II, Inc.
A General Partner
Date: May 13, 1999 By: /s/ Carmine Fusco
Carmine Fusco
VICE PRESIDENT, SECRETARY,
TREASURER AND CHIEF FINANCIAL
AND ACCOUNTING OFFICER
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PW PREFERRED
YIELD FUND II, L.P. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,344,147
<SECURITIES> 0
<RECEIVABLES> 499,864
<ALLOWANCES> (47,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,797,011
<PP&E> 24,299,968
<DEPRECIATION> (15,532,584)
<TOTAL-ASSETS> 13,564,395
<CURRENT-LIABILITIES> 518,612
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 13,045,783
<TOTAL-LIABILITY-AND-EQUITY> 13,564,395
<SALES> 0
<TOTAL-REVENUES> 1,320,435
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 943,732
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 376,703
<INCOME-TAX> 0
<INCOME-CONTINUING> 376,703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 376,703
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
