10-K 1 doc1.txt FORM 10-K UNITED STATES 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 [NO FEE REQUIRED] For the fiscal year ended December 31, 2001 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 Commission file number 0-22300 PW PREFERRED YIELD FUND II, L.P. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 84-118078 (STATE OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 450 CARRILON PARKWAY, SUITE 200 TAMPA, FLORIDA 33716 (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES) Registrant's telephone number, including area code (727) 803-8200 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. PW PREFERRED YIELD FUND II, L.P. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001

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 collectively referred to herein as the ("General Partners"). PYB Limited Partnership, a Massachusetts limited partnership, is the Class B Limited Partner ("Class B Limited Partner"). EFG 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 and the cash contributed by the Class B Limited Partner. 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 $231,098, $1,022,543 and $2,031,736 during 1994, 1993 and 1992, respectively, to fulfill its obligation. 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 consisted 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. Business equipment owned by the Partnership is limited to 60% of the value of the Partnership's total equipment. All equipment was acquired from EFG or from third-party sellers. Equipment cost represents asset base price plus acquisition fees. Asset base price is equal to the lower of (i) the actual price paid for the equipment by EFG plus the cost of an appraisal and all costs accrued by EFG while carrying the equipment less the amount of interim rents received by EFG prior to selling the equipment or (ii) fair market value of such equipment as determined by an independent appraiser. 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 was 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. During the acquisition stage, no more than 15% of the equipment was 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 by the end of 2003. During the reinvestment period (which ended in 2000), 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, were reinvested in additional leased equipment. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Upon the termination of the 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 ended in 2000) 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. In January 1996, certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group", and its acronym, were sold to a third-party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. EQUIPMENT PORTFOLIO The following table describes the Partnership's equipment portfolio as of December 31, 2001:

The above summary includes fully depreciated equipment held for sale or re-lease with a cost of approximately $268,000 at December 31, 2001. SIGNIFICANT LESSEES The Partnership leases its equipment to a significant number of lessees. Revenue from major individual lessees which accounted for 10% or more of lease revenue during 2001 is as follows:

The Partnership is not dependent on any one lessee 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. 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. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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, 2002, the number of Limited Partners was approximately 1,194. Total distributions declared to partners for 2001 and 2000 were as follows:

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 62% and 56%, respectively, of the cash distributions to the Class A Limited Partners for the years ended December 31, 2001 and 2000 constituted a return of capital. Additionally, since inception, approximately 68% 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. 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. For each of the five years in the period ended December 31:

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the "Selected Financial Data" and the "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. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the General Partners to make estimates and assumptions that affect the amounts reported in the financial statements. On a regular basis, the General Partners review these estimates and assumptions including those related to revenue recognition, asset lives and depreciation, allowance for doubtful accounts, allowance for loan loss, impairment of long-lived assets and contingencies. These estimates are based on the General Partners' historical experience and on various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The General Partners believe, however, that the estimates, including those for the above-listed items, are reasonable. The General Partners believe the following critical accounting policies, among others, are subject to significant judgments and estimates used in the preparation of these financial statements: Revenue Recognition: Rents are payable to the Partnership monthly or quarterly --------------------- and no significant amounts are calculated on factors other than the passage of time. The majority of the Partnership's leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Asset lives and depreciation method: The Partnership's primary business involves ------------------------------------ the purchase and subsequent lease of long-lived equipment. The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which generally represents the period of greatest revenue potential for each asset. Accordingly, 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 the 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. Allowance for doubtful accounts: The Partnership maintains allowances for ----------------------------------- doubtful accounts for estimated losses resulting from the inability of the lessees to make the lease payments required under the contracted lease agreements. These estimates are primarily based on the amount of time that has elapsed since the related payments were due as well as specific knowledge related to the ability of the lessees to make the required payments. If the financial condition of the Partnership's lessees were to deteriorate, additional allowances could be required that would increase expenses. Conversely, if the financial condition of the lessees were to improve or if legal remedies to collect past due amounts were successful, the allowance for doubtful accounts could be reduced, thereby decreasing expenses. Impairment of long-lived assets: On a regular basis, the General Partners ----------------------------------- review the net carrying value of equipment to determine whether it can be recovered from undiscounted future cash flows. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value and are reflected separately on the accompanying Statement of Operations as write-down of equipment. Inherent in the Partnership's estimate of net realizable value are assumptions regarding estimated future cash flows. If these assumptions or estimates change in the future, the Partnership could be required to record impairment charges for these assets. 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 December 31, 2001, equipment purchased pursuant to the reinvestment program, including acquisition fees and expenses, totaled $28,462,805. The Partnership's reinvestment period ended in fiscal 2000. 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 December 31, 2001, the Partnership had approximately $1.8 million invested in a money market fund that invests in commercial paper and similar instruments. Cash and cash equivalents increased $1,328,530 from $1,403,646 at December 31, 2000 to $2,732,176, including the $1.8 million described above, at December 31, 2001. This increase primarily represents the amount by which cash generated by operating activities and equipment sales exceeded distributions to partners. During the year ended December 31, 2001, the Partnership declared distributions of cash flow received from operations in the amount of $3,473,706. 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 62% of the cash distributions to the Class A Limited Partners for the year ended December 31, 2001 constituted a return of capital. Additionally, since inception, approximately 68% of the Class A Limited Partner's cash distributions constituted a return of capital. However, the total actual return on capital over a leasing partnership's life can only be determined at the termination of the Partnership after all residual cash flows (which include proceeds from the re-leasing and sale of equipment after initial lease terms expire) have been realized. RESULTS OF OPERATIONS For the year ended December 31, 2001, the Partnership recognized lease revenue of $3,663,156, compared to $4,161,267 and $4,767,855 for the years ended December 31, 2000 and 1999, respectively. The decrease in lease revenue from 2000 to 2001 and from 1999 to 2000 resulted principally from lease term expirations and the sale of equipment. The decrease from 2000 to 2001 was partially offset by the receipt of lease termination proceeds in 2001 from a lessee of the partnership. In March 2001, the lessee paid $513,479 as part of an agreement to terminate its lease early. The Partnership also earns interest income from temporary investments of rental receipts and equipment sales proceeds in short-term instruments. During 2001, the Partnership sold equipment having a net book value of $1,189,728 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $90,794 compared to a net gain in 2000 of $201,234 on equipment having a net book value of $167,066 and a net gain in 1999 of $346,023 on equipment having a net book value of $941,987. 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 $2,225,380, $2,635,037 and $3,257,913 for the years ended December 31, 2001, 2000 and 1999, 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 4.7%, 4.1% and 4.2% of lease revenue during the years ended December 31, 2001, 2000 and 1999, 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. 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. The Partnership has not accrued for subordinated disposition fees during 2001, 2000 or 1999. General and administrative expenses consisted primarily of investor reporting expenses, transfer agent fees, audit and tax fees. NEW ACCOUNTING PRONOUNCMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", (collectively the "statements") effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. In October 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which replaces SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of". SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company will apply the new rules on accounting for the goodwill and other intangible assets and for the impairment or disposal of long-lives assets beginning for the first quarter of 2002, which is not anticipated to have an impact on the Company's earnings or financial position. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Overall market risks are considered immaterial. ITEM 8. FINANCIAL STATEMENTS PW PREFERRED YIELD FUND II, L.P. LIST OF FINANCIAL STATEMENTS

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- To the Partners of PW Preferred Yield Fund II, L.P.: We have audited the accompanying balance sheets of PW Preferred Yield Fund II, L.P. as of December 31, 2001 and 2000, and the related statements of income, changes in partners' equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of 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. at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Tampa, Florida February 27, 2001 PW PREFERRED YIELD FUND II, L.P. BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000

The accompanying notes are an integral part of these financial statements. PW PREFERRED YIELD FUND II, L.P. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

The accompanying notes are an integral part of these financial statements. PW PREFERRED YIELD FUND II, L.P. STATEMENTS OF CHANGES IN PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

The accompanying notes are an integral part of these financial statements. PW PREFERRED YIELD FUND II, L.P. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

The accompanying notes are an integral part of these financial statements. ------ PW PREFERRED YIELD FUND II, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 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 has acquired, 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 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 Equis Financial Group Limited Partnership ("EFG"), a Massachusetts limited 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"). EFG owns all of the equity ownership interest in PYB Limited Partnership. 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. 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 $3,285,377 to fulfill its obligation. 2. SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents ---------------------------- The Partnership considers liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. The Partnership invests working capital and cash flows from operations, prior to distribution to partners in short-term highly liquid investments. At December 31, 2001 and 2000, the Partnership had approximately $1,821,000 and $865,000, respectively, invested in commercial paper and a money market fund that invests in similar instruments. Revenue Recognition -------------------- Rents are payable to the Partnership monthly or quarterly and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Future minimum rents of $3,312,316 are due as follows:

Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 2001, 2000 and 1999 is as follows: PERCENTAGE OF LEASE REVENUE ------------------------------

The allowance for bad debts was deemed to be immaterial at December 31, 2001 and 2000, respectively. Use of Estimates ------------------ The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Equipment on Lease -------------------- All equipment was acquired from EFG or from third-party sellers. Equipment cost represents asset base price plus acquisition fees. Asset base price is equal to the lower of (i) the actual price paid for the equipment by EFG plus the cost of an appraisal and all costs accrued by EFG while carrying the equipment less the amount of interim rents received by EFG prior to selling the equipment or (ii) fair market value of such equipment as determined by an independent appraiser. Depreciation ------------ The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, 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. Periodically, the General Partners evaluate the net carrying value of equipment to determine whether it exceeds estimated net realizable value. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including the General Partners' 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. The General Partners attempt 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. Provision for Income Taxes ----------------------------- No provision for income taxes is included in the accompanying financial statements. The Partners are responsible for reporting their proportionate share of the Partnership's taxable income and other tax attributes on their tax returns. 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. Receivable from General Partner ---------------------------------- Certain rents and proceeds from the sale of equipment are paid directly to EFG. EFG temporarily deposits collected funds in a separate escrow account and remits such amounts to the Partnership on a monthly basis. The Partnership was owed $148,300 and $149,843 for such funds as of December 31, 2001 and 2000, respectively. 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. 1. During the reinvestment period (which ended in 2000): -----------------------------------------------------------

Upon liquidation of the Partnership, cash available for distribution will be distributed in accordance with the partners' capital accounts after all allocations of profits and losses. PROFITS AND LOSSES Profits (not including the special allocations discussed below) are first allocated to offset current and prior year losses, if any. Remaining profits are then allocated among the partners in the same manner that cash distributions are allocated, or would be allocated (as set forth above) if cash distributions were equal to the allocable profits. Losses (not including the special allocations discussed below) are first allocated to offset current and prior year profits and then 1% to the General Partners and 99% to the Limited Partners. The 99% allocated to the Limited Partners will be shared 87.5% to the Class A Limited Partners and 12.5% to the Class B Limited Partner. There are several special allocation provisions included in the Partnership agreement, of which the two most significant are as follows: First, commissions and expenses paid in connection with the sale of Units ("Offering Costs") are allocated 1% to the General Partners and 99% to the Limited Partners. The 99% allocated to the Limited Partners will be shared 87.5% to the Class A Limited Partners and 12.5% to the Class B Limited Partner. Second, depreciation with respect to the equipment and any losses resulting from the sale of equipment are allocated 1% to the General Partners and 99% to the Limited Partners, until the cumulative amount of depreciation and losses so allocated to the Limited Partners 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 is a summary of equipment owned by the Partnership at December 31, 2001 and 2000:

The above summary includes fully depreciated equipment held for sale or re-lease with a cost of approximately $268,000 at December 31, 2001. At December 31, 2000, the Partnership had equipment held for sale or re-lease with a cost and net book value of approximately $95,000 and $4,000, respectively. The General Partners are actively seeking the sale or re-lease of all such equipment not on lease. At December 31, 2001, industrial equipment includes materials handling (approximately 54%), construction and mining (approximately 12%), retail store fixtures (approximately 12%), furniture & fixtures (approximately 5%), research & test (approximately 1%), trailers & intermodal containers (less than 1%) and manufacturing (approximately 15%), and business equipment includes computers and periphals (approximately 1%), communications (less than 1%), and photocopying (less than 1%). At December 31, 2000, industrial equipment includes materials handling (approximately 59%), construction and mining (approximately 10%), retail store fixtures (approximately 9%), furniture & fixtures (approximately 4%), general purpose plant/warehouse (approximately 3%), research & test (approximately 1%), trailers & intermodal containers (less than 1%) and manufacturing (approximately 12%), and business equipment includes computers and periphals (approximately 1%), communications (less than 1%), and photocopying (less than 1%). All percentages are based upon total equipment cost. 5. TRANSACTIONS WITH AFFILIATES Acquisition of Equipment -------------------------- Pursuant to its investment objectives, the Partnership has acquired, on an all-cash basis, certain leased equipment from EFG, an affiliate of the Managing General Partner. The Partnership purchased equipment aggregating $1,446,464 and $4,142,139 (including acquisition fees) during the 2000 and 1999, respectively. The Partnership's reinvestment period ended in fiscal 2000. Acquisition Fees ----------------- 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. The Managing General Partner, or its affiliates, earned acquisition fees of $42,130 and $120,645 in 2000 and 1999, respectively. The Partnership's reinvestment period ended during fiscal 2000. 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 Operating 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 $169,917, $168,763, and $199,059 were earned by the General Partners during 2001, 2000 and 1999, respectively. Effective July 1, 1998, the Managing General Partner agreed to perform certain administrative functions on behalf of the Partnership that previously had been performed by the Administrative General Partner. For these services, the Administrative General Partner pays the Managing General Partner an amount equivalent to the fees otherwise due the Administrative General Partner. 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. The Partnership has not accrued subordinated disposition fees during 2001, 2000 or 1999, because it is not probable that these fees would be paid. 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. Class Action Settlement ------------------------- As part of a class action settlement, beginning January 1996, all fees and distributions paid to the Administrative General Partner and all future fees and distributions paid to the Administrative General Partner will be 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:

The following is a reconciliation of the Partnership's capital accounts as shown in the accompanying financial statements to the tax bases capital accounts:

7. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

8. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", (collectively the "statements") effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. In October 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which replaces SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of". SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company will apply the new rules on accounting for the goodwill and other intangible assets and for the impairment or disposal of long-lives assets beginning for the first quarter of 2002, which is not anticipated to have an impact on the Company's earnings or financial position. 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)

Gary D. Engle, age 53, is President and Chief Executive Officer of the general partner of EFG and President and a Director of AFG Leasing VII Incorporated. Mr. Engle joined EFG in 1990 and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle is also Chairman, Chief Executive Officer, and a member of the Board of Directors of Semele Group, Inc. ("Semele"). 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, a large-scale community development company owned by Walt Disney Company. Prior to 1980, Mr. Engle served in various management consulting and institutional brokerage capacities. Mr. Engle has an MBA from Harvard University and a BS degree from the University of Massachusetts (Amherst). Mr. Butterfield, age 42, is Chief Operating Officer and Treasurer of the general partner of EFG and is Treasurer and Clerk of AFG Leasing VII Incorporated. Mr. Butterfield joined EFG in 1992, became Vice President, Finance and Treasurer of the general partner EFG in 1996 and 2000 became Chief Operating Officer and Treasurer of the general partner of EFG. Prior to joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was employed in public accounting and industry positions in New Zealand and London (UK) prior to coming to the United States in 1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.) professional qualification in New Zealand and has completed his CPA requirements in the United States. He holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Geoffrey A. McDonald, age 53, is a co-founder of EFG and Chairman of its General Partner. Mr. MacDonald is a Director of AFG Leasing VII Incorporated. 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 MBA from Boston College and a BA degree from the University of Massachusetts (Amherst). GENERAL EQUIPMENT MANAGEMENT II, INC.

Stephen R. Dyer, age 42, 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 Senior 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. Clifford B. Wattley, age 52, 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. (1) Carmine Fusco, age 33, was Vice President, Secretary, Treasurer and Chief Financial and Accounting Officer of the Administrative General Partner. He also served as an Assistant Vice President within the Private Investments Department of UBS PaineWebber Inc. Mr. Fusco had previously been employed as a Financial Valuation Consultant in the Business Valuation Group of Deloitte & Touche, LLP from January 1997 to August 1998. He was employed as a Commodity Fund Analyst in the Managed Futures Department of Dean Witter Reynolds Incorporated, from October 1994 to November 1995. Prior to joining Dean Witter, Mr. Fusco was a Mutual Fund Accountant with the Bank of New York Company, Incorporated. He received his Bachelor of Science degree in Accounting and Finance in May 1991 from Rider University and a Master of Business Administration from Seton Hall University in June 1996. On February 25, 2000, Mr. Fusco was charged with, and on January 14, 2002 pleaded guilty to, conspiracy to distribute a controlled substance. His employment with UBS PaineWebber Inc. and the Administrative General Partner was terminated on March 11, 2002, the date UBS PaineWebber Inc. and the Administrative General Partner were informed of these facts. (1) Until March 11, 2002 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 2001. 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. PYB Limited Partnership owns 100% of the Partnership's Class B Units. EFG acquired all of the equity ownership interest in PYB Limited Partnership as of November 1, 1993. The names and addresses of the General Partners and the Class B Limited Partner are as follows: Managing General Partner: Pembroke Financial Limited Partnership 450 Carillon Parkway, Suite 200 Tampa, FL 33716 Administrative General Partner: General Equipment Management II, Inc. 800 Harbor Boulevard, 3rd Floor Weehawken, NJ 07087 Class B Limited Partner: PYB Limited Partnership 450 Carillon Parkway, Suite 200 Tampa, FL 33716 (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, 2002. (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. Acquisition of Equipment -------------------------- Pursuant to its investment objectives, the Partnership has acquired, on an all-cash basis, certain leased equipment from EFG, an affiliate of the Managing General Partner. The Partnership purchased equipment aggregating $1,446,464 and $4,142,139 (including acquisition fees) during 2000 and 1999, respectively. The Partnership's reinvestment period ended during fiscal 2000. Acquisition Fees ----------------- 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. The Managing General Partner, or its affiliates, earned acquisition fees of $42,130 and $120,645 in 2000 and 1999, respectively. The Partnership's reinvestment period ended during fiscal 2000. 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 Operating 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 $169,917, $168,763, and $199,059 were earned by the General Partners during 2001, 2000 and 1999, respectively. Effective July 1, 1998, the Managing General Partner agreed to perform certain administrative functions on behalf of the Partnership that previously had been performed by the Administrative General Partner. For these services, the Administrative General Partner pays the Managing General Partner an amount equivalent to the fees otherwise due the Administrative General Partner. 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. At December 31, 1998, the Partnership reversed previously accrued subordinated disposition fees of $106,962 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 2001, 2000 or 1999. 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. Class Action Settlement ------------------------- As part of a class action settlement, beginning January 1996, all fees and distributions paid to the Administrative General Partner and all future fees and distributions paid to the Administrative General Partner will be 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"). 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. (b) None. (c) Exhibits required to be filed. EXHIBIT NO. DESCRIPTION ------------ ----------- 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. 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 29, 2002 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: Pembroke Financial Limited Partnership Managing General Partner By: AFG Leasing VII Incorporated By: /s/ Gary D. Engle Gary D. Engle President By: /s/ Michael J. Butterfield Michael J. Butterfield Chief Financial Officer 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 29, 2002. SIGNATURE TITLE --------- ----- /s/ Gary D. Engle Director of AFG Leasing VII Gary D. Engle Incorporated, the sole General Partner of Pembroke Financial Limited Partnership /s/ Geoffrey A. MacDonald President and Director of AFG Leasing VII Geoffrey A. MacDonald Incorporated, the sole General Partner of Pembroke Financial Limited Partnership /s/ Stephen R. Dyer President and Director of General Stephen R. Dyer Equipment Management II, Inc. /s/ Clifford B. Wattley Vice President, Assistant Secretary Clifford B. Wattley and Director of General Equipment Management II, Inc.

PAINEWEBBER PREFERRED YIELD FUND 2 LP 10-K