10-Q 1 a2049461z10-q.txt FORM 10-Q 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, 2001 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 . PW PREFERRED YIELD FUND II, L.P. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PW PREFERRED YIELD FUND II, L.P. BALANCE SHEETS MARCH 31, 2001 AND DECEMBER 31, 2000 (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 3 PW PREFERRED YIELD FUND II, L.P. STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 4 PW PREFERRED YIELD FUND II, L.P. STATEMENTS OF PARTNERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 5 PW PREFERRED YIELD FUND II, L.P. STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 6 PW PREFERRED YIELD FUND II, L.P. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 1. GENERAL The financial statements presented herein are prepared in conformity with generally accepted accounting principles for interim financial information 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 2000 Annual Report. Except as disclosed herein, there has been no material change to the information presented in the footnotes to the 2000 Annual Report. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation have been included. Certain 2000 amounts have be reclassified to conform to the current year presentation. 2. TRANSACTIONS WITH AFFILIATES ACQUISITION AND OPERATING STAGES ACQUISITION OF EQUIPMENT Pursuant to its investment objectives, the Partnership 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, received or was 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 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 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 $65,624 and $43,868 were earned by the General Partners during the three months ended March 31, 2001 and 2000, 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. 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 1999, 2000 or 2001. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with 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. LIQUIDITY AND CAPITAL RESOURCES The Partnership invests working capital and cash flow from operations prior to its distribution to the partners in short-term highly liquid investments. These investments are primarily short-term commercial paper issued by large domestic corporations. At March 31, 2001, the Partnership had approximately $879,000 invested in a money market fund that invests in commercial paper and similar instruments. Cash and cash equivalents increased $68,849 from $1,403,646 at December 31, 2000 to $1,472,495 at March 31, 2001. 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, 2001, 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 64% of the 11% cash distributions to the Class A Limited Partners for the three months ended March 31, 2001 constituted a return of capital. Additionally, since inception, approximately 69% of the Class A Limited Partner's 11% cash distributions constituted a return of capital. However, the total actual return on capital over a leasing partnership's life can only be determined at the termination of the Partnership after all residual cash flows (which include proceeds from the re-leasing and sale of equipment after initial lease terms expire) have been realized. RESULTS OF OPERATIONS For the three months ended March 31, 2001, the Partnership recognized lease revenue of $1,499,106 compared to $1,065,705 for the same period in 2000. The increase in lease revenue from 2000 to 2001 is due principally to 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 early terminate its lease. In future, lease revenue is expected to decline as a result of 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. 9 During the three months ended March 31, 2001, the Partnership sold equipment having a net book value of $1,120,654 to existing lessees and third parties. These sales resulted in a net loss, for financial statement purposes, of $515,660 compared to a net gain in 2000 of $23,573 on equipment having a net book value of $14,557. 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 $596,019 and $714,650 for the three months ended March 31, 2001 and 2000, 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 4.4% and 4.1% of lease revenue during the three months ended March 31, 2001 and 2000, 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. 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 1999, 2000 or 2001. General and administrative expenses consisted primarily of investor reporting expenses, transfer agent fees, audit and tax fees. 10 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) The Partnership did not file any Forms 8-K during the first quarter of the fiscal year ending December 31, 2001. 11 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 15, 2001 By: /s/ Carmine Fusco Carmine Fusco VICE PRESIDENT, SECRETARY, TREASURER AND CHIEF FINANCIAL AND ACCOUNTING OFFICER 12

PAINEWEBBER PREFERRED YIELD FUND 2 LP 10-Q