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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year ended
December 31, 1996.
[ ] 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 0-15436
PLM EQUIPMENT GROWTH FUND
(Exact name of registrant as specified in its charter)
California 94-2998816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Market, Steuart Street Tower
Suite 800, San Francisco, CA 94105-1301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (415) 974-1399
-----------------------
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 (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of 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. [X]
Aggregate market value of the voting stock: N/A.
Indicate the number of units outstanding of each of the issuer's
classes of partnership units, as of the latest practicable date:
Class Outstanding at February 28, 1997
----- --------------------------------
Limited Partnership Depositary Units: 5,785,350
General Partnership Units: 1
An index of exhibits filed with this Form 10-K is located at page 39.
Total number of pages in this report: 42.
PART I
ITEM 1. BUSINESS
(A) Background
On January 28, 1986, PLM Financial Services, Inc. (FSI or the General Partner),
a wholly-owned subsidiary of PLM International, Inc. (PLM International), filed
a Registration Statement on Form S-1 with the Securities and Exchange Commission
with respect to a proposed offering of 6,000,000 limited partnership units (the
Units) in PLM Equipment Growth Fund, a California limited partnership (the
Partnership, the Registrant or EGF). The Partnership's offering became effective
on May 20, 1986. FSI, as General Partner, owns a 1% interest in the Partnership.
The Partnership was formed to engage in the business of owning and managing a
diversified pool of used and new transportation-related equipment and certain
other items of equipment. The Partnership's primary objectives are:
(i) to maintain a diversified portfolio of long-lived, low-obsolescence,
high-residual value equipment with the net proceeds of the initial partnership
offering, supplemented by debt financing if deemed appropriate by the General
Partner. The General Partner places the equipment on lease or under other
contractual agreements with creditworthy lessees and operators of equipment;
(ii)to generate sufficient net operating cash flows from lease operations
to meet liquidity requirements and to generate cash distributions to the Limited
Partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(iii) to selectively sell equipment when the General Partner believes that,
due to market conditions, market prices for equipment exceed inherent equipment
values or expected future benefits from continual ownership of a particular
asset will not equal or exceed other equipment investment opportunities.
Proceeds from these sales, together with excess net operating cash flows from
operations are used for distributions to the partners;
(iv)to preserve and protect the value of the portfolio through quality
management, maintaining diversity, and constantly monitoring equipment markets.
The offering of the Units of the Partnership closed on May 19, 1987. On
June 1, 1989, each Unitholder received a depositary receipt representing
ownership of the number of Units owned by such Unitholder. As of December 31,
1996, there were 5,785,350 depositary units (Depositary Units) outstanding. The
General Partner contributed $100 for its 1% general partner interest in the
Partnership. The General Partner delisted the Partnership's Depositary Units
from the American Stock Exchange (AMEX) on April 8, 1996. The last day for
trading on the AMEX was March 22, 1996.
It is anticipated that the Partnership will be completely liquidated by
the end of 1999. Since the third quarter of 1994, the General Partner may no
longer reinvest cash flows and surplus funds in equipment. All future cash flows
and surplus funds, if any, are to be used for distributions to Partners, except
to the extent used to maintain reasonable reserves.
Table 1, below, lists the equipment and the cost of the equipment in the
Partnership's portfolio and the cost of investments in unconsolidated special
purpose entities, at December 31, 1996 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
- -------------------------------------------------------------------------------------------------------------------------
Equipment held for operating leases:
1 727 commercial aircraft Boeing $ 6,299
882 Tank railcars Various 21,909
1,330 Various marine containers Various 2,439
376 Refrigerated marine containers Various 5,026
12 Dry storage trailers Various 230
224 Dry trailers Various 2,034
160 Dry piggyback trailers Various 2,239
161 Refrigerated trailers Various 4,776
8 Piggyback refrigerated trailers Various 166
---------------
Total equipment $ 45,118
===============
Investments in unconsolidated special purpose entities
0.50 Product tanker Kaldnes M/V $ 8,277
0.50 737 commercial aircraft Boeing 8,084
0.12 767 commercial aircraft Boeing 4,905
---------------
Total investments $ 21,266
===============
Jointly owned: EGF (50%) and one affiliated partnership.
Jointly owned: EGF (50%) and one affiliated partnership.
Jointly owned: EGF (12%) and two affiliated partnerships.
Includes proceeds from capital contributions, operations and Partnership
borrowings invested in equipment. Includes costs capitalized, subsequent to
the date of acquisitions, and equipment acquisition fees paid to PLM
Transportation Equipment Corporation, a wholly-owned subsidiary of FSI. All
equipment was used equipment at the time of purchase.
The equipment is generally leased under operating leases with terms of one
to six years. All of the Partnership's marine containers are leased to operators
of utilization-type leasing pools which include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. Rents for railcars are based on mileage traveled or a fixed rate;
rents for all other equipment are based on fixed rates.
At December 31, 1996, 100% of the Partnership's trailer equipment operated
in rental yards owned and maintained by PLM Rental, Inc., the short-term trailer
rental subsidiary of PLM International. Revenues collected under short-term
rental agreements with the rental yards' customers are credited to the owners of
the related equipment as received. Direct expenses associated with the equipment
are charged directly to the Partnership. An allocation of other direct expenses
of the rental yard operations are billed to the Partnership monthly.
The lessees of the equipment include, but are not limited to: Transamerica
Leasing, Petro Canada, SWR Brazil and Paradise Airlines. As of December 31,
1996, all of the equipment was either operating in short-term rental facilities,
on lease, or under other contractual agreements, except 27 marine containers, 20
railcars and the Partnership's 50% investment in a commercial aircraft.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the equipment. IMI has agreed to perform all services necessary to
manage the transportation equipment on behalf of the Partnership and to perform
or contract for the performance of all obligations of the lessor under the
Partnership's leases. In consideration for its services and pursuant to the
Partnership Agreement, IMI is entitled to a monthly management fee (refer to
Notes 1 and 2 to the Financial Statements).
(C) Competition
(1) Operating Leases vs. Full Payout Leases
Generally, the equipment owned by the Partnership is leased out on an operating
lease basis wherein the rents owed during the initial noncancelable term of the
lease are insufficient to recover the Partnership's purchase price of the
equipment. The short to mid-term nature of operating leases generally commands a
higher rental rate than the longer term, full payout leases and offers lessees
relative flexibility in their equipment commitment. In addition, the rental
obligation under an operating lease need not be capitalized on the lessee's
balance sheet.
The Partnership encounters considerable competition from lessors utilizing
full payout leases on new equipment, i.e., leases which have terms equal to the
expected economic life of the equipment. Full payout leases are written for
longer terms and for lower monthly rates than the Partnership offers. While some
lessees prefer the flexibility offered by a shorter term operating lease, other
lessees prefer the rate advantages possible with a full payout lease.
Competitors of the Partnership may write full payout leases at considerably
lower rates, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, and as a result, the Partnership may be at a
competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership also competes with equipment manufacturers who offer operating
leases and full payout leases. Manufacturers may provide ancillary services
which the Partnership cannot offer, such as specialized maintenance service
(including possible substitution of equipment), training, warranty services, and
trade-in privileges.
The Partnership competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), General Electric Railcar Services
Corporation, Greenbrier Leasing Company, General Electric Capital Aviation
Services Corporation, and other limited partnerships which lease the same types
of equipment.
D) Demand
The Partnership invests in transportation-related capital equipment and in
"relocatable environments." "Relocatable environments" refer to capital
equipment constructed to be self-contained in function but transportable,
examples of which include storage trailers. A general distinction can be drawn
between equipment used for the transport of either materials and commodities or
people. With the exception of aircraft leased to passenger air carriers, the
Partnership's equipment is used primarily for the transport of materials.
The following describes the markets for the Partnership's equipment:
(1) Commercial Aircraft
The market for commercial aircraft continued to improve in 1996, representing
two consecutive years of growth and profits in the airline industry. The $5.7
billion in net profits recorded by the world's top 100 airlines in 1995 grew to
over $6 billion in 1996. The profits are a result of the continued management
emphasis on costs. The demand for ever lower unit costs by airline managements
has caused a significant reduction of surplus used Stage II and Stage III
commercial aircraft. The result is a return to supply/demand equilibrium. On the
demand side, passenger traffic is improving, cargo movement is up and load
factors are generally higher across the major markets.
These changes are reflected in the performance of the world's 62 major
airlines that operate 60% of the world airline fleet but handle 78% of world
passenger traffic. Focusing on the supply/demand for Partnership type narrowbody
commercial aircraft, there were 213 used narrowbody aircraft available at year
end 1995. In the first ten months of 1996, this supply was reduced to 119
narrowbody aircraft available for sale or lease. Forecasts for 1997 see a
continuing supply/demand equilibrium due to air travel growth and balanced
aircraft supply.
The Partnership has a 50% investment in a late-model (post 1974) Boeing
737-200 aircraft. There are a total of 939 Boeing 737-200 aircraft in service,
with 219 built prior to 1974. Independent forecasts estimate that 250 of the
total 737-200s will be retired leaving approximately 700 aircraft in service
after 2003. The forecasts regarding hushkits estimate that half of the 700
Boeing 737-200s will be hushed to meet Stage III noise levels. The Partnership's
aircraft is a prospect for a Stage III hushkit due to its age, hours, cycles,
engine configurations, and operating weight.
Independent projections for the Boeing 727-200 aircraft indicate that there
are 1,050 in service, with 299 built prior to 1974. The Partnership's aircraft
is a 1969-model 727-200, and is expected to be retired prior to 2003. The
current strategy is to optimize its remaining value based on the present value
of lease cash flows and projected residuals.
The Partnership has a 12% investment in a widebody, twin-engine, twin-aisle
Boeing 767-200ER. The aircraft is a late-model aircraft with high gross
operating weights and the most advanced-technology engine powerplants available
on the market. The aircraft carries 216 passengers in a mixed class over 6800
nautical miles. There are currently 99 of these aircraft in service with 26
different operators worldwide. The aircraft competes with the three-engine
older-generation widebody aircraft, such as the Lockheed L1011 and Douglas
DC-10. This fleet (L1011/DC-10) totals over 500 aircraft today. These older
aircraft will continue to be phased out of service, with 140 retired before
2003.
(2) Marine Containers
At the end of 1995, the consensus of industry sources was that 1996 would see
both higher container utilization and strengthening of per diem lease rates.
Such was not the case, as there was no appreciable cyclical improvement in the
container market following the traditional winter slowdown. Industry utilization
continues to be under pressure, with per diem rates being impacted as well.
A substantial portion of the Partnership's containers are on long-term
utilization leases which were entered into with Trans Ocean Leasing as lessee.
The industry has seen a major consolidation as Transamerica Leasing late in the
fourth quarter of 1996, acquired Trans Ocean Leasing. Transamerica Leasing is
the second largest container leasing company in the world. Transamerica Leasing
is the substitute lessee for Trans Ocean Leasing. Long term, such industry
consolidation should bring more rationalization to the market and result in
higher utilization and per diem rates.
(3) Railcars
Pressurized Tank Cars
These cars are used primarily in the petrochemical and fertilizer industries.
They transport liquefied petroleum gas (LPG) and anhydrous ammonia. The
utilization rate on the Partnership's fleet of pressurized tank cars was over
98% during 1996. Independent forecasts show the demand for natural gas growing
during 1997 to 1999, as the developing world, former Communist countries, and
the industrialized world all increase their demand for energy. The fertilizer
industry was undergoing a rapid restructuring toward the end of 1996 after a
string of major mergers, which began in 1995. These mergers reduce the number of
companies that use pressurized tank cars for fertilizer service. Whether or not
the economies of the mergers allow the total fleet size to be reduced remains to
be seen.
General-Purpose Tank Cars
General-purpose, or nonpressurized, tank cars are used to transport a wide
variety of bulk liquid commodities, such as petroleum fuels, lubricating oils,
vegetable oils, molten sulphur, corn syrup, asphalt, and specialty chemicals.
Demand for general purpose tank cars in the Partnership fleet has remained
healthy over the last two years with utilization remaining above 98%.
Independent projections show the demand for petroleum growing during 1997 to
1999, as the developing world, former Communist countries, and the
industrialized world all increase their demand for energy. Chemical carloadings
for the first 40 weeks of 1996 were up one tenth of one percent (0.1%) as
compared to the same period in 1995.
(4) Marine Vessels
The Partnership has a 50% investment in a product tanker. Demand for commodity
shipping closely tracks worldwide economic growth; however, economic development
may alter demand patterns from time to time. The General Partner operates the
Partnership's 50% investment in the product tanker in a "voyage" or "time"
charter market. This operating approach provides the flexibility to adapt to
changing demand patterns.
Independent forecasts show that the long-term outlook (past 1997) is for
improvement in freight rates earned by vessels; however, this is dependent on
the supply/demand balance and stability in growth levels. The newbuilding
orderbook is currently slightly lower than at the end of 1995 in tonnage.
Shipyard capacity is booked through late 1998; however, it remains to be seen
how many of these orders will actually be fulfilled. Historically, demand has
averaged approximately 3% annual growth, fluctuating between flat growth and 6%
annually. With predictable long-term demand growth, the long-term outlook
depends on the supply side, which is affected by interest rates, government
shipbuilding subsidy programs, and prospects for reasonable capital returns in
shipping.
(5) Trailers
Intermodal Trailers
The robust intermodal trailer market that began four years ago began to soften
in 1995 and reduced demand continued in 1996. Intermodal trailer loadings were
flat in 1996 from 1995's depressed levels. This lack of growth has been the
result of many factors, ranging from truckload firms aggressively recapturing
market share from the railroads through aggressive pricing to the continuing
consolidation activities and asset efficiency improvements of the major U.S.
railroads.
All of these factors helped make 1996 a year of equalizing equipment supply
as railroads and lessors were pressured to retire older and less efficient
trailers. The two largest suppliers of railroad trailers reduced the available
fleet in 1996 by over 15%. Overall utilization for intermodal trailers,
including the Partnership's fleet, was lower in 1996 than in previous years.
Over-The-Road Dry Trailers
The over-the-road dry trailer market was weak in 1996, with utilization down
15%. The trailer industry experienced a record year in 1994 for new production
and 1995 production levels were similar to 1994's. However, in 1996, the truck
freight recession, along with an overbuilding situation, contributed to 1996's
poor performance. The year 1996 had too little freight and too much equipment
industrywide.
Over-The-Road Refrigerated Trailers
Although the refrigerated trailer market experienced fairly strong demand in
1996, the Partnership, with 30% of its trailer fleet in refrigerated trailers,
experienced a decline in utilization, mainly due to the increasing age of its
refrigerated trailers.
(E) Government Regulations
The use, maintenance, and ownership of equipment is regulated by federal, state,
local, and/or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations which may
require the removal from service or extensive modification of such equipment to
meet these regulations at considerable cost to the Partnership. Such regulations
include (but are not limited to):
(1) the U.S. Oil Pollution Act of 1990 (which established liability for
operators and owners of vessels, mobile offshore drilling units, etc. that
create environmental pollution);
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990
(which limits or eliminates the operation of commercial aircraft in the U.S.
that do not meet certain noise, aging, and corrosion criteria);
(3) the Montreal Protocol on Substances That Deplete the Ozone Layer and
the U.S. Clean Air Act Amendments of 1990 (which call for the control and
eventual replacement of substances that have been found to cause or contribute
significantly to harmful effects on the stratospheric ozone layer and which are
used extensively as refrigerants in refrigerated marine cargo containers,
over-the-road trailers, etc.);
(4) the U.S. Department of Transportation's Hazardous Materials Regulations
(which regulate the classification of and packaging requirements for hazardous
materials and which apply particularly to the Partnership's tank cars).
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased for leasing purposes. At December 31, 1996, the Partnership
owned a portfolio of transportation equipment as described in Part I, Table 1.
The Partnership maintains its principal office at One Market, Steuart
Street Tower, Suite 800, San Francisco, California 94105-1301. All office
facilities are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1996.
Part II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT
MATTERS
The General Partner delisted the Partnership's Depositary Units from the
American Stock Exchange (AMEX) on April 8, 1996. The last day for trading on the
AMEX was March 22, 1996. As of February 28, 1997, there were 5,785,350
Depositary Units outstanding. There are approximately 8,800 Depositary
Unitholders of record as of the date of this report. Under the Internal Revenue
Code (the Code) the Partnership is classified as a Publicly Traded Partnership.
The Code treats all Publicly Traded Partnerships as corporations if they remain
publicly traded after December 31, 1997. Treating the Partnership as a
corporation would mean the Partnership itself would have become a taxable,
rather than a "flow through" entity. As a taxable entity, the income of the
Partnership would have become subject to federal taxation at both the
partnership level and at the investor level to the extent that income would have
been distributed to an investor. In addition, the General Partner believed that
the trading price of the Depositary Units would have become distorted when the
Partnership began the final liquidation of the underlying equipment portfolio.
In order to avoid taxation of the Partnership as a corporation and to prevent
unfairness to Unitholders, the General Partner delisted the Partnership's
Depositary Units from the AMEX. While the Partnership's Depositary Units are no
longer publicly traded on a national stock exchange, the General Partner
continues to manage the equipment of the Partnership and prepare and distribute
quarterly and annual reports and Forms 10-Q and 10-K in accordance with the
Securities and Exchange Commission requirements. In addition, the General
Partner continues to provide pertinent tax reporting forms and information to
Unitholders. The General Partner anticipates an informal market for the
Partnership's units may develop in the secondary marketplace similar to that
which currently exists for non-publicly traded partnerships.
Pursuant to the terms of the Partnership Agreement, the General Partner is
generally entitled to a 1% interest in the profits and losses and distributions
of the Partnership. The General Partner also is entitled to a special allocation
of any gains from sale of the Partnership's assets during the liquidation phase
in an amount sufficient to eliminate any negative balance in the General
Partner's capital account.
Table 2, below, sets forth the high and low reported prices of the
Partnership's Depositary Units for 1996 and 1995 as reported by the AMEX as well
as cash distributions paid per Depositary Unit.
TABLE 2
Cash
Distributions
Paid Per
Reported Trade Depositary
Prices Unit
-----------------------------------------
Calendar Period High Low
1996
1st Quarter $ 8.25 $ 5.94 $ 0.575
2nd Quarter $ -- $ -- $ 0.289
3rd Quarter $ -- $ -- $ 0.289
4th Quarter $ -- $ -- $ 0.274
1995
1st Quarter $ 12.63 $ 10.50 $ 0.575
2nd Quarter $ 12.75 $ 11.00 $ 0.575
3rd Quarter $ 12.00 $ 9.31 $ 0.575
4th Quarter $ 9.50 $ 6.63 $ 0.575
The General Partner delisted the Partnership's depositary units from the
American Stock Exchange (AMEX) under the symbol GFX. The last day for
trading on the AMEX was March 22, 1996.
The Partnership has engaged in a plan to repurchase up to 250,000
Depositary Units. During the first, second, third, and fourth quarters of 1994,
the Partnership repurchased 3,600, 3,000, 2,500 and 2,600 Depositary Units at a
total cost of $53,000, $44,000, $37,000, and $34,000, respectively. During the
first, second, and fourth quarters of 1995, the Partnership repurchased 11,900,
16,147 and 10,000 Depositary Units at a total cost of $140,000, $194,000, and
$80,000, respectively. During the first quarter of 1996, the Partnership
repurchased 24,800 Depositary Units at a total cost of $163,000. As of December
31, 1996, the Partnership had purchased a cumulative total of 199,650 Depositary
Units at a cost of $2.6 million.
ITEM 6. SELECTED FINANCIAL DATA
Table 3, below, lists selected financial data for the Partnership:
TABLE 3
For the years ended December 31,
(in thousands of dollars, except per unit amounts)
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------
Operating results:
Total revenues $ 23,859 $ 23,575 $ 25,659 $ 24,278 $ 27,470
Net gain (loss) on
disposition of equipment 13,304 2,195 1,585 838 (194 )
Loss on revaluation of
equipment -- -- 1,989 1,380 7,934
Equity in net income of
unconsolidated special
purpose entities 8,728 -- -- -- --
Net income (loss) 23,847 4,234 75 1,725 (7,492 )
At year-end:
Total assets $ 20,749 $ 39,061 $ 56,669 $ 70,482 $ 82,196
Total liabilities 1,331 24,727 32,606 32,746 31,201
Notes payable -- 23,000 28,000 28,000 28,000
Cash distributions $ 8,358 $ 13,549 $ 13,580 $ 13,760 $ 13,830
Cash distributions which
represent a return of capital $ -- $ 9,351 $ 13,462 $ 12,042 $ 13,692
Special distributions $ 10,242 $ -- $ -- $ -- $ --
Per Weighted Average Depositary
Unit:
Net income (loss) $ 4.08 $ 0.70 $ (0.01 ) $ 0.27 $ (1.27 )
Cash distributions $ 1.43 $ 2.30 $ 2.30 $ 2.31 $ 2.30
Cash distributions which
represent a return of capital $ -- $ 1.60 $ 2.30 $ 2.04 $ 2.30
Special distributions $ 1.75 $ -- $ -- $ -- $ --
After reduction of income of $129 ($0.02 per weighted average Depositary
Unit) in 1995, $117 ($0.02 per weighted average Depositary Unit) in 1994,
$128 ($0.02 per weighted average Depositary Unit) in 1993, and $158 ($0.03
per weighted average Depositary Unit) in 1992 representing special
allocations to the General Partner resulting from an amendment to the
Partnership Agreement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management's Discussion and Analysis of Financial Condition and Results of
Operations relates to the Financial Statements of PLM Equipment Growth Fund (the
Partnership). The following discussion and analysis of operations focuses on the
performance of the Partnership's equipment in various sectors of the
transportation industry and its effect on the Partnership's overall financial
condition.
Results of Operations - Factors Affecting Performance
(A) Re-leasing and Repricing Activity
The exposure of the Partnership's equipment portfolio to repricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and the
equipment must be remarketed. Major factors influencing the current market rate
for transportation equipment include supply and demand for similar or comparable
types or kinds of transport capacity, desirability of the equipment in the lease
market, market conditions for the particular industry segment in which the
equipment is to be leased, overall economic conditions, various regulations
concerning the use of the equipment, and others. Equipment that is idle or out
of service between the expiration of one lease and the assumption of a
subsequent one can result in a reduction of contribution to the Partnership. The
Partnership experienced re-leasing or repricing exposure in 1996 primarily in
its aircraft, marine vessel, marine container, trailer and railcar portfolios.
(1) Aircraft: Aircraft contribution decreased from 1995 to 1996 due to the
off-lease status of a Boeing 737-200 aircraft that is being remarketed, in which
the Partnership owns a 50% investment. All other aircraft investments were on
lease for the entire year.
(2) Marine Vessels: The Partnership has a 50% investment in a marine vessel
which operated in a "voyage" or "time" charter market. Voyage and time charters
are usually of short duration, and reflect the short-term demand and pricing
trends in the vessel market. Voyage and time charter rates were lower on average
in 1996 than those experienced in 1995.
(3) Marine Containers: The majority of the Partnership's marine container
portfolio operates in utilization-based leasing pools and as such was highly
exposed to repricing activity. The Partnership's marine container contributions
declined from 1995 to 1996, due to soft market conditions that caused a decline
in re-leasing activity.
(4) Trailers: The Partnership's trailer portfolio operates in short-term
rental facilities or on short-line railroad systems. The relatively short
duration of most leases in these operations exposes the trailers to considerable
re-leasing activity. Contributions from the Partnership's trailers operated in
short-term rental facilities and the short-line railroad system declined from
1995 to 1996, due to soft market conditions that caused a decline in re-leasing
activity.
(5) Railcars: The majority of the Partnership's railcar equipment remained
on lease throughout the year, and thus was not adversely affected by re-leasing
and repricing exposure.
(B) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment represents a reduction in the size of the
equipment portfolio, and will result in reduction of contributions to the
Partnership. Lessees not performing under the terms of their leases, either by
not paying rent, not maintaining or operating the equipment in accordance with
the conditions of the leases, or other possible departures from the leases can
result not only in reductions in contribution, but also may require the
Partnership to assume additional costs to protect its interests under the
leases, such as repossession, legal fees, etc. The Partnership experienced the
following in 1996:
(1) Liquidations: During 1996, the Partnership sold its 70% and 50%
investments in two commuter aircraft, a 50% investment in an aircraft engine, a
55% investment in a mobile offshore drilling unit, 410 marine containers, 1
aircraft engine, 64 trailers, 7 offshore supply vessels, 15 railcars and 20
locomotives. A portion of the proceeds from the sale of this equipment was used
to repay the entire $23.0 million balance of the Partnership's debt. As no
additional equipment was purchased in 1996, these disposals represent a
permanent reduction in the Partnership's equipment portfolio.
(2) Nonperforming Lessees: In the beginning of the third quarter of 1996,
the General Partner repossessed an aircraft in which the Partnership has a 50%
investment, due to the lessee's inability to pay the Partnership for outstanding
receivables. In addition, another aircraft lessee encountered financial
difficulties in 1996. The General Partner established reserves against these
receivables due to the determination that ultimate collection of these rents is
uncertain. Other equipment such as railcars, trailers, marine vessels, and
marine containers experienced minor nonperforming issues that have no
significant impact on the Partnership.
(C) Reinvestment Risk
During the first seven years of operations, the Partnership invested surplus
cash in additional equipment after fulfilling operating requirements and paying
distributions to the partners. Since the third quarter of 1994, pursuant to the
Partnership agreement, the Partnership may no longer reinvest in equipment. The
Partnership is currently engaged in a three year holding or passive liquidation
period. In 1998, the Partnership will begin an orderly liquidation over an
anticipated two-year period.
During 1996, the Partnership received proceeds of approximately $17.9
million from the liquidation or sale of equipment. In addition, the Partnership
received proceeds of approximately $17.5 million from the sale of investments in
special purpose entities which own equipment. The General Partner incurred
approximately $62,000 in capital improvement costs, but did not purchase any
additional equipment in 1996. In 1996, sales proceeds of $23.0 million were used
to pay off the Partnership's debt obligation.
(D) Equipment Valuation and Write-downs
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" (SFAS 121). This standard is effective for years
beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995,
the effect of which was not material as the method previously employed by the
Partnership was consistent with SFAS 121. In accordance with SFAS 121, the
General Partner reviews the carrying value of its equipment portfolio at least
annually in relation to expected future market conditions for the purpose of
assessing the recoverability of the recorded amounts. If the projected future
lease revenue plus residual values are less than the carrying value of the
equipment, a loss on revaluation is recorded. There were no reductions made to
the carrying value of equipment during 1996 or 1995. The carrying value of two
commercial aircraft and one aircraft engine were reduced by approximately $1.7
million and $0.3 million, respectively, in 1994. The implicit impact of such
reductions is anticipated future lower sales proceeds.
As of December 31, 1996, the General Partner estimated the current fair
market value of the Partnership's equipment portfolio to be approximately $40.8
million.
Financial Condition - Capital Resources and Liquidity
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering and permanent debt financing. No
further capital contributions from original partners are permitted under the
terms of the Limited Partnership Agreement. The Partnership currently has no
debt obligations. The Partnership relies on operating cash flows to meet its
operating obligations and to make cash distributions to the Limited Partners.
For the year ended December 31, 1996, the General Partner generated
sufficient operating revenues to meet its operating obligations and to maintain
the current level of distributions to the partners. During the year, the General
Partner sold equipment for approximately $35.4 million and paid off its $23.0
million debt obligation.
The General Partner has not planned any expenditures, nor is it aware of
any contingencies that would cause it to require any additional capital to that
mentioned above.
Results of Operations - Year to Year Detail Comparison
Comparison of the Partnership's Operating Results for the Years Ended 1996
and 1995
(A) Owned equipment operations
Lease revenues less direct expenses (defined as repairs and maintenance, marine
equipment operating, and asset specific insurance expenses) on owned equipment
decreased during the year ended 1996 when compared to 1995. The following table
presents lease revenues less direct expenses by owned equipment type (in
thousands):
1996 1995
----------------------------
Aircraft and aircraft engines $ 472 $ 364
Trailers 1,299 1,895
Rail equipment 4,547 4,823
Marine containers 1,276 1,631
Marine vessels 162 1,889
Aircraft: Aircraft lease revenues and direct expenses were $0.5 million and
$16,000, respectively, for 1996, compared to $0.5 million and $0.1 million,
respectively, during 1995. Aircraft contribution increased in 1996 due to lower
insurance expenses for the year, compared to 1995;
Trailers: Trailer lease revenues and direct expenses were $1.8 million and $0.5
million, respectively, for 1996, compared to $2.5 million and $0.6 million,
respectively, during 1995. The trailer net contribution decreased due to the
sale of 45 trailers during 1995, and 64 trailers during 1996. In addition, the
trailer fleet is experiencing lower utilization in the short-term rental yards;
Rail equipment: Rail equipment lease revenues and direct expenses were $6.4
million and $1.9 million, respectively, for 1996, compared to $6.8 million and
$2.0 million, respectively, during 1995. During 1996, the Partnership sold 15
railcars and 20 locomotives resulting in lower revenues and expenses in 1996,
compared to 1995. In addition, the decrease in railcar contribution resulted
from running repairs required on certain of the railcars in the fleet during
1996 which were not needed during 1995;
Marine containers: Marine container lease revenues and direct expenses were $1.3
million and $8,000, respectively, for 1996, compared to $1.6 million and
$28,000, respectively, during 1995. The number of marine containers owned by the
Partnership has been declining over the past twelve months due to sales and
dispositions. In addition, the marine container fleet has been experiencing
lower utilization resulting in a decrease in marine container net contribution;
Marine vessels: Marine vessel lease revenues and direct expenses were $0.2
million and ($22,000), respectively, for 1996, compared to $1.7 million and
($0.2) million, respectively, during 1995. In 1995, marine vessel expenses were
$0.2 million lower than in 1996 due to actual refurbishment costs for the
Partnership's vessels being lower than the amount previously accrued. The
decrease in marine vessel lease revenues from 1995 to 1996 was due to the sale
of seven offshore supply vessels during the first quarter of 1996, which were on
lease during 1995.
(B) Indirect expenses related to owned equipment operations
Total indirect expenses of $6.3 million for 1996, decreased from $8.8 million in
1995. The variances are explained as follows:
(1) A $1.3 million decrease in depreciation and amortization expenses from 1995
levels reflecting the sale of certain assets during 1996 and 1995;
(2) A $1.0 million decrease in interest expense due to repayment of the
Partnership's outstanding debt;
(3) A $0.1 million decrease in general and administrative expenses due to a
decrease in trailer accruals no longer required;
(4) A $0.1 million decrease in management fees to affiliate due to a decrease in
the Partnership's operating cash flows. Management fees are based on the greater
of i) 10% of cash flows, or ii) 1/12 of 1/2% of the net book value of the
equipment portfolio subject to reduction in certain events described in the
Limited Partnership Agreement.
(C) Net gain on disposition of owned equipment
Net gain on disposition of owned equipment for 1996 totaled $13.3 million which
resulted mainly from the sale of seven offshore supply vessels with a net book
value of $2.3 million, for proceeds of $13.4 million. The remaining gain
resulted from the sale or disposal of 410 marine containers, 64 trailers, 1
aircraft engine, 15 railcars and 20 locomotives, with an aggregate net book
value of $2.3 million for aggregate proceeds of $4.5 million. For 1995, the $1.3
million net gain on disposition of owned equipment resulted from the sale or
disposal of 396 marine containers, 45 trailers, and 18 railcars with an
aggregate net book value of $0.9 million, for aggregate proceeds of $2.2
million.
(D) Interest and other income
Interest and other income decreased $0.4 million during 1996 due to lower cash
balances and adjustments recorded in 1995 which represented $0.3 million of
accrued interest income on deposit balances no longer payable. There were no
similar adjustments recorded in 1996.
(E) Equity in net income of unconsolidated special purpose entities
Equity in net income of unconsolidated special purpose entities represents net
income generated from the operation of jointly-owned assets accounted for under
the equity method (see Note 3 to the financial statements).
1996 1995
----------------------------
Aircraft and aircraft engines $ 468 $ 331
Marine vessels 247 268
Mobile offshore drilling unit 8,013 (134 )
Aircraft and aircraft engines: The Partnership's share of aircraft revenues and
expenses were $2.5 million and $2.0 million, respectively, for 1996, compared to
$2.5 million and $2.2 million, respectively, for 1995. As of December 31, 1996,
the Partnership owned 50% and 12% investments in commercial aircraft. The
Partnership sold its 70% and 50% investments in commuter aircraft, and its 50%
investment in an aircraft engine during 1996, resulting in $1.3 million in net
gains, and $1.2 million of net income. Income from the sales was partially
offset by net loss during 1996 of $0.7 million related to the Partnership's 50%
investment in a commercial aircraft due to an increase in the allowance for
doubtful accounts related to a financially troubled lessee. In addition, the
aircraft was off lease during the last six months of 1996. The Partnership's
remaining 12% investment in a commercial aircraft operated at essentially break
even during 1996.
During 1995, the Partnership sold its 50% investments in a commuter and a
commercial aircraft, resulting in aggregate gains of $0.4 million and an
aggregate net income of $0.3 million. The Partnership's remaining aircraft joint
investments generated $13,000 of net income during 1995;
Marine vessel: The Partnership's share of marine vessel revenues and expenses
was $2.2 million and $2.0 million, respectively, for 1996, compared to $4.4
million and $4.1 million, respectively, for 1995. During 1995 and 1996, the
Partnership owned a 50% investment in a marine vessel. Although this vessel
experienced lower daily rates in 1996, the vessel generated $0.2 million in net
income for the Partnership in 1996, compared to $0.1 million in net loss for the
Partnership in 1995. The increase in net income in 1996 resulted from lower
marine operating expenses associated with the vessel compared to 1995 due mainly
to lower drydocking costs.
In addition, the Partnership had a 50% investment in a marine vessel that
was sold during the second quarter of 1995 for a gain of $0.5 million. This
vessel generated $0.4 million of net income during 1995. There was no similar
net income during 1996.
Mobile offshore drilling unit: The Partnership's share of mobile offshore
drilling unit (rig) revenues and expenses were $8.8 million and $0.8 million,
respectively, for 1996, compared to $1.6 million and $1.7 million, respectively,
during 1995. Net income generated from the rig increased in 1996 due to the $8.0
million gain on the sale of the Partnership's rig during July 1996.
(F) Net Income
As a result of the foregoing, the Partnership's net income of $23.8 million
during 1996, increased from net income of $4.2 million during 1995. The
Partnership's ability to operate and liquidate assets, secure leases, and
re-lease those assets whose leases expire during the duration of the Partnership
is subject to many factors and the Partnership's performance in 1996 is not
necessarily indicative of future periods. During 1996, the Partnership
distributed $18.4 million to the Limited Partners, or $3.18 per Depositary Unit,
which included special distributions of $10.1 million, or $1.75 per depositary
unit.
Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1995 and 1994
(A) Revenues
Total revenues of $23.6 million for the year ended December 31, 1995, decreased
from $25.7 million in 1994. The decrease in 1995 revenues was primarily
attributable to lower recorded operating lease revenues compared to 1994.
(1) Lease revenues decreased to $20.6 million for the year ended December
31, 1995, from $23.4 million in 1994. The following table lists lease revenues
earned by equipment type (in thousands):
For the year ended December
31,
1995 1994
-------------------------------
Railcars $ 6,791 $ 7,002
Marine vessels 5,507 6,015
Aircraft and aircraft engines 2,621 4,021
Trailers 2,455 2,376
Marine containers 1,659 1,832
Mobile offshore drilling unit 1,588 2,112
==============================
$ 20,621 $ 23,358
==============================
The decrease in 1995 lease revenues resulted from:
(a) A $1.4 million decrease in aircraft and aircraft engine lease revenue
resulting from the sale of two commercial aircraft in June of 1994, the sale of
one commercial aircraft and one commuter aircraft in June of 1995, and the
remarketing of a commuter aircraft and an aircraft engine in 1995;
(b) A $0.5 million decrease in mobile offshore drilling unit (rig) lease
revenue due to a reduced re-lease rate as a result of the rig's repositioning to
the Gulf of Mexico during 1994 in order to capture greater long-term
opportunity;
(c) A $0.5 million decrease in marine vessel lease revenue resulting from
the sale of one of the Partnership's 50%-owned marine vessels during the second
quarter of 1995 and due to the drydocking of the Partnership's other 50%-owned
marine vessel during December of 1995;
(d) A $0.2 million decrease in marine container lease revenue resulting
from the sale of 396 marine containers during 1995 and the sale of 566 marine
containers during 1994;
(e) A $0.2 million decrease in railcar lease revenue resulting from the
sale of 57 railcars during 1994 and 18 railcars during 1995.
(2) Net gain on disposition of equipment for the year ended December 31,
1995, totaled $2.2 million from the sale or disposal of 1 of the Partnership's
50%-owned marine vessels, 396 marine containers, 1 commercial aircraft, 1
commuter aircraft, 45 trailers, and 18 railcars, with an aggregate net book
value of $5.2 million for aggregate proceeds of $7.1 million. Included in the
gain on sale of the marine vessel is the unused portion of
accrued drydocking of $0.3 million. During 1994, the Partnership had a $1.6
million net gain on the disposition of equipment which resulted from the sale or
disposition of 2 commercial aircraft, 5 barges, 566 marine containers, 57
railcars, and 48 trailers which had an aggregate net book value of $1.5 million
for proceeds of $3.1 million.
(B) Expenses
Total expenses for the year ended December 31, 1995, of $19.3 million decreased
from $25.6 million in 1994. The decrease in 1995 was primarily attributable to
lower depreciation and amortization, repairs and maintenance, management fees to
affiliate, and marine equipment operating expenses, in addition to no loss on
revaluation of equipment, no repositioning expenses, and no losses on legal
settlements, offset partially by higher interest and bad debt expense.
(1) Direct operating expenses (defined as repairs and maintenance,
insurance expenses, marine equipment operating expenses, and repositioning
expense) decreased to $5.6 million in year ended December 31, 1995, from $7.5
million in 1994. The decrease resulted from:
(a) A $0.9 million decrease in charges related to the repositioning of the
mobile offshore drilling unit from the Indian ocean to the Gulf of Mexico during
1994. There were no similar charges in 1995;
(b) A $0.8 million decrease in repairs and maintenance expenses due mainly
to upgrade costs expensed in 1994 related to the Partnership's 55%-owned mobile
offshore drilling unit. There were no similar charges in 1995;
(c) A $0.2 million decrease in marine equipment operating expenses due to
the sale of one of the Partnership's 50%-owned marine vessels during the second
quarter of 1995, offset partially by an increase in marine operating expenses
due to one of the Partnership's marine vessels transferring in June 1994 from a
"time" charter, where the lessee is responsible for most operating costs, into a
voyage charter where all "voyage" costs are paid by the Partnership.
(2) Indirect operating expenses (defined as depreciation and amortization
expense, management fees, interest expense, general and administrative expenses,
and bad debt expense) were $13.7 million in 1995 compared to $15.4 million in
1994. The decrease in indirect operating expenses resulted primarily from:
(a) A $1.8 million decrease in depreciation and amortization expense from
1994 levels primarily due to the sale of certain assets during 1995 and 1994;
(b) A $0.4 million decrease in management fees to affiliate due to a
decrease in the Partnership's operating cash flows. Management fees are based on
the greater of i)10% of "Cash Flows," or ii)1/12 of 1/2% of the net book value
of the equipment portfolio subject to reduction in certain events described in
the Limited Partnership Agreement;
(c) A $0.3 million increase in interest expense resulting from an increase
in the floating rate of interest on the Partnership's debt.
(3) There was no loss on revaluation of equipment recorded during 1995.
During the year ended December 31, 1994, the Partnership recorded a $2.0 million
loss on revaluation of equipment resulting from the $1.0 million and $0.7
million reductions in carrying values of two commercial aircraft to their
estimated net realizable values and from the $0.3 million reduction in the
carrying value of one aircraft engine to its estimated net realizable value.
(4) Loss on a legal settlement of $0.7 million was recorded by the
Partnership during 1994. The settlement involved a dispute with one of the
Partnership's marine vessel charterers over the ability of the marine vessel to
trade to Cuba on charterer's instructions. There were no similar charges in
1995.
(C) Net Income
As a result of the foregoing, the Partnership's net income of $4.2 million for
the year ended December 31, 1995, increased from net income of $0.1 million in
1994. The Partnership's ability to operate and liquidate assets, secure leases,
and re-lease those assets whose leases expire during the duration of the
Partnership, is subject to many factors and the Partnership's performance for
the year ended December 31, 1995, is not necessarily indicative of future
periods. In the year ended December 31, 1995, the Partnership distributed $13.4
million to the Limited Partners, or $2.30 per Depositary Unit.
Geographic Information
The Partnership operates its equipment in international markets. Although these
operations expose the Partnership to certain currency, political, credit and
economic risks, the General Partner believes these risks are minimal or has
implemented strategies to control the risks as follows: currency risks are at a
minimum because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
generally through the avoidance of operations in countries that do not have a
stable judicial system and established commercial business laws. Credit support
strategies for lessees range from letters of credit supported by U.S. banks to
cash deposits. Although these credit support mechanisms generally allow the
Partnership to maintain its lease yield, there are risks associated with
slow-to-respond judicial systems when legal remedies are required to secure
payment or repossess equipment. Economic risks are inherent in all international
markets and the General Partner strives to minimize this risk with market
analysis prior to committing equipment to a particular geographic area. Refer to
the Financial Statements, Note 4 for information on the revenues, income, and
assets in various geographic regions.
Revenues and net income by geographic region are impacted by the time
period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges which are greatest in the early years due to
the use of the declining balance method of depreciation. The relationships of
geographic revenues, net income (loss) and net book value are expected to
significantly change in the future as equipment is sold in various equipment
markets and geographic areas. An explanation of the current relationships is
presented below:
During 1996, the Partnership's equipment on lease to U.S. domiciled lessees
accounted for 30% of the revenues generated by owned and partially owned
equipment while U.S. generated net income accounted for $9.2 million of the
$23.8 million of the net income for the entire Partnership. The primary reason
for this relationship is that during 1996, the Partnership sold a 55% investment
in a mobile offshore drilling unit, a 50% investment in a commuter aircraft, 64
trailers and various railcars generating $10.0 million in gains on equipment
operated in the U.S. Depreciating the Partnership's rail equipment, which is
leased in the U.S., over 15-18 years versus 9-12 years for other types of
equipment partially offset the gains, resulting in net income of $9.2 million.
The Partnership's equipment leased to Canadian domiciled lessees consists
of railcars. During 1996, revenues in Canada accounted for 38% of total lease
revenues while these operations accounted for $3.6 million of the $23.8 million
of the net income for the entire Partnership.
The Partnership's 50% investment in a marine vessel, seven offshore supply
vessels and various marine containers, which were leased in various regions
throughout 1996, accounted for 25% of the lease revenues and 52% of the net
income for the year. During January 1996, the Partnership sold seven offshore
supply vessels which earned lease revenues of $0.1 million in 1996, and
generated gains of $11.3 million. The Partnership's 50% investment in a marine
vessel earned lease revenues of $2.1 million in 1996, and generated $0.2 million
in net income. This vessel is expected to continue to generate similar net
income in the future. The Partnership's marine containers earned $1.3 million in
lease revenues, and generated $1.1 million in net income. Marine container net
income is expected to decline in the future as the Partnership has sold and will
continue to sell marine containers.
European operations consisted of a 50% investment in an aircraft engine
which was sold during 1996 for a gain to the Partnership of $0.7 million.
The Partnership has a 12% investment in a commercial aircraft which
operates in South America. Revenues and net loss related to this investment in
1996 were $0.6 million and ($0.1) million, respectively. This aircraft is on
lease until 1998, and is expected to generate higher net profit in the future as
depreciation charges decline.
Asian operations consisted of a 50% investment in a commercial aircraft
which was on lease to a troubled lessee. At the end of the second quarter of
1996, the Partnership repossessed the commercial aircraft, due to the lessee's
inability to pay the Partnership for outstanding receivables. The Partnership
established reserves against these receivables due to the General Partner's
determination that ultimate collection of this rent is uncertain. During the
third and fourth quarters of 1996, the aircraft remained off lease for
relocation and repair. This aircraft generated lease revenues and net loss of
$0.4 million and ($0.7) million, respectively, during 1996.
Australian operations consisted of a 70% investment in a commuter aircraft
which was sold during 1996 for a gain to the Partnership of $0.3 million.
Inflation
There was no significant impact on the Partnership's operations as a result of
inflation during 1996, 1995, or 1994.
Forward Looking Information
Except for historical information contained herein, the discussion in this Form
10-K contains forward-looking statements that involve risks and uncertainties,
such as statements of the Partnership's plans, objectives, expectations and
intentions. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.
Outlook for the Future
Since the Partnership is approaching its orderly liquidation phase, the General
Partner will be seeking to selectively re-lease or sell assets as the existing
leases expire. Sale decisions will cause the operating performance of the
Partnership to decline over the remainder of its life. The General Partner
anticipates the liquidation of Partnership assets will be completed by the
scheduled termination of the Partnership at the end of 1999. Throughout the
remaining life of the Partnership, the Partnership will periodically be making
special distributions to the Partners as asset sales are completed.
(A) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the General Partner has
observed rising insurance costs to operate certain vessels into U.S. ports
resulting from implementation of the U.S. Oil Pollution Act of 1990. Ongoing
changes in the regulatory environment, both in the U.S. and internationally,
cannot be predicted with any accuracy, and preclude the General Partner from
determining the impact of such changes on Partnership operations or sale of
equipment.
(B) Distributions
Pursuant to the Limited Partnership Agreement, the Partnership ceased to
reinvest in additional equipment. The General Partner will pursue a strategy of
selectively re-leasing equipment to achieve competitive returns, or selling
equipment that is underperforming or whose operation becomes prohibitively
expensive, during the liquidation of the Partnership. During this time, the
Partnership will use operating cash flow and proceeds from the sale of equipment
to meet its operating obligations and make distributions to the partners.
Although the General Partner intends to maintain a sustainable level of
distributions prior to final liquidation of the Partnership, actual Partnership
performance and other considerations may require adjustments to then-existing
distribution levels. In the long term, changing market conditions and
used-equipment values may preclude the General Partner from accurately
determining the impact of future re-leasing activity and equipment sales on
partnership performance and liquidity.
As of the first quarter of 1996, the cash distribution rate was reduced to
more closely reflect current and expected net cash flows from operations.
Continued weak market conditions in certain equipment sectors and equipment
sales have reduced overall lease revenues in the Partnership to the point where
reductions in distribution levels were necessary. In addition, with the
Partnership expected to enter the active liquidation phase in the near future,
the size of the Partnership's remaining equipment portfolio, and, in turn, the
amount of net cash flows from operations, will continue to become progressively
smaller as assets are sold. Although distribution levels will be reduced,
significant asset sales may result in potential special distributions to
Unitholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements included in Item 14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(This space intentionally left blank.)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
As of the date of this Annual Report, the directors and executive officers of
PLM International (and key executive officers of its subsidiaries) are as
follows:
Name Age Position
-------------------------------------- ------------------ -------------------------------------------------------
J. Alec Merriam 61 Director, Chairman of the Board, PLM International,
Inc.; Director, PLM Financial Services, Inc.
Douglas P. Goodrich 50 Director and Senior Vice President, PLM
International; Director and President, PLM Financial
Services, Inc.; Senior Vice President, PLM
Transportation Equipment Corporation; President, PLM
Railcar Management Services, Inc.
Walter E. Hoadley 80 Director, PLM International, Inc.
Robert L. Pagel 60 Director, Chairman of the Executive Committee, PLM
International, Inc.; Director, PLM Financial
Services, Inc.
Harold R. Somerset 62 Director, PLM International, Inc.
Robert N. Tidball 58 Director, President and Chief Executive Officer, PLM
International, Inc.
J. Michael Allgood 48 Vice President and Chief Financial Officer, PLM
International, Inc. and PLM Financial Services, Inc.
Stephen M. Bess 50 President, PLM Investment Management, Inc.;
President, PLM Securities Corp.; Vice President, PLM
Financial Services, Inc.
David J. Davis 40 Vice President and Corporate Controller, PLM
International and PLM Financial Services, Inc.
Frank Diodati 42 President, PLM Railcar Management Services Canada
Limited.
Steven O. Layne 42 Vice President, PLM Transportation Equipment
Corporation; Vice President and Director, PLM
Worldwide Management Services, Ltd.
Stephen Peary 48 Senior Vice President, General Counsel and Secretary,
PLM International, Inc.; Vice President, General
Counsel and Secretary, PLM Financial Services, Inc.,
PLM Investment Management, Inc., PLM Transportation
Equipment Corporation; Vice President, PLM
Securities, Corp.
Thomas L. Wilmore 54 Vice President, PLM Transportation Equipment
Corporation; Vice President, PLM Railcar Management
Services, Inc.
J. Alec Merriam was appointed Chairman of the Board of Directors of PLM
International in September 1990, having served as a director since February
1988. In October 1988, he became a member of the Executive Committee of the
Board of Directors of PLM International. From 1972 to 1988, Mr. Merriam was
Executive Vice President and Chief Financial Officer of Crowley Maritime
Corporation, a San Francisco area-based company engaged in maritime shipping and
transportation services. Previously, he was Chairman of the Board and Treasurer
of LOA Corporation of Omaha, Nebraska and served in various financial positions
with Northern Natural Gas Company, also of Omaha.
Douglas P. Goodrich was elected to the Board of Directors in July 1996, and
appointed Director and President of PLM Financial Services in June 1996, and
appointed Senior Vice President of PLM International in March 1994. Mr. Goodrich
has also served as Senior Vice President of PLM Transportation Equipment
Corporation since July 1989, and as President of PLM Railcar Management
Services, Inc. since September 1992 having been a Senior Vice President since
June 1987. Mr. Goodrich was an Executive Vice President of G.I.C. Financial
Services Corporation, a subsidiary of Guardian Industries Corp. of Chicago,
Illinois from December 1980 to September 1985.
Dr. Hoadley joined PLM International's Board of Directors and its Executive
Committee in September, 1989. He served as a Director of PLM, Inc. from November
1982 to June 1984 and PLM Companies, Inc. from October 1985 to February 1988.
Dr. Hoadley has been a Senior Research Fellow at the Hoover Institute since
1981. He was Executive Vice President and Chief Economist for the Bank of
America from 1968 to 1981, and Chairman of the Federal Reserve Bank of
Philadelphia from 1962 to 1966. Dr. Hoadley served as a Director of Transcisco
Industries, Inc. from 1988 through August of 1995.
Robert L. Pagel was appointed Chairman of the Executive Committee of the
Board of Directors of PLM International in September 1990, having served as a
director since February 1988. In October 1988, he became a member of the
Executive Committee of the Board of Directors of PLM International. From June
1990 to April 1991, Mr. Pagel was President and Co-Chief Executive Officer of
The Diana Corporation, a holding company traded on the New York Stock Exchange.
He is the former President and Chief Executive Officer of FanFair Corporation
which specializes in sports fans' gift shops. He previously served as President
and Chief Executive Officer of Super Sky International, Inc., a publicly traded
company, located in Mequon, Wisconsin, engaged in the manufacture of skylight
systems. He was formerly Chairman and Chief Executive Officer of Blunt, Ellis &
Loewi, Inc., a Milwaukee-based investment firm. Mr. Pagel retired from Blunt,
Ellis & Loewi in 1985 after a career spanning 20 years in all phases of the
brokerage and financial industries. Mr. Pagel has also served on the Board of
Governors of the Midwest Stock Exchange.
Harold R. Somerset was elected to the Board of Directors of PLM
International in July 1994. From February 1988 to December 1993, Mr. Somerset
was President and Chief Executive Officer of California & Hawaiian Sugar
Corporation (C&H), a recently-acquired subsidiary of Alexander & Baldwin, Inc.
Mr. Somerset joined C&H in 1984 as Executive Vice President and Chief Operating
Officer, having served on its Board of Directors since 1978, a position in which
he continues to serve. Between 1972 and 1984, Mr. Somerset served in various
capacities with Alexander & Baldwin, Inc., a publicly-held land and agriculture
company headquartered in Honolulu, Hawaii, including Executive Vice President -
Agricultures, Vice President, General Counsel and Secretary. In addition to a
law degree from Harvard Law School, Mr. Somerset also holds degrees in civil
engineering from the Rensselaer Polytechnic Institute and in marine engineering
from the U.S. Naval Academy. Mr. Somerset also serves on the Boards of Directors
for various other companies and organizations, including Longs Drug Stores,
Inc., a publicly-held company.
Robert N. Tidball was appointed President and Chief Executive Officer of
PLM International in March 1989. At the time of his appointment, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989 and a member of the Executive Committee of the
Board of Directors of PLM International in September 1990. Mr. Tidball was
elected President of PLM Railcar Management Services, Inc. in January 1986. Mr.
Tidball was Executive Vice President of Hunter Keith, Inc., a Minneapolis-based
investment banking firm, from March 1984 to January 1986. Prior to Hunter Keith,
Inc., he was Vice President, a General Manager and a Director of North American
Car Corporation, and a Director of the American Railcar Institute and the
Railway Supply Association.
J. Michael Allgood was appointed Vice President and Chief Financial Officer
of PLM International in October 1992. Between July 1991 and October 1992, Mr.
Allgood was a consultant to various private and public sector companies and
institutions specializing in financial operational systems development. In
October 1987, Mr. Allgood co-founded Electra Aviation Limited and its holding
company, Aviation Holdings Plc of London where he served as Chief Financial
Officer until July 1991. Between June 1981 and October 1987, Mr. Allgood served
as a First Vice President with American Express Bank, Ltd. In February 1978, Mr.
Allgood founded and until June 1981, served as a director of Trade Projects
International/Philadelphia Overseas Finance Company, a joint venture with
Philadelphia National Bank. From March 1975 to February 1978, Mr. Allgood served
in various capacities with Citibank, N.A.
Stephen M. Bess was appointed President of PLM Securities, Corp. in June
1996 and President of PLM Investment Management, Inc. in August 1989, having
served as Senior Vice President of PLM Investment Management, Inc. beginning in
February 1984 and as Corporate Controller of PLM Financial Services, Inc.
beginning in October 1983. Mr. Bess served as Corporate Controller of PLM, Inc.,
beginning in December 1982. Mr. Bess was Vice President-Controller of Trans
Ocean Leasing Corporation, a container leasing company, from November 1978 to
November 1982, and Group Finance Manager with the Field Operations Group of
Memorex Corp., a manufacturer of computer peripheral equipment, from October
1975 to November 1978.
David J. Davis was appointed Vice President and Controller of PLM
International in January 1994. From March 1993 through January 1994, Mr. Davis
was engaged as a consultant for various firms, including PLM. Prior to that Mr.
Davis was Chief Financial Officer of LB Credit Corporation in San Francisco from
July 1991 to March 1993. From April 1989 to May 1991, Mr. Davis was Vice
President and Controller for ITEL Containers International Corporation which was
located in San Francisco. Between May 1978 and April 1989, Mr. Davis held
various positions with Transamerica Leasing Inc., in New York, including that of
Assistant Controller for their rail leasing division.
Frank Diodati was appointed President of PLM Railcar Management Services
Canada Limited in 1986. Previously, Mr. Diodati was Manager of Marketing and
Sales for G.E. Railcar Services Canada Limited.
Steven O. Layne was appointed Vice President, PLM Transportation Equipment
Corporation's Air Group in November 1992, and was appointed Vice President and
Director of PLM Worldwide Management Services, Ltd. in September 1995. Mr. Layne
was PLM Transportation Equipment Corporation's Vice President, Commuter and
Corporate Aircraft beginning in July 1990. Prior to joining PLM, Mr. Layne was
the Director, Commercial Marketing for Bromon Aircraft Corporation, a joint
venture of General Electric Corporation and the Government Development Bank of
Puerto Rico. Mr. Layne is a Major in the United States Air Force Reserves and
senior pilot with 13 years of accumulated service.
Stephen Peary became Vice President, Secretary, and General Counsel of PLM
International in February 1988 and Senior Vice President in March 1994. Mr.
Peary was Assistant General Counsel of PLM Financial Services, Inc. from August
1987 through January 1988. Previously, Mr. Peary was engaged in the private
practice of law in San Francisco. Mr. Peary is a graduate of the University of
Illinois, Georgetown University Law Center, and Boston University (Masters of
Taxation Program).
Thomas L. Wilmore was appointed Vice President - Rail, PLM Transportation
Equipment Corporation, in March 1994 and has served as Vice President, Marketing
for PLM Railcar Management Services, Inc. since May 1988. Prior to joining PLM,
Mr. Wilmore was Assistant Vice President Regional Manager for MNC Leasing Corp.
in Towson, Maryland from February 1987 to April 1988. From July 1985 to February
1987, he was President and Co-Owner of Guardian Industries Corp., Chicago,
Illinois, and between December 1980 and July 1985, Mr. Wilmore was an Executive
Vice President for its subsidiary, G.I.C. Financial Services Corporation. Mr.
Wilmore also served as Vice President of Sales for Gould Financial Services
located in Rolling Meadows, Illinois from June 1978 to December 1980.
The directors of the General Partner are elected for a one-year term or
until their successors are elected and qualified. There are no family
relationships between any director or any executive officer of the General
Partner.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership has no
pension, profit-sharing, retirement, or similar benefit plan in effect as of
December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 1% interest in the profits and
losses and distributions of the Partnership. At December 31, 1996, no investor
was known by the General Partner to beneficially own more than 5% of the
Depositary Units of the Partnership.
(b) Security Ownership of Management
Table 5, below, sets forth, as of the date of this report, the amount and
percent of the Partnership's outstanding Depositary Units beneficially owned by
each of the directors and executive officers and all directors and executive
officers as a group of the General Partner and its affiliates:
TABLE 5
Name Depositary Units Percent of Units
Robert N. Tidball 400 *
J. Alec Merriam 1,000 *
All directors and officers
as a group (2 people) 1,400 *
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
During 1996, management fees to IMI were $0.7 million. During 1996, the
Partnership reimbursed FSI or its affiliates $0.7 million for administrative
services and data processing expenses performed on behalf of the Partnership.
The Partnership paid Transportation Equipment Indemnity Company Ltd. (TEI), a
wholly-owned, Bermuda-based subsidiary of PLM International, $1,000 for
insurance coverages during 1996, which amounts were paid substantially to third
party reinsurance underwriters or placed in risk pools managed by TEI on behalf
of affiliated partnerships and PLM International which provide threshold
coverages on marine vessel loss of hire and hull and machinery damage. All
pooling arrangement funds are either paid out to cover applicable losses or
refunded pro rata by TEI.
During 1996, the unconsolidated special purpose entities (USPE's) paid or
accrued the following fees to FSI or its affiliates (based on the Partnership's
proportional share of ownership): management fees - $0.2 million; administrative
and data processing services - $0.1 million. The unconsolidated special purpose
entities also paid TEI $0.2 million for insurance coverages during 1996.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions With Promoters
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report.
(b) Reports on Form 8-K
None.
(c) Exhibits
4. Limited Partnership Agreement of Partnership, incorporated by
reference to the Partnership's Registration Statement on Form
S-1 (Reg. No. 33-2834) which became effective with the
Securities and Exchange Commission on May 20, 1986.
4.1 Amendment, dated November 18, 1991, to Limited Partnership
Agreement of Partnership.
10.1 Management Agreement between the Partnership and PLM Investment
Management, Inc. incorporated by reference to the Partnership's
Registration Statement on Form S-1 (Reg. No. 33-2834) which
became effective with the Securities and Exchange Commission on
May 20, 1986.
24. Powers of Attorney.
(This space intentionally left blank.)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has
signed on behalf of the Partnership by duly authorized officers.
Dated: February 28, 1997 PLM EQUIPMENT GROWTH FUND
PARTNERSHIP
By: PLM Financial Services, Inc.
General Partner
By: /s/ Douglas P. Goodrich
--------------------------
Douglas P. Goodrich
President and Director
By: /s/ David J. Davis
--------------------------
David J. Davis
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
*_______________________
J. Alec Merriam Director - FSI February 28, 1997
*_______________________
Robert L. Pagel Director - FSI February 28, 1997
* Stephen Peary, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to powers of attorney duly executed by
such persons and filed with the Securities and Exchange Commission.
/s/ Stephen Peary
- -----------------------
Stephen Peary
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Report of Independent Auditors 26
Balance sheets at December 31, 1996 and 1995 27
Statements of income for the years ended
December 31, 1996, 1995, and 1994 28
Statements of changes in partners' capital for the years
ended December 31, 1996, 1995, and 1994 29
Statements of cash flows for the years ended
December 31, 1996, 1995, and 1994 30
Notes to financial statements 31-38
All financial statement schedules have been omitted as the required information
is not pertinent to the Registrant or is not material, or because the
information required is included in the financial statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners
PLM Equipment Growth Fund:
We have audited the financial statements of PLM Equipment Growth Fund as listed
in the accompanying index. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 PLM Equipment Growth Fund as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
- ---------------------------------
SAN FRANCISCO, CALIFORNIA
February 28, 1997
PLM EQUIPMENT GROWTH FUND
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands, except unit amounts)
ASSETS
1996 1995
----------------------------------
Equipment held for operating leases, at cost $ 45,118 $ 52,762
Less accumulated depreciation (33,919 ) (36,198 )
---------------------------------
11,199 16,564
Equipment held for sale -- 2,298
---------------------------------
Net equipment 11,199 18,862
Cash and cash equivalents 1,864 1,474
Restricted cash 60 332
Investments in unconsolidated special purpose entities 6,553 16,871
Accounts receivable, less allowance for doubtful accounts
of $139 and $55 at December 31, 1996 and 1995, respectively 1,039 1,282
Prepaid expenses and other assets 34 85
Deferred charges, net of accumulated amortization
of $172 and $17 at December 31, 1996 and 1995, respectively -- 155
---------------------------------
Total assets $ 20,749 $ 39,061
=================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 457 $ 665
Due to affiliates 121 100
Security deposits 60 126
Lessee deposits and reserve for repairs 693 836
Notes payable -- 23,000
---------------------------------
Total liabilities 1,331 24,727
Partners' capital (deficit):
Limited Partners (5,785,350 and 5,810,150 Depositary Units at
December 31, 1996 and 1995, respectively) 19,641 14,609
General Partner (223 ) (275 )
---------------------------------
Total partners' capital 19,418 14,334
---------------------------------
Total liabilities and partners' capital $ 20,749 $ 39,061
=================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND
(A Limited Partnership)
STATEMENTS OF INCOME
For the years ended December 31,
(in thousands, except per unit amounts)
1996 1995 1994
--------------------------------------------
Revenues:
Lease revenue $ 10,187 $ 20,621 $ 23,358
Interest and other income 368 759 716
Net gain on disposition of equipment 13,304 2,195 1,585
-------------------------------------------
Total revenues 23,859 23,575 25,659
Expenses:
Depreciation and amortization 3,267 8,547 10,349
Management fees to affiliate 739 1,318 1,695
Repairs and maintenance 2,405 2,787 3,541
Interest expense 945 2,021 1,693
Insurance expense to affiliate 1 214 112
Other insurance expense 73 382 465
Marine equipment operating expenses -- 2,261 2,482
General and administrative expenses
to affiliate 708 921 647
Other general and administrative expenses 468 623 942
Bad debt expense 134 267 76
Loss on revaluation of equipment -- -- 1,989
Repositioning expense -- -- 879
Loss on legal settlement -- -- 714
-------------------------------------------
Total expenses 8,740 19,341 25,584
Equity in net income of unconsolidated
special purpose entities 8,728 -- --
-------------------------------------------
Net income $ 23,847 $ 4,234 $ 75
===========================================
Partners' share of net income:
Limited Partners $ 23,609 $ 4,063 $ (43 )
General Partner 238 171 118
===========================================
Total $ 23,847 $ 4,234 $ 75
===========================================
Net income (loss) per weighted average Depositary Unit
(5,787,545 - 1996; 5,826,210 - 1995;
5,853,255 - 1994) $ 4.08 $ 0.70 $ (0.01 )
===========================================
Cash distributions $ 8,358 $ 13,549 $ 13,580
===========================================
Cash distributions per weighted average Depositary Unit $ 1.43 $ 2.30 $ 2.30
===========================================
Special distributions $ 10,242 $ -- $ --
===========================================
Special distributions per weighted average Depositary Unit $ 1.75 $ -- $ --
===========================================
Total distributions per weighted average Depositary Unit $ 3.18 $ 2.30 $ 2.30
===========================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the years ended December 31, 1996, 1995, and 1994
(in thousands)
Limited General
Partners Partner Total
---------------------------------------------
Partners' capital (deficit) at December 31, 1993 $ 38,047 $ (311 ) $ 37,736
Net (loss) income (43 ) 118 75
Repurchase of Depositary Units (168 ) -- (168 )
Cash distributions (13,462 ) (118 ) (13,580 )
------------------------------------------------
Partners' capital (deficit) at December 31, 1994 24,374 (311 ) 24,063
Net income 4,063 171 4,234
Repurchase of Depositary Units (414 ) -- (414 )
Cash distributions (13,414 ) (135 ) (13,549 )
------------------------------------------------
Partners' capital (deficit) at December 31, 1995 14,609 (275 ) 14,334
Net income 23,609 238 23,847
Repurchase of Depositary Units (163 ) -- (163 )
Cash distributions (8,274 ) (84 ) (8,358 )
Special distributions (10,140 ) (102 ) (10,242 )
------------------------------------------------
Partners' capital (deficit) at December 31, 1996 $ 19,641 $ (223 ) $ 19,418
================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31,
(thousands of dollars)
1996 1995 1994
--------------------------------------------
Operating activities:
Net income $ 23,847 $ 4,234 $ 75
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,267 8,547 10,349
Net gain on disposition of equipment (13,304 ) (2,195 ) (1,585 )
Loss on revaluation of equipment -- -- 1,989
Income from unconsolidated special purpose entities (8,728 ) -- --
Changes in operating assets and liabilities:
Accounts receivable, net 344 256 (67 )
Prepaid expenses and other assets (50 ) 9 (14 )
Deferred charges, net -- (172 ) --
Restricted cash 187 272 289
Due to affiliates 21 (98 ) 304
Accounts payable and accrued expenses (208 ) (47 ) 315
Security deposits (66 ) (271 ) (290 )
Prepaid deposits and reserve for repairs (143 ) (706 ) 255
-------------------------------------------------
Net cash provided by operating activities 5,167 9,829 11,620
-------------------------------------------------
Investing activities:
Payments for capital improvements and
equipment purchases (62 ) (47 ) (1,915 )
Proceeds from disposition of equipment 17,917 7,142 3,082
Liquidation distributions from unconsolidated
special purpose entities 17,525 -- --
Distributions from unconsolidated special
purpose entities 1,521 -- --
-------------------------------------------------
Net cash provided by investing activities 36,901 7,095 1,167
-------------------------------------------------
Financing activities:
Principal repayments under note payable (23,000 ) (28,000 ) --
Proceeds from notes payable -- 23,000 --
Decrease (increase) in restricted cash 85 1,348 (53 )
Cash distributions paid to Limited Partners (8,274 ) (13,414 ) (13,462 )
Cash distributions paid to General Partner (84 ) (135 ) (118 )
Special distributions paid to Limited Partners (10,140 ) -- --
Special distributions paid to General Partner (102 ) -- --
Repurchases of Depositary Units (163 ) (414 ) (168 )
-------------------------------------------------
Net cash used in financing activities (41,678 ) (17,615 ) (13,801 )
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents 390 (691 ) (1,014 )
Cash and cash equivalents at beginning of year (See Note 3) 1,474 2,542 3,556
-------------------------------------------------
Cash and cash equivalents at end of year $ 1,864 $ 1,851 $ 2,542
=================================================
Supplemental information:
Interest paid $ 958 $ 2,123 $ 1,553
=================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation
Organization
PLM Equipment Growth Fund, a California limited partnership (the
Partnership) was formed on January 28, 1986. The Partnership engages in
the business of owning and leasing primarily used transportation
equipment. The Partnership commenced significant operations in August
1986. PLM Financial Services, Inc. (FSI) is the General Partner. FSI is a
wholly-owned subsidiary of PLM International, Inc. (PLM International).
The Partnership will terminate on December 31, 2006, unless terminated
earlier upon sale of all equipment or by certain other events. Since the
third quarter of 1994, and in accordance with the Partnership agreement,
the General Partner may no longer reinvest cash flows and surplus funds in
equipment. All future cash flows and surplus funds, if any, are to be used
for distributions to Partners, except to the extent used to maintain
reasonable reserves. The General Partner will begin the liquidation phase
of the Partnership in 1998. It is anticipated the Partnership will be
completely liquidated by the end of 1999.
FSI manages the affairs of the Partnership. The net income (loss) and
distributions of the Partnership are generally allocated 99% to the
Limited Partners and 1% to the General Partner (see Net Income (Loss) and
Distributions per Depositary Unit, below). The General Partner is entitled
to an incentive fee equal to 15% of "Surplus Distributions" as defined in
the Limited Partnership Agreement remaining after the Limited Partners
have received a certain minimum rate of return.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operations
The equipment of the Partnership is managed, under a continuing management
agreement, by PLM Investment Management, Inc. (IMI), a wholly-owned
subsidiary of FSI. IMI receives a monthly management fee from the
Partnership for managing the equipment (see Note 2). FSI, in conjunction
with its subsidiaries, sells transportation equipment to investor programs
and third parties, manages pools of transportation equipment under
agreements with the investor programs, and is a General Partner of other
Limited Partnerships.
Accounting for Leases
The Partnership's leasing operations generally consist of operating
leases. Under the operating lease method of accounting, the leased asset
is recorded at cost and depreciated over its estimated useful life. Rental
payments are recorded as revenue over the lease term. Lease origination
costs are capitalized and amortized over the term of the lease.
PLM EQUIPMENT GROWTH FUND
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
Depreciation and Amortization
Depreciation of equipment held for operating leases is computed on 150%
declining balance, or 200% declining balance method based upon estimated
useful lives of 9 to 12 years for aircraft, 15 to 18 years for railcars,
and 12 years for marine containers, trailers, and the marine vessel. Both
accelerated depreciation methods convert to straight line when annual
depreciation expense using the straight line method exceeds that
calculated by the accelerated method. Acquisition fees were capitalized as
part of the cost of the equipment. Lease negotiation fees were amortized
over the initial equipment lease term. Debt placement fees and issuance
costs were amortized over the term of the loan for which they were paid.
Major expenditures which are expected to extend the useful lives or reduce
future operating expenses for equipment are capitalized.
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" (SFAS 121). This standard is
effective for years beginning after December 15, 1995. The Partnership
adopted SFAS 121 during 1995, the effect of which was not material as the
method previously employed by the Partnership was consistent with SFAS
121. In accordance with SFAS 121, the General Partner reviews the carrying
value of its equipment portfolio at least annually in relation to expected
future market conditions for the purpose of assessing the recoverability
of the recorded amounts. If the projected future lease revenue plus
residual values are less than the carrying value of the equipment, a loss
on revaluation is recorded.
Equipment held for operating leases is stated at cost. Equipment held
for sale is stated at the lower of the equipment's depreciated cost or
estimated fair value less cost to sell and is subject to a pending
contract for sale.
Investments in Unconsolidated Special Purpose Entities
The Partnership has interests in unconsolidated special purpose entities
which own transportation equipment. These interests are accounted for
using the equity method.
The Partnership's investment in unconsolidated special purpose entities
includes acquisition and lease negotiation fees paid by the Partnership to
TEC. The Partnership's equity interest in net income of unconsolidated
special purpose entities is reflected net of management fees paid or
payable to IMI and the amortization of acquisition and lease negotiation
fees paid to TEC.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are
not covered by the lessee, they are charged against operations as
incurred. To meet the maintenance obligations of certain aircraft
airframes and engines, escrow accounts are prefunded by the lessees.
Estimated costs associated with marine vessel drydockings are accrued and
charged to income ratably over the period prior to such drydocking. The
reserve accounts are included in the balance sheet as prepaid deposits and
reserve for repairs.
Net Income (Loss) and Distributions per Depositary Unit
The net income (loss) and distributions of the Partnership are generally
allocated 99% to the Limited Partners and 1% to the General Partner. The
Limited Partners' net income (loss) and distributions are allocated among
the Limited Partners based on the number of Depositary Units owned by each
Limited Partner.
The General Partner received a special allocation of income in the
PLM EQUIPMENT GROWTH FUND
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
amount of $129,000 in 1995 and $117,000 in 1994 resulting from a 1991
amendment to the Partnership Agreement.
Cash distributions are recorded when paid. Operating cash distributions of
$1.6 million ($0.274 per Depositary Unit) were declared on December 15,
1996, and paid on February 14, 1997, to the unitholders of record as of
December 31, 1996. Operating cash distributions were $8.4 million, $13.5
million, and $13.6 million in 1996, 1995 and 1994, respectively. In
addition, $10.2 million in special distributions were paid to the Partners
during 1996, from the equipment sales proceeds.
Net Income (Loss) and Distributions per Depositary Unit
There were no special distributions paid to Partners in 1995 or 1994. Cash
distributions to investors in excess of net income are considered to
represent a return of capital. Cash distributions to Limited Partners of
$9.4 million and $13.5 million in 1995 and 1994, respectively, were deemed
to be a return of capital.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three
months or less as cash equivalents. The carrying amount of cash
equivalents approximates fair market value due to the short-term nature of
the investments.
Restricted Cash
Lessee security deposits held by the Partnership are considered restricted
cash. In addition, restricted cash included the Partnership's joint escrow
account deposits required by the Partnership's loan (see Note 5) to be the
greater of 45% of the fair market value of sold equipment or 60% of the
net sales proceeds.
Reclassifications
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentation.
2. General Partner and Transactions with Affiliates
An officer of FSI contributed $100 of the Partnership's initial capital.
Under the equipment management agreement, IMI receives a monthly
management fee attributable to either owned equipment or interests in
equipment owned by the USPE's equal to the greater of (i) 10% of "Cash
Flows," or (ii) 1/12 of 1/2% of the book value of the equipment portfolio
subject to reduction in certain events described in the Limited
Partnership Agreement. Partnership management fees of $0.1 million were
payable to IMI as of December 31, 1996 and 1995. The Partnership's
proportional share of USPE's management fees of $36,000, and $0 were
payable as of December 31, 1996 and 1995, respectively. The Partnership's
proportional share of USPE's management fees expense during 1996 was $0.2
million. Additionally, the Partnership reimbursed FSI and its affiliates
$0.7 million, $0.9 million, and $0.6 million for administrative services
and data processing expenses performed on behalf of the Partnership in
1996, 1995, and 1994, respectively. The Partnership's proportional share
of USPE's admininstrative and data processing expenses was $0.1 million
during 1996.
The Partnership paid $1,000, $0.2 million, and $0.1 million in 1996,
1995, and 1994, respectively, to Transportation Equipment Indemnity,
Company, Ltd. (TEI) which provides marine insurance coverage and other
insurance brokerage services. The Partnership's proportional share of
USPE's marine insurance coverage paid to TEI was $0.2 million during 1996.
TEI is an affiliate
PLM EQUIPMENT GROWTH FUND
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
2. General Partner and Transactions with Affiliates (continued)
of the General Partner. A substantial portion of these amounts were paid to
third party reinsurance underwriters or placed in risk pools managed by TEI
on behalf of affiliated partnerships and PLM International which provide
threshold coverages on marine vessel loss of hire and hull and machinery
damage. All pooling arrangement funds are either paid out to cover
applicable losses or refunded pro rata by TEI.
As of December 31, 1996, 100% of the Partnership's trailer equipment is
in rental facilities operated by an affiliate of the General Partner.
Revenues collected under short-term rental agreements with rental
facilities' customers are distributed monthly to the owners of the related
equipment. Direct expenses associated with the equipment and an allocation
of indirect expenses of the rental yard operations are billed to the
Partnership.
3. Investments in Unconsolidated Special Purpose Entities
Prior to 1996, the Partnership accounted for operating activities
associated with joint ownership of transportation equipment as undivided
interests, including its proportionate share of each asset with similar
wholly-owned assets in its financial statements. Under generally accepted
accounting principles, the effects of such activities, if material, should
be reported using the equity method of accounting. Therefore, effective
January 1, 1996, the Partnership adopted the equity method to account for
its investment in such jointly-held assets.
The principal differences between the previous accounting method and
the equity method relate to the presentation of activities relating to
these assets in the statement of operations. Under the equity method the
Partnership's proportionate share is presented as a single net amount,
"Equity in net income (loss) of unconsolidated special purpose entities".
Under the previous method, the Partnership's income statement reflected its
proportionate share of each individual item of revenue and expense.
Accordingly, the effect of adopting the equity method of accounting has no
cumulative effect on previously reported partners' capital or on the
Partnership's net income (loss) for the period of adoption. Because the
effects on previously issued financial statements of applying the equity
method of accounting for investments in jointly-owned assets are not
considered to be material to such financial statements taken as a whole,
previously issued financial statements have not been restated. However,
certain items have been reclassified in the previously issued balance sheet
to conform to the current period presentation. The beginning cash and cash
equivalents for 1996 is different from the ending cash and cash equivalents
for 1995 on the statements of cash flows due to the reclassification.
The following summarizes the financial information for the special
purpose entities and the Partnership's interest therein as of and for the
year ended December 31, 1996 (in $000s):
Net
Total USPE Interest of
Partnership
------------------------------
Net Investments $ 31,608 $ 6,553
Revenues 11,872 4,156
Net Income 15,453 8,728
PLM EQUIPMENT GROWTH FUND
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. Investments in Unconsolidated Special Purpose Entities (continued)
The net investments in unconsolidated special purpose entities
include the following jointly-owned equipment (and related assets and
liabilities) (in thousands) at December 31,:
% Ownership Equipment 1996 1995
----------------------------------------------------------------------------------------------
50% Product Tanker $ 2,090 $ 2,615
50% Aircraft engine -- 731
50% Boeing 737-200 1,689 2,368
50% Fairchild Metro III -- 170
55% Mobile Offshore drilling unit -- 7,295
70% Fairchild Metro III -- 358
12% Boeing 767-200ER 2,774 3,334
---------------------------------
Net investments $ 6,553 $ 16,871
=================================
During 1996, the Partnership sold its 70% and 50% investments in
commuter aircraft, its 55% investment in a mobile offshore drilling unit
and its 50% investment in an aircraft engine with an aggregate net book
value of $8.3 million, for aggregate proceeds of $17.5 million. During
1995, the Partnership sold its 50% investments in a marine vessel, a
commuter aircraft and a commercial aircraft with an aggregate net book
value of $4.3 million, for aggregate proceeds of $4.9 million. Included in
the gain on sale of the marine vessel in 1995 is the unused portion of
accrued drydocking of $0.3 million.
The Partnership's 50% investment in a commercial aircraft included in
"Investments in unconsolidated special purpose entities" was off lease at
December 31, 1996.
The Partnership received liquidating distributions from the
Unconsolidated Special Purpose Entities during 1996.
4. Equipment
The components of owned equipment at December 31, 1996 and 1995, are as
follows (in thousands):
1996 1995
----------------------------------
Rail equipment $ 21,909 $ 24,339
Marine containers 7,465 8,728
Aircraft and aircraft engines 6,299 8,992
Trailers 9,445 10,703
----------------------------------
45,118 52,762
Less accumulated depreciation (33,919 ) (36,198 )
----------------------------------
11,199 16,564
Equipment held for sale -- 2,298
----------------------------------
Net equipment $ 11,199 $ 18,862
==================================
As of December 31, 1996, there was no equipment held for sale.
Equipment held for sale at December 31, 1995, included seven offshore
supply vessels with a net book value of $2.3 million, which were sold in
January 1996, for $13.4 million.
Revenues are earned by placing the equipment under operating
leases which are generally billed monthly or quarterly. All of the
Partnership's marine containers are leased to operators of
utilization-type leasing pools which include equipment owned by
unaffiliated parties. In such instances, revenues received by the
Partnership consist of a specified percentage of revenues generated by
leasing the equipment to sublessees, after deducting certain direct
operating
PLM EQUIPMENT GROWTH FUND
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
expenses of the pooled equipment. Rents for railcars are based on mileage
traveled or a fixed rate; rents for all other equipment are based on fixed
rates.
As of December 31, 1996, all equipment in the Partnership's portfolio
was on lease or operating in PLM-affiliated short-term trailer rental
facilities, except 27 marine containers and 20 railcars off-lease with an
aggregate net book value of $0.1 million. At December 31, 1995, the
Partnership had 60 marine containers off lease, with a net book value of
$0.1 million.
The General Partner incurred approximately $62,000 and $47,000 in 1996
and 1995, respectively, in capital improvements but did not purchase any
additional equipment, in accordance with the Partnership agreement.
During 1996, the Partnership sold 410 marine containers, 1 aircraft
engine, 64 trailers, 7 offshore supply vessels, 15 railcars and 20
locomotives with a net book value of $4.6 million for $17.9 million.
During 1995, the Partnership sold or disposed of 396 marine containers, 45
trailers, and 18 railcars with a net book value of $0.9 million for $2.2
million.
All leases for owned and partially owned equipment are being accounted
for as operating leases. Future minimum rentals under noncancelable leases
for owned and partially owned equipment at December 31, 1996, during each
of the next five years and thereafter are approximately $7.3 million -
1997; $5.9 million - 1998; $4.0 million - 1999; $1.7 million - 2000; $0.5
million - 2001, and $6,000 - thereafter. Contingent rentals based upon
utilization for owned and partially owned equipment were approximately
$1.2 million, $2.2 million, and $2.6 million in 1996, 1995, and 1994,
respectively.
The Partnership owns certain equipment which is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are
not material.
The Partnership leased its aircraft, railcars, mobile offshore drilling
unit and trailers to lessees domiciled in six geographic regions: Canada,
United States, South America, Europe, Australia and Asia. Marine vessels
and marine containers are leased to multiple lessees in different regions
who operate the marine vessels and marine containers worldwide. The tables
below set forth geographic information about the Partnership's equipment
grouped by domicile of the lessee as of and for the years ended December
31, 1996, 1995 and 1994 (in thousands):
Investments in
Unconsolidated
Special Purpose Owned
Entities Equipment Total Equipment
Revenues: 1996 1996 1995 1994
---------
-----------------------------------------------------------------
Various $ 2,115 $ 1,423 $ 7,166 $ 7,847
Canada -- 5,381 5,426 5,518
United States 879 3,383 6,092 6,097
Asia 441 -- 876 2,050
Europe 104 -- 311 1,078
South America 590 -- 590 590
Australia 27 -- 160 178
================================================================
Total Revenues $ 4,156 $ 10,187 $ 20,621 $ 23,358
================================================================
PLM EQUIPMENT GROWTH FUND
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
The following table sets forth indentifiable income (loss) information by
region for the years ended December 31, 1996, 1995 and 1994 (in thousands):
Investments in
Unconsolidated
Special Purpose Owned Equipment
Entities Total Equipment
Income (loss): 1996 1996 1995 1994
--------------
------------------------------------------------------------------------
Various $ 247 $ 12,223 $ 2,756 $ 2,304
Canada -- 3,570 3,282 3,303
United States 8,264 935 942 (2,413 )
Asia (695 ) (175 ) (295 ) (125 )
Europe 715 -- 38 (310 )
South America (62 ) -- (175 ) (266 )
Australia 259 -- 17 40
------------------------------------------------------------------------
Total identifiable income 8,728 16,553 6,565 2,533
Other net loss not identifiable -- (1,434 ) (2,331 ) (2,458 )
========================================================================
Total net income $ 8,728 $ 15,119 $ 4,234 $ 75
========================================================================
The net book value of these assets at December 31, 1996, 1995, and 1994
is as follows (in thousands):
Investments Investments
in in Unconsolidated
Unconsolidated Special Purpose
Special Purpose Entities
Entities Owned Owned Total
Equipment Equipment Equipment
Net book value: 1996 1996 1995 1995 1994
---------------
--------------------------------------------------------------------------
Various $ 2,090 $ 2,252 $ 2,615 $ 3,066 $ 12,409
Canada -- 5,800 -- 7,140 8,471
United States -- 3,147 170 5,019 18,128
Asia 1,689 -- 2,368 1,339 4,283
Europe -- -- 731 -- 2,216
South America 2,774 -- 3,334 -- 4,031
Australia -- -- 358 -- 463
-------------------------------------------------------------------------
Total equipment held for
operating leases 6,553 11,199 9,576 16,564 50,001
Various -- -- -- 2,298 --
United States -- -- 7,295 -- --
-------------------------------------------------------------------------
Total assets held for sale -- -- 7,295 2,298 --
-------------------------------------------------------------------------
Total equipment $ 6,553 $ 11,199 $ 16,871 $ 18,862 $ 50,001
=========================================================================
There were no lessees accounting for 10% or more of total lease
revenues during 1996, 1995 or 1994.
PLM EQUIPMENT GROWTH FUND
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
5. Notes Payable
During 1996, the General Partner used a portion of its equipment sales
proceeds to pay off its entire $23.0 million adjustable rate senior
secured note with a syndicate of insurance companies. Quarterly interest
payments on the debt were equal to LIBOR plus 1.35% per annum and adjusted
quarterly (7.04% at December 31, 1995).
6. Income Taxes
The Partnership is not subject to income taxes as any income or loss is
included in the tax returns of the individual Partners. Accordingly, no
provision for income taxes has been made in the financial statements of
the Partnership.
As of December 31, 1996, there were temporary differences of
approximately $11.6 million between the financial statement carrying
values of certain assets and liabilities and the federal income tax bases
of such assets and liabilities, primarily due to differences in
depreciation methods and equipment reserves.
7. Depositary Unit Repurchase Plan
The Partnership had engaged in a program to repurchase up to 250,000
Depositary Units. During the year ended December 31, 1996, the Partnership
repurchased 24,800 Depositary Units at a cost of $163,000. As of December
31, 1996, the Partnership had repurchased a total of 199,650 Depositary
Units at a cost of $2.6 million.
8. Delisting of Partnership Units
The General Partner delisted the Partnership's Depositary Units from the
American Stock Exchange (AMEX) on April 8, 1996. The last day for trading
on the AMEX was March 22, 1996. As of February 28, 1997, there were
5,785,350 Depositary Units outstanding. There are approximately 8,800
Depositary Unitholders of record as of the date of this report. Under the
Internal Revenue Code (the Code) the Partnership is classified as a
Publicly Traded Partnership. The Code treats all Publicly Traded
Partnerships as corporations if they remain publicly traded after December
31, 1997. Treating the Partnership as a corporation would mean the
Partnership itself would have become a taxable, rather than a "flow
through" entity. As a taxable entity, the income of the Partnership would
have become subject to federal taxation at both the partnership level and
at the investor level to the extent that income would have been
distributed to an investor. In addition, the General Partner believed that
the trading price of the Depositary Units would have become distorted when
the Partnership began the final liquidation of the underlying equipment
portfolio. In order to avoid taxation of the Partnership as a corporation
and to prevent unfairness to Unitholders, the General Partner delisted the
Partnership's Depositary Units from the AMEX. While the Partnership's
Depositary Units are no longer publicly traded on a national stock
exchange, the General Partner continues to manage the equipment of the
Partnership and prepare and distribute quarterly and annual reports and
Forms 10-Q and 10-K in accordance with the Securities and Exchange
Commission requirements. In addition, the General Partner continues to
provide pertinent tax reporting forms and information to Unitholders. The
General Partner anticipates an informal market for the Partnership's units
may develop in the secondary marketplace similar to that which currently
exists for non-publicly traded partnerships.
PLM EQUIPMENT GROWTH FUND
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Registrant *
4.1 Amendment to Limited Partnership Agreement of Registrant *
10.1 Management Agreement between Registrant and PLM Investment *
Management, Inc.
25. Powers of Attorney 40-42
- ----------------------------------
* Incorporated by reference. See page 23 of this report.