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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001.
[ ] 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 1-10553
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PLM EQUIPMENT GROWTH FUND II
(Exact name of registrant as specified in its charter)
California 94-3041013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Montgomery Street
Suite 1350, San Francisco, CA 94104
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (415) 445-3201
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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 voting stock: N/A
Indicate the number of units outstanding of each of the issuer's classes of
depositary units, as of the latest practicable date:
Class Outstanding at March 25, 2002
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Limited partnership depositary units: 7,381,165
General Partnership units: 1
An index of exhibits filed with this Form 10-K is located at page 18.
Total number of pages in this report: 45
PART I
ITEM 1. BUSINESS
(A) Background
On April 2, 1987, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly-owned subsidiary of PLM International, Inc. (PLM International or PLM),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 7,500,000 depositary units
(the units) in PLM Equipment Growth Fund II, a California limited partnership
(the Partnership, the Registrant, or EGF II). The Partnership's offering became
effective on June 5, 1987. FSI, as General Partner, owns a 5% interest in the
Partnership. The Partnership engages in the business of investing in a
diversified equipment portfolio consisting primarily of used, long-lived,
low-obsolescence capital equipment that is easily transportable by and among
prospective users.
The Partnership's primary objectives are:
(1) to maintain a diversified portfolio of long-lived, low-obsolescence,
high residual-value equipment which was purchased with the net proceeds of the
initial partnership offering, supplemented by debt financing, and surplus
operating cash during the investment phase of the Partnership. All transactions
of over $1.0 million must be approved by the PLM International Credit Review
Committee (the Committee), which is made up of members of PLM International
Senior Management. In determining a lessee's creditworthiness, the Committee
will consider, among other factors, its financial statements, internal and
external credit ratings, and letters of credit;
(2) to generate sufficient net operating cash flow 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;
(3) to selectively sell equipment when the General Partner believes that,
due to market conditions, market prices for equipment exceed inherent equipment
values or that expected future benefits from continued ownership of a particular
asset will have an adverse effect on the Partnership. As the Partnership is in
the liquidation phase, proceeds from these sales, together with excess net
operating cash flow from operations (net cash provided by operating activities
plus distributions from unconsolidated special-purpose entities (USPEs)), less
reasonable reserves are used to pay distributions to the partners;
(4) to preserve and protect the value of the portfolio through quality
management, maintaining the portfolio's diversity and constantly monitoring
equipment markets;
The offering of the Units of the Partnership closed on March 18, 1988. The
General Partner contributed $100 for its 5% general partner interest in the
Partnership. On November 20, 1990, the units of the Partnership began trading on
the American Stock Exchange (AMEX). Thereupon each unitholder received a
depositary receipt representing ownership of the number of units owned by such
unitholder. The General Partner delisted the Partnership's units from the AMEX
on April 8, 1996. The last day for trading on the AMEX was March 22, 1996.
As of December 31, 2001, there were 7,381,165 depositary units outstanding.
On January 1, 1999, the Partnership entered its liquidation phase and in
accordance with the limited partnership agreement, the General Partner has
commenced an orderly liquidation of the Partnership's assets. The liquidation
phase will end on December 31, 2006, unless the Partnership is terminated
earlier upon sale of all of the equipment or by certain other events.
Table 1, below, lists the equipment and the cost of equipment in the
Partnership's portfolio, as of December 31, 2001 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
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Owned equipment held for operating leases:
185 Box railcars Various $ 3,525
118 Mill gondolas railcars Various 3,340
112 Pressurized tank railcars Various 3,131
26 Covered hopper railcars ACF Industries 408
15 Nonpressurized tank railcars Various 301
612 Dry piggyback trailers Various 9,404
45 Refrigerated marine containers Various 1,010
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Total owned equipment held for operating lease $ 21,119 (1)
==============
(1) Includes equipment purchased with the proceeds from capital contributions,
undistributed cash flow from operations, and Partnership borrowings. Includes
costs capitalized subsequent to the date of acquisition and equipment
acquisition fees paid to PLM Transportation Equipment Corporation (TEC), a
wholly owned subsidiary of FSI. All equipment was used equipment at the time of
purchase.
Railcars are leased under operating leases with terms of six months to six
years. The Partnership's marine containers are leased to operators of
utilization-type leasing pools that 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 pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment.
The lessees of the equipment include Cronos, Elgin, Joliet & Eastern Railway and
Kankakee, Beaverville & Southern Railroad (KBS).
(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 Partnership's equipment. The Partnership's management
agreement with IMI is to co-terminate with the dissolution of the Partnership,
unless the limited partners vote to terminate the agreement prior to that date
or at the discretion of the General Partner. IMI has agreed to perform all
services necessary to manage the 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 (see Notes 1
and 2 to the audited financial statements).
(C) Competition
(1) Operating Leases versus Full Payout Leases
The equipment owned by the Partnership is leased out on an operating lease basis
wherein the rents received 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 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 that utilize
full payout leases on new equipment, i.e. leases that have terms equal to the
expected economic life of the equipment. 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 may write full
payout leases at considerably lower rates and for longer terms than the
Partnership offers, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers who offer operating leases
and full payout leases. Manufacturers may provide ancillary services that the
Partnership cannot offer, such as specialized maintenance services (including
possible substitution of equipment), training, warranty services, and trade-in
privileges.
The Partnership also competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), GATX, General Electric Railcar
Services Corporation, and other investment programs that lease the same types of
equipment.
(D) Demand
The Partnership currently operates in three primary operating segments: railcar
leasing, trailer leasing and marine container leasing. Each equipment-leasing
segment engages in short-term to mid-term operating leases to a variety of
customers. The Partnership equipment is used to transport materials and
commodities rather than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Railcars
(a) Box Railcars
Boxcars are primarily used to transport paper and paper products. Carloadings of
forest products in North America decreased over 2% in 2001, compared to 2000
volumes. During 2001 the lessee returned the Partnership's boxcars, which
remained off lease at year-end. These cars have a smaller load capacity than
those currently in demand for paper service. Depending upon the market for these
cars over the coming months, they will either be offered for sale or re-lease.
(b) Mill Gondolas Railcars
Mill gondola railcars are typically used to transport scrap steel for recycling
from steel processors to small steel mills called minimills. Demand for steel is
cyclical and moves in tandem with the growth or contraction of the overall
economy. Within the United States, carloadings for the commodity group that
includes scrap steel decreased over 12% in 2001, compared to 2000 volumes.
(c) Pressurized Tank Railcars
Pressurized tank cars are used to transport liquefied petroleum gas (natural
gas) and anhydrous ammonia (fertilizer). The US markets for natural gas are
industrial applications, residential use, electrical generation, commercial
applications, and transportation. Natural gas consumption is expected to grow
over the next few years as most new electricity generation capacity planned for
is expected to be natural gas fired. Within the fertilizer industry, demand is a
function of several factors, including the level of grain prices, status of
government farm subsidy programs, amount of farming acreage and mix of crops
planted, weather patterns, farming practices, and the value of the US dollar.
Population growth and dietary trends also play an indirect role.
On an industry-wide basis, North American carloadings of the commodity group
that includes petroleum and chemicals decreased over 5% in 2001 compared to
2000. Even with this decrease in industry-wide demand, the utilization of this
type of railcar within the Partnership continued to be in the 98% range through
2001.
(d) Covered Hopper (Grain) Railcars
Demand for covered hopper railcars, which are specifically designed to service
the grain industry, continued to experience weakness during 2001; carloadings
were down 2% when compared to 2000 volumes. The US agribusiness industry serves
a domestic market that is relatively mature, the future growth of which is
expected to be consistent but modest. Most domestic grain rail traffic moves to
food processors, poultry breeders, and feedlots. The more volatile export
business, which accounts for approximately 30% of total grain shipments, serves
emerging and developing nations. In these countries, demand for protein-rich
foods is growing more rapidly than in the United States, due to higher
population growth, a rapid pace of industrialization, and rising disposable
income. Other factors contributing to the softness in demand for covered hopper
cars are the large number of new cars built during the last few years and the
more efficient utilization of covered hoppers by the railroads.
(e) General Purpose (Nonpressurized) Tank Railcars
These railcars are used to transport bulk liquid commodities and chemicals not
requiring pressurization, such as certain petroleum products, liquefied asphalt,
lubricating oils, molten sulfur, vegetable oils, and corn syrup. The overall
health of the market for these types of commodities is closely tied to both the
US and global economies, as reflected in movements in the Gross Domestic
Product, personal consumption expenditures, retail sales, and currency exchange
rates. The manufacturing, automobile, and housing sectors are the largest
consumers of chemicals. Within North America, 2001 carloadings of the commodity
group that includes chemicals and petroleum products fell over 5% from 2000
levels. Utilization of the Partnership's nonpressurized tank cars decreased from
90% at the beginning of 2001 to 85% at year-end.
(2) Intermodal (Piggyback) Trailers
Intermodal trailers are used to transport a variety of dry goods by rail on
flatcars, usually for distances of over 400 miles. Over the past five years,
intermodal trailers have continued to be rapidly displaced by domestic
containers as the preferred method of transport for such goods. This
displacement occurs because railroads offer approximately 20% lower freight
rates on domestic containers compared to trailer rates. During 2001, demand for
intermodal trailers was much more volatile than historic norms. Unusually low
demand occurred over the second half of the year due to a rapidly slowing
economy and low rail freight rates for 53-foot domestic containers. Due to the
decline in demand, which occurred over the latter half of 2001, shipments for
the year, within the intermodal trailer market, declined approximately 10%,
compared to the prior year. Average utilization of the entire US intermodal
fleet rose from 73% in 1998 to 77% in 1999, and then declined to 75% in 2000 and
further declined to a record low of 63% in 2001.
The General Partner continued its aggressive marketing program in a bid to
attract new customers for the Partnership's intermodal trailers during 2001.
Even with these efforts, average utilization of the Partnership's intermodal
trailers for the year 2001 dropped 8% to approximately 73%, still 10% above the
national average.
The trend towards using domestic containers instead of intermodal trailers is
expected to accelerate in the future. Overall, intermodal trailer shipments are
forecast to decline by 10% to 15% in 2002, compared to 2001, due to the
anticipated continued weakness of the overall economy. As such, the nationwide
supply of intermodal trailers is expected to have approximately 25,000 units in
surplus for 2002. Maintenance costs have increased approximately 10% from 2000
due to improper repair methods performed by the railroads' vendors and billed to
owners. For the Partnership's intermodal fleet, the General Partner will
continue to seek to expand its customer base while minimizing trailer downtime
at repair shops and terminals. Significant efforts will continue to be
undertaken to reduce maintenance costs and cartage costs.
(3) Marine Containers
The Partnership's fleet of both standard dry and specialized containers is in
excess of 12 years of age, and is generally no longer suitable for use in
international commerce, either due to its specific physical condition, or the
lessees' preferences for newer equipment. As individual containers are returned
from their specific lessees, they are being marketed for sale on an "as is,
where is" basis. The market for such sales, although highly dependent upon the
specific location and type of container, has softened somewhat in the last year
primarily due to the worldwide recession. In addition to this overall softness
in residual values, the Partnership has continued to experience reduced residual
values on the sale of refrigerated containers, due primarily to technological
obsolescence associated with this equipment's refrigeration machinery.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign government 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 its removal from service or extensive modifications of such equipment to
meet these regulations, at considerable cost to the Partnership. Such
regulations include but are not limited to:
(1) the Montreal Protocol on Substances that Deplete the Ozone Layer and the US
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 to the stratospheric ozone layer and that are
used extensively as refrigerants in refrigerated marine cargo containers.
(2) The US Department of Transportation's Hazardous Materials Regulations
regulates the classification and packaging requirements of hazardous materials
that apply particularly to the Partnership's tank railcars. The Federal Railroad
Administration has mandated that effective July 1, 2000 all tank railcars must
be re-qualified every ten years from the last test date stenciled on each
railcar to insure tank shell integrity. Tank shell thickness, weld seams and
weld attachments must be inspected and repaired if necessary to re-qualify the
tank railcar for service. The average cost of this inspection is$3,600 for
jacketed tank railcars and $1,800 for non-jacketed tank railcars. This does not
include any necessary repairs. This inspection is to be performed at the next
scheduled tank test and every ten years thereafter. The Partnership currently
owns 128 of this type of railcars. As of December 31, 2001, 12 have been
inspected and no significant defects have been discovered.
As of December 31, 2001, the Partnership was in compliance with the above
government regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased. As of December 31, 2001, the Partnership owned a portfolio of
transportation and related equipment as described in Item I, Table 1. The
Partnership acquired equipment with the proceeds of the Partnership offering of
$150.0 million, proceeds from debt financing of $35.0 million and by reinvesting
a portion of its operating cash flow in additional equipment.
The Partnership maintains its principal office at 120 Montgomery Street, Suite
1350, San Francisco, California 94104. All office facilities are provided by FSI
without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
The Partnership, together with affiliates, has initiated litigation in various
official forums in India against a defaulting Indian airline lessee to repossess
Partnership property and to recover damages for failure to pay rent and failure
to maintain such property in accordance with relevant lease contracts. The
Partnership has repossessed all of its property previously leased to such
airline, and the airline has ceased operations. In response to the Partnership's
collection efforts, the airline filed counter-claims against the Partnership in
excess of the Partnership's claims against the airline. The General Partner
believes that the airline's counterclaims are completely without merit, and the
General Partner will vigorously defend against such counterclaims.
During 2001, the General Partner decided to minimize its collection efforts from
the India lessee in order to save the Partnership from incurring additional
expenses associated with trying to collect from a lessee that has no apparent
ability to pay.
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, 2001.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT MATTERS
Pursuant to the terms of the partnership agreement, the General Partner is
entitled to a 5% interest in the profits, losses and distributions of the
Partnership. The General Partner is the sole holder of such interest. Special
allocations of income are made to the General Partner equal to the deficit
balance, if any, in the capital account of the General Partner. The General
Partner's annual allocation of net income will generally be equal to the General
Partner's cash distributions paid during the current year. The remaining
interests in the profits, losses and distributions of the Partnership are owned,
as of December 31, 2001, by the 6,062 unit holders of units in the Partnership.
There are several secondary markets that will facilitate sales and purchases of
depositary units. Secondary markets are characterized as having few buyers for
depository units and, therefore, are generally viewed as inefficient vehicles
for the sale of depositary units. Presently, there is no public market for the
units and none is likely to develop.
The Partnership is listed on the OTC Bulletin Board under the symbol GFYPZ.
To prevent the units from being considered publicly traded and thereby to avoid
taxation of the Partnership as an association treated as a corporation under the
Internal Revenue Code, the limited partnership units will not be transferable
without the consent of the General Partner, which may be withheld in its
absolute discretion. The General Partner intends to monitor transfers of limited
partnership units in an effort to ensure that they do not exceed the percentage
or number permitted by certain safe harbors promulgated by the Internal Revenue
Service. A transfer may be prohibited if the intended transferee is not a United
States citizen or if the transfer would cause any portion of the units of a
"Qualified Plan" as defined by the Employee Retirement Income Security Act of
1974 and Individual Retirement Accounts to exceed the allowable limit.
(the space intentionally left blank)
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the Years Ended December 31,
(In thousands of dollars, except weighted-average depositary unit amounts)
2001 2000 1999 1998 1997
--------------------------------------------------------------------
Operating results:
Total revenues $ 3,823 $ 7,878 $ 6,367 $ 13,567 $ 12,748
Net gain on disposition of equipment 929 2,448 328 5,990 1,922
Equity in net income (loss) of
unconsolidated special-purpose
entities -- 1,304 (448) (1,484) (519)
Net income 42 4,207 934 6,031 2,695
At year-end:
Total assets $ 5,533 $ 7,535 $ 8,858 $ 12,474 $ 18,631
Total liabilities 302 983 1,202 1,207 4,906
Notes payable -- -- -- -- 2,500
Cash distribution $ 1,363 $ 4,534 $ 4,545 $ 4,604 $ 6,216
Special distribution $ -- $ 777 $ -- $ 3,885 $ --
Total cash distribution $ 1,363 $ 5,311 $ 4,545 $ 8,489 $ 6,216
Cash distribution representing a
return of capital to the limited
partners $ 1,295 $ 1,104 $ 3,611 $ 2,458 $ 3,709
Per weighted-average depositary unit:
Net income (loss) $ (0.00)(1) $ 0.53 (1)$ 0.10 (1) $ 0.76 (1) $ 0.30 (1)
Cash distribution $ 0.18 $ 0.58 $ 0.58 $ 0.59 $ 0.80
Special distribution $ -- $ 0.10 $ -- $ 0.50 $ --
Total cash distribution $ 0.18 $ 0.68 $ 0.58 $ 1.09 $ 0.80
Cash distribution representing a
return of capital to the limited
partners $ 0.18 $ 0.15 $ 0.49 $ 0.33 $ 0.50
(1) After a reduction of income of $0.1 million ($0.01 per weighted-average
depositary unit) in 2001 and 2000, representing special allocations to the
General Partner. After a reduction of income of $0.2 million ($0.02 per
weighted-average depositary unit) in 1999, representing special allocations to
the General Partner. After reductions in net income of $0.1 million ($0.02 per
weighted-average depositary unit) in 1998, and $0.4 million ($0.05 per
weighted-average depositary unit) in 1997 representing special allocations to
the General Partner.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth Fund II
(the Partnership). The following discussion and analysis of operations focuses
on the performance of the Partnership's equipment in the various segments in
which it operates and its effect on the Partnership's overall financial
condition.
(B) Results of Operations -- Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
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 the Partnership's equipment include supply and demand for similar or
comparable types of transport capacity, desirability of the equipment in the
leasing market, market conditions for the particular industry segment in which
the equipment is to be leased, overall economic conditions, and various
regulations concerning the use of the equipment. Equipment that is idle or out
of service between the expiration of one lease and the assumption of a
subsequent lease can result in a reduction of contribution to the Partnership.
The Partnership experienced re-leasing or repricing activity in 2001 across its
railcar, trailer, and marine container portfolios.
(a) Railcars: The relatively short duration of most leases exposes the
railcars to considerable re-leasing activity. As of December 31, 2001, the
Partnership had 223 railcars off-lease. Additional railcar leases will expire in
2002. The Partnership's railcar lease revenue declined approximately $2.2
million from 2000 to 2001 due to the sale and disposition of railcars during
2000 and 2001.
(b) Trailers: The Partnership's trailer portfolio operates with short-line
railroad systems. The relatively short duration of most leases in these
operations exposes the trailers to considerable re-leasing activity. The
Partnership's lease revenue decreased approximately $0.3 million from 2000 to
2001 primarily due to the sale and disposition of trailers during 2000 and 2001.
(c) Marine containers: The Partnership's remaining marine container
portfolio operates in utilization-based leasing pools and, as such, is exposed
to considerable repricing activity. As of December 31, 2001, the Partnership had
7 marine containers off-lease that are being marketed for sale. The
Partnership's marine container contributions declined approximately $0.1 million
from 2000 to 2001 primarily due to the disposition of marine containers in 2000
and 2001.
(2) Equipment Liquidations
Liquidation of Partnership equipment represents a reduction in the size of the
equipment portfolio and may result in a reduction of contribution to the
Partnership. During the year ended December 31, 2001, the Partnership sold or
disposed of marine containers, trailers, and railcars, with an aggregate net
book value of $0.1 million, for proceeds of $0.7 million. Included in the gain
on sale calculation were unused repair reserves of $0.3 million.
(3) Equipment Valuation
In accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of," (SFAS No. 121) the
General Partner reviews the carrying value of the Partnership's equipment
portfolio at least quarterly and whenever circumstances indicate that the
carrying value of an asset may not be recoverable due to expected future market
conditions. If the projected undiscounted cash flows and the fair market value
of the equipment are less than the carrying value of the equipment, a loss on
revaluation is recorded. No reductions to the equipment carrying values were
required for the years ended December 31, 2001, 2000, or 1999.
In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which replaces SFAS No. 121. SFAS No. 144
provides updated guidance concerning the recognition and measurement of an
impairment loss for certain types of long-lived assets, expands the scope of a
discontinued operation to include a component of an entity and eliminates the
current exemption to consolidation when control over a subsidiary is likely to
be temporary. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001.
The Partnership will apply the new rules on accounting for the impairment or
disposal of long-lived assets beginning in the first quarter of 2002, and they
are not anticipated to have an impact on the Partnership's earnings or financial
position.
(C) 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 the original partners are permitted under the
terms of the limited partnership agreement. As of December 31, 2001, the
Partnership had no outstanding indebtedness. The Partnership relies on operating
cash flow to meet its operating obligations and make cash distributions to the
limited partners.
For the year ended December 31, 2001, the Partnership generated $0.1 million in
cash from its operating activities, and also used undistributed available cash
from prior periods and asset sale proceeds to make distributions (total in 2001
of $1.4 million) to the partners.
During the year ended December 31, 2001, the Partnership sold or disposed of
marine containers, trailers, nd railcars, with an aggregate net book value of
$0.1 million, for proceeds of $0.7 million. Included in the gain on sale
calculation are unused repair reserves of $0.3 million.
Accounts receivable decreased $0.1 million during the year ended December 31,
2001 due to the decrease in lease revenue caused by the reduction in the size of
the equipment portfolio.
Accounts payable decreased $0.1 million during the year ended December 31, 2001
due to the decrease in payments to vendors resulting from by the reduction in
the size of the equipment portfolio.
The Partnership's reserve for repairs and lessee deposits decreased by $0.4
million during the year ended December 31, 2001. A $0.3 million decrease
resulted from containers being sold and the unused portion of the reserves for
repairs for those marine containers being included in the gain on sale from
these marine containers. A $0.2 million decrease resulted from the determination
that future repairs to marine container portfolio would not be made which
resulted in the Partnership taking the remaining reserve into income.
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.
The Partnership is in its active liquidation phase. As a result, 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. Significant asset sales may result in special distributions to the
partners.
The amounts reflected for assets and liabilities of the Partnership have not
been adjusted to reflect liquidation values. The equipment portfolio that is
actively being marketed for sale by the General Partner continues to be carried
at the lower of depreciated cost or fair value less cost of disposal. Although
the General Partner estimates that there will be distributions to the
Partnership after final disposal of assets and settlement of liabilities, the
amounts cannot be accurately determined prior to actual disposal of the
equipment.
(D) Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the General Partner
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On a regular basis, the General Partner reviews
these estimates including those related to asset lives and depreciation methods,
impairment of long-lived assets including intangibles, allowance for doubtful
accounts, reserves related to legally mandated equipment repairs and
contingencies and litigation. These estimates are based on the General Partner's
historical experience and on various other assumptions believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The General Partner believes, however, that
the estimates, including those for the above-listed items, are reasonable and
that actual results will not vary significantly from the estimated amounts.
The General Partner believes the following critical accounting policies affect
the more significant judgments and estimates used in the preparation of the
Partnership's financial statements:
Asset lives and depreciation methods: The Partnership's primary business
involves the purchase and subsequent lease of long-lived transportation and
related equipment. The General Partner has chosen asset lives that it believes
correspond to the economic life of the related asset. The General Partner has
chosen a deprecation method that it believes matches the benefit to the
Partnership from the asset with the associated costs. These judgments have been
made based on the General Partner's expertise in each equipment segment that the
Partnership operates. If the asset life and depreciation method chosen does not
reduce the book value of the asset to at least the potential future cash flows
from the asset to the Partnership, the Partnership would be required to record a
loss on revaluation. Likewise, if the net book value of the asset was reduced by
an amount greater than the economic value has deteriorated, the Partnership may
record a gain on sale upon final disposition of the asset.
Impairment of long-lived assets: On a regular basis, the General Partner reviews
the carrying value of its equipment, investments in unconsolidated special
purpose entities and intangible assets to determine if the carrying value of the
asset may not be recoverable in consideration of current economic conditions.
This requires the General Partner to make estimates related to future cash flows
from each asset as well as the determination if the deterioration is temporary
or permanent. If these estimates or the related assumptions change in the
future, the Partnership may be required to record additional impairment charges.
Allowance for doubtful accounts: The Partnership maintains allowances for
doubtful accounts for estimated losses resulting from the inability of the
lessees to make the lease payments. These estimates are primarily based on the
amount of time that has lapsed since the related payments were due as well as
specific knowledge related to the ability of the lessees to make the required
payments. If the financial condition of the Partnership's lessees were to
deteriorate, additional allowances could be required that would reduce income.
Conversely, if the financial condition of the lessees were to improve or if
legal remedies to collect past due amounts were successful, the allowance for
doubtful accounts may need to be reduced and income would be increased.
Reserves for repairs: The Partnership accrues for legally required repairs to
equipment such as dry docking for marine vessels and engine overhauls to
aircraft engines over the period prior to the required repairs. The amount that
is reserved for is based on the General Partner's expertise in each equipment
segment, the past history of such costs for that specific piece of equipment and
discussions with independent, third party equipment brokers. If the amount
reserved for is not adequate to cover the cost of such repairs or if the repairs
must be performed earlier than the General Partner estimated, the Partnership
would incur additional repair and maintenance or equipment operating expenses.
Contingencies and litigation: The Partnership is subject to legal proceedings
involving ordinary and routine claims related to its business. The ultimate
legal and financial liability with respect to such matters cannot be estimated
with certainty and requires the use of estimates in recording liabilities for
potential litigation settlements. Estimates for losses from litigation are made
after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, the
Partnership may be required to record additional litigation expense.
(E) Results of Operations -- Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 2001 and 2000.
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
decreased during the year ended December 31, 2001 compared to the same period of
2000. Gains or losses from the sale of equipment, interest and other income and
certain expenses such as depreciation and general and administrative expenses
relating to the operating segments (see Note 5 to the audited financial
statements), are not included in the owned equipment operation discussion
because they are indirect in nature and not a result of operations, but the
result of owning a portfolio of equipment. The following table presents lease
revenues less direct expenses by equipment type (in thousands of dollars):
For the Years
Ended December 31,
2001 2000
----------------------------
Trailers $ 785 $ 1,217
Railcars 401 1,983
Marine containers (25) 75
Trailers: Trailer lease revenues and direct expenses were $1.6 million and $0.8
million, respectively, for the year ended December 31, 2001, compared to $1.9
million and $0.7 million, respectively, during the same period of 2000. The
decrease in trailer contribution was due to the sale of 32% of the Partnership's
trailers during 2000.
Railcars: Railcar lease revenues and direct expenses were $1.1 million and $0.7
million, respectively, for the year ended December 31, 2001, compared to $3.3
million and $1.3 million, respectively, during the same period of 2000. The
decrease in railcar contribution during the year ended December 31, 2001 was due
to the disposition of railcars during 2000 and 2001.
Marine containers: Marine container lease revenues were ($24,000) and $0.1
million during the years ended December 31, 2001 and 2000, respectively. The
decrease in marine container contribution in the year ended December 31, 2001
was due to the disposition of marine containers in 2000 and 2001. The negative
lease revenues during the year ended December 31, 2001 was caused by actual
lease revenues in 2000 being less than had been previously reported. The
Partnership receives its actual amount of marine container lease revenues
managed in equipment pools approximately 90 days following the end of each
quarter. Estimates are made for each quarter's lease revenues that are trued up
to the actual results in the following quarter.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $2.2 million for the year ended December 31, 2001
decreased from $2.9 million for the same period in 2000. Significant variances
are explained as follows:
(i) A $0.5 million decrease in depreciation expense from 2000 levels
reflects the effect of equipment dispositions during 2001 and 2000.
(ii) A $0.2 million decrease in general and administrative expenses was due
to the reduction in the size of the Partnership's equipment portfolio.
(iii) A $0.1 million decrease in management fees was due to lower lease
revenues earned during the year ended December 31, 2001 compared to the same
period of 2000.
(iv) A $0.1 million increase in the provision for bad debts was based on
the General Partner's evaluation of the collectability of receivables compared
to the same period of 2000.
(c) Net Gain on Disposition of Owned Equipment
Net gain on disposition of equipment for the year ended December 31, 2001
totaled $0.9 million, and resulted from the sale of marine containers, trailers,
and railcars, with an aggregate net book value of $0.1 million for proceeds of
$0.7 million. Included in the gain on sale are unused repair reserves of $0.3
million. Net gain on disposition of equipment for the year ended December 31,
2000 totaled $2.4 million, which resulted from the disposal of marine
containers, trailers, and railcars, with an aggregate net book value of $0.8
million, for proceeds of $3.3 million.
(d) Equity in Net Income of an Unconsolidated Special-Purpose Entity (USPE)
Equity in net income of an unconsolidated special-purpose entity represents the
Partnership's share of the net income generated from the operation of jointly
owned assets accounted for under the equity method (see Note 4 to the financial
statements). This entity was a single purpose entity that did not have any debt.
As of December 31, 2001 and 2000, the Partnership had no interests in USPEs.
During the year ended December 31, 2000, net income of $1.3 million resulted
from the gain on sale of the Partnership's interest in the USPE of $1.4 million,
partially offset by depreciation expense, direct expenses, and administrative
expenses of $0.1 million.
(e) Net Income
As a result of the foregoing, the Partnership's net income was $42,000 for the
year ended December 31, 2001, compared to net income of $4.2 million during
2000. The Partnership's ability to operate and liquidate assets, secure leases,
and re-lease those assets whose leases expire is subject to many factors, and
the Partnership's performance in the year ended December 31, 2001 is not
necessarily indicative of future periods. In the year ended December 31, 2001,
the Partnership distributed $1.3 million to the limited partners, or $0.18 per
weighted-average limited partnership unit.
(2) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 2000 and 1999.
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operating expense and asset-specific insurance expenses) on owned
equipment decreased during the year ended December 31, 2000, when compared to
the same period of 1999. The following table presents lease revenues less direct
expenses by segment (in thousands of dollars):
For the Years Ended
December 31,
2000 1999
--------------------------
Railcars $ 1,983 $ 2,571
Trailers 1,217 1,540
Marine containers 75 160
Railcars: Railcar lease revenues and direct expenses were $3.3 million and $1.3
million, respectively, for 2000, compared to $3.6 million and $1.0 million,
respectively, during 1999. Lease revenue decreased approximately $0.3 million in
2000, compared to the same period of 1999, due to more cars being off-lease in
2000 compared to 1999. Railcar expenses increased by $0.3 million due repairs
required on a group of railcars in 2000 which were being marketed for sale.
Similar repairs were not required in 1999.
Trailers: Trailer lease revenues and direct expenses were $2.0 million and $0.7
million, respectively, for 2000, compared to $2.2 million and $0.7 million,
respectively, during 1999. Lease revenue decreased approximately $0.3 million
from 1999 to 2000 primarily due to the sale and disposition of trailers in 2000.
Marine containers: Marine container lease revenues were $0.1 and $0.2 million
for 2000 and 1999, respectively. The decrease in marine container contribution
was primarily due to a group of marine containers that were off lease during
2000 that were on lease in 1999.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $2.9 million for the year ended December 31, 2000
decreased from $3.3 million for the same period of 1999. Significant variances
are explained as follows:
(i) A $0.4 million decrease in depreciation expense from 1999 levels
reflects the effect of asset sales in 2000 and 1999.
(ii) The $0.1 million decrease in bad debt expense was due to the recovery
of an outstanding receivable in the year ended December 31, 2000, that had
previously been reserved as a bad debt. A similar recovery did not occur in
1999.
(c) Net Gain on Disposition of Owned Equipment
Net gain on disposition of equipment for the year ended December 31, 2000
totaled $2.4 million, which resulted from the disposal of marine containers,
trailers, and railcars, with an aggregate net book value of $0.8 million, for
proceeds of $3.3 million. For the year ended December 31, 1999, the $0.3 million
net gain on disposition of equipment resulted from the disposal of marine
containers, trailers, and railcars, with an aggregate net book value of $0.4
million, for proceeds of $0.7 million.
(d) Equity in Net Income (Loss) of an USPE
Equity in net income (loss) of an unconsolidated special-purpose entity
represents the Partnership's share of the net income (loss) generated from the
operation of jointly-owned assets accounted for under the equity method (see
Note 4 to the financial statements). This entity was a single purpose that did
not have any debt.
The Partnership's remaining 50% interest in an entity that owned a commercial
aircraft was off lease during 1999 and was sold in March 2000 for a gain $1.4
million. The Partnership's USPE had no revenues and expenses were $0.1 million
in 2000: in 1999 revenues and expenses were $0.1 million and $0.5 million,
respectively.
(e) Net Income
As a result of the foregoing, the Partnership's net income for the period ended
December 31, 2000 was $4.2 million, compared to net income of $0.9 million
during the same period in 1999. The Partnership's ability to operate and
liquidate assets, secure leases, and re-lease those assets whose leases expire
during the life of the Partnership is subject to many factors, and the
Partnership's performance in the year ended December 31, 2000 is not necessarily
indicative of future periods. In the year ended December 31, 2000, the
Partnership distributed $5.0 million to the limited partners, or $0.68 per
weighted-average depositary unit.
(F) Geographic Information
Certain of the Partnership's equipment operates 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. Currency risks are at a
minimum because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in US 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 US 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
Note 6 to the financial statements for information on the revenues, net income,
and net book value of equipment in various geographic regions.
Revenues and net operating income (loss) 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 of
ownership due to the use of the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to significantly change in the future as assets come
off lease and decisions are made to either redeploy the assets in the most
advantageous geographic location, or sell the assets.
The Partnership's owned equipment on lease to US-domiciled lessees consists of
trailers and railcars. During 2001, lease revenues generated by owned equipment
in the United States accounted for 77% of the lease revenues generated by wholly
and jointly owned equipment, while generating net operating income of $0.4
million.
The Partnership's equipment leased to Canadian-domiciled lessees consists of
railcars. During 2001, lease revenues generated by owned equipment in Canada
accounted for 24% of the lease revenues generated by the wholly and jointly
owned equipment, while generating a net loss of $0.4 million
In 2001, marine containers, which were leased in various regions throughout the
year, accounted for (1%) of the lease revenues from equipment in 2001. This
equipment generated net income of $0.5 million in 2001. The Partnership sold
marine containers in 2001 for a gain of $0.4 million. Additionally, repair
reserves for marine containers of $0.2 million were taken into income in 2001.
(G) Inflation
Inflation had no significant impact on the Partnership's operations during 2001,
2000, or 1999.
(H) 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.
(I) Outlook for the Future
Since the Partnership is in its active 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. Throughout the remaining life of the
Partnership, the Partnership may periodically make special distributions to the
partners as asset sales are completed.
Liquidation of the Partnership's equipment will cause a reduction in the size of
the equipment portfolio and may result in a reduction of contribution to the
Partnership. Other factors affecting the Partnership's contribution in the year
2002 include:
1. The Partnership's fleet of marine containers is in excess of twelve
years of age and is no longer suitable for use in international commerce
either due to its specific physical condition, or lessee's preferences for
newer equipment. Demand for the Partnership's marine containers will
continue to be weak due to their age.
2. Railcar loadings in North America have weakened over the past year.
During 2001, utilization and lease rates decreased. Railcar contribution
may decrease in 2002 as existing leases expire and renewal leases are
negotiated.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent on many factors, such
as specific market conditions and economic activity, technological obsolescence,
and government or other regulations. The General Partner continually monitors
both the equipment markets and the performance of the Partnership's equipment in
these markets. The General Partner may make an evaluation to reduce the
Partnership's exposure to equipment markets in which it determines that it
cannot operate equipment and achieve acceptable rates of return.
Several other factors may affect the Partnership's operating performance in 2002
and beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
The other factors affecting the Partnership's contribution in 2002 and beyond
include:
(1) Repricing Risk
Certain of the Partnership's trailers, railcars, and marine containers will be
remarketed in 2002 as existing leases expire, exposing the Partnership to
repricing risk/opportunity. Additionally, the Partnership entered its
liquidation phase on January 1, 1999, and has commenced an orderly liquidation
of the Partnership's assets. The General Partner intends to re-lease or sell
equipment at prevailing market rates; however, the General Partner cannot
predict these future rates with any certainty at this time, and cannot
accurately assess the effect of such activity on future Partnership performance.
(2) 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. Ongoing changes in the regulatory
environment, both in the US 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.
The US Department of Transportation's Hazardous Materials Regulations regulates
the classification and packaging requirements of hazardous materials that apply
particularly to Partnership's tank railcars. The Federal Railroad Administration
has mandated that effective July 1, 2000 all tank railcars must be re-qualified
every ten years from the last test date stenciled on each railcar to insure tank
shell integrity. Tank shell thickness, weld seams, and weld attachments must be
inspected and repaired if necessary to re-qualify the tank railcar for service.
The average cost of this inspection is $3,600 for jacketed tank railcars and
$1,800 for non-jacketed tank railcars, not including any necessary repairs. This
inspection is to be performed at the next scheduled tank test and every ten
years thereafter. The Partnership currently owns 128 of this type of railcars.
As of December 31, 2001, 12 have been inspected and no significant defects have
been discovered.
(3) Distributions
During the active liquidation phase, the Partnership will use operating cash
flow and proceeds from the sale of equipment to meet its operating obligations
and, to the extent available, make distributions to the partners. In the long
term, changing market conditions and used equipment values preclude the General
Partner from accurately determining the impact of future re-leasing activity and
equipment sales on Partnership performance and liquidity.
(4) Liquidation
Liquidation of the Partnership's equipment represents a reduction in the size of
the equipment portfolio and may result in a reduction of contribution to the
Partnership.
Since the Partnership is in its active liquidation phase, 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. Significant asset sales may result in potential special distributions
to unitholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of currency devaluation
risk. During 2001, 23% of the Partnership's total lease revenues came from
non-United States domiciled lessees. Most of the leases require payment in
United States (US) currency. If these lessees' currency devalues against the US
dollar, the lessees could potentially encounter difficulty in making the US
dollar denominated lease payments.
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(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
(A) Disagreements with Accountants on Accounting and Financial Disclosures
None
(B) Changes in Accountants
In September 2001, the General Partner announced that the Partnership
had engaged Deloitte & Touche LLP as the Partnership's auditors and
had dismissed KPMG, LLP. KPMG LLP issued unqualified opinions on the
1999 and 2000 financial statements. During 1999 and 2000 and the
subsequent interim periods preceding such dismissal, there were no
disagreements with KPMG LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM FINANCIAL SERVICES, INC.
As of the date of this annual report, the directors and executive officers of
PLM Financial Services, Inc. (and key executive officers of its subsidiaries)
are as follows:
Name Age Position
- ------------------------- ------- ----------------------------------------------
Gary D. Engle 52 Director, PLM Financial Services, Inc., PLM
Investment Management Inc., and PLM
Transportation Equipment Corp.
James A. Coyne 41 Director and Secretary, PLM Financial Services
Inc., PLM Investment Management, Inc., and PLM
Transportation Equipment Corp.
Stephen M. Bess 55 President and Director, PLM Financial Services
Inc., PLM Investment Management Inc., and PLM
Transportation Equipment Corp.
Gary D. Engle was appointed a Director of PLM Financial Services, Inc. in
January 2002. He was appointed a director of PLM International, Inc. in February
2001. He is a director and President of MILPI. Since November 1997, Mr. Engle
has been Chairman and Chief Executive Officer of Semele Group Inc. ("Semele"), a
publicly traded company. Mr. Engle is President and Chief Executive Officer of
Equis Financial Group ("EFG"), which he joined in 1990 as Executive Vice
President. Mr. Engle purchased a controlling interest in EFG in December 1994.
He is also President of AFG Realty, Inc.
James A. Coyne was appointed a Director and Secretary of PLM Financial Services
Inc. in April 2001. He was appointed a director of PLM International, Inc in
February 2001. He is a director, Vice President and Secretary of MILPI. Mr.
Coyne has been a director, President and Chief Operating Officer of Semele since
1997. Mr. Coyne is Executive Vice President of Equis Corporation, the general
partner of EFG. Mr. Coyne joined EFG in 1989, remained until 1993, and rejoined
in November 1994.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Financial Services, Inc. in
October 2000. He was appointed President and Chief Executive Officer of PLM
International, Inc. in October 2000. Mr. Bess was appointed 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.
He 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 Corporation, a
manufacturer of computer peripheral equipment, from October 1975 to November
1978.
The directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director and executive officer of PLM Financial Services, Inc., PLM
Transportation Equipment Corp., or PLM Investment Management, Inc.
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, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is entitled to a 5% interest in the profits and
losses (subject to certain allocations of income) and distributions of
the Partnership. As of December 31, 2001, 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
Neither the General Partner and its affiliates nor any executive
officer or director of the General Partner and its affiliates own any
depository units of the Partnership as of December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
During 2001, management fees to IMI were $0.1 million. During 2001,
the Partnership reimbursed FSI and its affiliates $0.2 million for
administrative services and data processing expenses performed on
behalf of the Partnership.
(this space intentionally left blank)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 on Form 10-K.
2. Financial Statements required under Regulation S-X Rule 3-09.
The following financial statements are filed as exhibits of the Annual
Report on Form 10-K.
a. East West 925
(B) Reports on Form 8-K
None.
(C) Exhibits
4. Limited Partnership Agreement of Registrant, incorporated by
reference to the Partnership's Registration Statement on Form S-1
(Reg. No. 33-13113), which became effective with the Securities
and Exchange Commission on June 5, 1987.
4.1 Amendment, dated November 18, 1991, to Limited Partnership
Agreement of the Partnership, incorporated by reference to the
Partnership's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 1993.
10.1 Management Agreement between Registrant and PLM Investment
Management, Inc., incorporated by reference to the Partnership's
Registration Statement on Form S-1 (Reg. No. 33-13113), which
became effective with the Securities and Exchange Commission on
June 5, 1987.
Financial Statements required under Regulation S-X Rule 3-09.
99.1 East West 925
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 a duly authorized officer.
Date: March 25, 2002 PLM EQUIPMENT GROWTH FUND II
PARTNERSHIP
By: PLM Financial Services, Inc.
General Partner
By: /s/ Stephen M. Bess
-----------------------------------
Stephen M. Bess
President and Current Chief Accounting Officer
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
/s/ Gary D. Engle Director, FSI March 25, 2002
- --------------------
Gary D. Engle
/s/ James A. Coyne
- --------------------
James A. Coyne Director, FSI March 25, 2002
/s/ Stephen M. Bess
- --------------------
Stephen M. Bess Director, FSI March 25, 2002
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' reports 21-22
Balance sheets as of December 31, 2001 and 2000 23
Statements of income for the years ended
December 31, 2001, 2000, and 1999 24
Statements of changes in partners' capital for the years
ended December 31, 2001, 2000, and 1999 25
Statements of cash flows for the years ended
December 31, 2001, 2000, and 1999 26
Notes to financial statements 27-35
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.
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth Fund II:
We have audited the accompanying balance sheet of PLM Equipment Growth Fund II
("the Partnership") as of December 31, 2001 and the related statements of
income, partners' capital and cash flows for the year then ended. 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 audit.
We have conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 2001, and
the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 1 to the financial statements, the Partnership, in
accordance with the limited partnership agreement, entered its liquidation phase
on January 1, 1999 and has commenced an orderly liquidation of the Partnership
assets. The Partnership will terminate on December 31, 2006, unless terminated
earlier upon sale of all equipment or by certain other events.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 8, 2002
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth Fund II:
We have audited the accompanying balance sheet of PLM Equipment Growth Fund II
("the Partnership") as of December 31, 2000 and the related statements of
income, changes in partners' capital and cash flows for each of the years in the
two-year period ended December 31, 2000. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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.
As described in Note 1 to the financial statements, PLM Equipment Growth Fund
II, in accordance with the limited partnership agreement, entered its
liquidation phase on January 1, 1999 and has commenced an orderly liquidation of
the Partnership assets. The Partnership will terminate on December 31, 2006,
unless terminated earlier upon sale of all equipment or by certain other events.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth Fund II as
of December 31, 2000, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
SAN FRANCISCO, CALIFORNIA
March 2, 2001
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
2001 2000
---------------------------------
ASSETS
Equipment held for operating lease, at cost $ 21,119 $ 24,727
Less accumulated depreciation (18,146) (20,483)
---------------------------------
Net equipment 2,973 4,244
Cash and cash equivalents 1,958 2,538
Accounts receivable, less allowance for doubtful
accounts of $89 in 2001 and $57 in 2000 584 718
Prepaid expenses and other assets 18 35
---------------------------------
Total assets $ 5,533 $ 7,535
=================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable and accrued expenses $ 260 $ 482
Due to affiliates 42 52
Lessee deposits and reserve for repairs -- 449
---------------------------------
Total liabilities 302 983
---------------------------------
Commitments and contingencies
Partners' capital
Limited partners (7,381,165 depositary units as of
December 31, 2001 and 2000) 5,231 6,552
General Partner -- --
---------------------------------
Total partners' capital 5,231 6,552
---------------------------------
Total liabilities and partners' capital $ 5,533 $ 7,535
=================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF INCOME
For the Years Ended December 31,
(in thousands of dollars, except weighted-average unit amounts)
2001 2000 1999
--------------------------------------------
REVENUES
Lease revenue $ 2,673 $ 5,338 $ 5,949
Interest and other income 221 92 90
Net gain on disposition of equipment 929 2,448 328
--------------------------------------------
Total revenues 3,823 7,878 6,367
--------------------------------------------
EXPENSES
Depreciation 1,127 1,581 1,933
Repairs and maintenance 1,377 1,915 1,537
Equipment operating expenses 121 119 120
Insurance expense 123 67 42
Management fees to affiliate 132 269 295
General and administrative expenses to affiliate 171 234 271
Other general and administrative expenses 699 848 757
Provision for (recovery of) bad debts 31 (58) 30
--------------------------------------------
Total expenses 3,781 4,975 4,985
--------------------------------------------
Equity in net income (loss) of unconsolidated
special-purpose entity -- 1,304 (448)
--------------------------------------------
Net income $ 42 $ 4,207 $ 934
============================================
PARTNERS' SHARE OF NET INCOME (LOSS)
Limited partners $ (26) $ 3,942 $ 707
General Partner 68 265 227
--------------------------------------------
Total $ 42 $ 4,207 $ 934
============================================
Limited Partner's net (loss) income per weighted-average
depositary unit $ (0.00) $ 0.53 $ 0.10
============================================
Cash distribution $ 1,363 $ 4,534 $ 4,545
Special cash distribution -- 777 --
--------------------------------------------
Total distribution $ 1,363 $ 5,311 $ 4,545
============================================
Per weighted-average depositary unit:
Cash distribution $ 0.18 $ 0.58 $ 0.58
Special cash distribution -- 0.10 --
--------------------------------------------
Total distribution $ 0.18 $ 0.68 $ 0.58
============================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 2001, 2000, and 1999
(in thousands of dollars)
Limited General
Partners Partner Total
-------------------------------------------------
Partners' capital as of December 31, 1998 $ 11,267 $ -- $ 11,267
Net income 707 227 934
Cash distribution (4,318) (227) (4,545)
--------------------------------------------------
Partners' capital as of December 31, 1999 7,656 -- 7,656
Net income 3,942 265 4,207
Cash distribution (4,308) (226) (4,534)
Special distribution (738) (39) (777)
--------------------------------------------------
Partners' capital as of December 31, 2000 6,552 -- 6,552
Net (loss) income (26) 68 42
Cash distribution (1,295) (68) (1,363)
--------------------------------------------------
Partners' capital as of December 31, 2001 $ 5,231 $ -- $ 5,231
==================================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(in thousands of dollars)
OPERATING ACTIVITIES 2001 2000 1999
--------------------------------------------
Net income $ 42 $ 4,207 $ 934
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,127 1,581 1,933
Net gain on disposition of equipment (929) (2,448) (328)
Equity in net (loss) income of an unconsolidated special-
purpose entity -- (1,304) 448
Changes in operating assets and liabilities:
Accounts receivable, net 144 158 125
Prepaid expenses and other assets 17 12 (17)
Accounts payable and accrued expenses (98) 130 --
Due to affiliates (11) (15) (16)
Lessee deposits and reserve for repairs (162) (334) 11
--------------------------------------------
Net cash provided by operating activities 130 1,987 3,090
--------------------------------------------
INVESTING ACTIVITIES
Proceeds from disposition of equipment 653 3,297 691
Distribution from liquidation of an unconsolidated
special-purpose entity -- 1,827 --
Additional investments in unconsolidated special-purpose
entity -- (156) (322)
Payments for capital improvements -- -- (6)
--------------------------------------------
Net cash provided by investing activities 653 4,968 363
--------------------------------------------
FINANCING ACTIVITIES
Cash distribution paid to limited partners (1,295) (4,308) (4,318)
Cash distribution paid to General Partner (68) (226) (227)
Special distribution paid to limited partners -- (738) --
Special distribution paid to General Partner -- (39) --
--------------------------------------------
Net cash used in financing activities (1,363) (5,311) (4,545)
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (580) 1,644 (1,092)
Cash and cash equivalents at beginning of year 2,538 894 1,986
--------------------------------------------
Cash and cash equivalents at end of year $ 1,958 $ 2,538 $ 894
============================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Organization
PLM Equipment Growth Fund II, a California limited partnership (the
Partnership), was formed on March 30, 1987. The Partnership engages primarily in
the business of owning, leasing, or otherwise investing in predominately used
transportation and related equipment. The Partnership commenced significant
operations in June 1987. PLM Financial Services, Inc. (FSI) is the General
Partner of the Partnership. FSI is a wholly owned subsidiary of PLM
International, Inc. (PLM International).
The Partnership, in accordance with its limited partnership agreement, entered
its liquidation phase on January 1, 1999, and has commenced an orderly
liquidation of the Partnership's assets (see Note 10). The Partnership will
terminate on December 31, 2006, unless terminated earlier upon the sale of all
equipment or by certain other events. The General Partner may no longer reinvest
cash flows and surplus funds in equipment. All future cash flows and surplus
funds after payment of operating expenses, if any, are to be used for
distributions to partners, except to the extent used to maintain reasonable
reserves. During the liquidation phase, the Partnership's assets will continue
to be recorded at the lower of the carrying amount or fair value less cost to
sell.
FSI manages the affairs of the Partnership. The cash distributions of the
Partnership are generally allocated 95% to the limited partners and 5% to the
General Partner (see Net Income (Loss) and Distributions per Depository Unit,
below). Net income is allocated to the General Partner to the extent necessary
to cause the General Partner's capital account to equal zero. Such allocation of
income may not cumulatively exceed five ninety-fifths of the aggregate of the
capital contributions made by the limited partners and the reinvestment cash
available for distribution. The General Partner is also entitled to a
subordinated incentive fee equal to 7.5% of surplus distributions, as defined in
the limited partnership agreement, remaining after the limited partners have
received a certain minimum rate of return. The General Partner does not
anticipate that this fee will be earned.
ESTIMATES
The accompanying financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America. This requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
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
equipment to investor programs and third parties, manages pools of equipment
under agreements with the investor programs, and is a general partner of other
programs.
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 as earned in accordance with Statement
of Financial Accounting Standards (SFAS) No. 13, "Accounting for Leases" (SFAS
No.13). Lease origination costs are capitalized and amortized over the term of
the lease.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION (continued)
DEPRECIATION
Depreciation of transportation equipment held for operating leases is computed
on the double-declining balance method, taking a full month's depreciation in
the month of acquisition, based upon estimated useful lives of 15 years for
railcars and 12 years for other types of equipment. The depreciation method
changes to straight-line when annual depreciation expense using the
straight-line method exceeds that calculated by the double-declining balance
method. Acquisition fees have been capitalized as part of the cost of the
equipment. Major expenditures that are expected to extend the useful lives or
reduce future operating expenses of equipment are capitalized and amortized over
the estimated remaining life of the equipment.
TRANSPORTATION EQUIPMENT
Equipment held for operating leases is stated at cost.
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of," (SFAS No. 121), the General
Partner reviewed the carrying value of the Partnership's equipment portfolio at
least quarterly and whenever circumstances indicate that the carrying value of
an asset may not be recoverable due to expected future market conditions. If the
projected undiscounted cash flows and the fair market value of the equipment are
less than the carrying value of the equipment, a loss on revaluation is
recorded. No reductions were required to the carrying value of the equipment
during 2001, 2000, or 1999.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", (SFAS No. 144)
which replaces SFAS No. 121. SFAS No. 144 provides updated guidance concerning
the recognition and measurement of an impairment loss for certain types of
long-lived assets, expands the scope of a discontinued operation to include a
component of an entity and eliminates the current exemption to consolidation
when control over a subsidiary is likely to be temporary. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001.
The Partnership will apply the new rules on accounting for the impairment or
disposal of long-lived assets beginning in the first quarter of 2002, and they
are not anticipated to have an impact on the Partnership's earnings or financial
position.
INVESTMENT IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITY
The Partnership had an interest in an unconsolidated special-purpose entity
(USPE) that owned an aircraft. This was a single purpose entity that did not
have any debt. This interest was accounted for using the equity method. This
aircraft was sold in the first quarter of 2000.
The Partnership's investment in the USPE included acquisition and lease
negotiation fees paid by the Partnership to PLM Transportation Equipment
Corporation (TEC), a wholly owned subsidiary of FSI. The Partnership's interest
in the USPE was managed by IMI. The Partnership's equity interest in the net
income (loss) of the USPE is reflected net of management fees paid or payable to
IMI and the amortization of acquisition and lease negotiation fees paid to TEC.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION (continued)
REPAIRS AND MAINTENANCE
Repair and maintenance costs to railcars and trailers are usually the obligation
of the Partnership. Maintenance costs for the marine containers are the
obligation of the lessee. If they are not covered by the lessee, they are
generally charged against operations as incurred. The Partnership took into
income $0.2 million in 2001 related to marine container repair reserves. The
Partnership determined that there would be no future repairs made to these
marine containers. The $0.2 million is included in interest and other income on
the statements of income.
NET INCOME AND DISTRIBUTIONS PER DEPOSITARY UNIT
Cash distributions are allocated 95% to the limited partners and 5% to the
General Partner and may include amounts in excess of net income. Cash
distributions of the Partnership are generally allocated 95% to the limited
partners and 5% to the General Partner and may include amounts in excess of net
income. The limited partners' net income is allocated among the limited partners
based on the number of limited partnership units owned by each limited partner
and on the number of days of the year each limited partner is in the
Partnership. During 2001, the General Partner received a special allocation of
income of $0.1 million ($0.1 million in 2000 and $0.2 million in 1999) in excess
of its pro-rata ownership share.
Cash distributions are recorded when paid. Cash distributions relating to the
fourth quarter of 2000 and 1999 of $1.1 million ($0.15 per weighted-average
depositary unit) were paid during the first quarter of 2001 and 2000. There were
no distributions paid relating to the fourth quarter of 2001 in the first
quarter of 2002.
Cash distributions to investors in excess of net income are considered a return
of capital. Cash distributions to the limited partners of $1.3 million, $1.1
million and $3.6 million in 2001, 2000, and 1999, respectively, were deemed to
be a return of capital.
NET INCOME PER WEIGHTED-AVERAGE DEPOSITARY UNIT
Net income per weighted-average depositary unit was computed by dividing net
income attributable to limited partners by the weighted-average number of
depositary units deemed outstanding during the period. The weighted-average
number of depositary units deemed outstanding during the years ended December
31, 2001, 2000, and 1999 were 7,381,165.
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.
COMPREHENSIVE INCOME
The Partnership's net income was equal to comprehensive income for the years
ended December 31, 2001, 2000, and 1999.
2. TRANSACTIONS WITH GENERAL PARTNER AND 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
USPEs equal to the greater of (i) 5% of Gross Revenues (as defined in the
agreement) or (ii) 1/12 of 1/2% of the net book value of the equipment portfolio
subject to certain adjustments. The Partnership management fee in 2001 was based
on lease revenue. In 2001, Partnership management fees of $42,000 and $0.1
million, respectively, were payable as
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
2. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES (continued)
of December 31, 2001 and 2000. The Partnership reimbursed FSI and its affiliates
$0.2 million, $0.2 million, and $0.3 million in 2001, 2000, and 1999,
respectively, for data processing expenses and administrative services performed
on behalf of the Partnership. The Partnership's proportional share of the USPE's
administrative and data processing expenses reimbursed to FSI were $0, $2,000,
and $6,000 during 2001, 2000 and 1999, respectively.
3. EQUIPMENT
The components of owned equipment as of December 31 were as follows (in
thousands of dollars):
EQUIPMENT HELD FOR OPERATING LEASES 2001 2000
- ----------------------------------- ----------------------------------
Railcars $ 10,705 $ 12,712
Trailers 9,404 9,510
Marine containers 1,010 2,505
----------------------------------
21,119 24,727
Less accumulated depreciation (18,146) (20,483)
--------------------------------
Net equipment $ 2,973 $ 4,244
==================================
Revenues are earned by placing equipment under operating leases. The
Partnership's marine containers are leased to operators of utilization-type
leasing pools that 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. Rental
revenues for trailers are based on a per-diem lease in the free running
interchange with the railroads.
As of December 31, 2001, all owned equipment in the Partnership portfolio was on
lease except for 223 railcars and 7 marine containers with an aggregate net book
value of $0.2 million. As of December 31, 2000, all owned equipment in the
Partnership portfolio was on lease, except for 203 railcars and 106 marine
containers with an aggregate net book value of $0.4 million.
During 2001, the General Partner disposed of marine containers, trailers, and
railcars owned by the Partnership, with an aggregate net book value of $0.1
million, for proceeds of $0.7 million. Included in the gain on sale are unused
repair reserves of $0.3 million. During 2000, the General Partner disposed of
marine containers, trailers, and railcars owned by the Partnership, with an
aggregate net book value of $0.8 million, for proceeds of $3.3 million.
There were no reductions to the carrying values of equipment in 2001, 2000, or
1999.
All owned equipment on lease is being accounted for as operating leases. Future
minimum rents under noncancelable operating leases as of December 31, 2001
during each of the next five years are $0.6 million in 2002, $0.4 million in
2003, $0.4 million in 2004, $0.2 million in 2005, $0.1 million in 2006 and $-0-
thereafter. Per diem and short-term rentals consisting of utilization rate lease
payments included in revenue amounted to approximately $1.8 million, $2.0
million, and $2.5 million in 2001, 2000, and 1999, respectively.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENT IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITY
The Partnership had an interest in a USPE that owned an aircraft. This was a
single purpose entity that did not have any debt. The following summarizes the
financial information for the special-purpose entity and the Partnership's
interest therein as of and for the years ended December 31 (in thousands of
dollars):
2000 1999
--------- --------
Net Net
Total Interest of Total Interest of
USPE Partnership USPE Partnership
- ---------------------------------------------------------------------------------------
Net investments $ -- $ -- $ 739 $ 368
Net income (loss) 2,605 1,304 (900) (448)
The net investment in a USPE consisted of a 50% interest in a trust owning a
Boeing 737-200A aircraft (and related assets and liabilities) totaling $0.4
million as of December 31, 1999. This aircraft was sold in the first quarter of
2000 and the Partnership received liquidating proceeds from the sale of $1.8
million for its net investment of $0.3 million. In October 1999, this entity
received a $0.2 million deposit for the sale of the aircraft. The buyer failed
to perform under the terms of the agreement and the deposit was recorded as
income in 1999.
5. OPERATING SEGMENTS
The Partnership operates or operated in four primary operating segments:
aircraft leasing, marine container leasing, trailer leasing, and railcar
leasing. Each equipment-leasing segment engages in short-term to mid-term
operating leases to a variety of customers.
The General Partner evaluates the performance of each segment based on profit or
loss from operations before allocation of general and administrative expenses,
and certain other expenses. The segments are managed separately due to different
business strategies for each operation.
The following tables present a summary of the operating segments (in thousands
of dollars):
Marine
Container Trailer Railcar
For the Year Ended December 31, 2001 Leasing Leasing Leasing Other (1) Total
------------------------------------ ------- ------- ------- ----- -----
REVENUES
Lease revenue $ (24) $ 1,596 $ 1,101 $ -- $ 2,673
Interest income and other 159 -- 3 59 221
Net gain (loss) on disposition
of equipment 391 22 526 (10) 929
-----------------------------------------------------
Total revenues 526 1,618 1,630 49 3,823
-----------------------------------------------------
EXPENSES
Operations support 1 811 700 109 1,621
Depreciation 20 530 577 -- 1,127
Management fees to affiliates (1) 38 95 -- 132
General and administrative expenses 1 284 94 491 870
Provision for bad debts 1 21 9 -- 31
-----------------------------------------------------
Total costs and expenses 22 1,684 1,475 600 3,781
-----------------------------------------------------
Net income (loss) $ 504 $ (66) $ 155 $ (551) $ 42
=====================================================
Total assets as of December 31, 2001 $ 27 $ 2,953 $ 577 $ 1,976 $ 5,533
=====================================================
(1) Includes certain assets not identifiable to a specific segment, such as cash
and prepaid expenses. Also includes interest income and costs not identifiable
to a particular segment, such as certain operations support and general and
administrative expenses.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
5. OPERATING SEGMENTS (continued)
Marine
Aircraft Container Trailer Railcar
For the Year Ended December 31, 2000 Leasing Leasing Leasing Leasing Other (2) Total
------------------------------------ ------- ------- ------- ------- ----- -----
REVENUES
Lease revenue $ -- $ 81 $ 1,945 $ 3,312 $ -- $ 5,338
Interest income and other -- -- -- 6 86 92
Net gain on disposition of -- 182 301 1,965 -- 2,448
equipment
--------------------------------------------------------------
Total revenues -- 263 2,246 5,283 86 7,878
--------------------------------------------------------------
EXPENSES
Operations support -- 6 728 1,329 38 2,101
Depreciation -- 206 648 727 -- 1,581
Management fees to affiliates -- 4 98 167 -- 269
General and administrative expenses 4 6 332 205 535 1,082
Recovery of bad debts -- -- (21) (27) (10) (58)
--------------------------------------------------------------
Total costs and expenses 4 222 1,785 2,401 563 4,975
--------------------------------------------------------------
Equity in net income of USPE 1,304 -- -- -- -- 1,304
--------------------------------------------------------------
Net income (loss) $ 1,300 $ 41 $ 461 $ 2,882 $ (477) $ 4,207
==============================================================
Total assets as of December 31, 2000 $ -- $ 107 $ 3,580 $ 1,275 $ 2,573 $ 7,535
==============================================================
Marine
Aircraft Container Trailer Railcar
For the Year Ended December 31, 1999 Leasing Leasing Leasing Leasing Other (2) Total
------------------------------------ ------- ------- ------- ------- ------ -----
REVENUES
Lease revenue $ -- $ 163 $ 2,214 $ 3,572 $ -- $ 5,949
Interest income and other -- -- -- 13 77 90
Net gain (loss) on disposition of 47 (67) 161 187 328
equipment
-------------------------------------------------------------
Total revenues 47 96 2,375 3,772 77 6,367
-------------------------------------------------------------
EXPENSES
Operations support -- 3 674 1,001 21 1,699
Depreciation -- 332 834 767 -- 1,933
Management fees to affiliates -- 8 109 178 -- 295
General and administrative expenses 5 12 342 208 461 1,028
(Recovery of) provision for bad debts -- (1) 10 21 -- 30
-------------------------------------------------------------
Total costs and expenses 5 354 1,969 2,175 482 4,985
-------------------------------------------------------------
Equity in net loss of USPE (448) -- -- -- -- (448)
-------------------------------------------------------------
Net income (loss) $ (406) $ (258) $ 406 $ 1,597 $ (405) $ 934
=============================================================
(1) Includes certain assets not identifiable to a specific segment, such as
cash and prepaid expenses. Also includes interest income and costs not
identifiable to a particular segment, such as certain operations support
and general and administrative expenses.
(2) Includes interest income and costs not identifiable to a particular
segment, such as certain operations support and general and administrative
expenses.
6. GEOGRAPHIC INFORMATION
The Partnership owns certain equipment that 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 leases or leased its aircraft, railcars, and trailers to lessees
domiciled in three geographic regions: the United States, Canada, and South
Asia. Marine containers are leased to multiple lessees in different regions that
operate worldwide.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
6. GEOGRAPHIC INFORMATION (continued)
The table below sets forth lease revenues by geographic region for the
Partnership's owned equipment, grouped by domicile of the lessee as of and for
the years ended December 31 (in thousands of dollars):
Owned Equipment
Region 2001 2000 1999
- ------------------------------- ----------------------------------------
United States $ 2,046 $ 3,956 $ 4,350
Canada 651 1,301 1,436
Rest of the world (24) 81 163
----------------------------------------
Lease revenues $ 2,673 $ 5,338 $ 5,949
========================================
The following table sets forth net income (loss) information by region for the
Partnership's owned equipment and investments in a USPE, grouped by domicile of
the lessee as of and for the years ended December 31 (in thousands of dollars):
Owned Equipment Investments in USPE
--------------------------------------- --------------------------------------
Region 2001 2000 1999 2001 2000 1999
- ------------------------------- --------------------------------------- --------------------------------------
United States $ (429) $ 2,661 $ 1,278 $ -- $ -- $ --
Canada 518 679 767 -- -- --
South Asia -- -- -- -- 1,304 (448)
Rest of the world 504 42 (258) -- -- --
--------------------------------------- --------------------------------------
Regional income (loss) 593 3,382 1,787 -- 1,304 (448)
Administrative and other (551) (479) (405) -- -- --
--------------------------------------- --------------------------------------
Net income (loss) $ 42 $ 2,903 $ 1,382 $ -- $ 1,304 $ (448)
======================================= ======================================
The net book value of these assets as of December 31 are as follows (in
thousands of dollars):
Owned Equipment Investments in USPE
------------------------------------ -------------------------------------
Region 2001 2000 1999 2001 2000 1999
--------------------------- ------------------------------------ -------------------------------------
United States $ 2,692 $ 3,743 $ 5,372 $ -- $ -- $ --
Canada 255 432 614 -- -- --
South Asia -- -- -- -- -- 368
Rest of the world 26 69 686 -- -- --
---------------------------------- -------------------------------------
Net book value $ 2,973 $ 4,244 $ 6,672 $ -- $ -- $ 368
================================== =====================================
7. CONCENTRATIONS OF CREDIT RISK
No single lessee accounted for more than 10% of the consolidated revenues for
the years ended December 31, 2001, 2000 and 1999. In 2000, however, the
Partnership sold its remaining investment in a USPE in which it had a 50%
interest in an aircraft to Aegro Capital. The gain from this sale accounted for
14% of the Partnership's revenues from wholly owned equipment in 2000.
As of December 31, 2001 and 2000, the General Partner believes the Partnership
had no other significant concentrations of credit risk that could have a
material adverse effect on the Partnership.
8. 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.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
As of December 31, 2001, the federal income tax basis was higher than the
financial statement carrying values of certain assets and liabilities by $14.2
million, primarily due to differences in depreciation methods and the tax
treatment of underwriting commissions and syndication costs.
9. CONTINGENCIES
The Partnership, together with affiliates, has initiated litigation in various
official forums in India against a defaulting Indian airline lessee to repossess
Partnership property and to recover damages for failure to pay rent and failure
to maintain such property in accordance with relevant lease contracts. The
Partnership has repossessed all of its property previously leased to such
airline, and the airline has ceased operations. In response to the Partnership's
collection efforts, the airline filed counter-claims against the Partnership in
excess of the Partnership's claims against the airline. The General Partner
believes that the airline's counterclaims are completely without merit, and the
General Partner will vigorously defend against such counterclaims.
During 2001, the General Partner decided to minimize its collection efforts from
the India lessee in order to save the Partnership from incurring additional
expenses associated with trying to collect from a lessee that has no apparent
ability to pay.
The Partnership is involved as plaintiff or defendant in various other legal
actions incidental to its business. Management does not believe that any of
these actions will be material to the financial condition or results of
operations of the Partnership.
10. LIQUIDATION AND SPECIAL DISTRIBUTIONS
On January 1, 1999, the General Partner began the liquidation phase of the
Partnership with the intent to commence an orderly liquidation of the
Partnership assets. The General Partner is actively marketing the remaining
equipment portfolio with the intent of maximizing sale proceeds. As sale
proceeds are received the General Partner intends to periodically declare
special distributions to distribute the sale proceeds to the partners. During
the liquidation phase of the Partnership the equipment will continue to be
leased under operating leases until sold. Operating cash flows, to the extent
they exceed Partnership expenses, may be made from time to time to the partners.
The amounts reflected for assets and liabilities of the Partnership have not
been adjusted to reflect liquidation values. The equipment portfolio continues
to be carried at the lower of depreciated cost or fair value less cost to
dispose. Although the General Partner estimates that there will be distributions
after liquidation of assets and liabilities, the amounts cannot be accurately
determined prior to actual liquidation of the equipment. Any excess proceeds
over expected Partnership obligations will be distributed to the Partners. Upon
final liquidation, the Partnership will be dissolved.
A special distribution of $0.8 million ($0.10 per weighted-average depositary
unit) was paid in 2000. No special distributions were paid in 2001 and 1999. The
Partnership is not permitted to reinvest proceeds from sales or liquidations of
equipment. These proceeds, in excess of operational cash requirements, are
periodically paid out to limited partners in the form of special distributions.
The sales and liquidations occur because of the determination by the General
Partner that it is the appropriate time to maximize the return on an asset
through the sale of that asset, and, in some leases, the ability of the lessee
to exercise purchase options.
EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
11. QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following is a summary of the quarterly results of operations for the year
ended December 31, 2001 (in thousands of dollars, except per share amounts):
March June September December
31, 30, 30, 31, Total
---------------------------------------------------------------------------
Operating results:
Total revenues $ 921 $ 675 $ 818 $ 1,409 $ 3,823
Net income (loss) (338) (368) 20 728 42
Per weighted-average depositary unit:
Limited partners'
net income (loss) $ (0.05) $ (0.05) $ 0.00 $ 0.10 $ (0.00)
In the fourth quarter of 2001, the Partnership sold trailers, marine containers,
and railcars for a gain of $0.6 million.
The following is a summary of the quarterly results of operations for the year
ended December 31, 2000 (in thousands of dollars, except per share amounts)
March June September December
31, 30, 30, 31, Total
----------------------------------------------------------------------------
Operating results:
Total revenues $ 1,494 $ 1,910 $ 1,590 $ 2,884 $ 7,878
Net income 1,592 624 508 1,483 4,207
Per weighted-average depositary unit:
Limited partners'
net income $ 0.21 $ 0.07 $ 0.06 $ 0.19 $ 0.53
In the first quarter of 2000, the Partnership sold its interest in a trust
owning an aircraft for a gain of $1.4 million.
In the second quarter of 2000, the Partnership sold trailers, marine containers,
and railcars for a gain of $0.5 million. In the third quarter of 2000, the
Partnership sold trailers, marine containers, and railcars for a gain of $0.3
million.
In the fourth quarter of 2000, the Partnership sold trailers, marine containers,
and railcars for a gain of $1.7 million.
PLM EQUIPMENT GROWTH FUND II
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership *
4. 1 Amendment to Limited Partnership Agreement of Registrant *
10. 1 Management Agreement between Partnership and PLM Investment *
Management, Inc.
99. 1 East West 925. 37-45
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*Incorporated by reference. See page 18 of this report.