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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.
[x] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission file number 0-26594
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PLM EQUIPMENT GROWTH & INCOME FUND VII
(Exact name of registrant as specified in its charter)
California 94-3168838
(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 (Zip code)
executive offices)
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 ______
Aggregate market value of voting stock: N/A
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An index of exhibits filed with this Form 10-K is located on page 26.
Total number of pages in this report:96
PART I
ITEM 1. BUSINESS
(A) Background
In December 1992, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly owned subsidiary of PLM International, Inc. (PLM International or PLMI),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 7,500,000 limited partnership
units (the units) in PLM Equipment Growth & Income Fund VII, a California
limited partnership (the Partnership, the Registrant, or EGF VII). The
Partnership's offering became effective on May 25, 1993. 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 invest in a diversified portfolio of low-obsolescence equipment
having long lives and high residual values, at prices that the General Partner
believes to be below inherent values, and to place the equipment on lease or
under other contractual arrangements with creditworthy lessees and operators of
equipment. All transactions over $1.0 million must be approved by the PLMI
Credit Review Committee (the Committee), which is made up of members of PLMI's
senior management. In determining a lessee's creditworthiness, the Committee
will consider, among other factors, the lessee's financial statements, internal
and external credit ratings, and letters of credit;
(2) to generate cash distributions, which may be substantially tax-deferred
(i.e., distributions that are not subject to current taxation) during the early
years of the Partnership;
(3) to create a significant degree of safety relative to other equipment
leasing investments through the purchase of a diversified equipment portfolio.
This diversification reduces the exposure to market fluctuations in any one
sector. The purchase of used, long-lived, low-obsolescence equipment, typically
at prices that are substantially below the cost of new equipment, also reduces
the impact of economic depreciation and can create the opportunity for
appreciation in certain market situations, where supply and demand return to
balance from oversupply conditions; and
(4) to increase the Partnership's revenue base by reinvesting a portion of
its operating cash flow in additional equipment during the first six years of
the Partnership's operation in order to grow the size of its portfolio. Since
net income and distributions are affected by a variety of factors, including
purchase prices, lease rates, and costs and expenses, growth in the size of the
Partnership's portfolio does not necessarily mean that the Partnership's
aggregate net income and distributions will increase upon the reinvestment of
operating cash flow.
The offering of units of the Partnership closed on April 25, 1995. As of
December 31, 2001, there were 5,041,936 limited partnership units outstanding.
The General Partner contributed $100 for its 5% general partner interest in the
Partnership.
As a result of amendments to the Partnership's Limited Partnership Agreement
made pursuant to a court approved class action settlement, the Partnership may
reinvest its cash flow, surplus cash, and equipment sale proceeds in additional
equipment, consistent with the objectives of the Partnership, until December 31,
2004. The Partnership will terminate on December 31, 2013 unless terminated
earlier upon the sale of all of the equipment or by certain other events.
Table 1, below, lists the equipment and the original cost of equipment in the
Partnership's portfolio, and the Partnership's proportional share of equipment
owned by unconsolidated special-purpose entities 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:
13,941 Marine containers Various $ 31,701
431 Refrigerated marine containers Various 7,214
2 Dry-bulk marine vessels Ishikawa Jima 22,212
323 Pressurized tank railcars Various 8,574
67 Woodchip gondola railcars National Steel 1,028
1 737-200 Stage II commercial aircraft Boeing 5,483
244 Dry piggyback trailers Various 3,743
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Total owned equipment held for operating leases $ 79,955 (1)
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Equipment owned by unconsolidated special-purpose entities:
0.38 737-300 Stage III commercial aircraft Boeing $ 9,072 (2)
0.50 MD-82 Stage III commercial aircraft McDonnell Douglas 8,125 (2)
0.50 MD-82 Stage III commercial aircraft McDonnell Douglas 7,132 (2)
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Total investments in unconsolidated special-purpose entities $ 24,329 (1)
============
(1) Includes equipment and investments purchased with the proceeds from capital
contributions, undistributed cash flow from operations, and Partnership
borrowings invested in equipment. Includes costs capitalized subsequent to
the date of purchase, and equipment acquisition fees paid to PLM
Transportation Equipment Corporation (TEC) or PLM Worldwide Management
Services (WMS).
(2) Jointly owned: EGF VII and an affiliated program.
Equipment is generally leased under operating leases for a term of one to six
years. A portion of the Partnership's marine containers are leased to operators
of utilization-type leasing pools, which include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. The remaining Partnership marine containers are based on a fixed
rate. Lease revenues for intermodal trailers are based on a per-diem lease in
the free running interchange with the railroads. Rents for all other equipment
are based on fixed rates.
The lessees of the equipment include but are not limited to: Alcoa Inc.,
American Airlines, Capital Leasing, Cronos Capital Corporation, Pluna-Lineas
Aereas Uruguayas S.A., Skeena Cellulose Inc., and Varig South America.
(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
Generally, the equipment owned or invested in 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 that 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 Corp., General Electric
Railcar Services Corporation, General Electric Aviation Services Corporation,
Xtra Corporation, and other investment programs that may lease the same types of
equipment.
(D) Demand
The Partnership currently operates in the following operating segments: marine
container leasing, marine vessel leasing, railcar leasing, aircraft leasing, and
intermodal trailer leasing. Each equipment-leasing segment engages in short-term
to mid-term operating leases to a variety of customers. Except for those
aircraft leased to passenger air carriers, the Partnership's transportation
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) Marine Containers
The Partnership has acquired new standard dry cargo containers and placed this
equipment either on mid-term leases or into revenue-sharing agreements. These
investments were at the time opportunistically driven by the historically low
acquisition prices then available in the market. The Partnership was able to
acquire these containers in the $1,500 to $1,600 range for a standard 20-foot
container; historically, similar equipment had been sold in the $2,000 range.
During 2001 new container prices and market lease rates have continued to
decline. The primary reason for this decline is the worldwide recession and
attendant slowdown in exports to the United States (US), mostly from the Far
East. This trend was further exacerbated by the events of September 11, 2001.
Those containers placed on mid-term leases are protected from these market
trends, whereas those containers in revenue-sharing agreements have seen reduced
earnings.
(2) Marine Vessels
The Partnership owns small to medium-sized dry-bulk marine vessels that operate
in international markets carrying a variety of commodity-type cargoes. Demand
for commodity-based shipping is closely tied to worldwide economic growth
patterns, which can affect demand by causing changes in volume on trade routes.
The General Partner operates the Partnership's vessels on periodic charters, an
approach that provides some insulation to short term market fluctuations.
During 2001, the market for bulk carriers exhibited, as expected, seasonal
strengthening in the late winter, and continued to be strong throughout the
summer with some weakness occurring in the fall. The Partnership's dry-bulk
marine vessels' long term charters expired during the summer, and were renewed
with the existing lessee at current market rates (somewhat below their previous
rates).
(3) Railcars
(a) 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% 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.
(b) Woodchip Gondola Railcars
These railcars are used to transport woodchips from sawmills to pulp mills,
where the woodchips are converted into pulp. Thus, demand for woodchip cars is
directly related to demand for paper, paper products, particleboard, and
plywood. In Canada, where the Partnership's woodchip railcars operate, 2001
carloadings of forest products decreased approximately 5% when compared to 2000
levels. Utilization of the Partnership's woodchip gondola railcars remained 100%
during 2001.
(4) Commercial Aircraft
Prior to September 11, 2001, Boeing and Airbus Industries predicted that the
rate of growth in the demand for air transportation services would be relatively
robust for the next 20 years. Boeing's prediction was that the demand for
passenger services would grow at an average rate of about 5% per year and the
demand for cargo traffic would grow at about 6% per year during such period.
Airbus' numbers were largely the same at 5% and 6%, respectively. Neither
manufacturer has released new long-term predictions; however, both have
confirmed lower production rates as well as substantial reductions in their work
forces. Both manufacturers experienced significant reductions in the numbers of
new orders for the year 2001 (through the end of November), with Boeing
reporting 294 (as compared to 611 the previous year) and Airbus reporting 352
(as compared to 520 for the previous year).
Current Market: It is to be noted that even prior to the events on September 11,
2001, the worldwide airline industry experienced negative traffic growth, which
in itself is unprecedented in peace time (it also happened during and after the
Gulf War). The tragic events of September 11, 2001 have resulted in an
unprecedented market situation for used commercial aircraft. The major carriers
in the Unites States have grounded (or are in the process of grounding)
approximately 20% of their fleets, causing the imbalance between supply and
demand for aircraft seats to be exacerbated. In short, the market for used
commercial aircraft is more negatively impacted than ever and in un-chartered
territory. The Partnership's portfolio of aircraft has been severely impacted.
The Partnership owns one Boeing 737-200 aircraft. The lease for this aircraft
expires on October 30, 2002. At December 31, 2001. the lessee of this aircraft
is four months in arrears with its lease payments and has notified the General
Partner that it wants to return the aircraft. The market for the Boeing 737-200
aircraft is very soft and the credit quality of the airlines interested is,
generally speaking, poor. A Boeing 737-300 aircraft, in which the Partnership
owns a 38% interest, was placed on lease in late 2001. The Partnership also owns
50% of two MD-82 aircraft, which are on long-term lease to a major US carrier at
market rates.
(5) 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 competing 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. 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.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in governmental 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 modification of such equipment to
meet these regulations, at considerable cost to the Partnership. Such
regulations include:
(1) the US Oil Pollution Act of 1990, which established liability for
operators and owners of marine vessels that create environmental pollution.
This regulation has resulted in higher oil pollution liability insurance.
The lessee of the equipment typically reimburses the Partnership for these
additional costs;
(2) the US Department of Transportation's Aircraft Capacity Act of 1990,
which limits or eliminates the operation of commercial aircraft in the
United States that does not meet certain noise, aging, and corrosion
criteria. In addition, under US Federal Aviation Regulations, after
December 31, 1999, no person shall operate an aircraft to or from any
airport in the contiguous United States unless that airplane has been shown
to comply with Stage III noise levels. The Partnership has one Stage II
aircraft that does not meet Stage III requirements. The cost to install a
hushkit to meet quieter Stage III requirements is approximately $2.5
million, depending on the type of aircraft. Currently, the Partnership's
Stage II aircraft is operating in countries that do not require this
regulation. Upon lease expiration, this aircraft will either be leased in a
country that does not have these regulations or sold;
(3) 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; and
(4) 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 269 jacketed tank railcars
and 54 non-jacketed tank railcars that will need re-qualification. As of
December 31, 2001, a total of 30 tank railcars have been inspected with no
significant defects.
As of December 31, 2001, the Partnership was in compliance with the above
governmental 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 and its interest in entities that own equipment for leasing
purposes. As of December 31, 2001, the Partnership owned a portfolio of
transportation and related equipment and investments in equipment owned by
unconsolidated special-purpose entities (USPEs), as described in Item 1, Table
1. The Partnership acquired equipment with the proceeds of the Partnership
offering of $107.4 million through the third quarter of 1995, proceeds from the
debt financing of $23.0 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
Two class action lawsuits which were filed against PLM International and various
of its wholly owned subsidiaries in January 1997 in the United States District
Court for the Southern District of Alabama, Southern Division (the court), Civil
Action No. 97-0177-BH-C (the Koch action), and June 1997 in the San Francisco
Superior Court, San Francisco, California, Case No. 987062 (the Romei action),
were fully resolved during the fourth quarter of 2001.
The named plaintiffs were individuals who invested in PLM Equipment Growth Fund
IV (Fund IV), PLM Equipment Growth Fund V (Fund V), PLM Equipment Growth Fund VI
(Fund VI), and the Partnership (Fund VII and collectively, the Funds), each a
California limited partnership for which PLMI's wholly owned subsidiary, FSI,
acts as the General Partner. The complaints asserted causes of action against
all defendants for fraud and deceit, suppression, negligent misrepresentation,
negligent and intentional breaches of fiduciary duty, unjust enrichment,
conversion, conspiracy, unfair and deceptive practices and violations of state
securities law. Plaintiffs alleged that each defendant owed plaintiffs and the
class certain duties due to their status as fiduciaries, financial advisors,
agents, and control persons. Based on these duties, plaintiffs asserted
liability against defendants for improper sales and marketing practices,
mismanagement of the Funds, and concealing such mismanagement from investors in
the Funds. Plaintiffs sought unspecified compensatory damages, as well as
punitive damages.
In February 1999, the parties to the Koch and Romei actions agreed to monetary
and equitable settlements of the lawsuits, with no admission of liability by any
defendant, and filed a Stipulation of Settlement with the court. The court
preliminarily approved the settlement in August 2000, and information regarding
the settlement was sent to class members in September 2000. A final fairness
hearing was held on November 29, 2000, and on April 25, 2001, the federal
magistrate judge assigned to the case entered a Report and Recommendation
recommending final approval of the monetary and equitable settlements to the
federal district court judge. On July 24, 2001, the federal district court judge
adopted the Report and Recommendation, and entered a final judgment approving
the settlements. No appeal has been filed and the time for filing an appeal has
expired.
The monetary settlement provides for a settlement and release of all claims
against defendants in exchange for payment for the benefit of the class of up to
$6.6 million, consisting of $0.3 million desposited by PLMI and the remainder
funded by an insurance policy. The final settlement amount of $4.9 million (of
which PLMI's share was approximately $0.3 million) was accrued in 1999, paid out
in the fourth quarter of 2001 and was determined based upon the number of claims
filed by class members, the amount of attorneys' fees awarded by the court to
plaintiffs' attorneys, and the amount of the administrative costs incurred in
connection with the settlement.
The equitable settlement provides, among other things, for: (a) the extension
(until January 1, 2007) of the date by which FSI must complete liquidation of
the Funds' equipment, except for Fund IV, (b) the extension (until December 31,
2004) of the period during which FSI can reinvest the Funds' funds in additional
equipment, except for Fund IV, (c) an increase of up to 20% in the amount of
front-end fees (including acquisition and lease negotiation fees) that FSI is
entitled to earn in excess of the compensatory limitations set forth in the
North American Securities Administrator's Association's Statement of Policy;
except for Fund IV, (d) a one-time purchase by each of Funds V, VI and VII of up
to 10% of that partnership's outstanding units for 80% of net asset value per
unit as of September 30, 2000; and (e) the deferral of a portion of the
management fees paid, except for Fund IV, to an affiliate of FSI until, if ever,
certain performance thresholds have been met by the Funds. The equitable
settlement also provides for payment of additional attorneys' fees to the
plaintiffs' attorneys from Fund funds in the event, if ever, that certain
performance thresholds have been met by the Funds. Following a vote of limited
partners resulting in less than 50% of the limited partners of each of Funds V,
VI and VII voting against such amendments and after final approval of the
settlement, each of the Funds' limited partnership agreement was amended to
reflect these changes. During the fourth quarter of 2001, the respective Funds
purchased limited partnership units from those equitable class members who
submitted timely requests for purchase. Fund VII agreed to purchase 351,290 of
its limited partnership units at a total cost of $3.2 million.
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.
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.
(This space intentionally left blank)
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS
Pursuant to the terms of the partnership agreement, the General Partner is
entitled to 5% of the cash distributions of the Partnership. The General Partner
is the sole holder of such interests. Net income is allocated to the General
Partner to the extent necessary to cause the General Partner's capital account
to equal zero. The remaining interests in the profits, losses, and cash
distributions of the Partnership are allocated to the limited partners. As of
December 31, 2001, there were 5,472 limited partners holding units in the
Partnership.
There are several secondary markets in which limited partnership units trade.
Secondary markets are characterized as having few buyers for limited partnership
interests and, therefore, are generally viewed as inefficient vehicles for the
sale of limited partnership units. Presently, there is no public market for the
limited partnership units and none is likely to develop.
To prevent the limited partnership 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 US 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.
As a result of the settlement in the Koch and Romei actions (see Note 10 to the
audited financial statements), the Partnership was required to purchase up to
10% of the Partnership's limited partnership units for 80% of the net asset
valued per unit. During the fourth quarter 2001, the General Partner, on behalf
of the Partnership, agreed to purchase 351,290 limited partnership units and, as
of December 31, 2001, has paid or accrued $3.2 million to the purchasing agent
for this purchase.
As of December 31, 2001, the purchasing agent purchased 281,633 units, which is
reflected as a reduction in Partnership units. The purchasing agent also
purchased an additional 59,786 during January 2002. The General Partner expects
the remaining 9,871 units to be purchased during the remainder of 2002.
Under the former redemption plan, as of December 31, 2000, the Partnership had
purchased a cumulative total of 46,728 limited partnership units at a total cost
of $0.6 million.
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ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the Year Ended December 31,
(In thousands of dollars, except weighted-average unit amounts)
2001 2000 1999 1998 1997
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Operating results:
Total revenues $ 16,120 $ 19,801 $ 20,849 $ 18,200 $ 17,885
Net gain (loss) on disposition of
equipment 41 3,614 1,140 (31) 1,803
Equity in net income (loss) of uncon-
solidated special-purpose entities 1,255 (621) 6,067 6,493 1,430
Net income 2,147 4,059 6,708 5,824 1,101
At year-end:
Total assets $ 50,684 $ 56,208 $ 65,966 $ 76,537 $ 82,623
Total liabilities 16,455 19,493 23,219 26,505 30,050
Notes payable 14,000 17,000 20,000 23,000 23,000
Cash distribution $ 1,422 $ 10,088 $ 10,083 $ 10,127 $ 10,176
Cash distribution representing
a return of capital to the limited
partners $ -- $ 6,029 $ 3,375 $ 4,303 $ 9,075
Per weighted-average limited partnership unit:
Net income $ 0.38(1) $ 0.67(1) $ 1.16(1) $ 0.99(1) $ 0.11(1)
Cash distribution $ 0.24 $ 1.80 $ 1.80 $ 1.80 $ 1.80
Cash distribution representing
a return of capital $ -- $ 1.13 $ 0.64 $ 0.81 $ 1.69
(1) After reduction of income necessary to cause the General Partner's capital
account to equal zero of $19,000 ($0.00 per weighted-average limited
partnership unit) in 2001, $0.3 million ($0.06 per weighted-average limited
partnership unit) in 2000, $0.2 million ($0.03 per weighted-average limited
partnership unit) in 1999, $0.2 million ($0.04 per weighted-average limited
partnership unit) in 1998, and $0.5 million ($0.08 per weighted-average
limited partnership unit) in 1997.
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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 & Income
Fund VII (the Partnership). The following discussion and analysis of operations
focuses on the performance of the Partnership's equipment in 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 Partnership 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 for its railcar, marine
container, trailer, marine vessel, and aircraft portfolios.
(a) Railcars: This equipment experienced significant re-leasing activity. Lease
rates in this market are showing signs of weakness and this has lead to lower
utilization and lower contribution to the Partnership as existing leases expire
and renewal leases are negotiated.
(b) Marine containers: A portion of the Partnership's marine containers are
leased to operators of utilization-type leasing pools and, as such, are highly
exposed to re-leasing and repricing activity.
(c) Trailers: The Partnership's trailer portfolio operates within short-line
railroad systems. The relatively short duration of most leases in these
operations exposes the trailers to considerable re-leasing and repricing
activity.
(d) Marine vessels: The Partnership's marine vessels were released during 2001
at the current market rate exposing them to repricing and re-leasing risk.
(e) Aircraft: This equipment also experienced re-leasing and repricing activity.
Two of the Partnership's partially owned aircraft on an operating lease were
re-leased during 2001 at the current market rate which was much lower than the
rate that was in place during 2000. The Partnership's remaining partially owned
aircraft on an operating lease was also re-leased during 2001 at approximately
the same rate that was in place during 2000.
(2) Equipment Liquidations
Liquidation of Partnership owned equipment and of investments in unconsolidated
special-purpose entities (USPEs), unless accompanied by an immediate replacement
of additional equipment earning similar rates (see Reinvestment Risk, below),
represents a reduction in the size of the equipment portfolio and may result in
a reduction of contribution to the Partnership.
During 2001, the Partnership disposed of owned equipment that included marine
containers and a trailer for total proceeds of $0.1 million. The Partnership
also disposed of its interest in an USPE that owned a marine vessel for proceeds
of $5.3 million.
(3) Nonperforming Lessees
Lessees not performing under the terms of their leases, either by not paying
rent, not maintaining or operating the equipment in accordance with the
conditions of the leases, or other possible departures from the lease terms, can
result not only in reductions in contribution, but also may require the
Partnership to assume additional costs to protect its interests under the
leases, such as repossession or legal fees. The Partnership experienced the
following in 2001:
(i) During 2001, the lessee of a Stage II Boeing 737-200 commercial
aircraft notified the General Partner of its intention to return this aircraft.
As of December 31, 2001, the lessee has not remitted four lease payments due to
the Partnership. The Partnership has a security deposit from this lessee that
could be used to pay a portion of the amount due. During October 2001, the
General Partner sent a notification of default to the lessee. The lease, with an
expiration date of October 2002, has certain return condition requirements for
each aircraft. The General Partner has recorded an allowance for bad debts for
the amount due less the security deposit.
(ii)Trans World Airlines (TWA), a former lessee, filed for bankruptcy
protection under Chapter 11 in January 2001. Upon the acquisition of TWA by
American Airlines (AA), the General Partner accepted an offer from AA to lease
the aircraft for 84 months at the current market rate.
(4) Reinvestment Risk
Reinvestment risk occurs when the Partnership cannot generate sufficient surplus
cash after fulfillment of operating obligations and distributions to reinvest in
additional equipment during the reinvestment phase of the Partnership, equipment
is disposed of for less than threshold amounts, proceeds from the dispositions,
or surplus cash available for reinvestment cannot be reinvested at the threshold
lease rates, or proceeds from sales or surplus cash available for reinvestment
cannot be deployed in a timely manner.
Pursuant to the equitable settlement related to the Koch and Romei actions (see
Note 10 to the audited financial statements), the Partnership intends to
increase its equipment portfolio by investing surplus cash in additional
equipment, after fulfilling operating requirements, until December 31, 2004.
Additionally, during 2001, the Partnership paid PLM Financial Services, Inc.
(FSI or the General Partner) $0.3 million in acquisition and lease negotiation
fees related to equipment purchased during 2001.
Other nonoperating funds for reinvestment are generated from the sale of
equipment prior to the Partnership's planned liquidation phase, the receipt of
funds realized from the payment of stipulated loss values on equipment lost or
disposed of while it was subject to lease agreements, or from the exercise of
purchase options in certain lease agreements. Equipment sales generally result
from evaluations by the General Partner that continued ownership of certain
equipment is either inadequate to meet Partnership performance goals, or that
market conditions, market values, and other considerations indicate it is the
appropriate time to sell certain equipment.
During 2001, the Partnership purchased a portfolio of marine containers for $8.4
million, including acquisition fees of $0.4 million. All acquisition fees were
paid to FSI.
(5) Equipment Valuation
In accordance with the Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121),
the General Partner reviews the carrying values 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 FASB 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.
(C) Financial Condition - Capital Resources, Liquidity, and Unit Redemption Plan
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering of $107.4 million and permanent
debt financing of $23.0 million. No further capital contributions from the
limited partners are permitted under the terms of the Partnership's limited
partnership agreement. The debt agreement with the five institutional investors
of the senior notes requires the Partnership to maintain certain financial
covenants related to fixed-charge coverage and maximum debt.
The Partnership relies on operating cash flow to meet its operating obligations,
make cash distributions, and increase the Partnership's equipment portfolio with
any remaining available surplus cash.
For the year ended December 31, 2001, the Partnership generated $10.2 million in
operating cash (net cash provided by operating activities plus non-liquidating
cash distributions from USPEs) to meet its operating obligations and make
distributions of $1.4 million to the partners.
During the year ended December 31, 2001, the Partnership disposed of owned
equipment and an investment in an USPE for aggregate proceeds of $5.4 million.
During the year ended December 31, 2001, the Partnership purchased marine
containers for $8.0 million and paid acquisition fees and lease negotiation fees
of $0.2 million to FSI. The Partnership also increased its interest in a trust
owning a commercial aircraft $0.1 million by paying lease negotiation fees to
FSI. Pursuant to the equitable settlement related to the Koch and Romei actions
(see Note 10 to the audited financial statements), during 2001 the Partnership
paid FSI $0.3 million in acquisition and lease negotiation fees related to owned
marine containers.
Accounts receivable increased $0.3 million during 2001 due to the timing of cash
receipts.
Investments in USPEs decreased $6.3 million due to cash distributions of $2.4
million to the Partnership from the USPEs and liquidation proceeds of $5.3
million to the Partnership offset, in part, by income of $1.3 million that was
recorded from the Partnership's equity interests in USPEs for the year 2001 and
an additional investment of $0.1 million in an USPE made by the Partnership.
Accounts payable increased $0.5 million during 2001. An increase of $0.8 million
was due to an accrual to purchase Partnership units required by the equitable
settlement (see Note 10 to the audited financial statements) offset, in part, by
a decrease of $0.3 million due to the timing of payments to vendors.
During 2001, due to affiliates decreased $0.6 million resulting from the payment
of $0.8 million in engine reserves to an affiliated USPE offset, in part, by the
receipt $0.1 million in engine reserves from an affiliated USPE.
As a result of the settlement in the Koch and Romei actions (see Note 10 to the
audited financial statements), the Partnership's redemption plan has been
terminated and the Partnership was required to purchase up to 10% of the
Partnership's limited partnership units for 80% of the net asset valued per
unit. During the fourth quarter 2001, the General Partner, on behalf of the
Partnership, paid $2.4 million to the purchasing agent and accrued $0.8 million
to purchase 351,290 limited partnership units. The cash for this purchase will
come from available cash.
The Partnership made the annual debt payment of $3.0 million to the lenders of
the notes payable during 2001.
The Partnership has a remaining outstanding balance of $14.0 million on the
notes payable. The remaining balance of the notes will be repaid in two
principal payments of $3.0 million on December 31, 2002 and 2003, and in two
principal payments of $4.0 million on December 31, 2004 and 2005. The agreement
requires the Partnership to maintain certain financial covenants related to
fixed-charge coverage and maximum debt.
In April 2001, PLM International, Inc. (PLMI) entered into a $15.0 million
warehouse facility, which is shared with the Partnership, PLM Equipment Growth
Fund VI, and Professional Lease Management Income Fund I, LLC. During December
2001, this facility was amended to lower the amount available to be borrowed to
$10.0 million. The facility provides for financing up to 100% of the cost of the
equipment. Outstanding borrowings by one borrower reduce the amount available to
each of the other borrowers under the facility. Individual borrowings may be
outstanding for no more than 270 days, with all advances due no later than April
12, 2002. Interest accrues either at the prime rate or LIBOR plus 2.0% at the
borrower's option and is set at the time of an advance of funds. Borrowings by
the Partnership are guaranteed by PLMI. This facility expires in April 2002. The
General Partner believes it will be able to renew the warehouse facility upon
its expiration with terms similar to those in the current facility.
As of March 27, 2002, the Partnership had no borrowings outstanding under this
facility and there were no other borrowings outstanding under this facility by
any other eligible borrower.
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.
(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 USPEs and intangible assets
to determine if the carrying value of the asset may not be recoverable due to
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
increased during the year ended December 31, 2001, compared to 2000. Gains or
losses from the sale of equipment, interest and other income, and certain
expenses such as depreciation and amortization 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 segment (in thousands of dollars):
For the Years
Ended December 31,
2001 2000
---------------------------
Marine containers $ 6,185 $ 3,905
Marine vessels 2,903 2,681
Railcars 1,798 1,927
Aircraft 1,079 1,053
Trailers 318 1,998
Marine containers: Lease revenues and direct expenses for marine containers were
$6.3 million and $0.1 million respectively, for 2001, compared to $3.9 million
and $20,000, respectively, during 2000. An increase in lease revenues of $1.5
million was due to the purchase of additional equipment during 2001 and 2000.
Additionally, an increase of $0.8 million was due to the transfer of the
Partnership's interest in an entity that owned marine containers from an
unconsolidated special-purpose entity (USPE) to owned equipment during 2000.
Marine vessels: Marine vessel lease revenues and direct expenses were $5.5
million and $2.6 million, respectively, for 2001, compared to $5.5 million and
$2.8 million, respectively, during 2000.
Marine vessel direct expenses decreased $0.2 million during 2001. The decrease
in direct expenses was caused by lower depreciation expense of $0.1 million as
the result of the double declining-balance method of depreciation which results
in greater depreciation in the first years an asset is owned and lower marine
operating expenses of $0.1 million.
Railcars: Railcar lease revenues and direct expenses were $2.4 million and $0.6
million, respectively, for 2001, compared to $2.5 million and $0.5 million,
respectively, during 2000. A decrease in railcar lease revenues of $0.1 million
was due to lower re-lease rates earned on railcars whose leases expired during
2001.
Aircraft: Aircraft lease revenues and direct expenses were $1.1 million and
$6,000, respectively, for 2001, compared to $1.1 million and $32,000,
respectively, during 2000.
Trailers: Trailer lease revenues and direct expenses were $0.6 million and $0.3
million, respectively, for 2001, compared to $2.9 million and $0.9 million,
respectively, during 2000. A decrease in trailer contribution of $1.7 million
was due to the sale of 78% of the Partnership's trailers during 2000.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $11.6 million for 2001 increased from $10.8 million
for 2000. Significant variances are explained as follows:
(i) A $1.2 million increase in depreciation and amortization expenses from
2000 levels reflects an increase of $2.6 million in depreciation and
amortization expenses resulting from the purchase of additional equipment during
2001 and 2000 and an increase of $0.5 million resulting from the transfer of the
Partnership's interest in an entity that owned marine containers from an USPE to
owned equipment during 2000. These increases were offset, in part, by a decrease
of $1.1 million caused by the double-declining balance method of depreciation
which results in greater depreciation in the first years an asset is owned and a
decrease of $0.8 million due to the sale of equipment during 2001 and 2000.
(ii)A $0.2 million increase in the provision for bad debts was based on the
General Partner's evaluation of the collectability of receivables compared to
2000;
(iii) A $0.1 million decrease in interest expense was due to lower average
borrowings outstanding during 2001 compared to 2000; and
(iv)A $0.4 million decrease in general and administrative expenses during
the year ended December 31, 2001 was due to lower costs of $0.5 million
resulting from the sale of 78% of the Partnership's trailers during 2000.
(c) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment for the year ended December 31, 2001
totaled $41,000, and resulted from the sale of marine containers and a trailer
with an aggregate net book value of $34,000 for proceeds of $75,000. The net
gain on disposition of equipment for the year ended December 31, 2000 totaled
$3.6 million, and resulted from the sale of a commuter aircraft, railcars,
marine containers, and trailers with an aggregate net book value of $6.9 million
for proceeds of $10.5 million.
(d) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
(USPEs)
Equity in net income (loss) of USPEs represent the Partnership's share of the
net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method of accounting. These entities were single purpose
and had no debt or other financial encumbrances. The following table presents
equity in net income (loss) by equipment type (in thousands of dollars):
For the Years
Ended December 31,
2001 2000
---------------------------
Marine vessels $ 2,002 $ 826
Aircraft (747) (1,605)
Marine containers -- 129
Mobile offshore drilling unit -- 29
------------ -----------
Equity in net income (loss) of U $ 1,255 $ (621)
============ ===========
Marine vessels: During 2001, lease revenues of $0.7 million and the gain of $2.1
million from the sale of the Partnership's interest in an entity that owned a
marine vessel were offset by depreciation expense, direct expenses, and
administrative expenses of $0.8 million. During 2000, lease revenues of $2.9
million and the gain of $0.9 million from the sale of the Partnership's interest
in an entity that owned a marine vessel were offset by depreciation expense,
direct expenses, and administrative expenses of $2.9 million.
The decrease in marine vessel lease revenues of $2.1 million and depreciation
expense, direct expenses, and administrative expenses of $2.1 million during
2001, was caused by the sale of the Partnership's interest in an entity that
owned a marine vessel during 2001 and the sale of a Partnership's interest in an
entity that owned a marine vessel during 2000.
Aircraft: During 2001, lease revenues of $2.2 million and other income of $0.8
million were offset by depreciation expense, direct expenses, and administrative
expenses of $3.7 million. During 2000, lease revenues of $2.7 million were
offset by depreciation expense, direct expenses, and administrative expenses of
$4.3 million.
Lease revenues decreased $0.6 million due to the reduction of the lease rate on
both MD-82's as part of a new lease agreement for these commercial aircraft.
This decrease in lease revenues was partially offset by an increase of $0.1
million due to the Boeing 737-300 being on-lease during 2001 that was off-lease
for four months during 2000. Other income increased $0.8 million during 2001 due
to the recognition of $0.8 million in engine reserve liability as income upon
termination of a previous lease agreement. A similar event did not occur during
2000.
During 2001, depreciation expense, direct expenses, and administrative expenses
decreased $0.5 million resulting from the double declining-balance method of
depreciation which results in greater depreciation in the first years an asset
is owned.
Marine containers: During 2000, the Partnership's interest in an entity that
owned marine containers was transferred to owned equipment.
(e) Net Income
As a result of the foregoing, the Partnership had a net income of $2.1 million
for the year ended December 31, 2001, compared to net income of $4.1 million
during 2000. The Partnership's ability to acquire, operate, and liquidate
assets, secure leases, and re-lease those assets whose leases expire is subject
to many factors. Therefore, 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 $0.24 per weighted-average limited partnership unit.
(This space intentionally left blank)
(2) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 2000 and 1999
In September 1999, FSI amended the corporate-by-laws of certain USPEs in which
the Partnership, or any affiliated program, owns an interest greater than 50%.
The amendment to the corporate-by-laws provided that all decisions regarding the
acquisition and disposition of the investment as well as other significant
business decisions of that investment would be permitted only upon unanimous
consent of the Partnership and all the affiliated programs that have an
ownership in the investment (the Amendment). As such, although the Partnership
may own a majority interest in an USPE, the Partnership does not control its
management and thus the equity method of accounting will be used after adoption
of the Amendment. As a result of the Amendment, as of September 30, 1999, all
jointly owned equipment in which the Partnership owned a majority interest,
which had been consolidated, was reclassified to investments in USPEs. Lease
revenues and direct expenses for jointly owned equipment in which the
Partnership held a majority interest were reported under the consolidation
method of accounting during the year ended December 31, 1999 and were included
with the owned equipment operations. For the three months ended December 31,
1999 and twelve months ended December 31, 2000, lease revenues and direct
expenses for these entities are reported under the equity method of accounting
and are included with the operations of the USPEs.
(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, 2000, when compared to 1999. The
following table presents lease revenues less direct expenses by segment (in
thousands of dollars):
For the Years
Ended December 31,
2000 1999
---------------------------
Marine containers $ 3,905 $ 2,518
Marine vessels 2,681 3,880
Trailers 1,998 3,302
Railcars 1,927 2,090
Aircraft 1,053 642
Portable heaters and others -- 739
Marine containers: Lease revenues and direct expenses for marine containers were
$3.9 million and $20,000, respectively, for 2000, compared to $2.5 million and
$2,000, respectively, during 1999.
The September 30, 1999 Amendment that changed the accounting method of
majority-held equipment from the consolidation method of accounting to the
equity method of accounting impacted the reporting of lease revenues for marine
containers. As a result of the Amendment, during the year ended December 31,
2000, lease revenues decreased $1.3 million when compared to the same period of
1999. The decrease in lease revenues caused by the Amendment was offset by an
increase in marine containers lease revenues of $2.2 million caused by the
purchase of additional equipment during 1999 and 2000 and an increase of $0.6
million caused by the transfer of the Partnership's interest in an entity that
owned marine containers from an USPE to owned equipment during 2000.
Marine vessels: Marine vessel lease revenues and direct expenses were $5.5
million and $2.8 million, respectively, for 2000, compared to $7.8 million and
$3.9 million, respectively, during 1999.
The September 30, 1999 Amendment that changed the accounting method of majority
held equipment from the consolidation method of accounting to the equity method
of accounting impacted the reporting of lease revenues and direct expenses of
one marine vessel. As a result of the Amendment, during 2000, lease revenues
decreased $1.8 million and direct expenses decreased $1.4 million when compared
to 1999.
In addition, a decline in lease revenues of $0.4 million was caused by the
required dry-docking of one of the Partnership's two wholly owned marine
vessels. During the dry-docking period, this marine vessel did not earn any
lease revenues. Marine vessel direct expenses also increased $0.4 million during
2000 due to increases in repairs and maintenance of $0.4 million and equipment
operating expenses of $0.2 million. These increases were offset, in part, by a
decrease of $0.2 million in insurance expense.
Trailers: Trailer lease revenues and direct expenses were $2.9 million and $0.9
million, respectively, for 2000, compared to $4.2 million and $0.9 million,
respectively, during 1999. The decrease in trailer contribution was due to the
sale of 78% of the Partnership's trailers during 2000.
Railcars: Railcar lease revenues and direct expenses were $2.5 million and $0.5
million, respectively, for 2000, compared to $2.7 million and $0.6 million,
respectively, during 1999. The decrease in railcar lease revenues of $0.2
million was primarily due to lower re-lease rates earned on railcars whose
leases expired during 2000.
Aircraft: Aircraft lease revenues and direct expenses were $1.1 million and
$32,000, respectively, for 2000, compared to $1.5 million and $0.9 million,
respectively, during 1999. The decrease of $0.4 million in aircraft lease
revenues was due to the sale of three commercial aircraft during 1999 and a
commuter aircraft during 2000. During 1999, an off-lease commuter aircraft
required repairs of $0.9 million which were not required during 2000.
Portable heaters and others: The Partnership sold all the portable heaters and
others during September 1999.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $10.8 million for 2000 decreased from $14.0 million
for 1999. Significant variances are explained as follows:
(i) A $2.3 million decrease in depreciation and amortization expenses from
1999 levels reflects the decrease of $0.7 million caused by the double-declining
balance method of depreciation which results in greater depreciation in the
first years an asset is owned, a decrease of $1.3 million due to the sale of
equipment during 2000 and 1999, and a decrease of $2.1 million as a result of
the Amendment which changed the accounting method used for majority-held
equipment from the consolidation method of accounting to the equity method of
accounting. These decreases were offset, in part, by an increase of $1.4 million
in depreciation and amortization expenses resulting from the purchase of
additional equipment during 2000 and 1999 and an increase of $0.4 million
resulting from the transfer of the Partnership's interest in an entity that
owned marine containers from an USPE to owned equipment during 2000.
(ii)A $0.7 million decrease in the provision for bad debts was based on the
General Partner's evaluation of the collectability of receivables. During 1999,
the General Partner increased the provision for bad debts based on the
collectability of receivables due from the lessee of the portable heaters. A
similar provision did not have to be made during 2000.
(iii) A $0.2 million decrease in interest expense was due to a lower
average outstanding debt balance during 2000 when compared to 1999.
(iv)A $0.1 million decrease in management fees was due to lower lease
revenues earned by the Partnership during 2000 when compared to 1999.
(v) A $0.1 million increase in administrative expenses was due to higher
costs associated with the transition of Partnership trailers and operations of
three new PLM short-term trailer rental facilities prior to the sale of these
facilities during 2000.
(c) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment for 2000 totaled $3.6 million, and
resulted from the sale of a commuter aircraft, railcars, marine containers, and
trailers with an aggregate net book value of $6.9 million for proceeds of $10.5
million. The net gain on disposition of equipment for 1999 totaled $1.1 million,
and resulted from the sale of a commuter aircraft, commercial aircraft, portable
heaters, trailers, modular buildings, and railcars with an aggregate net book
value of $6.5 million for proceeds of $7.6 million.
(d) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
(USPEs)
Equity in net income (loss) of USPEs represent the Partnership's share of the
net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method of accounting. These entities were single purpose
and had no debt or other financial encumbrances. The following table presents
equity in net income (loss) by equipment type (in thousands of dollars):
For the Years
Ended December 31,
2000 1999
-------------------------------
Marine vessels $ 826 $ (192)
Marine containers 129 7
Mobile offshore drilling unit 29 92
Aircraft (1,605) 6,160
------------ ------------
Equity in net income (loss) of USPEs $ (621) $ 6,067
============ ============
Marine vessels: During 2000, lease revenues of $2.9 million and the gain from
the sale of the Partnership's interest in an entity that owned a marine vessel
of $0.9 million were offset by depreciation expense, direct expenses, and
administrative expenses of $2.9 million. During 1999, lease revenues of $1.4
million were offset by depreciation expense, direct expenses, and administrative
expenses of $1.6 million.
An increase in marine vessel lease revenues of $1.8 million and depreciation
expense, direct expenses, and administrative expenses of $1.6 million during
2000, was caused by the September 30, 1999 Amendment that changed the accounting
method of majority-held equipment from the consolidation method of accounting to
the equity method of accounting for one marine vessel. The lease revenues and
depreciation expense, direct expenses, and administrative expenses for the
majority-owned marine vessel were reported under the consolidation method of
accounting for the first nine months under owned equipment operations during
1999.
The increase in marine vessel lease revenues and depreciation expense, direct
expenses, and administrative expenses caused by the Amendment, was offset in
part by lower lease revenues of $0.3 million and lower depreciation expense,
direct expenses, and administrative expenses of $0.2 million due to the sale of
a marine vessel during the third quarter of 2000.
Marine containers: During 2000, lease revenues of $0.8 million were offset by
depreciation expense, direct expenses, and administrative expenses of $0.7
million. During 1999, lease revenues of $0.3 million were offset by depreciation
expense, direct expenses, and administrative expenses of $0.3 million.
The increase in marine container lease revenues of $0.5 million and depreciation
expense, direct expenses, and administrative expenses of $0.3 million during
2000, was caused by the September 30, 1999 Amendment that changed the accounting
method of majority-held equipment from the consolidation method of accounting to
the equity method of accounting.
Mobile offshore drilling unit: The Partnership's interest in an entity owning a
mobile offshore drilling unit was sold during the fourth quarter of 1999. During
2000, additional sale proceeds of $30,000 were offset by administrative expenses
of $1,000. During 1999, lease revenues of $0.4 million were offset by
depreciation expense, direct expenses, and administrative expenses of $0.2
million and the loss from the sale of the Partnership's interest in an entity
that owned the mobile offshore drilling unit of $0.1 million.
Aircraft: During 2000, lease revenues of $2.7 million were offset by
depreciation expense, direct expenses, and administrative expenses of $4.3
million. During 1999, lease revenues of $2.6 million and the gain from the sale
of the Partnership's interest in three trusts of $8.9 million were offset by
depreciation expense, direct expenses, and administrative expenses of $5.3
million.
Lease revenues increased $0.5 million due to a Boeing 737-300 being on-lease in
2000 that was off-lease during 1999. This increase in lease revenues was
partially offset by a decrease of $0.4 million in lease revenues due to the sale
of the Partnership's investment in a trust that owned a Boeing 767-200ER
commercial aircraft during the second quarter 1999.
The decrease in expenses of $1.0 million was primarily due to lower depreciation
expense. The sale of the Partnership's interest in three trusts during 1999
caused depreciation expense to decrease $0.4 million. Depreciation expense
decreased an additional $1.4 million as the result of the double-declining
balance method of depreciation which results in greater depreciation in the
first years an asset is owned. The decreases were offset, in part, by the
Partnership's investment in an additional trust during the second quarter of
1999 which increased depreciation expense $0.4 million. The decrease in
depreciation expense was partially offset by an increase in repairs and
maintenance of $0.4 million to the Boeing 737-300 which were not required during
1999.
(e) Net Income
As a result of the foregoing, the Partnership had a net income of $4.1 million
for the year ended December 31, 2000, compared to a net income of $6.7 million
during 1999. The Partnership's ability to acquire, operate, and liquidate
assets, secure leases, and re-lease those assets whose leases expire is subject
to many factors. Therefore, 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 $9.6 million to the limited
partners, or $1.80 per weighted-average limited partnership 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 United States (US) dollars. Political risks
are minimized by avoiding 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 audited financial statements for information on the lease
revenues, net income (loss), 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 change significantly in the future, as assets come
off lease and decisions are made either to redeploy the assets in the most
advantageous geographic location or sell the assets.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to US-domiciled lessees consists of aircraft, trailers, and railcars.
During 2001, US lease revenues accounted for 16% of the total lease revenues of
wholly and jointly owned equipment. This region reported a net income of $0.5
million.
The Partnership's owned equipment on lease to Canadian-domiciled lessees
consists of railcars. During 2001, Canadian lease revenues accounted for 8% of
the total lease revenues of wholly- and jointly-owned equipment. This region
reported a net income of $0.7 million.
The Partnership's investment in equipment owned by an USPE that was on lease to
a lessee domiciled in Iceland consisted of an aircraft. During 2001, Icelandic
lease revenues accounted for 3% of the total lease revenues of wholly and
jointly owned equipment. This region reported a net loss of $0.8 million. The
primary reasons for this loss were the double-declining balance method of
depreciation which results in greater depreciation in the first years an asset
is owned and repairs and maintenance to the aircraft during 2001.
The Partnership's owned equipment and investments in equipment owned by an USPE
on lease to a South American-domiciled lessee consists of aircraft. During 2001,
South American lease revenues accounted for 6% of the total lease revenues of
wholly and jointly owned equipment. This region reported a net income of $0.2
million.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to lessees in the rest of the world consists of marine vessels and marine
containers. During 2001, lease revenues for these operations accounted for 67%
of the total lease revenues of wholly and jointly owned equipment while this
region reported a net income of $3.7 million. Included in net income from this
region was the gain on sale of a marine vessel of $2.1 million.
(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
The Partnership's operation of a diversified equipment portfolio in a broad base
of markets is intended to reduce its exposure to volatility in individual
equipment sectors.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent upon many factors,
such as specific market conditions and economic activity, technological
obsolescence, and government or other regulations. The unpredictability of these
factors makes it difficult for the General Partner to clearly define trends or
influences that may impact the performance of the Partnership's equipment. 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 those equipment
markets in which it determines that it cannot operate equipment and achieve
acceptable rates of return. Alternatively, the General Partner may make a
determination to enter those equipment markets in which it perceives
opportunities to profit from supply/demand instabilities or other market
imperfections.
The Partnership intends to use excess cash flow, if any, after payment of
operating expenses, to pay principal and interest on debt, pay cash
distributions to the partners, and acquire additional equipment until December
31, 2004. The General Partner believes that these acquisitions may cause the
Partnership to generate additional earnings and cash flow for the Partnership.
Factors that may affect the Partnership's contribution in 2002 and beyond
include:
(i) Marine vessel dry bulk freight rates are dependent upon the overall
condition of the international economy. One of the marine vessel leases will
expire late in 2002 and the other will expire early in 2003. Future
opportunities for the Partnership's marine vessels will become limited due to
the age of this equipment.
(ii) The cost of new marine containers have been at historic lows for the past
several years which has caused downward pressure on per diem lease rates.
(iii) 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.
(iv) The airline industry began to see lower passenger travel during 2001. The
tragic events on September 11, 2001 worsened the situation. No direct damage
occurred to any of the Partnership's aircraft as a result of these events and
the General Partner is currently unable to determine the long-term effects, if
any, these events may have on the Partnership's aircraft. One of the
Partnership's owned commercial aircraft leases expire during 2002; however, the
lessee stopped paying on the aircraft lease in September 2001 and has notified
the General Partner that they would like to return the aircraft before the lease
expiration date.
Several other factors may affect the Partnership's operating performance in the
year 2002 and beyond, including changes in the markets for the Partnership's
equipment and changes in the regulatory environment in which that equipment
operates.
(1) Repricing and Reinvestment Risk
Certain portions of the Partnership's aircraft, marine vessels, marine
containers, railcars, and trailers portfolios will be remarketed in 2002 as
existing leases expire, exposing the Partnership to repricing risk/opportunity.
Additionally, the General Partner may elect to sell certain underperforming
equipment or equipment whose continued operation may become prohibitively
expensive. In either case, 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.
The proceeds from the sold or liquidated equipment will be redeployed to
purchase additional equipment, as the Partnership is in its reinvestment phase.
(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.
Under US Federal Aviation Regulations, after December 31, 1999, no person shall
operate an aircraft to or from any airport in the contiguous United States
unless that airplane has been shown to comply with Stage III noise levels. The
Partnership's Stage II aircraft is currently leased in a country that does not
require this regulation.
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 269 jacketed tank railcars and
54 non-jacketed tank railcars that will need re-qualification. As of December
31, 2001, a total of 30 tank railcars have been inspected with no significant
defects.
Ongoing changes in the regulatory environment, both in the United States and
internationally, cannot be predicted with accuracy, and preclude the General
Partner from determining the impact of such changes on Partnership operations,
purchases, or sale of equipment.
(I) Distribution Levels and Additional Capital Resources
Pursuant to the amended limited partnership agreement, the Partnership will
cease to reinvest surplus cash in additional equipment beginning on January 1,
2005. Prior to that date, the General Partner intends to continue its strategy
of selectively redeploying equipment to achieve competitive returns, or selling
equipment that is underperforming or whose operation becomes prohibitively
expensive. During this time, the Partnership will use operating cash flow,
proceeds from the sale of equipment, and additional debt to meet its operating
obligations, make distributions to the partners, and acquire additional
equipment. In the long term, changing market conditions and used-equipment
values may preclude the General Partner from accurately determining the impact
of future re-leasing activity and equipment sales on Partnership performance and
liquidity. Consequently, the General Partner cannot establish future
distribution levels with any certainty at this time.
The Partnership's permanent debt obligation began to mature in December 1999.
The General Partner believes that sufficient cash flow will be available in the
future for repayment of debt and to meet Partnership operating cash flow
requirements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of currency devaluation
risk. During 2001, 84% of the Partnership's total lease revenues from wholly-
and jointly-owned equipment came from non-United States-domiciled lessees. Most
of the Partnership's leases require payment in 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 DISCLOSURE
(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 period 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.
(This space intentionally left blank)
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 or 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 had 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 generally entitled to a 5% interest in the
profits and losses (subject to certain allocations of income), and
distributions. As of December 31, 2001, no investor was known by the
General Partner to beneficially own more than 5% of the limited
partnership 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 owned
any limited partnership units of the Partnership as of December 31,
2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
During 2001, the Partnership paid or accrued the following fees to FSI
or its affiliates: management fees, $0.8 million; equipment
acquisition fees, $0.4 million; and lease negotiation fees, $0.1
million. The Partnership reimbursed FSI or its affiliates $0.5 million
for administrative and data processing services performed on behalf of
the Partnership during 2001.
During 2001, the USPEs paid or accrued the following fees to FSI or
its affiliates: management fees, $0.1 million; administrative and data
processing services, $0.1 million; and lease negotiation fees, $0.1
million.
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 this
Annual Report on Form 10-K:
a. Boeing 767
b. Boeing 737-200 Trust S/N 24700
c. TAP Trust
(B) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
All other 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.
(C) Reports on Form 8-K
None.
(D) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated by
reference to the Partnership's Registration Statement on Form S-1
(Reg. No. 33-55796), which became effective with the Securities and
Exchange Commission on May 25, 1993.
4.1 First Amendment to the Third Amended and Restated Partnership
Agreement dated May 28, 1993, incorporated by reference to the
Partnership's Form 10-K dated December 31, 2000 filed with the
Securities and Exchange Commission on March 16, 2001.
4.2 Second Amendment to the Third Amended and Restated Partnership
Agreement, dated January 21, 1994, incorporated by reference to the
Partnership's Form 10-K dated December 31, 2000 filed with the
Securities and Exchange Commission on March 16, 2001.
4.3 Third Amendment to the Third Amended and Restated Partnership
Agreement, dated March 25, 1999, incorporated by reference to the
Partnership's Form 10-K dated December 31, 2000 filed with the
Securities and Exchange Commission on March 16, 2001.
4.4 Fourth Amendment to the Third Amended and Restated Partnership
Agreement, dated August 24, 2001.
10.1 Management Agreement between Partnership and PLM Investment
Management, Inc., incorporated by reference to the Partnership's
Registration Statement on Form S-1 (Reg. No. 33-55796), which became
effective with the Securities and Exchange Commission on May 25, 1993.
10.2 Note Agreement, dated as of December 1, 1995, regarding $23.0 million
of 7.27% senior notes due December 21, 2005. Incorporated by reference
to the Partnership's Annual Report on Form 10-K dated December 31,
1995 filed with the Securities and Exchange Commission on March 20,
1996.
10.3 Warehousing Credit Agreement, dated as of April 13, 2001, incorporated
by reference to the Partnership's Form 10-Q dated March 31, 2001 filed
with the Securities and Exchange Commission on May 9, 2001.
10.4 First Amendment to Warehousing Credit Agreement, dated as of December
21, 2001.
Financial Statements required under Regulation S-X Rule 3-09:
99.1 Boeing 767.
99.2 Boeing 737-200 Trust S/N 24700.
99.3 TAP Trust.
(This space intentionally left blank)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on
behalf of the Partnership by duly authorized officers.
Dated: March 27, 2002 PLM EQUIPMENT GROWTH & INCOME FUND VII
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
- ---------------------------------
Gary D. Engle Director, FSI March 27, 2002
/s/ James A. Coyne
- ---------------------------------
James A. Coyne Director, FSI March 27, 2002
/s/ Stephen M. Bess
- ---------------------------------
Stephen M. Bess Director, FSI March 27, 2002
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' reports 29-30
Balance sheets as of December 31, 2001 and 2000 31
Statements of income for the years ended
December 31, 2001, 2000, and 1999 32
Statements of changes in partners' capital for the
years ended December 31, 2001, 2000, and 1999 33
Statements of cash flows for the years ended
December 31, 2001, 2000, and 1999 34
Notes to financial statements 35-47
Independent auditors' report on financial statement schedule 48
Schedule II Valuation and Qualifying Accounts 49
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth & Income Fund VII:
We have audited the accompanying balance sheet of PLM Equipment Growth & Income
Fund VII (the "Partnership"), as of December 31, 2001, and the related
statements of income, changes in 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 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.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 8, 2002
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth & Income Fund VII:
We have audited the accompanying balance sheet of PLM Equipment Growth & Income
Fund VII ("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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth & Income
Fund VII 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 12, 2001
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
2001 2000
-----------------------------------
ASSETS
Equipment held for operating leases, at cost $ 79,955 $ 71,632
Less accumulated depreciation (42,910) (35,114)
-----------------------------------
Net equipment 37,045 36,518
Cash and cash equivalents 3,129 2,941
Restricted cash 75 194
Accounts receivable, less allowance for doubtful accounts of
$306 in 2001 and $27 in 2000 1,764 1,502
Investments in unconsolidated special-purpose entities 8,351 14,689
Lease negotiation fees to affiliate, less accumulated
amortization of $169 in 2001 and $80 in 2000 129 138
Debt issuance costs, less accumulated amortization
of $155 in 2001 and $129 in 2000 100 126
Prepaid expenses and other assets 91 100
-----------------------------------
Total assets $ 50,684 $ 56,208
===================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable and accrued expenses $ 959 $ 411
Due to affiliates 551 1,182
Lessee deposits and reserve for repairs 945 900
Notes payable 14,000 17,000
-----------------------------------
Total liabilities 16,455 19,493
-----------------------------------
Commitments and contingencies
Partners' capital
Limited partners (limited partnership units of 5,041,936 and
5,323,569 as of December 31, 2001 and 2000, respectively) 34,229 36,715
General Partner -- --
-----------------------------------
Total partners' capital 34,229 36,715
-----------------------------------
Total liabilities and partners' capital $ 50,684 $ 56,208
===================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(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 $ 15,842 $ 15,870 $ 19,432
Interest and other income 237 317 277
Net gain on disposition of equipment 41 3,614 1,140
-----------------------------------------------
Total revenues 16,120 19,801 20,849
-----------------------------------------------
EXPENSES
Depreciation and amortization 7,938 6,723 9,013
Repairs and maintenance 1,629 2,189 3,121
Equipment operating expenses 1,643 1,847 2,629
Insurance expenses 396 308 563
Management fees to affiliate 827 858 982
Interest expense 1,308 1,454 1,672
General and administrative expenses to affiliates 471 824 925
Other general and administrative expenses 737 816 602
Provision for bad debts 279 102 815
-----------------------------------------------
Total expenses 15,228 15,121 20,322
-----------------------------------------------
Minority interests -- -- 114
-----------------------------------------------
Equity in net income (loss) of unconsolidated
special-purpose entities 1,255 (621) 6,067
-----------------------------------------------
Net income $ 2,147 $ 4,059 $ 6,708
===============================================
Partners' share of net income
Limited partners $ 2,021 $ 3,555 $ 6,204
General Partner 126 504 504
-----------------------------------------------
Total $ 2,147 $ 4,059 $ 6,708
===============================================
Limited partners' net income per
weighted-average limited partnership unit $ 0.38 $ 0.67 $ 1.16
===============================================
Cash distribution $ 1,422 $ 10,088 $ 10,083
===============================================
Cash distribution per weighted-average
limited partnership unit $ 0.24 $ 1.80 $ 1.80
===============================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(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 $ 46,247 $ -- $ 46,247
Net income 6,204 504 6,708
Purchase of limited partnership units (125) -- (125)
Cash distribution (9,579) (504) (10,083)
--------------------------------------------------
Partners' capital as of December 31, 1999 42,747 -- 42,747
Net income 3,555 504 4,059
Purchase of limited partnership units (3) -- (3)
Cash distribution (9,584) (504) (10,088)
--------------------------------------------------
Partners' capital as of December 31, 2000 36,715 -- 36,715
Net income 2,021 126 2,147
Purchase of limited partnership units (3,211) -- (3,211)
Cash distribution (1,296) (126) (1,422)
--------------------------------------------------
Partners' capital as of December 31, 2001 $ 34,229 $ -- $ 34,229
==================================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(in thousands of dollars)
2001 2000 1999
--------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,147 $ 4,059 $ 6,708
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 7,938 6,723 9,013
Provision for bad debts 279 102 815
Net gain on disposition of equipment (41) (3,614) (1,140)
Equity in net (income) loss from unconsolidated
special-purpose entities (1,255) 621 (6,067)
Changes in operating assets and liabilities:
Restricted cash 119 (83) (111)
Accounts receivable, net (557) (490) (207)
Prepaid expenses and other assets 9 (46) (44)
Accounts payable and accrued expenses (230) 70 (237)
Due to affiliates (631) 623 251
Lessee deposits and reserve for repairs 46 (492) 233
Minority interests -- -- (443)
--------------------------------------------
Net cash provided by operating activities 7,824 7,473 8,771
--------------------------------------------
INVESTING ACTIVITIES
Payments for purchase of equipment and capitalized repairs (8,017) (10,729) (11,855)
Investment in and equipment purchased and placed in
unconsolidated special-purpose entities (86) -- (8,975)
Distribution from unconsolidated special-purpose entities 2,387 4,411 3,382
Payments of acquisition fees to affiliate (366) (440) (567)
Payments of lease negotiation fees to affiliate (82) (98) (126)
Distributions from liquidation of unconsolidated special-purpose
entities 5,293 2,433 17,043
Proceeds from disposition of equipment 90 10,487 7,626
--------------------------------------------
Net cash (used in) provided by investing activities (781) 6,064 6,528
--------------------------------------------
FINANCING ACTIVITIES
Proceeds from short-term notes payable to affiliate 5,500 -- --
Payments of short-term notes payable to affiliate (5,500) -- --
Cash distribution paid to limited partners (1,296) (9,584) (9,579)
Cash distribution paid to General Partner (126) (504) (504)
Purchase of limited partnership units (2,433) (3) (125)
Principal payments on notes payable (3,000) (3,000) (3,000)
--------------------------------------------
Net cash used in financing activities (6,855) (13,091) (13,208)
--------------------------------------------
Net increase in cash and cash equivalents 188 446 2,091
Cash and cash equivalents at beginning of year 2,941 2,495 404
--------------------------------------------
Cash and cash equivalents at end of year $ 3,129 $ 2,941 $ 2,495
============================================
SUPPLEMENTAL INFORMATION
Interest paid $ 1,308 $ 1,454 $ 1,672
============================================
Noncash transfer of equipment at net book value from
unconsolidated special-purpose entities $ -- $ 5,688 $ --
============================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ORGANIZATION
PLM Equipment Growth & Income Fund VII, a California limited partnership (the
Partnership), was formed on December 2, 1992 to engage in the business of
owning, leasing, or otherwise investing in predominately used transportation and
related equipment. PLM Financial Services, Inc. (FSI) is the General Partner of
the Partnership. FSI is a wholly owned subsidiary of PLM International, Inc.
(PLM International or PLMI).
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. Net income is allocated to the General Partner to the extent
necessary to cause the General Partner's capital account to equal zero (see Net
Income and Distributions Per Limited Partnership Unit below). The General
Partner is also entitled to receive a subordinated incentive fee as defined in
the limited Partnership agreement after the limited partners receive a minimum
return on, and a return of, their invested capital.
Pursuant to the equitable settlement related to the Koch and Romei actions (see
Note 10), the Partnership phases have been amended and a one-time purchase by
the Partnership of up to 10% of the outstanding units for 80% of net asset value
per unit has been approved. The amendment extends the period in which the
Partnership will be able to reinvest its cash flow, surplus cash, and equipment
sale proceeds into additional equipment until December 31, 2004. During that
time, the General Partner may purchase additional equipment, consistent with the
objectives of the Partnership, and increase the amount of front-end fees up to
20% (including acquisition and lease negotiation fees) that FSI is entitled to
earn. The amendment also extends the Partnership's termination date to December
31, 2013, unless terminated earlier upon the sale of all equipment or by certain
other events. As a result of the equitable settlement, the Partnership's
redemption plan has been terminated and the General Partner has agreed to
purchase 351,290 units and, as of December 31, 2001, has paid or accrued $3.2
million to the purchasing agent for this purchase.
As of December 31, 2001, the purchasing agent purchased 281,633 units, which is
reflected as a reduction in Partnership units. The purchasing agent also
purchased an additional 59,786 during January 2002. The General Partner expects
the remaining 9,871 units to be purchased during the remainder of 2002.
Under the former redemption plan, for the years ended December 31, 2000 and
1999, the Partnership had purchased 250 and 10,392 limited partnership units,
respectively, for $3,000, and $0.1 million, respectively. No units were
purchased under this plan in 2001.
ESTIMATES
These 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 the 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 investor programs, and is a general partner of
other programs.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION (continued)
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.
DEPRECIATION AND AMORTIZATION
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 equipment. The depreciation method is changed to
straight line when annual depreciation expense using the straight-line method
exceeds that calculated by the double-declining balance method. Acquisition fees
and certain other acquisition costs have been capitalized as part of the cost of
the equipment. Lease negotiation fees are amortized over the initial equipment
lease term. 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. Debt issuance costs are amortized
over the term of the related loan using the straight-line method that
approximates the effective interest method (see Note 7).
TRANSPORTATION EQUIPMENT
Equipment held for operating leases is stated at cost less any reductions to the
carrying value as required by SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121).
In accordance with SFAS No. 121, the General Partner reviews the carrying values
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 owned equipment or
partially owned USPE equipment during 2001, 2000, or 1999.
In October 2001, the Financial Accounting Standards Board (FASB) 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.
INVESTMENTS IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITIES
The Partnership has interests in unconsolidated special-purpose entities (USPEs)
that own transportation equipment. These are single purpose entities that do not
have any debt or other financial encumbrances and are accounted for using the
equity method. As of December 31, 2001 and 2000, the Partnership owned a
majority interest in one such entity. Prior to September 30, 1999, the
Partnership controlled the management of these entities and thus they were
consolidated into the Partnership's financial statements. On September 30, 1999,
the corporate by-laws of this entity were changed to require a unanimous vote by
all owners on major business decisions. Thus, from September 30, 1999 forward,
the Partnership no
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION (continued)
INVESTMENTS IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITIES (continued)
longer controlled the management of these entities, and the accounting method
for the entities was changed from the consolidation method to the equity method.
The Partnership's investment in USPEs includes acquisition and lease negotiation
fees paid by the Partnership to PLM Transportation Equipment Corporation (TEC)
and PLM Worldwide Management Services (WMS). TEC is a wholly owned subsidiary of
FSI and WMS is a wholly owned subsidiary of PLM International. The Partnership's
interest in USPEs are managed by IMI. The Partnership's equity interest in the
net income (loss) of USPEs is reflected net of management fees paid or payable
to IMI and the amortization of acquisition and lease negotiation fees paid to
TEC or WMS.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs related to marine vessels, railcars, and trailers
are usually the obligation of the Partnership and are charged against operations
as incurred. Costs associated with marine vessel dry-docking are estimated and
accrued ratably over the period prior to such dry-docking. If a marine vessel is
sold and there is a balance in the dry-docking reserve account for that marine
vessel, the balance in the reserve account is included as additional gain on
disposition. Maintenance costs of aircraft and marine containers are the
obligation of the lessee. To meet the maintenance requirements of certain
aircraft airframes and engines, reserve accounts are prefunded by the lessee
over the period of the lease based on the number of hours this equipment is
used, times the estimated rate to repair this equipment. If repairs exceed the
amount prefunded by the lessee, the Partnership may have the obligation to fund
and accrue the difference. If an aircraft is sold and there is a balance in the
reserve account for repairs to that aircraft, the balance in the reserve account
is included as additional gain on disposition. The aircraft reserve accounts and
marine vessel dry-docking reserve accounts are included in the accompanying
balance sheets as lessee deposits and reserve for repairs.
NET INCOME AND DISTRIBUTIONS PER LIMITED PARTNERSHIP UNIT
Special allocations of income are made to the General Partner to the extent
necessary to cause the capital account balance of the General Partner to be zero
as of the close of such year. 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.
Cash distributions of the Partnership are allocated 95% to the limited partners
and 5% to the General Partner and may include amounts in excess of net income.
Cash distributions are recorded when paid. Monthly unitholders receive a
distribution check 15 days after the close of the previous month's business and
quarterly unitholders receive a distribution check 45 days after the close of
the quarter.
Cash distributions to investors in excess of net income are considered a return
of capital. Cash distributions to the limited partners of $6.0 million and $3.3
million for the years ended December 31, 2000 and 1999, respectively, were
deemed to be a return of capital. None of the cash distributions to the limited
partners during 2001 were deemed to be a return of capital.
Cash distributions relating to the fourth quarter of 2000 and 1999, of $1.4
million for each year, were paid during the first quarter of 2001 and 2000,
respectively. There were no cash distributions related to the fourth quarter
2001 paid during the first quarter of 2002.
NET INCOME PER WEIGHTED-AVERAGE LIMITED PARTNERSHIP UNIT
Net income per weighted-average limited partnership unit was computed by
dividing net income attributable to limited partners by the weighted-average
number of limited partnership units deemed
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION (continued)
NET INCOME PER WEIGHTED-AVERAGE LIMITED PARTNERSHIP UNIT (continued)
outstanding during the year. The weighted-average number of limited partnership
units deemed outstanding during the years ended December 31, 2001, 2000, and
1999 was 5,321,254; 5,323,610; and 5,326,161, respectively.
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 comprehensive income is equal to net income for the years
ended December 31, 2001, 2000, and 1999.
RESTRICTED CASH
As of December 31, 2000, restricted cash represented lessee security deposits
held by the Partnership.
NEW ACCOUNTING STANDARDS
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142), was approved by the FASB. SFAS No. 142 changes the accounting for goodwill
and other intangible assets determined to have an indefinite useful life from an
amortization method to an impairment-only approach. Amortization of applicable
intangible assets will cease upon adoption of this statement. The Partnership is
required to implement SFAS No. 142 on January 1, 2002 and it has not yet
determined the impact, if any, this statement will have on its financial
position or results of operations.
2. GENERAL PARTNER AND TRANSACTIONS WITH AFFILIATES
An officer of FSI contributed $100 of the Partnership's initial capital. Under
the equipment management agreement, IMI, subject to certain reductions, receives
a monthly management fee attributable to either owned equipment or interests in
equipment owned by the USPEs equal to the lesser of (i) the fees that would be
charged by an independent third party for similar services for similar equipment
or (ii) the sum of (A) for that equipment for which IMI provides only basic
equipment management services, (a) 2% of the gross lease revenues, as defined in
the agreement, attributable to equipment that is subject to full payout net
leases and (b) 5% of the gross lease revenues attributable to equipment that is
subject to operating leases, and (B) for that equipment for which IMI provides
supplemental equipment management services, 7% of the gross lease revenues
attributable to such equipment. The Partnership reimbursed FSI $0.5 million
during 2001, $0.8 million during 2000, and $0.9 million during 1999 for data
processing expenses and other administrative services performed on behalf of the
Partnership.
The Partnership's proportional share of USPEs management fees to affiliate were
$0.1 million, $0.3 million, $0.2 million during 2001, 2000, and 1999,
respectively, and the Partnership's proportional share of administrative and
data processing expenses to affiliate during 2001, 2000, and 1999 was $0.1
million for each year. Both of these affiliate expenses reduced the
Partnership's proportional share of the equity interest in income in USPEs.
The Partnership and USPEs paid or accrued lease negotiation and equipment
acquisition fees of $0.5 million, $0.5 million, and $1.1 million, during 2001,
2000, and 1999, respectively, to FSI.
TEC will also be entitled to receive an equipment liquidation fee equal to the
lesser of (i) 3% of the sales price of equipment sold on behalf of the
Partnership or (ii) 50% of the "Competitive Equipment Sale Commission," as
defined in the agreement, if certain conditions are met. In certain
circumstances, the
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
2. GENERAL PARTNER AND TRANSACTIONS WITH AFFILIATES (continued)
General Partner will be entitled to a monthly re-lease fee for re-leasing
services following the expiration of the initial lease, charter, or other
contract for certain equipment equal to the lesser of (a) the fees that would be
charged by an independent third party for comparable services for comparable
equipment or (b) 2% of gross lease revenues derived from such re-lease,
provided, however, that no re-lease fee shall be payable if such re-lease fee
would cause the combination of the equipment management fee paid to IMI and the
re-lease fee with respect to such transaction to exceed 7% of gross lease
revenues.
The Partnership owned certain equipment in conjunction with affiliated
partnerships during 2001, 2000, and 1999 (see Note 4).
The Partnership had borrowings from the General Partner from time to time and
was charged market interest rates effective at the time of the borrowing. During
2001, the Partnership borrowed $5.5 million for 70 days from the General Partner
to fund the purchase of marine containers and paid a total of $0.1 million in
interest to the General Partner. There were no similar borrowings during 2000 or
1999.
The balance due to affiliates as of December 31, 2001 includes $0.2 million due
to FSI and its affiliates for management fees and $0.4 million due to affiliated
USPEs. The balance due to affiliates as of December 31, 2000 includes $0.1
million due to FSI and its affiliates for management fees and $1.0 million due
to affiliated USPEs.
3. EQUIPMENT
The components of owned equipment as of December 31 are as follows (in thousands
of dollars):
Equipment Held for Operating Leases 2001 2000
------------------------------------------------------ -------------------------------
Marine containers $ 38,915 $ 30,599
Marine vessels 22,212 22,212
Rail equipment 9,602 9,580
Aircraft 5,483 5,483
Trailers 3,743 3,758
-------------------------------
79,955 71,632
Less accumulated depreciation (42,910) (35,114)
-------------------------------
Net equipment $ 37,045 $ 36,518
===============================
Revenues are earned by placing the equipment under operating leases. A portion
of the Partnership's marine containers are leased to operators of
utilization-type leasing pools, which include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. The remaining Partnership leases for marine containers are based on a
fixed rate. Lease revenues for trailers operating with short-line railroad
systems are based on a per-diem lease in the free running railroad interchange.
Rents for all other equipment are based on fixed rates.
As of December 31, 2001, all owned equipment was on lease except for 8 railcars.
As of December 31, 2000, all owned equipment was on lease except for 23
railcars. The net book value of the equipment off lease was $0.1 million and
$0.2 million as of December 31, 2001 and 2000, respectively.
During 2001, the Partnership purchased marine containers for $8.0 million and
paid acquisition fees of $0.4 million to FSI. During 2000, the Partnership
purchased marine containers for $10.2 million, including acquisition fees of
$0.4 million paid to FSI, and paid $0.9 million related to an accrual for marine
containers that were purchased in 1999. In addition, the General Partner
transferred marine containers with an original equipment cost of $7.9 million
from the Partnership's USPE portfolio to owned equipment.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
3. EQUIPMENT (continued)
During 2001, the Partnership disposed of marine containers and a trailer with a
net book value of $34,000 for proceeds of $0.1 million. During 2000, the
Partnership disposed of a commuter aircraft, trailers, marine containers, and
railcars with an aggregate net book value of $6.9 million for $10.5 million.
All wholly and jointly-owned equipment leases are accounted for as operating
leases. Future minimum rent under noncancelable operating leases as of December
31, 2001 for this equipment during each of the next five years are approximately
$13.7 million in 2002; $6.2 million in 2003; $5.0 million in 2004; $3.3 million
in 2005; $2.2 million in 2006, and $2.3 million thereafter. Per diem and
short-term rentals consisting of utilization rate lease payments included in
lease revenues amounted to $3.6 million in 2001, $6.2 million in 2000, and $4.2
million in 1999.
4. INVESTMENTS IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITIEs (USPEs)
The Partnership owns equipment jointly with affiliated programs. These are
single purpose entities that do not have any debt or other financial
encumbrances.
In September 1999, the General Partner amended the corporate-by-laws of certain
USPEs in which the Partnership, or any affiliated program, owns an interest
greater than 50%. The amendment to the corporate-by-laws provided that all
decisions regarding the acquisition and disposition of the investment as well as
other significant business decisions of that investment would be permitted only
upon unanimous consent of the Partnership and all the affiliated programs that
have an ownership in the investment. As such, although the Partnership may own a
majority interest in an USPE, the Partnership does not control its management
and thus the equity method of accounting will be used after adoption of the
amendment. As a result of the amendment, as of September 30, 1999, all jointly
owned equipment in which the Partnership owned a majority interest, which had
been consolidated, was reclassified to investments in USPEs. Accordingly, as of
December 31, 2001 and 2000, the balance sheet reflect all investments in USPEs
on an equity basis.
The net investment in USPEs includes the following jointly owned equipment (and
related assets and liabilities) as of December 31 (in thousands of dollars):
2001 2000
------------------------------
38% interest in a trust owning a Boeing 737-300 Stage III commercial
aircraft $ 5,564 $ 6,497
50% interest in a trust owning an MD-82 Stage III commercial aircraft 2,845 3,751
80% interest in an entity that owned a dry bulk-carrier marine vessel (14) 3,482
50% interest in a trust that owned an MD-82 Stage III commercial aircraft (44) 900
44% interest in an entity that owned a dry bulk-carrier marine vessel -- 59
----------- -----------
Net investments $ 8,351 $ 14,689
=========== ===========
As of December 31, 2001 and 2000, all jointly owned equipment in the
Partnership's USPE portfolio was on lease.
During 2001, the Partnership increased its interest in a trust that owned a
commercial aircraft by paying $0.1 million in lease negotiation fees to FSI.
During 2001, the General Partner sold the Partnership's 80% interest in an
entity owning a dry bulk-carrier marine vessel. The Partnership's interest in
this entity was sold for proceeds of $5.3 million for its net investment of $3.4
million. Included in the net gain on sale of this entity was the unused portion
of marine vessel dry-docking of $0.2 million. During 2000, the General Partner
sold the Partnership's interest in an entity that owned a dry bulk-carrier
marine vessel for $2.4 million for its net investment of $1.7 million, and
received additional sales proceeds of $30,000 from the 1999 sale of a mobile
offshore drilling unit. The General Partner also transferred the Partnership's
interest in an entity that owned marine containers to owned equipment.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENTS IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITIES (continued)
The following summarizes the financial information for the USPEs and the
Partnership's interest therein as of and for the years ended December 31 (in
thousands of dollars):
2001 2000 1999
Net Interest Net Interest Net Interest
Total of Total of Total of
USPEs Partnership USPEs Partnership USPEs Partnership
--------------------------- -------------------------- --------------------------
Net Investments $ 20,380 $ 8,351 $ 30,411 $ 14,689 $ 53,037 $ 27,843
Lease revenues 5,725 2,925 10,841 6,300 12,908 4,638
Net income (loss) 522 1,255 (1,557) (621) 31,725 6,067
5. OPERATING SEGMENTS
The Partnership operates or operated in five primary operating segments:
aircraft leasing, marine container leasing, marine vessel 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 interest expense, and certain general
and administrative, operations support, and other expenses. The segments are
managed separately due to the utilization of different business strategies for
each operation.
The following tables present a summary of the operating segments (in thousands
of dollars):
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 2001 Leasing Leasing Leasing Leasing Leasing Other(1) Total
------------------------------------ --------- --------- -------- --------- --------- --------- ----------
REVENUES
Lease revenue $ 1,085 $ 6,256 $ 5,496 $ 626 $ 2,379 $ -- $ 15,842
Interest income and other 33 -- 1 -- 6 197 237
Gain on disposition of equipment -- 39 -- 2 -- -- 41
------------------------------------------------------------------------
Total revenues 1,118 6,295 5,497 628 2,385 197 16,120
------------------------------------------------------------------------
COSTS AND EXPENSES
Operations support 6 71 2,593 308 581 109 3,668
Depreciation and amortization 410 5,509 1,240 209 541 29 7,938
Interest expense -- -- -- -- -- 1,308 1,308
Management fees to affiliate 41 313 275 32 166 -- 827
General and administrative expenses 39 -- 104 118 64 883 1,208
Provision for (recovery of) bad 257 -- -- (11) 33 -- 279
debts
------------------------------------------------------------------------
Total costs and expenses 753 5,893 4,212 656 1,385 2,329 15,228
------------------------------------------------------------------------
Equity in net income (loss) of USPEs (747) -- 2,002 -- -- -- 1,255
------------------------------------------------------------------------
Net income (loss) $ (382) $ 402 $ 3,287 $ (28) $ 1,000 $ (2,132) $ 2,147
========================================================================
Total assets as of December 31, 2001 $ 8,528 $ 28,366 $ 5,662 $ 1,038 $ 3,566 $ 3,524 $ 50,684
========================================================================
(1) Includes certain assets not identifiable to a specific segment, such as
cash, lease negotiation fees, debt placement fees, and prepaid expenses.
Also includes interest income and costs not identifiable to a particular
segment, such as interest expense, certain amortization, general and
administrative, and operations support expenses.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
5. OPERATING SEGMENTS (continued)
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 2000 Leasing Leasing Leasing Leasing Leasing Other(2) Total
------------------------------------ --------- --------- -------- --------- --------- --------- ----------
REVENUES
Lease revenue $ 1,085 $ 3,925 $ 5,519 $ 2,878 $ 2,463 $ -- $ 15,870
Interest income and other -- -- -- -- -- 317 317
Gain on disposition of equipment 1,118 33 -- 2,462 1 -- 3,614
------------------------------------------------------------------------
Total revenues 2,203 3,958 5,519 5,340 2,464 317 19,801
------------------------------------------------------------------------
COSTS AND EXPENSES
Operations support 32 20 2,838 880 536 38 4,344
Depreciation and amortization 661 3,050 1,364 996 626 26 6,723
Interest expense -- -- -- -- -- 1,454 1,454
Management fees to affiliate 54 196 276 157 175 -- 858
General and administrative expenses 13 -- 57 655 88 827 1,640
Provision for (recovery of) bad -- -- -- 123 (21) -- 102
debts
------------------------------------------------------------------------
Total costs and expenses 760 3,266 4,535 2,811 1,404 2,345 15,121
------------------------------------------------------------------------
Equity in net income (loss) of USPEs (1,605) 129 826 -- -- 29 (621)
------------------------------------------------------------------------
Net income (loss) $ (162) $ 821 $ 1,810 $ 2,529 $ 1,060 $ (1,999) $ 4,059
========================================================================
Total assets as of December 31, 2000 $ 11,807 $ 25,176 $ 10,551 $ 1,254 $ 4,116 $ 3,304 $ 56,208
========================================================================
(2) Includes certain assets not identifiable to a specific segment, such as
cash, lease negotiation fees, debt placement fees, and prepaid expenses.
Also includes interest income and costs not identifiable to a particular
segment, such as interest expense, certain amortization, general and
administrative, and operations support expenses. Also includes gain from
the sale from an investment in an entity that owned a mobile offshore
drilling unit.
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1999 Leasing Leasing Leasing Leasing Leasing Other(3) Total
------------------------------------ --------- --------- -------- --------- --------- --------- ----------
REVENUES
Lease revenue $ 1,517 $ 2,520 $ 7,763 $ 4,228 $ 2,665 $ 739 $ 19,432
Interest income and other 29 1 -- -- 31 216 277
Gain (loss) on disposition of 977 -- -- 30 (31) 164 1,140
equipment
------------------------------------------------------------------------
Total revenues 2,523 2,521 7,763 4,258 2,665 1,119 20,849
------------------------------------------------------------------------
COSTS AND EXPENSES
Operations support 875 2 3,883 926 575 52 6,313
Depreciation and amortization 1,318 2,449 2,481 1,557 735 473 9,013
Interest expense -- -- -- -- -- 1,672 1,672
Management fees to affiliate 76 140 388 185 186 7 982
General and administrative expenses 44 19 75 719 58 612 1,527
Provision for bad debts -- -- -- 201 20 594 815
------------------------------------------------------------------------
Total costs and expenses 2,313 2,610 6,827 3,588 1,574 3,410 20,322
------------------------------------------------------------------------
Minority interests -- (2) 116 -- -- -- 114
------------------------------------------------------------------------
Equity in net income (loss) of USPEs 6,160 7 (192) -- -- 92 6,067
------------------------------------------------------------------------
Net income (loss) $ 6,370 $ (84) $ 860 $ 670 $ 1,091 $ (2,199) $ 6,708
========================================================================
(3) Includes interest income and costs not identifiable to a particular
segment, such as interest expense, certain amortization, general and
administrative, and operations support expenses. Also includes lease
revenues and gain from the sale of modular buildings and portable heaters
and net income from an investment in an entity that owned a mobile offshore
drilling unit.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
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 five geographic regions: the United States, Canada, Iceland, South
America, and Europe. Marine vessels and marine containers are leased to multiple
lessees in different regions that operate worldwide.
The table below sets forth lease revenues by geographic region for the
Partnership's owned equipment and investments in USPEs, grouped by domicile of
the lessees as of and for the years ended December 31 (in thousands of dollars):
Owned Equipment Investments in USPEs
------------------------------------- -------------------------------------
Region 2001 2000 1999 2001 2000 1999
----------------------------- ------------------------------------- -------------------------------------
United States $ 1,583 $ 3,152 $ 6,719 $ 1,505 $ 2,124 $ 2,124
Canada 1,421 2,188 1,345 -- -- --
Iceland -- -- -- 621 530 --
South America 1,086 1,085 1,085 59 -- 394
Rest of the world 11,752 9,445 10,283 740 3,646 2,120
------------------------------------- -------------------------------------
Lease revenues $ 15,842 $ 15,870 $ 19,432 $ 2,925 $ 6,300 $ 4,638
===================================== =====================================
The following table sets forth net income (loss) information by region for the
owned equipment and investments in USPEs for the years ended December 31 (in
thousands of dollars):
Owned Equipment Investments in USPEs
------------------------------------- -------------------------------------
Region 2001 2000 1999 2001 2000 1999
----------------------------- ------------------------------------- -------------------------------------
United States $ 306 $ 3,511 $ (419) $ 219 $ (220) $ (2,636)
Canada 666 1,196 523 -- 9 32
Iceland -- -- -- (769) (1,407) --
South America 365 326 1,734 (197) 13 5,811
Europe -- -- -- -- -- 2,953
Rest of the world 1,688 1,676 962 2,002 984 (93)
------------------------------------- -------------------------------------
Regional income 3,025 6,709 2,800 1,255 (621) 6,067
Administrative and other (2,133) (2,029) (2,159) -- -- --
------------------------------------- -------------------------------------
Net income (loss) $ 892 $ 4,680 $ 641 $ 1,255 $ (621) $ 6,067
===================================== =====================================
(This space intentionally left blank)
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
6. GEOGRAPHIC INFORMATION (continued)
The net book value of these assets as of December 31, are as follows (in
thousands of dollars):
Owned Equipment Investments in USPEs
------------------------- ------------------------
Region 2001 2000 2001 2000
---------------------------- ------------------------- -------------------------
United States $ 2,156 $ 2,582 $ 2,801 $ 4,651
Canada 2,198 2,503 -- --
Iceland -- -- -- 6,497
South America -- 410 5,564 --
Rest of the world 32,691 31,023 (14) 3,541
------------------------- -------------------------
Net book value $ 37,045 $ 36,518 $ 8,351 $ 14,689
========================= =========================
7. DEBT
In December 1995, the Partnership entered into an agreement to issue long-term
notes totaling $23.0 million to five institutional investors. The notes bear
interest at a fixed rate of 7.27% per annum and have a final maturity in 2005.
During 1995, the Partnership paid lender fees of $0.2 million in connection with
this loan. The Partnership's wholly and jointly owned equipment is used as
collateral to the notes.
Interest on the notes is payable semiannually. The remaining balance of the
notes will be repaid in two principal payments of $3.0 million on December 31,
2002 and 2003, and in two principal payments of $4.0 million on December 31,
2004 and 2005. The agreement requires the Partnership to maintain certain
financial covenants related to fixed-charge coverage and maximum debt. Proceeds
from the notes were used to fund equipment acquisitions.
The General Partner estimates, based on recent transactions, that the fair value
of the $14.0 million fixed-rate note is $14.8 million.
The Partnership made the regularly scheduled principal payments and semiannual
interest payments to the lenders of the notes during 2001.
In April 2001, PLM International entered into a $15.0 million warehouse
facility, which is shared with the Partnership, PLM Equipment Growth Fund VI,
and Professional Lease Management Income Fund I, LLC. During December 2001, this
facility was amended to lower the amount available to be borrowed to $10.0
million. The facility provides for financing up to 100% of the cost of the
equipment. Outstanding borrowings by one borrower reduce the amount available to
each of the other borrowers under the facility. Individual borrowings may be
outstanding for no more than 270 days, with all advances due no later than April
12, 2002. Interest accrues either at the prime rate or LIBOR plus 2.0% at the
borrower's option and is set at the time of an advance of funds. Borrowings by
the Partnership are guaranteed by PLMI. This facility expires in April 2002. The
General Partner believes it will be able to renew the warehouse facility upon
its expiration with terms similar to those in the current facility.
As of December 31, 2001, the Partnership had no borrowings outstanding under
this facility and there were no other borrowings outstanding under this facility
by any other eligible borrower.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
8. CONCENTRATIONS OF CREDIT RISK
For the year ended December 31, 2001, the Partnership's only customer that
accounted for 10% or more of the total consolidated revenues for the owned
equipment and jointly owned equipment was Capital Leasing (18% in 2001). No
single Partnership lessee accounted for 10% or more of the total consolidated
revenues for the owned equipment and jointly owned equipment during the years
ended December 31, 2000 or 1999. In 1999, however, AAR Allen Group International
purchased a commercial aircraft from the Partnership and the gain from the sale
accounted for 17% of total revenues from wholly- and jointly-owned equipment
during 1999.
As of December 31, 2001 and 2000, the General Partner believed the Partnership
had no other significant concentrations of credit risk that could have a
material adverse effect on the Partnership.
9. INCOME TAXES
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
As of December 31, 2001, the financial statement carrying amount of assets and
liabilities was approximately $31.0 million lower than the federal income tax
basis of such assets and liabilities, primarily due to differences in
depreciation methods, equipment reserves, provisions for bad debts, lessees'
prepaid deposits, and the tax treatment of underwriting commissions and
syndication costs.
10. CONTINGENCIES
Two class action lawsuits which were filed against PLM International and various
of its wholly owned subsidiaries in January 1997 in the United States District
Court for the Southern District of Alabama, Southern Division (the court), Civil
Action No. 97-0177-BH-C (the Koch action), and June 1997 in the San Francisco
Superior Court, San Francisco, California, Case No. 987062 (the Romei action),
were fully resolved during the fourth quarter of 2001.
The named plaintiffs were individuals who invested in PLM Equipment Growth Fund
IV (Fund IV), PLM Equipment Growth Fund V (Fund V), PLM Equipment Growth Fund VI
(Fund VI), and the Partnership (Fund VII and collectively, the Funds), each a
California limited partnership for which PLMI's wholly owned subsidiary, FSI,
acts as the General Partner. The complaints asserted causes of action against
all defendants for fraud and deceit, suppression, negligent misrepresentation,
negligent and intentional breaches of fiduciary duty, unjust enrichment,
conversion, conspiracy, unfair and deceptive practices and violations of state
securities law. Plaintiffs alleged that each defendant owed plaintiffs and the
class certain duties due to their status as fiduciaries, financial advisors,
agents, and control persons. Based on these duties, plaintiffs asserted
liability against defendants for improper sales and marketing practices,
mismanagement of the Funds, and concealing such mismanagement from investors in
the Funds. Plaintiffs sought unspecified compensatory damages, as well as
punitive damages.
In February 1999, the parties to the Koch and Romei actions agreed to monetary
and equitable settlements of the lawsuits, with no admission of liability by any
defendant, and filed a Stipulation of Settlement with the court. The court
preliminarily approved the settlement in August 2000, and information regarding
the settlement was sent to class members in September 2000. A final fairness
hearing was held on November 29, 2000, and on April 25, 2001, the federal
magistrate judge assigned to the case entered a Report and Recommendation
recommending final approval of the monetary and equitable settlements to the
federal district court judge. On July 24, 2001, the federal district court judge
adopted the Report and Recommendation, and entered a final judgment approving
the settlements. No appeal has been filed and the time for filing an appeal has
expired.
The monetary settlement provides for a settlement and release of all claims
against defendants in exchange for payment for the benefit of the class of up to
$6.6 million, consisting of $0.3 million desposited by PLMI and the remainder
funded by an insurance policy. The final settlement amount of
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
10. CONTINGENCIES (continued)
$4.9 million (of which PLMI's share was approximately $0.3 million) was accrued
in 1999, paid out in the fourth quarter of 2001 and was determined based upon
the number of claims filed by class members, the amount of attorneys' fees
awarded by the court to plaintiffs' attorneys, and the amount of the
administrative costs incurred in connection with the settlement.
The equitable settlement provides, among other things, for: (a) the extension
(until January 1, 2007) of the date by which FSI must complete liquidation of
the Funds' equipment, except for Fund IV, (b) the extension (until December 31,
2004) of the period during which FSI can reinvest the Funds' funds in additional
equipment, except for Fund IV, (c) an increase of up to 20% in the amount of
front-end fees (including acquisition and lease negotiation fees) that FSI is
entitled to earn in excess of the compensatory limitations set forth in the
North American Securities Administrator's Association's Statement of Policy;
except for Fund IV, (d) a one-time purchase by each of Funds V, VI and VII of up
to 10% of that partnership's outstanding units for 80% of net asset value per
unit as of September 30, 2000; and (e) the deferral of a portion of the
management fees paid, except for Fund IV, to an affiliate of FSI until, if ever,
certain performance thresholds have been met by the Funds. The equitable
settlement also provides for payment of additional attorneys' fees to the
plaintiffs' attorneys from Fund funds in the event, if ever, that certain
performance thresholds have been met by the Funds. Following a vote of limited
partners resulting in less than 50% of the limited partners of each of Funds V,
VI and VII voting against such amendments and after final approval of the
settlement, each of the Funds' limited partnership agreements was amended to
reflect these changes. During the fourth quarter of 2001 the respective Funds
purchased limited partnership units from those equitable class members who
submitted timely requests for purchase. Fund VII agreed to purchase 351,290 of
its limited partnership units at a total cost of $3.2 million.
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.
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 weighted-average unit
amounts):
March June September December
31, 30, 30, 31, Total
------------------------------------------------------------------------------------------
Operating results:
Total revenues $ 4,070 $ 4,199 $ 4,059 $ 3,792 $ 16,120
Net income (loss) (202) 2,860 (139) (372) 2,147
Per weighted-average limited partnership unit:
Net income (loss) $ (0.06) $ 0.54 $ (0.03) $ (0.07) $ 0.38
The following is a list of the major events that affected the Partnership's
performance during 2001:
(i) In the second quarter of 2001, the Partnership sold its interest in an
entity that owned a marine vessel for a gain of $2.1 million and recognized a
USPE engine reserve liability of $0.8 million as income; and
(ii) In the fourth quarter of 2001, Partnership lease revenues decreased
$0.3 million due to lower utilization earned on marine container and trailers,
and expenses increased $0.3 million due to an increase in the provision for bad
debts for an aircraft lessee.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
11. QUARTERLY RESULTS OF OPERATIONS (unaudited) (continued)
The following is a summary of the quarterly results of operations for the
year ended December 31, 2000 (in thousands of dollars, except weighted-average
unit amounts):
March June September December
31, 30, 30, 31, Total
------------------------------------------------------------------------------------------
Operating results:
Total revenues $ 4,794 $ 4,095 $ 6,801 $ 4,111 $ 19,801
Net income (loss) 904 (47) 3,326 (124) 4,059
Per weighted-average limited partnership unit:
Net income (loss) $ 0.15 $ (0.03) $ 0.60 $ (0.05) $ 0.67
The following is a list of the major events that affected the Partnership's
performance during 2000:
(i) In the first quarter of 2000, the Partnership sold a commuter aircraft,
a railcar, and trailers for a total gain of $1.1 million;
(ii)In the second quarter of 2000, lease revenues increased $0.3 million
due to the purchase of additional equipment; and
(iii)In the third quarter of 2000, the Partnership sold trailers, railcars,
and marine containers for a total gain of $2.5 million, and the Partnership sold
its interest in an entity that owned a marine vessel for a gain of $0.9 million.
(This space intentionally left blank)
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth & Income Fund VII:
We have audited the financial statements of PLM Equipment Growth & Income Fund
VII (the "Partnership") as of December 31, 2001, and for the year then ended,
and have issued our report thereon dated March 8, 2002; such report is included
elsewhere in this Form 10-K. Our audit also included the financial statement
schedule of PLM Equipment Growth & Income Fund VII, listed in Item 14. This
financial statement schedule is the responsibility of the Partnership's
management. Our responsibility is to express an opinion based on our audit. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 8, 2002
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
Valuation and Qualifying Accounts
Years Ended December 31, 2001, 2000, and 1999
(in thousands of dollars)
Additions
Balance at Charged to Other Balance at
Beginning of Cost and Increases Close of
Year Expense (Deductions) Year
---------------- ---------------- -------------- -------------
Year Ended December 31, 2001
Allowance for Doubtful Accounts $ 27 $ 279 $ -- $ 306
=======================================================================
Year Ended December 31, 2000
Allowance for Doubtful Accounts $ 382 $ 102 $ (457 ) $ 27
=======================================================================
Year Ended December 31, 1999
Allowance for Doubtful Accounts $ 251 $ 815 $ (684 ) $ 382
=======================================================================
PLM EQUIPMENT GROWTH & INCOME FUND VII
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership. *
4.1 First Amendment to the Third Amended and Restated Limited
Partnership Agreement *
4.2 Second Amendment to the Third Amended and Restated Limited
Partnership Agreement *
4.3 Third Amendment to the Third Amended and Restated Limited
Partnership Agreement *
4.4 Fourth Amendment to the Third Amended and Restated
Partnership Agreement 51-58
10.1 Management Agreement between Partnership and PLM Investment
Management, Inc. *
10.2 Note Agreement, dated as of December 1, 1995, regarding
$23.0 million of 7.27% senior notes due December 21, 2005. *
10.4 Warehousing Credit Agreement dated as of April 13, 2001. *
10.5 First Amendment to Warehousing Credit Agreement,
dated as of December 21, 2001. 59-67
Financial Statements required under Regulation S-X Rule 3-09:
99.1 Boeing 767. 68-76
99.2 Boeing 737-200 Trust S/N 24700. 77-88
99.3 TAP Trust 89-96
* Incorporated by reference. See pages 26 of this report.