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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, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-10553
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PLM EQUIPMENT GROWTH FUND II
(Exact name of registrant as specified in its charter)
California 94-3041013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Market, Steuart Street Tower
Suite 800, San Francisco, CA 94105-1301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (415) 974-1399
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock: N/A
An index of exhibits filed with this Form 10-K is located at page 41.
Total number of pages in this report: 44
PART I
ITEM 1. BUSINESS
(A) Background
On April 2, 1987, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly-owned subsidiary of PLM International, Inc. (PLM International), 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 Fund II, a California limited partnership (the
Partnership, the Registrant or EGF II). The Partnership's offering became
effective on June 5, 1987. FSI, as General Partner, owns a 5% interest in the
Partnership. The Partnership engages in the business of owning and leasing
transportation equipment to be operated by and/or leased to various shippers and
transportation companies.
The Partnership was formed to engage in the business of owning and managing
a diversified pool of used and new transportation-related equipment and certain
other items of equipment. The Partnership's primary objectives are:
(i) to maintain a diversified portfolio of long-lived, low obsolescence,
high residual value equipment with the net proceeds of the initial partnership
offering, supplemented by debt financing;
(ii)to generate sufficient net operating cash flow from lease operations to
meet liquidity requirements and to generate cash distributions to the Limited
Partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(iii) to selectively sell equipment when the General Partner believes that,
due to market conditions, market prices for equipment exceed inherent equipment
values or expected future benefits from continual ownership of a particular
asset will not equal or exceed other equipment investment opportunities.
Proceeds from these sales, together with excess net cash flow from operations
are used for distributions to the partners or for repayment of outstanding debt;
(iv)to preserve and protect the value of the portfolio through quality
management, maintaining the portfolio's diversity and constantly monitoring
equipment markets.
The offering of the Units of the Partnership closed on March 18, 1988. On
November 20, 1990, the Units of the Partnership began trading on the American
Stock Exchange. Thereupon each Unitholder received a depositary receipt
representing ownership of the number of Units owned by such Unitholder. As of
December 31, 1996, there were 7,381,805 depositary units (Depositary Units)
outstanding (including 1,150 Depositary Units held in the Treasury). The General
Partner contributed $100 for its 5% general partner interest in the Partnership.
The General Partner delisted the Partnership's Depositary Units from the
American Stock Exchange (AMEX) on April 8, 1996. The last day for trading on the
AMEX was March 22, 1996.
It is anticipated that the Partnership will be completely liquidated by
the end of 2000. Since the beginning of 1996, the General Partner may no longer
reinvest cash flows and surplus funds in equipment. All future cash flows and
surplus funds, if any, are to be used for distributions to Partners, used to
repay Partnership's debt, or held as Partnership working capital except to the
extent used to maintain reasonable reserves.
Table 1, below, the cost of equipment in the Partnership's portfolio, and
the cost of investments in unconsolidated special purpose entities, at December
31, 1996 (thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
- ----------------------------------------------------------------------------------------------------------------------
Equipment held for operating leases:
1 727-100C commercial aircraft Boeing $ 6,986
2 727-200 commercial aircraft Boeing 18,020
1 737-200 commercial aircraft Boeing 7,854
514 Refrigerated marine containers Various 10,137
28 Dry marine containers Various 73
164 Open top marine containers Various 430
202 Refrigerated trailers Trailmobile 6,565
210 Dry trailers Various 2,765
780 Dry piggyback trailers Various 11,702
25 Refrigerated piggyback trailers Various 141
460 Box cars Various 7,804
182 Tank cars Various 4,776
73 Covered hopper cars Various 1,144
193 Mill gondolas Various 4,459
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Total equipment $ 82,856
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Investments in unconsolidated special purpose entities:
0.50 737-200 commercial aircraft Boeing $ 8,046
==============
Includes proceeds from capital contributions, operations and Partnership
borrowings invested in equipment. Includes costs capitalized, subsequent to
the date of acquisition and equipment acquisition fees paid to PLM
Transportation Equipment Corporation, a wholly-owned subsidiary of FSI. All
equipment was used equipment at the time of purchase
The equipment is generally leased under operating leases with terms of one
to six years. Some of the Partnership's marine containers are leased to
operators of utilization-type leasing pools which include equipment owned by
unaffiliated parties. In such instances, revenues received by the Partnership
consist of a specified percentage of revenues generated by leasing the equipment
to sub-lessees, after deducting certain direct operating expenses of the pooled
equipment.
At December 31, 1996, 37% of the Partnership's trailer equipment operated
in rental yards owned and maintained by PLM Rental, Inc., the short-term trailer
rental subsidiary of PLM International. Revenues collected under short-term
rental agreements with the rental yards' customers are credited to the owners of
the related equipment as received. Direct expenses associated with the equipment
are charged directly to the Partnership. An allocation of other direct expenses
of the rental yard operations, are billed to the Partnership monthly.
The lessees of the equipment include, but are not limited to: Carnival
Airlines, Inc., DHL Airways, Inc., Transamerica Leasing, Union Pacific Railroad
Company, Burlington Northern, and Cargill International. As of December 31,
1996, all of the equipment was either operating in short-term rental facilities,
on lease, or under other contractual agreements except three railcars and 71
containers.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the equipment. IMI agreed to perform all services necessary to
manage the transportation equipment on behalf of the Partnership and to perform
or contract for the performance of all obligations of the lessor under the
Partnership's leases. In consideration for its services and pursuant to the
Partnership Agreement, IMI is entitled to a monthly management fee (see
Financial Statements, footnotes 1 and 2).
(C) Competition
(1) Operating Leases vs. Full Payout Leases
Generally, the equipment owned by the Partnership is leased out on an operating
lease basis wherein the rents owed during the initial noncancelable term of the
lease are insufficient to recover the Partnership's purchase price of the
equipment. The short- to mid-term nature of operating leases generally commands
a higher rental rate than longer term, full payout leases and offers lessees
relative flexibility in their equipment commitment. In addition, the rental
obligation under the operating lease need not be capitalized on the lessee's
balance sheet.
The Partnership encounters considerable competition from lessors utilizing
full payout leases on new equipment, i.e., leases which have terms equal to the
expected economic life of the equipment. Full payout leases are written for
longer terms and for lower rates than the Partnership offers. While some lessees
prefer the flexibility offered by a shorter term operating lease, other lessees
prefer the rate advantages possible with a full payout lease. Competitors of the
Partnership may write full payout leases at considerably lower rates, or larger
competitors with a lower cost of capital may offer operating leases at lower
rates, and as a result, the Partnership may be at a competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership also competes with equipment manufacturers who offer operating
leases and full payout leases. Manufacturers may provide ancillary services
which the Partnership cannot offer, such as specialized maintenance service
(including possible substitution of equipment), training, warranty services, and
trade-in privileges.
The Partnership competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), General Electric Railcar Services
Corporation, Greenbrier Leasing Company, General Electric Capital Aviation
Services Corporation, and other limited partnerships which lease the same types
of equipment.
(D) Demand
The Partnership invests in transportation-related capital equipment. A general
distinction can be drawn between equipment used for the transport of either
materials and commodities or people. With the exception of aircraft leased to
passenger air carriers, the Partnership's equipment is used primarily for the
transport of materials.
The following describes the markets for the Partnership's equipment:
(1) Aircraft
Commercial Aircraft
The market for commercial aircraft continued to improve in 1996, representing
two consecutive years of growth and profits in the airline industry. The $5.7
billion in net profits recorded by the world's top 100 airlines in 1995 grew to
over $6 billion in 1996. The profits are a result of the continued management
emphasis on costs. The demand for ever lower unit costs by airline managements
has caused a significant reduction of surplus used Stage II and Stage III
commercial aircraft. The result is a return to supply/demand equilibrium. On the
demand side, passenger traffic is improving, cargo movement is up and load
factors are generally higher across the major markets.
These changes are reflected in the performance of the world's 62 major
airlines that operate 60% of the world airline fleet but handle 78% of world
passenger traffic. Focusing on the supply/demand for Partnership-type narrowbody
commercial aircraft, there were 213 used narrowbody aircraft available at year
end 1995. In the first ten months of 1996, this supply was reduced to 119
narrowbody aircraft available for sale or lease. Forecasts for 1997 see a
continuing supply/demand equilibrium due to air travel growth and balanced
aircraft supply.
There are a total of 939 Boeing 737-200 aircraft in service, with 219 built
prior to 1974. Independent forecasts estimate that 250 of the 737-200s will be
retired, leaving approximately 700 aircraft in service after 2003. The forecasts
regarding hushkits estimate that half of the 700 Boeing 737-200s will be hushed
to meet Stage III noise levels.
Independent projections for the Boeing 727 aircraft indicate that there are
1,050 in service, with 299 built prior to 1974. The Partnership's aircraft are
all 1974 or earlier-model 727-100/200s, and are expected to be retired prior to
2003. The current strategy is to optimize their remaining value based on the
present value of lease cash flows and projected residuals.
(2) Marine Containers
At the end of 1995, the consensus of industry sources was that 1996 would see
both higher container utilization and strengthening of per diem lease rates.
Such was not the case, as there was no appreciable cyclical improvement in the
container market following the traditional winter slowdown. Industry utilization
continues to be under pressure, with per diem rates being impacted as well.
A substantial portion of the Partnership's containers are on long-term
utilization leases which were entered into with Trans Ocean Leasing as lessee.
The industry has seen a major consolidation as Transamerica Leasing late in the
fourth quarter of 1996, acquired Trans Ocean Leasing. Transamerica Leasing is
the second largest container leasing company in the world. Transamerica Leasing
is the substitute lessee for Trans Ocean Leasing. Long term, such industry
consolidation should bring more rationalization to the market and result in
higher utilization and per diem rates.
(3) Railcars
Pressurized Tank Cars
These cars are used primarily in the petrochemical and fertilizer industries.
They transport liquefied petroleum gas (LPG) and anhydrous ammonia. The
utilization rate on the Partnership's fleet of pressurized tank cars was over
98% during 1996. Independent forecasts show the demand for natural gas growing
during 1997 to 1999, as the developing world, former Communist countries, and
the industrialized world all increase their demand for energy. The fertilizer
industry was undergoing a rapid restructuring toward the end of 1996 after a
string of major mergers, which began in 1995. These mergers reduce the number of
companies that use pressurized tank cars for fertilizer service. Whether or not
the economies of the mergers allow the total fleet size to be reduced remains to
be seen.
General Purpose Tank Cars
General purpose, or nonpressurized, tank cars are used to transport a wide
variety of bulk liquid commodities, such as petroleum fuels, lubricating oils,
vegetable oils, molten sulfur, corn syrup, asphalt, and specialty chemicals.
Demand for general purpose tank cars in the Partnership fleet has remained
healthy over the last two years, with utilization remaining above 98%.
Independent projections show the demand for petroleum growing during 1997 to
1999, as the developing world, former Communist countries and the industrialized
world all increase their demand for energy. Chemical carloadings for the first
40 weeks of 1996 were up one-tenth of one percent (0.1%) as compared to the same
period in 1995.
Covered Hopper (Grain) Cars
Through October 5, 1996, grain car loadings were down 13% compared to the same
period for 1995. Even with the greatly reduced loadings, the on-lease rate
during 1996 for the Partnership grain cars remained at 100%. Industrywide, the
covered hopper is one car type that has increased in number over the last 10
years, going from a total of 299,172 cars in 1985 to 325,882 cars in 1995. It is
possible that another poor crop year, combined with more available cars, could
place downward pressure on grain car rental rates during 1997.
Box Cars
The lease covering 174 of the box cars was renewed during 1996 for an additional
five (5) years. The remaining 289 box cars are on lease with another lessee. Two
hundred and two (202) of these cars are up for renewal during 1997 with two
separate lessees. These cars are presently in paper service. Car loadings for
paper service during the first 40 weeks of 1996 were down 1.2% compared to
loadings for the same 1995 period. The General Partner has had preliminary
discussions with the lessee regarding the possible lease renewal of these cars,
but it is too early for them to make a decision. With the economy settling into
a period of 2.0 to 2.5% growth, it is anticipated by independent forecasts that
paper and paperboard production will follow a similar pattern, resulting in a 2%
increase in car loadings for 1997.
Mill Gondolas
The Partnership's net per diem rental income remained high during 1996, as the
demand for mill gondolas remained strong. Quoting from the December, 1996 issue
of Railway Age magazine: "Significant building programs have lessened shortages
somewhat, as have changes in rules on railroad cars and car assignments.
However, gondolas are still in short supply in many places." The November 1996
WEFA Group report indicates anticipation for scrap metal demands to grow as
electric furnace process gain share. Also, they anticipate demand for steel mill
products to expand by 2.5 to 3%, on average, from 1997 to 2000.
(6) Trailers
Intermodal Trailers
The robust intermodal trailer market that began four years ago began to soften
in 1995, and reduced demand continued in 1996. Intermodal trailer loadings were
flat in 1996 from 1995's depressed levels. This lack of growth has been the
result of many factors, ranging from truckload firms aggressively recapturing
market share from the railroads through aggressive pricing to the continuing
consolidation activities and asset efficiency improvements of the major U.S.
railroads.
All of these factors helped make 1996 a year of equalizing equipment supply
as railroads and lessors were pressured to retire older and less efficient
trailers. The two largest suppliers of railroad trailers reduced the available
fleet in 1996 by over 15%. Overall utilization for intermodal trailers,
including the Partnership's fleet, was lower in 1996 than in previous years.
Over-The-Road Dry Trailers
The over-the-road dry trailer market was weak in 1996, with utilization down
15%. The trailer industry experienced a record year in 1994 for new production,
and 1995 production levels were similar to 1994's. However, in 1996, the truck
freight recession, along with an overbuilding situation, contributed to 1996's
poor performance. The year 1996 had too little freight and too much equipment
industrywide.
Over-The-Road Refrigerated Trailers
PLM experienced fairly strong demand levels in 1996 for its refrigerated
trailers. With over 15% of the fleet in refrigerated trailers, PLM and the
Partnerships are the largest supplier of short-term rental refrigerated trailers
in the U.S.
(E) Government Regulations
The use, maintenance, and ownership of equipment is regulated by federal, state,
local, and/or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations which may
require the removal from service or extensive modification of such equipment to
meet these regulations at considerable cost to the Partnership. Such regulations
include (but are not limited to):
(1) the U.S. Department of Transportation's Aircraft Capacity Act of 1990
(which limits or eliminates the operation of commercial aircraft in the U.S.
that do not meet certain noise, aging, and corrosion criteria);
(2) the Montreal Protocol on Substances That Deplete the Ozone Layer and
the U.S. Clean Air Act Amendments of 1990 (which call for the control and
eventual replacement of substances that have been found to cause or contribute
significantly to harmful effects on the stratospheric ozone layer and which are
used extensively as refrigerants in refrigerated marine cargo containers,
over-the-road trailers, etc.);
(3) the U.S. Department of Transportation's Hazardous Materials Regulations
(which regulate the classification of and packaging requirements for hazardous
materials and which apply particularly to the Partnership's tank cars).
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased for leasing purposes. At December 31, 1996, the partnership
owned a portfolio of transportation equipment as described in Part I, Table 1.
The Partnership maintains its principal office at One Market, Steuart
Street Tower, Suite 800, San Francisco, California 94105-1301. All office
facilities are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1996.
Part II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT MATTERS
The General Partner delisted the Partnership's depositary units from the
American Stock Exchange (AMEX) under the symbol GFY on April 8, 1996. The last
day for trading on the AMEX was March 22, 1996. Under the Internal Revenue Code
(the Code), the Partnership was classified as a Publicly Traded Partnership. As
of March 3, 1997 there were 7,385,605 Depositary Units outstanding (including
1,150 Depositary Units held in the Treasury). There are approximately 9,900
Depositary Unitholders of record as of the date of this report. The Code treats
all Publicly Traded Partnerships as corporations if they remain publicly traded
after December 31, 1997. Treating the Partnership as a corporation would mean
the Partnership itself would become a taxable, rather than a "flow through"
entity. As a taxable entity, the income of the Partnership would have become
subject to federal taxation at both the partnership level and at the investor
level to the extent that income would have become distributed to an investor. In
addition, the General Partner believed that the trading price of the Depositary
Units would have been distorted when the Partnership began the final liquidation
of the underlying equipment portfolio. In order to avoid taxation of the
Partnership as a corporation and to prevent unfairness to Unitholders, the
General Partner delisted the Partnership's Depositary Units from the AMEX. While
the Partnership's Depositary Units are no longer publicly traded on a national
stock exchange, the General Partner continues to manage the equipment of the
Partnership and prepare and distribute quarterly and annual reports and Forms
10-Q and 10-K in accordance with the Securities and Exchange Commission
requirements. In addition, the General Partner continues to provide pertinent
tax reporting forms and information to Unitholders. The General Partner
anticipates an informal market for the Partnership's units may develop in the
secondary marketplace similar to that which currently exists for non-publicly
traded partnerships.
Pursuant to the terms of the Partnership Agreement, the General Partner is
generally entitled to a 5% interest in the profits and losses and distributions
of the Partnership. The General Partner also is entitled to a special allocation
of any gains from sale of the Partnership's assets during the liquidation phase
in an amount sufficient to eliminate any negative balance in the General
Partner's capital account.
Table 2, below, sets forth the high and low reported prices of the
Partnership's Depositary Units for 1995 as reported by the AMEX as well as cash
distributions paid per Depositary Unit.
TABLE 2
Cash
Distributions
Paid Per
Reported Trade Depositary
Prices Unit
------------------------------------------
Calendar Period High Low
1996
1st Quarter $ 5.000 $ 3.750 $ 0.40
2nd Quarter $ -- $ -- $ 0.25
3rd Quarter $ -- $ -- $ 0.25
4th Quarter $ -- $ -- $ 0.25
1995
1st Quarter $ 8.500 $ 7.000 $ 0.40
2nd Quarter $ 8.563 $ 7.250 $ 0.40
3rd Quarter $ 8.000 $ 6.250 $ 0.40
4th Quarter $ 6.625 $ 4.563 $ 0.40
The General Partner delisted the Partnership's depositary units from the
American Stock Exchange (AMEX) under the symbol GFY on April 8, 1996. The
last day for trading on the AMEX was March 22, 1996.
The Partnership has engaged in a plan to repurchase up to 250,000 of the
outstanding Depositary Units. During 1996, the Partnership repurchased and
canceled 44,500 Depositary Units at a total cost of $179,000. During 1995, the
Partnership repurchased and canceled 46,400 Depositary Units at a total cost of
$345,000. During the fourth quarter of 1994, the Partnership repurchased 20,200
Depositary Units at a total cost of $156,000. During the first quarter of 1993,
the Partnership repurchased 6,700 Depositary Units at a total cost of $70,000.
As of December 31, 1996, the Partnership had purchased and canceled a cumulative
total of 117,800 Depositary units at a cost of $750,000.
ITEM 6. SELECTED FINANCIAL DATA
Table 3, below, lists selected financial data for the Partnership:
TABLE 3
For the years ended
December 31, 1996, 1995, 1994, 1993, and 1992
(in thousands of dollars except per unit
amounts)
1996 1995 1994 1993 1992
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Operating results:
Total revenues $ 14,819 $ 18,983 $ 26,326 $ 36,901 $ 34,508
Net gain (loss) on
disposition of equipment 2,085 1,485 2,347 6,704 (329 )
Loss on revaluation of
equipment -- (667 ) (887 ) (161 ) (6,876 )
Equity in net income of
unconsolidated special purpose
entities 6,267 -- -- -- --
Net income (loss) 8,186 937 67 5,596 (10,489 )
At year-end:
Total assets $ 33,595 $ 48,957 $ 69,485 $ 84,206 $ 92,928
Total liabilities 16,349 30,761 39,332 41,344 42,928
Notes payable 13,000 27,000 35,000 35,000 38,218
Cash distributions $ 8,957 $ 12,549 $ 12,620 $ 12,665 $ 17,371
Cash distributions which represent a
return of capital to Limited Partners $ 1,045 $ 11,847 $ 11,989 $ 7,563 $ 16,502
Per Weighted Average Depositary Unit:
Net income (loss) $ 1.01 $ 0.01 $ (0.12) $ 0.60 $ (1.53 )
Cash distributions $ 1.15 $ 1.60 $ 1.60 $ 1.60 $ 2.20
Cash distributions which represent a
return of capital to Limited Partners $ 0.14 $ 1.59 $ 1.60 $ 1.01 $ 2.20
After reduction of income of $313 ($0.04 per Weighted Average Depositary
Unit) in 1996, $815 ($0.11 per Weighted Average Depositary Unit) in 1995,
$963 ($0.13 per Weighted Average Depositary Unit) in 1994, $845 ($0.11 per
Weighted Average Depositary Unit) in 1993, and $1,495 ($0.20 per Weighted
Average Depositary Unit) in 1992 representing special allocations to the
General Partner resulting from an amendment to the Partnership Agreement
(see Note 1 to the financial statements.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
Management's Discussion and Analysis of Financial Condition and Results of
Operations relates to the Financial Statements of PLM Equipment Growth Fund II
(the Partnership). The following discussion and analysis of operations and risks
focuses on the performance of the Partnership's equipment in various sectors of
the transportation industry and its effect on the Partnership's overall
financial condition.
Results of Operations - Factors Affecting Performance
(A) Re-leasing and Repricing Activity
The exposure of the Partnership's equipment portfolio to repricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and the
equipment must be remarketed. Major factors influencing the current market rate
for transportation equipment include supply and demand for similar or comparable
types or kinds of transport capacity, desirability of the equipment in the lease
market, market conditions for the particular industry segment in which the
equipment is to be leased, overall economic conditions, various regulations
concerning the use of the equipment, and others. Equipment that is idle or out
of service between the expiration of one lease and the assumption of a
subsequent one can result in a reduction of contribution to the Partnership. The
Partnership experienced re-leasing or re-pricing exposure in 1996 primarily in
its aircraft, trailer, marine container and railcar portfolios.
(1) Aircraft: Aircraft contribution decreased from 1995 to 1996 due to the
off-lease status of a Boeing 737-200 aircraft that is being remarketed, owned by
a trust in which the Partnership has a 50% interest. All other aircraft
investments were on lease for the entire year.
(2) Trailers: The majority of the Partnership's trailer portfolio operates
in short-term rental facilities or short-line railroad systems. The relatively
short duration of most leases in these operations exposes the trailers to
considerable re-leasing activity. Contributions from the Partnership's trailers
operated in short-term rental facilities and the short-line railroad system
declined from 1995 to 1996, due to soft market conditions that caused a decline
in re-leasing activity.
(3) Marine Containers: The majority of the Partnership's marine container
portfolio operates in utilization-based leasing pools and as such was highly
exposed to repricing activity. The Partnership's marine container contributions
declined from 1995 to 1996, due to soft market conditions that caused a decline
in re-leasing activity.
(4) Railcars: The majority of the Partnership's railcar equipment remained
on-lease throughout the year, and thus was not adversely affected by re-leasing
and repricing exposure.
(B) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment represents a reduction in the size of the
equipment portfolio, and will result in reduction of contribution to the
Partnership. Lessees not performing under the terms of their leases, either by
not paying rent, not maintaining or operating the equipment in accordance with
the conditions of the leases, or other possible departures from the leases can
result not only in reductions in contribution, but also may require the
Partnership to assume additional costs to protect its interests under the
leases, such as repossession, legal fees, etc. The Partnership experienced the
following in 1996:
(1) Liquidations: During 1996, the Partnership sold its remaining interest
in an entity which owns a mobile offshore drilling unit, 303 marine containers,
one aircraft, 47 railcars, and 154 trailers. The proceeds from the liquidation
of the investment in the entity which owns a mobile offshore drilling unit was
used to prepay the third and a portion of the fourth annual installments of the
Partnership's outstanding debt, totaling $14 million. The net result of all
sales and liquidations has been a reduction in the cost basis of the
Partnership's equipment portfolio of approximately $23.8 million.
(2) Nonperforming Lessees: In the beginning of the third quarter of 1996,
the General Partner repossessed an aircraft owned by a trust in which the
Partnership has a 50% interest, due to the lessee's inability to pay for
outstanding receivables. In addition, a marine container lessee also encountered
financial difficulties in 1996. The Partnership established reserves against
these receivables due to the General Partner's determination that ultimate
collection of these rents is uncertain. Other equipment such as railcars,
trailers and some of the marine containers experienced minor non-performing
issues that have no significant impact on the Partnership.
(C) Reinvestment Risk
During the first seven years of operations, the Partnership invested surplus
cash in additional equipment after fulfilling operating requirements and paying
distributions to the partners. Pursuant to the Partnership agreement, the
Partnership is no longer reinvesting in additional equipment since the beginning
of 1996. Subsequent to the end of the reinvestment period which concluded on
December 31, 1995, the Partnership will continue to operate for an additional
three years, then begin an orderly liquidation over an anticipated two-year
period.
During the year, the Partnership received proceeds of approximately $4.8
million from the liquidation or sale of equipment and liquidating proceeds from
unconsolidated special purpose entities of $14.3 million. These proceeds were
used to pay down $14 million of the Partnership's outstanding debt. The
Partnership reinvested approximately $0.2 million in aircraft modifications for
an existing aircraft.
(D) Equipment Valuation and Write-downs
In March 1995, the Financial Accounting Standards Board (FASB) issued statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121). This standard is effective for years
beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995,
the effect of which was not material as the method previously employed by the
Partnership was consistent with SFAS 121. In accordance with SFAS 121, the
Partnership reviews the carrying value of its equipment at least annually in
relation to expected future market conditions for the purpose of assessing the
recoverability of the recorded amounts. If projected future lease revenue plus
residual values are less than the carrying value of the equipment, a loss on
revaluation is recorded. The carrying value of an aircraft was reduced by
approximately $0.7 million in 1995. There were no write downs required in 1996.
As of December 31, 1996, the General Partner estimated the current fair
market value of the Partnership's equipment portfolio, including equipment owned
by unconsolidated special purpose entities, to be approximately $43.3 million.
Financial Condition - Capital Resources and Liquidity
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering and permanent debt financing. No
further capital contributions from original partners are permitted under the
terms of the Partnership's Limited Partnership Agreement, while the
Partnership's total outstanding indebtedness, currently $13.0 million, has been
reduced from its original balance of $35 million. The Partnership relies on
operating cash flow to meet its operating obligations and make cash
distributions to Limited Partners
For the year ended December 31, 1996, the Partnership generated sufficient
operating cash to meet its operating obligations, but used undistributed
available cash from prior periods of approximately $3.3 million to maintain the
current level of distributions (total of $8.9 million in 1996) to the partners.
During the year, the General Partner sold its investment in a mobile offshore
drilling unit for approximately $14.3 million and used these proceeds to prepay
$14.0 million in principal payments on its outstanding debt.
In the first quarter of 1994, the General Partner completed the refinancing
of a bank loan which was due to mature September 30, 1995. The new debt
comprised notes payable of $35.0 million, and the corresponding loan agreements
require the Partnership to maintain a minimum debt coverage ratio based on the
fair market value of equipment, a minimum fixed charge coverage ratio, and
limits the concentration of any one type of equipment in the Partnership's
equipment portfolio. The refinanced debt began to mature in March 1996. The
General Partner prepaid the first four annual installments of principal due on
the debt in the first and third quarters of 1995, and the third and fourth
quarters of 1996. The maturities of the remaining principal installments on the
debt coincide with the liquidation phase of the Partnership and will be repaid
with proceeds from sales of equipment during that phase.
The General Partner has not planned any expenditures, nor is it aware of
any contingencies that would cause it to require any additional capital to that
mentioned above.
Results of Operations - Year to Year Detail Comparison
Comparison of the Partnership's Operating Results for the Years Ended December
31, 1996 and 1995
(A) Owned equipment operations
Lease revenues less direct expenses (defined as repairs and maintenance, marine
equipment operating, and asset specific insurance expenses) on owned equipment
decreased during the year ended December 31, 1996 when compared to the same
period of 1995. The following table presents lease revenues less direct expenses
by owned equipment type (in thousands):
For the year
ended December 31,
1996 1995
----------------------------
Aircraft $ 2,390 $ 2,160
Trailers 3,382 4,301
Rail equipment 3,111 3,336
Marine containers 1,255 1,487
Aircraft: Aircraft lease revenues and direct expenses were $2.4 million and
$47,000, respectively, for the year ended December 31, 1996, compared to $2.8
million and $0.6 million, respectively, during the same period of 1995. Lease
revenues decreased due to the off-lease status of an aircraft in 1996 which was
eventually sold at the end of the year, offset by another aircraft, which was
off-lease in the first quarter of 1995. Direct expenses decreased due to the
costs incurred in the year ended December 31, 1995 to refurbish another aircraft
prior to being re-leased in 1995;
Trailers: Trailer lease revenues and direct expenses were $4.1 million and $0.7
million, respectively, for the year ended December 31, 1996, compared to $5.0
million and $0.7 million, respectively, during the same period of 1995. The
decrease in net contribution was due to the sale of 154 trailers in 1996. In
addition, the trailer fleet is experiencing lower utilization in the PLM
affiliated short-term rental yards;
Rail equipment: Railcar lease revenues and direct expenses were $4.6 million and
$1.5 million, respectively, for the year ended December 31, 1996, compared to
$4.8 million and $1.5 million, respectively during the same period of 1995. The
decrease in railcar contribution resulted from the sale of 47 railcars in 1996.
In addition, expenses increased due to running repairs required on certain of
the railcars during 1996 which were not needed during 1995;
Marine containers: Marine container lease revenues were $1.3 million and $1.5
million for the year ended December 31, 1996 and 1995, respectively. The number
of marine containers owned by the Partnership has been declining over the past
twelve months due to sales and dispositions. The result of the declining fleet
and lower utilization has been a decrease in marine container revenue.
(B) Indirect expenses related to owned equipment operations
Total indirect expenses of $10.6 million for the year ended December 31, 1996,
decreased from $11.5 million for the same period in 1995. The variances are
explained as follows:
(1) A $0.5 million decrease in depreciation and amortization expense from
1995 levels, reflecting the effect of asset sales in 1995 and 1996;
(2) A $0.5 million decrease in interest expense due to a lower base rate of
interest charged on the Partnership's floating rate debt during the year ended
December 31, 1996, as compared to the same period in 1995. In 1996, the
Partnership also prepaid $14 million ($9 million in September 1996 and $5
million in December 1996) of the $35 million outstanding note payable. This
payment was applied to the third and a portion of the fourth annual installments
due March 31, 1998 and 1999, respectively. In 1995, the Partnership prepaid $8.0
million of the outstanding note payable representing the principal payments due
March 31, 1996 and 1997;
(3) A $0.1 million decrease in management fee to affiliates, reflecting the
lower levels of lease revenues in 1996 as compared to 1995;
(4) A $0.2 million increase in bad debt expense to reflect the General
Partner's evaluation of the collectibility of receivables due from a container
lessee that encountered financial difficulties.
(C) Loss on revaluation of equipment
Loss on revaluation of equipment of $0.7 million in 1995 resulted from the
reduction of the net book value of an aircraft to its estimated net realizable
value. There was no loss on revaluation of equipment in the year ended December
31, 1996.
(D) Net gain on disposition of owned equipment
Net gain on disposition of equipment for the year ended December 31, 1996
totaled $2.1 million which resulted from the sale or disposal of one aircraft,
303 marine containers, 154 trailers, and 47 railcars, with an aggregate net book
value of $2.7 million for aggregate proceeds of $4.8 million. For the year ended
December 31, 1995, the $0.9 million net gain on disposition of equipment
resulted from the sale or disposal of 2,278 marine containers, 11 trailers, 1
tractor, and 1 railcar with an aggregate net book value of $2.6 million, for
aggregate proceeds of $3.5 million.
(E) Interest and other income
Interest and other income decreased $0.3 million during the year ended December
31, 1996 due primarily to lower interest rates earned on cash equivalents when
compared to the same period of 1995.
(F) Equity in net income of unconsolidated special purpose entities
Equity in net income of unconsolidated special purpose entities represents net
income generated from the operation of jointly-owned assets accounted for under
the equity method (see Note 2 to the financial statements).
For the year
ended December 31,
1996 1995
----------------------------
Aircraft $ (712 ) $ 254
Mobile offshore drilling unit 6,979 (367 )
Marine vessel -- 398
Aircraft: As of December 31, 1996 and 1995, the Partnership owned a 50%
investment in an entity which owns a commercial aircraft. Revenues and expenses
were $0.4 million and $1.1 million, respectively, for the year ended December
31, 1996, compared to $0.7 million and $0.5 million, respectively, for the same
period in 1995. The Partnership's share of revenue decreased $0.3 million due to
the off-lease status of this aircraft during the last six months of 1996, which
was on-lease for the entire year of 1995. The Partnership's share of expenses
increased $0.6 million due to the increase in bad debt expense to reflect the
General Partner's evaluation of the collectibility of receivables due from the
aircraft's lessee that encountered financial difficulties and repairs to meet
airworthiness conditions.
During 1995, the General Partner sold the Partnership's 50% investment in
an entity which owns a DC-9 aircraft resulting in a $47,000 net gain.
Mobile offshore drilling unit: As of December 31, 1995, the Partnership owned a
55% investment in an entity which owns a mobile offshore drilling unit (rig).
The rig was sold resulting in a $7.1 million net gain to the Partnership, offset
by a net loss from operations of $0.1 million.
Marine vessel: In the second quarter of 1995, the General Partner sold the
Partnership's 50% investment in an entity which owns a marine vessel resulting
in a $0.6 million gain, offset by a net loss from operations of $0.2 million.
(G) Net Income
As a result of the foregoing, the Partnership's net income of $8.2 million for
the year ended December 31, 1996, increased from net income of $0.9 million
during the same period in 1995. The Partnership's ability to operate and
liquidate assets, secure leases, and re-lease those assets whose leases expire
during the duration of the Partnership is subject to many factors and the
Partnership's performance in the year ended December 31, 1996 is not necessarily
indicative of future periods. In the year ended December 31, 1996, the
Partnership distributed $8.5 million to the Limited Partners, or $1.15 per
Weighted Average Depositary Unit.
Comparison of the Partnership's Operating Results for the Years Ended December
31, 1995 and 1994
(A) Revenues
Total revenues for the years ended December 31, 1995 and 1994, were $19.0
million and $26.3 million, respectively. The decrease in 1995 revenues was
primarily attributable to lower lease revenue and reduced gains on disposition
of equipment. Lower lease revenue resulted from the Partnership's sales of an
interest in a marine vessel, and an aircraft, a railcar, trailers, and marine
containers during 1995 and 1994 sales. The Partnership's ability to liquidate
assets, secure leases, and re-lease those assets whose leases expire during the
duration of the Partnership is subject to many factors and the Partnership's
performance in 1995 is not necessarily indicative of future periods.
(1) Lease revenue declined to $16.8 million in 1995 from $23.3 million in
1994. The following table lists lease revenue earned by equipment type (in
thousands):
For the year ended December
31,
1995 1994
------------------------------
Trailers and tractors $ 4,972 $ 3,885
Rail equipment 4,785 4,823
Aircraft 3,666 4,935
Marine containers 1,580 1,826
Mobile offshore drilling units 1,436 2,488
Marine vessels 391 5,294
==============================
$ 16,830 $ 23,251
==============================
Significant revenue component changes resulted primarily from:
(a) Declines of $4.9 million in marine vessel revenues due to the sale of
two marine vessels during the third quarter of 1994 and the Partnership's 50%
interest in another marine vessel in the second quarter of 1995;
(b) Declines of $1.3 million in aircraft revenue due to the sale of the
Partnership's 50% interest in a DC-9 aircraft during the second quarter of 1995
and another aircraft being off-lease during part of the fourth quarter of 1995;
(c) A decrease of $1.1 million in mobile offshore drilling unit (rig)
revenue due to the sale of one rig in the fourth quarter of 1994, and a lower
re-lease rate on another rig;
(d) A decrease of $0.2 million in marine container revenue due to the sale
of 2,278 marine containers during 1995;
(e) An increase of $1.1 million in trailer and tractor revenue due to the
purchase of 649 trailers in the third and fourth quarters of 1994.
(2) Interest and other income decreased by $0.1 million due primarily due
to lower cash balances available for investment, offset slightly by an increase
in the interest rate earned on cash investments.
(3) Net gain on disposition of equipment during 1995 totaled $1.5 million
from the sale or disposal of the Partnership's 50% interest in a DC-9 aircraft,
11 trailers, 1 tractor, 2,278 marine containers, 1 railcar, and the
Partnership's 50% interest in a marine vessel with an aggregate net book value
of $5.8 million and unused drydock reserves of $0.3 million, for proceeds of
$7.0 million. Net gains on disposition of equipment during 1994 totaled $2.3
million from the sale or disposal of 2 marine vessels, 2 railcars, 267 trailers,
423 marine containers, and a 12% interest in a mobile offshore drilling unit.
The equipment sold had an aggregate net book value of $13.5 million and accrued
drydock reserves of $2.2 million for proceeds of $13.6 million.
(B) Expenses
Total expenses for the years ended December 31, 1995 and 1994, were $18.0
million and $26.3 million, respectively. The decrease in 1995 expenses was
primarily attributable to decreased marine equipment operating expenses,
depreciation expense, repairs and maintenance, insurance, and management fees,
offset by a slight increase in bad debt expense.
(1) Direct operating expenses (defined as repairs and maintenance,
insurance, and marine equipment operating expenses) decreased to $3.3 million in
1995 from $8.3 million in 1994. This change resulted from:
(a) Decreases of $2.9 million in marine equipment operating expense
resulted from the sale of two marine vessels in the third quarter of 1994 and
the Partnership's 50% interest in another marine vessel in the second quarter of
1995;
(b) Decreases of $1.4 million in repairs and maintenance costs from 1994
levels resulted from the sale of two marine vessels in the third quarter of 1994
and a 50% interest in another marine vessel in the second quarter of 1995. These
declines were offset slightly by increases in aircraft expenses resulting from
the refurbishment of an aircraft prior to being re-leased;
(c) Decreases of $0.7 million in insurance expenses resulted from the sale
of two marine vessels in the second quarter of 1994. The 1994 expenses were
offset by a $0.2 million refund from an insurance pool in which the
Partnership's marine vessels participate, due to lower than expected insurance
claims in the pool. A similar refund was not received in 1995.
(2) Indirect operating expenses (defined as depreciation and amortization
expense, management fees, interest expense, general and administrative expenses,
and bad debt expense) decreased to $14.1 million in 1995 from $17.1 million in
1994. This change resulted from:
(a) Decreases of $2.6 million in depreciation expense from 1994 levels,
reflecting the Partnership's double-declining balance depreciation method and
the effect of asset sales in 1994 and 1995, partially offset by the purchase of
equipment during the later part of 1994;
(b) Decreases of $0.3 million in management fees to affiliates, reflecting
the lower levels of lease revenues in 1995 as compared to 1994;
(c) Decreases of $0.2 million in interest expense from a $0.3 million
write-off in 1994 of unamortized loan origination costs due to the refinancing
of the Partnership's debt in 1994, offset by a $0.1 million increase due to a
higher base rate of interest charged on the Partnership's floating rate debt
during 1995;
(d) Decreases of $0.1 million in general and administrative expenses from
1994 levels, resulting from the write-off of accrued legal and other expenses,
offset by increased administrative costs associated with the short-term rental
facilities due to an additional 636 trailers now operating in the facilities in
1995 when compared to the same period in 1994;
(e) Increases of $0.2 million in bad debt expense reflect the General
Partner's evaluation of the collectibility of receivables due from an aircraft
lessee that encountered financial difficulties.
(3) Loss on revaluation of equipment of $0.7 million in 1995 resulted from
the Partnership reducing the net book value of an aircraft to its estimated net
realizable value. There was no loss on revaluation of equipment in the year
ended December 31, 1994.
(C) Net Income
The Partnership's net income of $937,000 for the year ended December 31, 1995,
increased from net income of $67,000 for 1994. During 1995, the Partnership
distributed $11.9 million to the Limited Partners, or $1.60 per Weighted Average
Depositary Unit.
Geographic Information
The Partnership operates its equipment in international markets. Although these
operations expose the Partnership to certain currency, political, credit and
economic risks, the General Partner believes these risks are minimal or has
implemented strategies to control the risks as follows: Currency risks are at a
minimum because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
generally through the avoidance of operations in countries that do not have a
stable judicial system and established commercial business laws. Credit support
strategies for lessees range from letters of credit supported by U.S. banks to
cash deposits. Although these credit support mechanisms generally allow the
Partnership to maintain its lease yield, there are risks associated with
slow-to-respond judicial systems when legal remedies are required to secure
payment or repossess equipment. Economic risks are inherent in all international
markets and the General Partner strives to minimize this risk with market
analysis prior to committing equipment to a particular geographic area. Refer to
the Financial Statements, Note 3 for information on the revenues, income, and
assets in various geographic regions.
Revenues and net operating income by geographic region are impacted by the
time period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges which are greatest in the early years due to
the General Partner's decision to use the 200% declining balance method of
depreciation. The relationships of geographic revenues, net income (loss) and
net book value are expected to significantly change in the future as additional
equipment is sold or disposed of in various equipment markets and geographic
areas. An explanation of the current relationships is presented below:
The Partnership's equipment on lease to U.S. domiciled lessees consists of
trailers, railcars and aircraft. During 1996, lease revenues in the U.S.
accounted for 62% of the lease revenues while net operating income accounted for
$2.1 million of the $8.2 million in profit for the entire Partnership. The
primary reason for this relationship is the fact that the Partnership
depreciates its rail equipment over a fifteen year period versus twelve years
for other equipment types owned and leased in other geographic regions.
The Partnership's equipment leased to Canadian domiciled lessees consists
of railcars. During 1996, revenues for these railcars accounted for 13% of lease
revenues and $0.9 million of the $8.2 million of the net operating profit for
the entire Partnership.
The Partnership's equipment on lease to South Asia domiciled lessees
accounted for 9% of the lease revenues while net operating income accounted for
$6.3 million of the $8.2 million in profit for the entire Partnership. The
primary reason for this relationship is that during 1996, the Partnership sold
its 55% investment in a mobile offshore drilling unit for a gain of $7.1 million
offset by net operating loss of $0.1 million. The Partnership's remaining asset
in South Asia, a 50% investment in an aircraft, generated lease revenue of $0.4
million and a net operating loss of 0.7 million due mainly to the lessee's
inability to pay the Partnership for outstanding receivables. The Partnership
established reserves against these receivables due to the General Partner's
determination that ultimate collection of this rent is uncertain. In addition,
this aircraft underwent repairs to meet airworthiness conditions and incurred
costs of approximately $0.2 million.
In 1996, marine containers, which were leased in various regions throughout
the period, accounted for 9% of the lease revenues and $0.3 million of the net
operating profit for the period.
European operations consisted of an aircraft that accounted for 6% of lease
revenues while net income generated by this equipment accounted for $0.2 million
in profits for the period.
Asian operations consisted of an aircraft which was sold during 1996 for a
gain of $1.2 million offset by an operating net loss of $0.4 million.
Inflation
There was no significant impact on the Partnership's operations as a result of
inflation during 1996, 1995, or 1994.
Forward Looking Information
Except for historical information contained herein, the discussion in this Form
10-K contains forward-looking statements that involve risks and uncertainties,
such as statements of the Partnership's plans, objectives, expectations and
intentions. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.
Outlook for the Future
Since the Partnership is in its holding or passive liquidation phase, the
General Partner will be seeking to selectively re-lease or sell assets as the
existing leases expire. Sale decisions will cause the operating performance of
the Partnership to decline over the remainder of its life. The General Partner
anticipates the liquidation of Partnership assets will be completed by the
scheduled termination of the Partnership at the end of the year 2000.
The Partnership intends to use cash flow from operations to satisfy its
operating requirements, pay loan principal on debt, and pay cash distributions
to the investors.
(A) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Ongoing changes in the regulatory
environment, both in the U.S. and internationally, cannot be predicted with any
accuracy and preclude the General Partner from determining the impact of such
changes on Partnership operations, purchases, or sale of equipment.
(B) Distributions
Pursuant to the Limited Partnership Agreement, the Partnership ceased to
reinvest in additional equipment. The General Partner will pursue a strategy of
selectively re-leasing equipment to achieve competitive returns, or selling
equipment that is underperforming or whose operation becomes prohibitively
expensive, in the period prior to the final liquidation of the Partnership.
During this time, the Partnership will use operating cash flow and proceeds from
the sale of equipment to meet its operating obligations and make distributions
to the partners. Although the General Partner intends to maintain a sustainable
level of distributions prior to final liquidation of the Partnership, actual
Partnership performance and other considerations may require adjustments to
then-existing distribution levels. In the long term, changing market conditions
and used-equipment values may preclude the General Partner from accurately
determining the impact of future re-leasing activity and equipment sales on
Partnership performance and liquidity.
As of the first quarter of 1996, the cash distribution rate was reduced to
more closely reflect current and expected net cash flows from operations.
Continued weak market conditions in certain equipment sectors and equipment
sales have reduced overall lease revenues in the Partnership to the point where
reductions in distribution levels were necessary. In addition, with the
Partnership expected to enter the active liquidation phase in the near future,
the size of the Partnership's remaining equipment portfolio, and, in turn, the
amount of net cash flows from operations, will continue to become progressively
smaller as assets are sold. Although distribution levels will be reduced,
significant asset sales may result in potential special distributions to
Unitholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements and Financial Statement Schedules included in Item 14(a) of
this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(This space intentionally left blank.)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
As of the date of this Annual Report, the directors and executive officers of
PLM International (and key executive officers of its subsidiaries) are as
follows:
Name Age Position
- -------------------------------------- ------------------- -------------------------------------------------------
J. Alec Merriam 61 Director, Chairman of the Board, PLM International,
Inc.; Director, PLM Financial Services, Inc.
Douglas P. Goodrich 50 Director and Senior Vice President, PLM
International; Director and President, PLM Financial
Services, Inc.; Senior Vice President, PLM
Transportation Equipment Corporation; President, PLM
Railcar Management Services, Inc.
Walter E. Hoadley 80 Director, PLM International, Inc.
Robert L. Pagel 60 Director, Chairman of the Executive Committee, PLM
International, Inc.; Director, PLM Financial
Services, Inc.
Harold R. Somerset 62 Director, PLM International, Inc.
Robert N. Tidball 58 Director, President and Chief Executive Officer, PLM
International, Inc.
J. Michael Allgood 48 Vice President and Chief Financial Officer, PLM
International, Inc. and PLM Financial Services, Inc.
Stephen M. Bess 50 President, PLM Investment Management, Inc.;
President, PLM Securities, Inc.; Vice President, PLM
Financial Services, Inc.;
David J. Davis 40 Vice President and Corporate Controller, PLM
International and PLM Financial Services, Inc.
Frank Diodati 42 President, PLM Railcar Management Services Canada
Limited.
Steven O. Layne 42 Vice President, PLM Transportation Equipment
Corporation.; Vice President and Director, PLM
Worldwide Management Services, Ltd.
Stephen Peary 48 Senior Vice President, General Counsel and Secretary,
PLM International, Inc.; Vice President, General
Counsel and Secretary, PLM Financial Services, Inc.,
PLM Investment Management, Inc., PLM Transportation
Equipment Corporation; Vice President, PLM
Securities, Corp.
Thomas L. Wilmore 54 Vice President, PLM Transportation Equipment
Corporation; Vice President, PLM Railcar Management
Services, Inc.
J. Alec Merriam was appointed Chairman of the Board of Directors of PLM
International in September 1990, having served as a director since February
1988. In October 1988 he became a member of the Executive Committee of the Board
of Directors of PLM International. From 1972 to 1988, Mr. Merriam was Executive
Vice President and Chief Financial Officer of Crowley Maritime Corporation, a
San Francisco area-based company engaged in maritime shipping and transportation
services. Previously, he was Chairman of the Board and Treasurer of LOA
Corporation of Omaha, Nebraska and served in various financial positions with
Northern Natural Gas Company, also of Omaha.
Douglas P. Goodrich was elected to the Board of Directors in July 1996 and
appointed Director and President of PLM Financial Services in June 1996 and
Senior Vice President of PLM International in March 1994. Mr. Goodrich has also
served as Senior Vice President of PLM Transportation Equipment Corporation
since July 1989, and as President of PLM Railcar Management Services, Inc. since
September 1992, having been a Senior Vice President since June 1987. Mr.
Goodrich was an Executive Vice President of G.I.C. Financial Services
Corporation, a subsidiary of Guardian Industries Corp. of Chicago, Illinois from
December 1980 to September 1985.
Dr. Hoadley joined PLM International's Board of Directors and its Executive
Committee in September 1989. He served as a Director of PLM, Inc. from November
1982 to June 1984 and PLM Companies, Inc. from October 1985 to February 1988.
Dr. Hoadley has been a Senior Research Fellow at the Hoover Institute since
1981. He was Executive Vice President and Chief Economist for the Bank of
America from 1968 to 1981 and Chairman of the Federal Reserve Bank of
Philadelphia from 1962 to 1966. Dr. Hoadley had served as a Director of
Transcisco Industries, Inc. from February 1988 through August 1995.
Robert L. Pagel was appointed Chairman of the Executive Committee of the
Board of Directors of PLM International in September 1990, having served as a
director since February 1988. In October 1988, he became a member of the
Executive Committee of the Board of Directors of PLM International. From June
1990 to April 1991, Mr. Pagel was President and Co-Chief Executive Officer of
The Diana Corporation, a holding company traded on the New York Stock Exchange.
He is the former President and Chief Executive Officer of FanFair Corporation
which specializes in sports fans' gift shops. He previously served as President
and Chief Executive Officer of Super Sky International, Inc., a publicly traded
company, located in Mequon, Wisconsin, engaged in the manufacture of skylight
systems. He was formerly Chairman and Chief Executive Officer of Blunt, Ellis &
Loewi, Inc., a Milwaukee-based investment firm. Mr. Pagel retired from Blunt,
Ellis & Loewi in 1985 after a career spanning 20 years in all phases of the
brokerage and financial industries. Mr. Pagel has also served on the Board of
Governors of the Midwest Stock Exchange.
Harold R. Somerset was elected to the Board of Directors of PLM
International in July 1994. From February 1988 to December 1993, Mr. Somerset
was President and Chief Executive Officer of California & Hawaiian Sugar
Corporation (C&H), a recently-acquired subsidiary of Alexander & Baldwin, Inc.
Mr. Somerset joined C&H in 1984 as Executive Vice President and Chief Operating
Officer, having served on its Board of Directors since 1978, a position in which
he continues to serve. Between 1972 and 1984, Mr. Somerset served in various
capacities with Alexander & Baldwin, Inc., a publicly-held land and agriculture
company headquartered in Honolulu, Hawaii, including Executive Vice President -
Agricultures, Vice President, General Counsel and Secretary. In addition to a
law degree from Harvard Law School, Mr. Somerset also holds degrees in civil
engineering from the Rensselaer Polytechnic Institute and in marine engineering
from the U.S. Naval Academy. Mr. Somerset also serves on the Boards of Directors
for various other companies and organizations, including Longs Drug Stores,
Inc., a publicly-held company headquartered in Maryland.
Robert N. Tidball was appointed President and Chief Executive Officer of
PLM International in March 1989. At the time of his appointment, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989 and a member of the Executive Committee of the
Board of Directors of PLM International in September 1990. Mr. Tidball was
elected President of PLM Railcar Management Services, Inc. in January 1986. Mr.
Tidball was Executive Vice President of Hunter Keith, Inc., a Minneapolis-based
investment banking firm, from March 1984 to January 1986. Prior to Hunter Keith,
Inc., he was Vice President, a General Manager and a Director of North American
Car Corporation, and a Director of the American Railcar Institute and the
Railway Supply Association.
J. Michael Allgood was appointed Vice President and Chief Financial Officer
of PLM International in October 1992. Between July 1991 and October 1992, Mr.
Allgood was a consultant to various private and public sector companies and
institutions specializing in financial operational systems development. In
October 1987, Mr. Allgood co-founded Electra Aviation Limited and its holding
company, Aviation Holdings Plc of London where he served as Chief Financial
Officer until July 1991. Between June 1981 and October 1987, Mr. Allgood served
as a First Vice President with American Express Bank, Ltd. In February 1978, Mr.
Allgood founded and until June 1981, served as a director of Trade Projects
International/Philadelphia Overseas Finance Company, a joint venture with
Philadelphia National Bank. From March 1975 to February 1978, Mr. Allgood served
in various capacities with Citibank, N.A.
Stephen M. Bess was appointed President of PLM Securities, Inc. in June
1996 and President of PLM Investment Management, Inc. in August 1989, having
served as Senior Vice President of PLM Investment Management, Inc. beginning in
February 1984 and as Corporate Controller of PLM Financial Services, Inc.
beginning in October 1983. Mr. Bess served as Corporate Controller of PLM, Inc.,
beginning in December 1982. Mr. Bess was Vice President-Controller of Trans
Ocean Leasing Corporation, a container leasing company, from November 1978 to
November 1982, and Group Finance Manager with the Field Operations Group of
Memorex Corp., a manufacturer of computer peripheral equipment, from October
1975 to November 1978.
David J. Davis was appointed Vice President and Controller of PLM
International in January 1994. From March 1993 through January 1994, Mr. Davis
was engaged as a consultant for various firms, including PLM. Prior to that Mr.
Davis was Chief Financial Officer of LB Credit Corporation in San Francisco from
July 1991 to March 1993. From April 1989 to May 1991, Mr. Davis was Vice
President and Controller for ITEL Containers International Corporation which was
located in San Francisco. Between May 1978 and April 1989, Mr. Davis held
various positions with Transamerica Leasing Inc., in New York, including that of
Assistant Controller for their rail leasing division.
Frank Diodati was appointed President of PLM Railcar Management Services
Canada Limited in 1986. Previously, Mr. Diodati was Manager of Marketing and
Sales for G.E. Railcar Services Canada Limited.
Steven O. Layne was appointed Vice President, PLM Transportation Equipment
Corporation's Air Group in November 1992, and was appointed Vice President and
Director of PLM Worldwide Management Services, Ltd. in September, 1995. Mr.
Layne was PLM Transportation Equipment Corporation's Vice President, Commuter
and Corporate Aircraft beginning in July 1990. Prior to joining PLM, Mr. Layne
was the Director, Commercial Marketing for Bromon Aircraft Corporation, a joint
venture of General Electric Corporation and the Government Development Bank of
Puerto Rico. Mr. Layne is a Major in the United States Air Force Reserves and
senior pilot with 13 years of accumulated service.
Stephen Peary became Vice President, Secretary, and General Counsel of PLM
International in February 1988 and Senior Vice President in March 1994. Mr.
Peary was Assistant General Counsel of PLM Financial Services, Inc. from August
1987 through January 1988. Previously, Mr. Peary was engaged in the private
practice of law in San Francisco. Mr. Peary is a graduate of the University of
Illinois, Georgetown University Law Center, and Boston University (Masters of
Taxation Program).
Thomas L. Wilmore was appointed Vice President - Rail, PLM Transportation
Equipment Corporation in March 1994 and has served as Vice President, Marketing
for PLM Railcar Management Services, Inc. since May 1988. Prior to joining PLM,
Mr. Wilmore was Assistant Vice President Regional Manager for MNC Leasing Corp.
in Towson, Maryland from February 1987 to April 1988. From July 1985 to February
1987, he was President and Co-Owner of Guardian Industries Corp., Chicago,
Illinois and between December 1980 and July 1985, Mr. Wilmore was an Executive
Vice President for its subsidiary, G.I.C. Financial Services Corporation. Mr.
Wilmore also served as Vice President of Sales for Gould Financial Services
located in Rolling Meadows, Illinois from June 1978 to December 1980.
The directors of the General Partner are elected for a one-year term or
until their successors are elected and qualified. There are no family
relationships between any director or any executive officer of the General
Partner.
(This space intentionally left blank.)
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers or employees. The Partnership has no
pension, profit-sharing, retirement, or similar benefit plan in effect as of
December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to 5% interest in the profits
and losses and distributions of the Partnership. At December 31, 1996,
no investor was known by the General Partner to beneficially own more
than 5% of the Depositary Units of the Partnership.
(b) Security Ownership of Management
Table 5, below, sets forth, as of the date of this report, the amount
and the percent of the Partnership's outstanding Depositary Units
beneficially owned by each director and executive officer and all
directors and executive officers as a group of the General Partner and
its affiliates:
TABLE 5
Name Depositary Units Percent of Units
J. Alec Merriam 1,000 *
Robert N. Tidball 400 *
All directors and officers
as a group (2 people) 1,400 *
- --------------------------------
* Represents less than 1 percent of the Depositary Units outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
During 1996, management fees to IMI were $583,000. The General Partner and its
affiliates were reimbursed $727,000 for administrative and data processing
services performed on behalf of the Partnership in 1996.
During 1996, the Unconsolidated Special Purpose Entities paid or accrued
the following fees to FSI or its affiliates (based on the Partnership's
proportional share of ownership): management fees - $44,000; and administrative
and data processing services - $23,000.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
None.
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.
(b) Reports on Form 8-K
None.
(c) Exhibits
4. Limited Partnership Agreement of Registrant, incorporated by
reference to the Partnership's Registration Statement on Form
S-1 (Reg. No. 33-13113) which became effective with the
Securities and Exchange Commission on June 5, 1987.
4.1 Amendment, dated November 18, 1991, to Limited Partnership
Agreement of Partnership.
10.1 Management Agreement between Registrant and PLM Investment
Management, Inc., incorporated by reference to the
Partnership's Registration Statement on Form S-1 (Reg. No.
33-13113) which became effective with the Securities and
Exchange Commission on June 5, 1987.
10.2 $35,000,000 Note Agreement, dated as of March 1, 1994.
25. Powers of Attorney.
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.
Date: February 28, 1997 PLM EQUIPMENT GROWTH FUND II
Partnership
By: PLM Financial Services, Inc.
General Partner
By: /s/ Douglas P. Goodrich
------------------------
Douglas P. Goodrich
President and Director
By: /s/ David J. Davis
------------------------
David J. Davis
Vice President and
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following directors of the
Partnership's General Partner on the dates indicated.
Name Capacity Date
*_____________________
J. Alec Merriam Director - FSI February 28, 1997
*_____________________
Robert L. Pagel Director - FSI February 28, 1997
* Stephen Peary, by signing his name hereto does sign this document on behalf of
the persons indicated above pursuant to powers of attorney duly executed by such
persons and filed with the Securities and Exchange Commission.
/s/ Stephen Peary
- ---------------------
Stephen Peary
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Report of Independent Auditors 27
Balance sheets as of December 31, 1996 and 1995 28
Statements of income for the years ended December 31, 1996,
1995, and 1994 29
Statements of changes in partners' capital for the years
ended December 31, 1996, 1995, and 1994 30
Statements of cash flows for the years ended December 31,
1996, 1995, and 1994 31
Notes to financial statements 32 - 40
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.
REPORT OF INDEPENDENT AUDITORS
The Partners
PLM Equipment Growth Fund II:
We have audited the accompanying balance sheets of PLM Equipment Growth Fund II
as of December 31, 1996 and 1995, and the related statements of income, changes
in partners' capital, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth Fund II as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
- --------------------------
SAN FRANCISCO, CALIFORNIA
February 28, 1997
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars except per unit amounts)
ASSETS
1996 1995
---------------------------------
Equipment held for operating leases, at cost $ 82,856 $ 93,980
Less accumulated depreciation (62,114 ) (65,000 )
---------------------------------
Net equipment 20,742 28,980
Cash and cash equivalents 7,962 6,427
Restricted cash 295 548
Investment in unconsolidated special purpose entities 1,665 10,515
Accounts receivable, less allowance for doubtful
accounts of $882 in 1996 and $19 in 1995 1,765 2,198
Lease negotiation fees to affiliate, net of accumulated
amortization of $89 in 1996 and $1,305 in 1995 29 70
Debt issuance costs, net of accumulated amortization
of $108 in 1996 and $69 in 1995 128 167
Prepaid expenses and other assets 1,009 52
---------------------------------
Total assets $ 33,595 $ 48,957
=================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 412 $ 409
Due to affiliates 110 398
Notes payable 13,000 27,000
Lessee deposits and reserve for repairs 2,827 2,954
---------------------------------
Total liabilities 16,349 30,761
---------------------------------
Partners' capital (deficit):
Limited Partners (7,381,805 and 7,426,305 Depositary Units including 1,150
Depositary Units held in the Treasury at
December 31, 1996 and 1995 respectively) 17,434 18,658
General Partner (188 ) (462 )
---------------------------------
Total partners' capital 17,246 18,196
---------------------------------
Total liabilities and partners' capital $ 33,595 $ 48,957
=================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF INCOME
For the years ended December 31,
(in thousands of dollars except per unit amounts)
1996 1995 1994
-----------------------------------------
Revenues:
Lease revenue $ 12,379 $ 16,830 $ 23,251
Interest and other income 355 668 728
Net gain on disposition of equipment 2,085 1,485 2,347
-----------------------------------------
Total revenues 14,819 18,983 26,326
Expenses:
Depreciation and amortization 5,698 8,552 11,141
Management fees to affiliate 583 818 1,150
Interest expense 1,815 2,349 2,550
Insurance expense to affiliate -- 87 299
Other insurance expense 112 171 618
Repairs and maintenance 2,172 2,867 4,307
Marine equipment operating expenses -- 152 3,033
General and administrative expenses
to affiliates 727 1,026 732
Other general and administrative expenses 1,078 895 1,298
Bad debt expense 715 462 244
Loss on revaluation of equipment -- 667 887
-----------------------------------------
Total expenses 12,900 18,046 26,259
-----------------------------------------
Equity in net income of unconsolidated special purpose entities 6,267 -- --
-----------------------------------------
Net income $ 8,186 $ 937 $ 67
=========================================
Partners' share of net income (loss):
Limited Partners $ 7,464 $ 75 $ (899 )
General Partner 722 862 966
=========================================
Total $ 8,186 $ 937 $ 67
=========================================
Net income (loss) per weighted average Depositary Unit (7,384,738,
7,443,910 and 7,490,254 Depositary Units
at December 31, 1996, 1995, and 1994 $ 1.01 $ 0.01 $ (0.12 )
=========================================
Cash distributions $ 8,957 $ 12,549 $ 12,620
=========================================
Cash distribution per weighted average Depositary Unit $ 1.15 $ 1.60 $ 1.60
=========================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the years ended December 31, 1996, 1995, and 1994
(thousands of dollars)
Limited General
Partners Partner Total
--------------------------------------------------
Partners' capital (deficit) at December 31, 1993 $ 43,894 $ (1,032 ) $ 42,862
Net income (loss) (899 ) 966 67
Cash distributions (11,989 ) (631 ) (12,620 )
Repurchase of Depositary Units (156 ) -- (156 )
--------------------------------------------------
Partners' capital (deficit) at December 31, 1994 30,850 (697) 30,153
Net income 75 862 937
Cash distributions (11,922 ) (627 ) (12,549 )
Repurchase of Depositary Units (345 ) -- (345 )
--------------------------------------------------
Partners' capital (deficit) at December 31, 1995 18,658 (462 ) 18,196
Net income 7,464 722 8,186
Cash distributions (8,509 ) (448 ) (8,957 )
Repurchase of Depositary Units (179 ) -- (179 )
--------------------------------------------------
Partners' capital (deficit) at December 31, 1996 $ 17,434 $ (188 ) $ 17,246
==================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31,
(thousands of dollars)
1996 1995 1994
--------------------------------------------
Operating activities:
Net income $ 8,186 $ 937 $ 67
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Net gain on disposition of equipment (2,085 ) (1,485 ) (2,347 )
Write-off of unamortized loan origination
cost and debt placement fees -- -- 305
Loss on revaluation of equipment -- 667 887
Depreciation and amortization 5,698 8,552 11,141
Equity in net income of unconsolidated special purpose
entities (6,267 ) -- --
Changes in operating assets and liabilities:
Restricted cash 253 (252 ) 150
Accounts receivable, net 385 (166 ) 644
Prepaid expenses and other assets (957 ) 34 234
Accounts payable and accrued expenses 3 (473 ) (863 )
Due to affiliates (288 ) 308 (121 )
Accrued drydock expenses -- 271 2,201
Lease deposits and reserves for repairs (127 ) (217 ) (988 )
--------------------------------------------
Net cash provided by operating activities 4,801 8,176 11,310
--------------------------------------------
Investing activities:
Proceeds from disposition of equipment 4,761 7,005 13,558
Liquidation distributions from unconsolidated special purpose
entities 14,272 -- --
Distributions from unconsolidated special purpose entities 845 -- --
Payments of acquisition-related fees to affiliate -- -- (534 )
Payments for purchase of equipment -- -- (11,856 )
Payment for capital improvements (8 ) (11 ) (727 )
Decrease in restricted cash -- 7,378
Payments of lease negotiation fees to affiliate -- -- (119 )
--------------------------------------------
Net cash provided by investing activities 19,870 6,994 7,700
--------------------------------------------
Financing activities:
Proceeds from notes payable -- -- 35,000
Principal payments on notes payable (14,000 ) (8,000 ) (35,000 )
Payments of debt issuance costs -- -- (236 )
Cash distributions paid to Limited Partners (8,509 ) (11,922 ) (11,989 )
Cash distributions paid to General Partner (448 ) (627 ) (631 )
Repurchase of Depositary Units (179 ) (345 ) (156 )
--------------------------------------------
Net cash used in financing activities (23,136 ) (20,894 ) (13,012 )
--------------------------------------------
Cash and cash equivalents:
Net increase (decrease) in cash and cash
equivalents 1,535 (5,724 ) 5,998
Cash and cash equivalents at beginning of year (See Note 4) 6,427 12,348 6,350
--------------------------------------------
Cash and cash equivalents at end of year $ 7,962 $ 6,624 $ 12,348
============================================
Supplemental information:
Interest paid $ 1,815 $ 2,302 $ 2,246
============================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation
Organization
PLM Equipment Growth Fund II, a California limited partnership (the
Partnership) was formed on March 30, 1987. The Partnership engages in
the business of owning and leasing primarily used transportation
equipment. The Partnership commenced significant operations in June,
1987. PLM Financial Services, Inc. (FSI) is the General Partner. FSI is
a wholly-owned subsidiary of PLM International, Inc. (PLM
International).
The Partnership will terminate on December 31, 2006, unless
terminated earlier upon sale of all equipment or by certain other
events. Since the end of 1995, and in accordance with the Partnership
Agreement, the General Partner stopped reinvesting excess cash and will
start distributing any funds remaining to the Partners. It is
anticipated that the Partnership will be completely liquidated by the
end of 2000.
FSI manages the affairs of the Partnership. The net income (loss)
and distributions of the Partnership are generally allocated 95% to the
Limited Partners and 5% to the General Partner (see Net Income (Loss)
and Distributions per Depositary Unit, below). The General Partner is
entitled to an incentive fee equal to 7.5% of Surplus Distributions as
defined in the Limited Partnership Agreement remaining after the
Limited Partners have received a certain minimum rate of return.
These financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting
principles. This requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Operations
The equipment of the Partnership is managed under a continuing
management agreement by PLM Investment Management, Inc. (IMI), a
wholly-owned subsidiary of FSI. IMI receives a monthly management fee
from the Partnership for managing the equipment (see Note 2). FSI, in
conjunction with its subsidiaries, syndicates investor programs, sells
transportation equipment to investor programs and third parties,
manages pools of transportation equipment under agreements with the
investor programs, and is a General Partner of other Limited
Partnerships.
Accounting for Leases
The Partnership's leasing operations generally consist of operating
leases. Under the operating lease method of accounting, the leased
asset is recorded at cost and depreciated over its estimated useful
life. Rental payments are recorded as revenue over the lease term.
Lease origination costs are capitalized and amortized over the term of
the lease.
Depreciation and Amortization
Depreciation of equipment held for operating leases is computed on the
200% 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 all other types of equipment. The
depreciation method changes to straight line when annual depreciation
expense using the straight line method exceeds that calculated by the
200% declining balance method. Acquisition fees have been capitalized
as part of the cost of the equipment. Major expenditures which are
expected to extend the useful lives or reduce future operating expenses
of equipment are
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
Depreciation and Amortization (continued)
capitalized. Lease negotiation fees are amortized over the initial
equipment lease term. Debt issuance costs are amortized over the term
of the loan for which they are paid.
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued
statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (SFAS 121). This standard
is effective for years beginning after December 15, 1995. The
Partnership adopted SFAS 121 during 1995, the effect of which was not
material as the method previously employed by the Partnership was
consistent with SFAS 121. In accordance with SFAS 121, the Partnership
reviews the carrying value of its equipment at least annually in
relation to expected future market conditions for the purpose of
assessing the recoverability of the recorded amounts. If projected
future lease revenue plus residual values are less than the carrying
value of the equipment, a loss on revaluation is recorded.
Investments in Unconsolidated Special Purpose Entities
The Partnership has interests in unconsolidated special purpose
entities which own transportation equipment. These interests are
accounted for using the equity method.
The Partnership's investment in unconsolidated special purpose
entities includes acquisition and lease negotiation fees paid by the
Partnership to TEC. The Partnership's equity interest in net income of
unconsolidated special purpose entities is reflected net of management
fees paid or payable to IMI and the amortization of acquisition and
lease negotiation fees paid to TEC.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are
not covered by the lessee, they are charged against operations as
incurred. To meet the maintenance obligations of certain aircraft
airframes and engines, escrow accounts are prefunded by the lessees.
Estimated costs associated with marine vessel drydockings, which are
included in repairs and maintenance expense, are accrued and charged to
income ratably over the period prior to such drydocking. The reserve
accounts are included in the balance sheet as lessee deposits and
reserve for repairs.
Net Income (Loss) and Distributions per Depositary Unit
The net income (loss) and distributions of the Partnership are
generally allocated 95% to the Limited Partners and 5% to the General
Partner. During 1996, the General Partner received a special allocation
of income of $313,000 ($815,000 in 1995 and $963,000 in 1994). The
Limited Partners' net income or loss and distributions are allocated
among the Limited Partners based on the number of Depository Units
owned by each Limited Partner. Cash distributions are recorded when
paid. Cash distributions of $1,942,000 ($0.25 per Weighted Average
Depositary Unit), $3,127,000, and $3,146,000 ($0.40 per Weighted
Average Depositary Unit in 1995 and 1994) were declared on December 31,
1996, 1995, and 1994 and paid on February 15, 1997, 1996, and 1995,
respectively, to the unitholders of record as of December 31, 1996,
1995, and 1994, respectively. Cash distributions to investors in excess
of net income are considered to represent a return of capital. Cash
distributions to Limited Partners of $1,045,000, $11,847,000, and
$11,989,000 in 1996, 1995, and 1994, respectively, were deemed to be a
return of capital.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
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. Lessee security deposits held by
the Partnership are considered restricted cash.
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
2. General Partner and Transactions with Affiliates
An officer of FSI contributed $100 of the Partnership's initial
capital. Under the equipment management agreement, IMI receives a
monthly management fee attributable to either owned equipment or
interests in equipment owned by the Unconsolidated Special Purpose
Entities (USPE) equal to the greater of (i) 5% of Gross Revenues (as
defined in the agreement) prior to the payment of any principal and
interest incurred in connection with any indebtedness, or (ii) 1/12 of
1/2% of the net book value of the equipment portfolio subject to
certain adjustments. Partnership management fees of $116,000 and
$542,000, were payable at December 31, 1996, and 1995, respectively.
The Partnership's proportional share of the USPE's management fees
expenses during 1996 was $44,000. The Partnership reimbursed FSI and
its affiliates $727,000, $1,026,000, and $732,000 for administrative
and data processing services performed on behalf of the Partnership in
1996, 1995, and 1994, respectively. The Partnership's proportional
share of the USPE's administrative and data processing expenses was
$23,000 during 1996. Debt placement fees are charged by the General
Partner in an amount equal to 1% of the Partnership's borrowings less
amounts paid to third parties in relation to the debt placement. No
debt placement fees were paid or payable to FSI during 1996, 1995, and
1994.
The Partnership and USPE's paid lease negotiation and equipment
acquisition fees of $653,000 in 1994, and none in 1995 and 1996, to PLM
Transportation Equipment Corporation (TEC). TEC is a wholly owned
subsidiary of FSI.
The Partnership paid $87,000 and $299,000 in 1995 and 1994,
respectively, to Transportation Equipment Indemnity Company Ltd. (TEI),
which provides marine insurance coverage and other insurance brokerage
services. TEI is an affiliate of the General Partner. A substantial
portion of these amounts was paid to third party reinsurance
underwriters or placed in risk pools managed by TEI on behalf of
affiliated partnerships and PLM International which provide threshold
coverages on marine vessel loss of hire and hull and machinery damage.
All pooling arrangement funds are either paid out to cover applicable
losses or refunded pro rata by TEI.
At December 31, 1996, approximately 37% of the Partnership's
trailer equipment was held in rental yards operated by an affiliate of
the General Partner. Revenues collected under short-term rental
agreements with the rental yards' customers are distributed monthly to
the owners of the related equipment. Direct expenses associated with
the equipment and an allocation of other direct expenses of the rental
yard operations are billed to the Partnership.
The Partnership has an interest in certain equipment for lease in
conjunction with affiliated partnerships which is included in
investment in Unconsolidated Special Purpose Entities. In 1996, this
equipment included one commercial aircraft (50% owned).
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. Equipment
Owned equipment held for operating leases is stated at cost. The
components of equipment at December 31, 1996 and 1995, are as follows
(in thousands):
Equipment held for operating leases 1996 1995
-------------------------------
Rail equipment $ 18,183 $ 19,747
Marine containers 10,640 13,399
Aircraft 32,860 37,902
Trailers 21,173 22,932
-------------------------------
82,856 93,980
Less accumulated depreciation (62,114 ) (65,000 )
-------------------------------
Net equipment $ 20,742 $ 28,980
===============================
Revenues are earned by placing the equipment under operating
leases which are generally billed monthly or quarterly. Some of the
Partnership's marine containers are leased to operators of
utilization-type leasing pools which include equipment owned by
unaffiliated parties. In such instances revenues received by the
Partnership consist of a specified percentage of revenues generated by
leasing the equipment to sublessees, after deducting certain direct
operating expenses of the pooled equipment. Rents for railcars are
based on mileage traveled or a fixed rate; rents for all other
equipment are based on fixed rates.
As of December 31, 1996, all equipment in the Partnership
portfolio was either operating in short-term rental facilities or on
lease, except 3 railcars and 71 marine containers. At December 31,
1995, all equipment in the Partnership portfolio was either on lease or
operating in PLM-affiliated short-term trailer rental facilities, with
the exception of an aircraft, a railcar and 115 marine containers. The
aggregate carrying value of equipment off-lease was $0.2 million and
$2.0 million at December 31, 1996 and 1995, respectively.
During 1996, the Partnership sold or disposed of 303 marine
containers, 154 trailers, 47 railcars and one aircraft, with an
aggregate net book value of $2.7 million, for proceeds of $4.8 million.
During 1995, the Partnership sold or disposed of 2,278 marine
containers, 11 trailers, 1 tractor, and 1 railcar, with an aggregate
net book value of $2.6 million for proceeds of $3.5 million.
The Partnership reduced the carrying value of one aircraft by
$667,000 during 1995 to its estimated net realizable value.
All leases are being accounted for as operating leases. Future
minimum rentals receivable under noncancelable leases at December 31,
1996, during each of the next five years are approximately $5,352,000 -
1997; $3,810,000 - 1998; $3,174,000 - 1999; $1,216,000 - 2000; and
$515,000 - 2001 and thereafter. Contingent rentals based upon
utilization were approximately $1,293,000, $2,047,000, and $2,821,000
in 1996, 1995 and 1994, respectively.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. Equipment (continued)
The Partnership owns certain equipment which is leased and
operated internationally. A limited number of the Partnership's
transactions are denominated in a foreign currency. Gains or losses
resulting from foreign currency transactions are included in the
results of operations and are not material.
The Partnership leases its aircraft, railcars and trailers to
lessees domiciled in six geographic regions: South Asia, Middle East,
Canada, United States, Asia, and Europe. Marine vessels and marine
containers are leased to multiple lessees in different regions who
operate the marine vessels and marine containers worldwide. For the
year ended December 31, 1996, the Partnership accounts for proportional
interest in equipment using the equity method. The geographic
information is grouped by domicile of the lessee as of and for the year
ended December 31, 1996, 1995, and 1994 (in thousands):
Investments in
Unconsolidated Special Owned Total Equipment
Purpose Entities
--------------------------------------------------------------------------
1996 1996 1995 1994
--------------------------------------------------------------------------
Revenues:
Various $ -- $ 1,258 $ 1,971 $ 7,120
South Asia 1,284 -- 2,192 2,660
Middle East -- -- -- 584
Canada -- 1,765 1,760 1,800
United States -- 8,516 9,591 8,635
Asia -- -- 630 756
Europe -- 840 686 1,696
==========================================================================
Total revenues $ 1,284 $ 12,379 $ 16,830 $ 23,251
==========================================================================
The following table sets forth identifiable net income (loss)
information by region for the year ended December 31, 1996, 1995, and
1994 (in thousands):
Investments in Unconsolidated
Special Purpose Entities Owned Total Equipment
------------------------------------------------------------------------
1996 1996 1995 1994
------------------------------------------------------------------------
Income (loss):
Various $ -- $ 320 $ 1,445 $ (1,639 )
South Asia 6,267 -- (10) 18
Middle East -- -- -- 1,447
Canada -- 927 897 911
United States -- 2,075 2,876 2,982
Asia -- 763 173 217
Europe -- 162 (728) (468 )
------------------------------------------------------------------------
Total identifiable net 6,267 4,247 4,653 3,468
income
Administrative and other -- (2,328 ) (3,716) (3,401 )
========================================================================
Total net income $ 6,267 $ 1,919 $ 937 $ 67
========================================================================
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. Equipment (continued)
The net book value of owned assets at December 31, 1996, and 1995, and
the net investment in the unconsolidated special purpose entities at
December 31, 1996 and 1995, are as follows (in thousands):
Investment in Total
Unconsolidated Special Owned Equipment
Purpose Entities
-----------------------------------------------------------------
1996 1995 1996 1995 1994
-----------------------------------------------------------------
Various $ -- $ -- $ 2,748 $ 3,951 $ 9,706
Canada -- -- 2,215 1,912 2,215
United States -- -- 14,538 19,632 23,378
Asia -- -- -- 1,641 2,046
South Asia 1,665 10,515 -- -- 2,665
Middle East -- -- -- -- 9,669
Europe -- -- 1,241 1,844 4,433
=================================================================
Total Equipment $ 1,665 $ 10,515 $ 20,742 $ 28,980 $ 54,112
=================================================================
There were no lessees that accounted for 10% or more of total revenues
for 1996, 1995, and 1994.
4. Investment in Unconsolidated Special Purpose Entities
Prior to 1996, the Partnership accounted for operating activities
associated with joint ownership of transportation equipment as
undivided interests, including its proportionate share of each asset
with similar wholly-owned assets in its financial statements. Under
generally accepted accounting principles, the effects of such
activities, if material, should be reported using the equity method of
accounting. Therefore, effective January 1, 1996, the Partnership
adopted the equity method to account for its investment in such
jointly-held assets.
The principle differences between the previous accounting method
and the equity method relate to the presentation of activities relating
to these assets in the statement of operations. Under the previous
method, the Partnership's income statement reflected its proportionate
share of each individual item of revenue and expense. Under the equity
method of accounting, the Partnership's proportionate share is
presented as a single net amount, equity in net income (loss) of
unconsolidated special purpose entities. Accordingly, the effect of
adopting the equity method of accounting has no cumulative effect on
previously reported partner's capital or on the Partnership's net
income (loss) for the period of adoption. Because the effects on
previously issued financial statements of applying the equity method of
accounting to investments in jointly-owned assets are not considered to
be material to such financial statements taken as a whole, previously
issued financial statements have not been restated. However, certain
items have been reclassified in the previously issued balance sheet to
conform to the current period presentation. The beginning cash and cash
equivalents for 1996 is different from the ending cash and cash
equivalents for 1995 on statements of cash flows due to the
reclassification.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Investment in Unconsolidated Special Purpose Entities (continued)
The net investment in unconsolidated special purpose entities includes
the following jointly-owned equipment (and related assets and
liabilities) (in thousands):
December 31, December 31,
1996 1995
-------------------------------------
50% interest in a trust owning Boeing 737-200A
aircraft $ 1,665 $ 2,365
55% interest in a an entity owning mobile offshore
drilling unit -- 8,150
------------------------------------
Investment in unconsolidated special purpose
entities $ 1,665 $ 10,515
====================================
During the year ended December 31, 1996, the General Partner sold
the asset related to the Partnership's 55% interest in an entity which
owns a mobile offshore drilling unit, included in "Investment in
Unconsolidated Special Purpose Entities," with a net book value of $7.2
million for proceeds of $14.3 million. For the same period ended
December 31, 1995, the General Partner sold the assets related to the
Partnership's 50% owned DC-9 aircraft and 50% owned marine vessel,
included in "Investment in Unconsolidated Special Purpose Entities,"
with an aggregate net book value of $3.2 million and unused drydock
reserves of $0.3 million, for proceeds of $3.5 million.
The Partnership's 50% investment in a commercial aircraft included
in "Investments in unconsolidated special purpose entities" was
off-lease at December 31, 1996.
The Partnership received liquidating distributions from the
Unconsolidated Special Purpose Entities during the third quarter.
The following summarizes the financial information for the special
purpose entities and the Company's interests therein as of and for the
year ended December 31, 1996 (in thousands):
Net Interest of
Total Numbers Partnership
--------------------------------------
Net Assets $3,354 $1,665
Lease Revenues 2,418 1,284
Net Income 11,295 6,267
5. Other Assets
Included in other assets is a spare engine which was purchased in 1996.
This engine will replace an existing engine in need of overhaul on one
of the Partnership's Boeing 737-200 commercial aircraft in 1997. The
old engine will be sold when removed from service.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
6. Notes Payable
1996 1995
--------------------------------
Notes payable to insurance companies under a $35 million Loan
facility, bearing interest at LIBOR + 1.55% per annum (7.12% at
December 31, 1996, and 7.24% at December 31,
1995) payable quarterly in arrears $13,000,000 $27,000,000
--------------------------------
Total notes payable $13,000,000 $27,000,000
================================
On March 31, 1994, the Partnership completed a refinancing of its
$35 million bank loan which was originally due on September 30, 1995.
The new loan facility is unsecured and nonrecourse, limits additional
borrowings, and specifies covenants related to collateral coverage,
fixed charge coverage, ratios for market value, and composition of the
equipment owned by the Partnership. The loan facility bears interest at
LIBOR + 1.55% per annum (7.12% at December 31, 1996, and 7.24% at
December 31, 1995) and is payable quarterly in arrears. Principal is
payable in annual installments of $4 million due on March 31, 1996 and
1997, $9 million on March 31, 1998 and 1999, and a final payment of $9
million on March 31, 2000. The Partnership paid a facility fee of
$236,000 to the lender in connection with this credit facility. As of
December 31, 1996, the Partnership prepaid $22,000,000 of the
outstanding note payable representing the principal payments due March
31, 1996, 1997, 1998 and a portion of 1999.
The General Partner believes that the book value of the notes
payable approximates fair value due to its variable interest rate.
In May 1996, the General Partner revised its short term loan
facility (the "Committed Bridge Facility") and PLM Equipment Growth
Fund II is no longer included as a borrower.
7. Income Taxes
The Partnership is not subject to income taxes as any income or loss is
included in the tax returns of the individual Partners. Accordingly, no
provision for income taxes has been made in the financial statements of
the Partnership.
As of December 31, 1996, there were temporary differences of
approximately $12,870,000 between the financial statement carrying
values of certain assets and liabilities and the income tax basis of
such assets and liabilities, primarily due to the differences in
depreciation methods and in the method of providing reserves for
repairs.
8. Repurchase of Depositary Units
On December 28, 1992, the Partnership engaged in a program to
repurchase up to 200,000 Depositary Units. In 1996, the Partnership had
purchased and canceled 44,500 Depositary Units at a cost of $0.2
million. As of December 31, 1996, the Partnership had cumulatively
repurchased 117,800 Depositary Units at a cost of $0.8 million.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
9. Delisting of Partnership Units
The General Partner delisted the Partnership's depositary units from
the American Stock Exchange (AMEX) under the symbol GFY on April 8,
1996. The last day for trading on the AMEX was March 22, 1996. Under
the Internal Revenue Code (the Code), the Partnership was classified as
a Publicly Traded Partnership. The Code treats all Publicly Traded
Partnerships as corporations if they remain publicly traded after
December 31, 1997. Treating the Partnership as a corporation would mean
the Partnership itself would become a taxable, rather than a "flow
through" entity. As a taxable entity, the income of the Partnership
would have become subject to federal taxation at both the partnership
level and at the investor level to the extent that income would have
become distributed to an investor. In addition, the General Partner
believed that the trading price of the Depositary Units would have been
distorted when the Partnership began the final liquidation of the
underlying equipment portfolio. In order to avoid taxation of the
Partnership as a corporation and to prevent unfairness to Unitholders,
the General Partner delisted the Partnership's Depositary Units from
the AMEX. While the Partnership's Depositary Units are no longer
publicly traded on a national stock exchange, the General Partner
continues to manage the equipment of the Partnership and prepare and
distribute quarterly and annual reports and Forms 10-Q and 10-K in
accordance with the Securities and Exchange Commission requirements. In
addition, the General Partner continues to provide pertinent tax
reporting forms and information to Unitholders. The General Partner
anticipates an informal market for the Partnership's units may develop
in the secondary marketplace similar to that which currently exists for
non-publicly traded partnerships.
PLM EQUIPMENT GROWTH FUND II
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership *
4. 1 Amendment to Limited Partnership Agreement of Registrant *
10. 1 Management Agreement between Partnership and PLM Investment *
Management, Inc.
10. 2 $35,000,000 Note Agreement dated as of March 1, 1994 *
24. Powers of Attorney. 42 - 44
* Incorporated by reference. See page 24 of this report.