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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, 1997.
[ ] 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]
Indicate the number of units outstanding of each of the issuer's classes of
partnership units, as of the latest practicable date:
Class Outstanding at March 24, 1998
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Limited Partnership Depositary Units: 7,381,805
General Partnership Units: 1
Aggregate market value of voting stock: N/A
An index of exhibits filed with this Form 10-K is located at page 40.
Total number of pages in this report: 43.
PART I
ITEM 1. BUSINESS
(A) Background
On April 2, 1987, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly-owned subsidiary of PLM International, Inc. (PLM International or PLM),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 7,500,000 depositary units
(the units) in PLM Equipment Growth Fund II, a California limited partnership
(the Partnership, the registrant, or EGF II). The Partnership's offering became
effective on June 5, 1987. FSI, as General Partner, owns a 5% interest in the
Partnership. The Partnership 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:
(1) 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;
(2) to generate sufficient net operating cash flow from lease operations to
meet liquidity requirements and to generate cash distributions to the limited
partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(3) to selectively sell equipment when the General Partner believes that,
due to market conditions, market prices for equipment exceed inherent equipment
values or that expected future benefits from 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
(net cash provided by operating activities plus distributions from
unconsolidated special-purpose entities), are used for distributions to the
partners or for repayment of outstanding debt;
(4) to preserve and protect the value of the portfolio through quality
management, maintaining the portfolio's diversity and constantly monitoring
equipment markets.
The offering of the Partnership's units closed on March 18, 1988. The
General Partner contributed $100 for its 5% general partner interest in the
Partnership. On November 20, 1990, the units of the Partnership began trading on
the American Stock Exchange (AMEX). Thereupon each unitholder received a
depositary receipt representing ownership of the number of units owned by such
unitholder. The General Partner delisted the Partnership's depositary units from
the AMEX on April 8, 1996. The last day for trading on the AMEX was March 22,
1996.
As of December 31, 1997, there were 7,381,805 depositary units outstanding.
It is anticipated that the Partnership will be completely liquidated by the
end of the year 2000. Since the beginning of 1996, the Partnership has been in
its holding phase with the limited partnership agreement prohibiting the General
Partner from reinvesting cash flows and surplus funds in equipment. All future
cash flows and surplus funds, if any, are to be used to meet operating
requirements, for repayment of the Partnership's debt, and for distributions to
partners.
Table 1, below, lists the equipment and the cost of equipment in the Partnership
portfolio and the investments in unconsolidated special-purpose entities as of
December 31, 1997 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
- -----------------------------------------------------------------------------------------------------------------------
Equipment held for operating leases:
1 737-200 Stage II commercial aircraft Boeing $ 7,854
407 Refrigerated marine containers Various 8,308
116 Refrigerated trailers Various 3,682
162 Dry trailers Fruehauf 2,072
751 Dry piggyback trailers Various 11,372
2 Refrigerated piggyback trailers Great Dane 18
458 Box cars Various 7,777
180 Tank cars Various 4,741
27 Covered hopper cars ACF Industries 424
193 Mill gondolas Various 4,459
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Total equipment $ 50,707
================
Equipment held for sale:
1 727-200 Stage II commercial aircraft Boeing $ 10,973
44 Covered hopper cars ACF Industries 689
Total equipment held for sale $ 11,662
================
Investments in
unconsolidated special-purpose entities:
50% 737-200 Stage II commercial aircraft Boeing $ 8,046
23% 727-200 Stage III commercial aircraft Boeing 1,439
Total investments $ 9,485
Includes proceeds from capital contributions, undistributed cash flow from
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 (TEC), a
wholly-owned subsidiary of FSI. All equipment was used equipment at the
time of purchase.
Jointly owned: EGF II (50%) and an affiliated program.
Jointly owned: EGF II (23%) and two affiliated programs.
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 that include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. 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, 1997, 27% 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 doing business as PLM Trailer Leasing.
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 indirect expenses of the rental yard operations is
charged to the Partnership monthly.
The lessees of the equipment include but are not limited to: Sabre Airways
Limited, Transamerica Leasing, Union Pacific Railroad Company, Canadian Pacific
Railway Company, and Elgin, Jolieit & Eastern Railway. As of December 31, 1997,
all of the equipment was either operating in short-term rental facilities, on
lease, or under other contractual agreements, except for 3 railcars, 168 marine
containers, and the Partnership's 50% and 23% investments in entities that own
commercial aircraft, which had a total net book value of $3.1 million.
(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. The Partnership's management agreement with IMI is
to co-terminate with the dissolution of the Partnership, unless the partners
vote to terminate the agreement prior to that date or at the discretion of the
General Partner. IMI has agreed to perform all services necessary to manage the
transportation equipment on behalf of the Partnership and to perform or contract
for the performance of all obligations of the lessors under the Partnership's
leases. In consideration for its services and pursuant to the partnership
agreement, IMI is entitled to a monthly management fee (see Notes 1 and 2 to the
financial statements).
(C) Competition
(1) Operating Leases versus 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 an operating lease need not be capitalized on a lessee's
balance sheet.
The Partnership encounters considerable competition from lessors utilizing full
payout leases on new equipment. Full payout leases are leases that 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, which may put the Partnership 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 that
the Partnership cannot offer, such as specialized maintenance services
(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, General Electric Capital Aviation Services Corporation, and other
limited partnerships that lease the same types of equipment.
(D) Demand
The Partnership has investments in transportation-related capital equipment and
relocatable environments. Types of transportation equipment owned by the
Partnership include aircraft, railcars, and trailers. Relocatable environments
are functionally self-contained transportable equipment, such as marine
containers. Except for those aircraft leased to passenger air carriers, the
Partnership's equipment is used to transport materials and commodities, rather
than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Commercial Aircraft
The commercial aircraft market experienced another good year in 1997, with a
third consecutive year of profits by the world's airlines. Airline managements
have continued to emphasize cost reductions and a moderate increase in capacity.
However, even the limited volume of new aircraft deliveries has caused the
market to change from being in equilibrium at the end of 1996 to having excess
supply. This market imbalance is expected to continue, with the number of
surplus aircraft increasing from approximately 350 aircraft at the end of 1996
to an estimated 600 aircraft by the end of the decade.
The changes taking place in the commercial aircraft market also reflect the
impact of noise legislation enacted in the United States and Europe. Between
1997 and the end of 2002, approximately 1,400 Stage II aircraft (Stage II
aircraft are aircraft that have been shown to comply with Stage II noise levels
prescribed in Federal Aviation Regulation section C36.5) are forecast to be
retired, primarily due to noncompliance with Stage III noise requirements (Stage
III aircraft are aircraft that have been shown to comply with Stage III noise
levels prescribed in Federal Aviation Regulation section C36.5). This represents
about 41% of the Stage II aircraft now in commercial service worldwide. By 2002,
about 2,000 (59%) of the current fleet of Stage II aircraft will remain in
operational service outside of Stage III-legislated regions or as aircraft that
have had hushkits installed so that engine noise levels meet the quieter Stage
III requirements. The cost to install a hushkit is approximately $1.5 million,
depending on the type of aircraft. All aircraft currently manufactured meet
Stage III requirements.
The Partnership owns or holds investments in three Stage II aircraft and one
Stage III aircraft. The Partnership does not intend to install hushkits on its
Stage II aircraft, but rather intends to lease them outside of Stage
III-legislated regions or sell them by the end of the year 2000.
Marine Containers
The marine container market began 1997 with a continuation of the weakness in
industrywide container utilization and rate pressures that had been experienced
in 1996. A reversal of this trend began in early spring and continued throughout
the remainder of 1997, as utilization returned to the 80% range. Per diem rates
did not strengthen, however, as customers resisted attempts to raise daily
rental rates.
Industrywide consolidation continued in 1997. Late in the year, Genstar, one of
the world's largest container leasing companies, announced that it had reached
an agreement with SeaContainers, another large container leasing company,
whereby SeaContainers will take over the management of Genstar's fleet. Long
term, such industrywide consolidation should bring more rationalization to the
container leasing market and result in both higher fleetwide utilization and per
diem rates.
(3) Railcars
(a) Pressurized Tank Cars
Pressurized tank cars are used primarily in the petrochemical and fertilizer
industries to transport liquefied petroleum gas and anhydrous ammonia. The
demand for natural gas is anticipated to grow through 1999, as the developing
world, former Communist countries, and the industrialized world all increase
their energy consumption. World demand for fertilizer is expected to increase,
based on an awareness of the necessity of fertilizing crops and improving diets,
the shortage of farmland, and population growth in developing nations.
The utilization rate on the Partnership's fleet of pressurized tank cars was
over 98% during 1997. Based on ongoing renewals with current lessees, demand for
these cars continues to be strong and is projected to remain so during 1998.
(b) General Purpose (Nonpressurized) 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. Chemical
carloadings for the first 45 weeks of 1997 were up 4%, compared to the same
period in 1996. The demand for petroleum is anticipated to grow, as the
developing world, former Communist countries, and the industrialized world
increase energy consumption.
The demand for general purpose tank cars in the Partnership's fleet has remained
strong over the last three years, with utilization remaining above 98%.
(c) Covered Hopper (Grain) Cars
Industrywide, the size of the covered hopper car fleet has increased only 9%
over the last 10 years, from a total of 299,172 cars in 1985 to 325,882 cars in
1995. Covered hopper cars accounted for 30% of all new railcar deliveries in
1995 and 50% of new deliveries in 1996. During 1997, there was some downward
pressure on rental rates, as demand for covered hopper cars softened somewhat.
Grain carloadings decreased 2% compared to the same period in 1996.
All 71 of the Partnership's covered hopper cars were on lease as of December 31,
1997.
(d) Box Cars
Box cars, such as the Partnership owns, are primarily used to transport paper
and paper products. Carloadings for paper and paper products were essentially
flat during the first 45 weeks of 1997, compared to loadings for the same period
in 1996.
All 458 of the Partnership's box cars transport paper and paper goods, and are
currently on lease.
(e) Mill Gondolas
Mill gondolas are typically used to haul scrap steel from processors to steel
mills throughout the United States. Recycled scrap steel constitutes nearly all
of the raw material used by small steel mills, called minimills. For example, in
1960 minimills produced only 8% of the total steel output in the United States,
but by 1996 that figure had reached 42%. The overall stability of the United
States economy and relatively steady levels of steel production have
strengthened demand for mill gondolas over the last year. In 1997, the national
gondola fleet increased from 90,583 to 91,351 cars, a change consistent with the
anticipated continuing expansion of demand for steel mill products through 2000,
averaging 2.5% to 3% a year.
All 193 of the Partnership's gondolas are operating on net lease or full-service
leases until 1999.
(4) Trailers
(a) Intermodal (Piggyback) Trailers
In all intermodal equipment areas, 1997 was a remarkably strong year. The United
States inventory of intermodal equipment was approximately 163,900 units in
1997, divided between about 55% intermodal trailers and 45% domestic containers.
Trailer loadings increased approximately 4% in 1997 due to a robust economy and
a continuing shortage of drivers in over-the-road markets. The expectation is
for flat to slightly declining utilization of intermodal trailer fleets in the
near future, with 1998 trailer loadings predicted not to exceed 1997 levels by
more than 2%.
(b) Over-the-Road Dry Trailers
The United States over-the-road dry trailer market began to recover in mid-1997,
as an oversupply of equipment from 1996 subsided. The strong domestic economy, a
continuing focus on integrated logistics planning by American companies, and
numerous service problems on Class I railroads contributed to the recovery in
the dry van market. In addition, federal regulations requiring antilock brake
systems on all new trailers, effective in March 1998, has helped stimulate new
trailer production, and the
market is anticipated to remain strong in the near future. There continues to be
much consolidation of the trailer leasing industry in North America, as the two
largest lessors of dry vans now control over 60% of the market. The reduced
level of competition, coupled with anticipated continued strong utilization, may
lead to an increase in rates.
(c) Over-the-Road Refrigerated Trailers
The temperature-controlled over-the-road trailer market recovered in 1997;
freight levels improved and equipment oversupply was reduced as industry players
actively retired older trailers and consolidated fleets. Most refrigerated
carriers posted revenue growth of between 2% and 5% in 1997, and accordingly are
planning fleet upgrades. In addition, with refrigeration and trailer
technologies changing rapidly and industry regulations becoming tighter,
trucking companies are managing their refrigerated fleets more effectively.
As a result of these changes in the refrigerated trailer market, it is
anticipated that trucking companies will utilize short-term trailer leases more
frequently to supplement their fleets. Such a trend should benefit the
Partnership, which generally leases equipment of this type on a short-term basis
from rental yards owned and operated by a PLM International subsidiary.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in 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 that 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 United
States that do not meet certain noise, aging, and corrosion criteria. In
addition, under U.S. Federal Aviation Regulations, after December 31, 1999, no
person shall operate an aircraft to or from any airport in the contiguous United
States unless that airplane has been shown to comply with Stage III noise
levels. The Partnership has Stage II aircraft that do not meet Stage III
requirements. The Partnership intends to sell its Stage II aircraft before 2000.
(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 and
over-the-road refrigerated trailers.
(3) the U.S. Department of Transportation's Hazardous Materials
Regulations, which regulate the classification and packaging requirements of
hazardous materials and which apply particularly to the Partnership's tank cars.
As of December 31, 1997, the Partnership was in compliance with the above
governmental regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased for leasing purposes. As of December 31, 1997, the Partnership
owned a portfolio of transportation equipment and investments in equipment owned
by USPEs, 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
On February 26, 1998, Pan American Airways Corporation (Pan Am) filed for
protection under Chapter 11 of the United States Bankruptcy Code in the District
Court of the Southern District of Florida (Case No. 98-11618-BKC-AJC). Pan Am
was the lessee of a 727-200 owned by the Partnership. According to its amended
terms, the aircraft lease was scheduled to terminate in December 1999. The
Bankruptcy Court granted the lessee motion to reject the lease, effective March
20, 1998. The General Partner has reposessed the aircraft and intends to sell
it. The General Partner will continue to pursue remedies against the debtor in
the bankruptcy proceedings.
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, 1997.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED
DEPOSITARY UNIT MATTERS
The General Partner delisted the Partnership's depositary units from the
American Stock Exchange (AMEX) on April 8, 1996. The last day for trading on the
AMEX was March 22, 1996. Under the Internal Revenue Code (the Code) then in
effect, the Partnership was classified as a publicly traded partnership. The
Code treated all publicly traded partnerships as corporations if they remained
publicly traded after December 31, 1997. Treating the Partnership as a
corporation would have meant that the Partnership itself would have become a
taxable, rather than a flow-through entity. As a taxable entity, the income of
the Partnership would have become subject to federal taxation at both the
partnership level and at the investor level to the extent that income would have
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.
As of March 11, 1998, there were 7,381,805 depositary units outstanding. There
are approximately 8,800 depositary unitholders of record as of the date of this
report.
Several secondary exchanges facilitate sales and purchases of limited
partnership units. Secondary markets are characterized as having few buyers for
limited partnership interests and therefore are generally viewed as being
inefficient vehicles for the sale of partnership units. There is presently no
public market for the units and none is likely to develop. To prevent the units
from being considered publicly traded and thereby to avoid taxation of the
Partnership as an association treated as a corporation under the Code, the units
will not be transferred without the consent of the General Partner, which may be
withheld in its absolute discretion. The General Partner intends to monitor
transfers of units in an effort to ensure that they do not exceed the number
permitted by certain safe harbor provisions promulgated by the Internal Revenue
Service. A transfer may be prohibited if the intended transferee is not a U.S.
citizen or if the transfer would cause any portion of the units to be treated as
plan assets.
Pursuant to the terms of the limited 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 the 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. The General Partner is the sole holder
of such interests.
Table 2, below, sets forth the high and low reported prices of the Partnership's
depositary units for 1996, as reported by the AMEX, as well as cash
distributions paid per depositary unit.
TABLE 2
Cash Distributions Paid Per
Depositary
Unit
Reported Trade
Prices
---------------------------------------------
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
The General Partner delisted the Partnership's depositary units from the
American Stock Exchange (AMEX), which had traded under the symbol GFY. The last
day for trading on the AMEX was March 22, 1996.
The Partnership engaged in a plan to repurchase up to 250,000 of the outstanding
depositary units. During 1995, the Partnership repurchased 46,400 depositary
units at a total cost of $0.3 million. During 1996, the Partnership repurchased
44,500 depositary units at a total cost of $0.2 million. There were no
repurchases of depositary units in 1997. As of December 31, 1997, the
Partnership had purchased and canceled a cumulative total of 117,800 depositary
units at a cost of $0.8 million. The General Partner does not plan any future
repurchase of depositary units on behalf of the Partnership.
ITEM 6. SELECTED FINANCIAL DATA
Table 3, below, lists selected financial data for the Partnership:
TABLE 3
For the years ended December 31,
(in thousands of dollars, except weighted-average depositary unit amounts)
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------
Operating results:
Total revenues $ 12,748 $ 14,819 $ 18,983 $ 26,326 $ 36,901
Net gain on disposition of equipment 1,922 2,085 1,485 2,347 6,704
Loss on revaluation of equipment -- -- (667) (887 ) (161)
Equity in net income (loss) of
unconsolidated special-purpose
entities (519) 6,267 -- -- --
Net income 2,695 8,186 937 67 5,596
At year-end:
Total assets $ 18,631 $ 33,595 $ 48,957 $ 69,485 $ 84,206
Total liabilities 4,906 16,349 30,761 39,332 41,344
Notes payable 2,500 13,000 27,000 35,000 35,000
Cash distribution $ 6,216 $ 8,957 $ 12,549 $ 12,620 $ 12,665
Cash distribution representing a
return of capital $ 3,709 $ 1,045 $ 11,847 $ 11,989 $ 7,563
Per weighted-average depositary unit:
Net income (loss) $ 0.301 $ 1.01 $ 0.01 $ (0.12) $ 0.60
Cash distribution $ 0.80 $ 1.15 $ 1.60 $ 1.60 $ 1.60
Cash distribution representing a
return of capital $ 0.50 $ 0.14 $ 1.59 $ 1.60 $ 1.01
After reduction of income of $364 ($0.05 per weighted-average depositary
unit) in 1997, $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, and $845 ($0.11 per
weighted-average depositary unit) in 1993 representing special allocations
to the General Partner resulting from an amendment to the 1 1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth Fund II
(the Partnership). The following discussion and analysis of operations 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.
(B) Results of Operations -- Factors Affecting Performance
(1) 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 1997 primarily in
its aircraft, trailer, and marine container portfolios.
(a) Aircraft: Aircraft contribution decreased from 1996 to 1997 due to an
aircraft in which the Partnership owns a 50% interest remaining off lease for
all of 1997. This aircraft was on lease until the third quarter of 1996.
(b) Trailers: The majority of the Partnership's trailer portfolio operates
in short-term rental facilities or with short-line railroad systems. The
relatively short duration of most leases in these operations exposes the
trailers to considerable re-leasing activity.
(c) Marine Containers: The majority of the Partnership's marine container
portfolio is operated in utilization-based leasing pools and, as such, is
exposed to considerable repricing activity. The Partnership's marine container
contributions declined from 1996 to 1997 due to the disposition of equipment
during 1997.
(2) 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 or legal fees. The Partnership experienced the
following in 1997:
(a) Liquidations: During 1997, the General Partner received proceeds of
$5.1 million from the liquidation or sale of marine containers, aircraft,
railcars, and trailers owned by the Partnership. These proceeds and proceeds
from 1996 sales were used to prepay $10.5 million of the Partnership's
outstanding debt in 1997. The net result of 1997 dispositions has been a
reduction in the cost basis of the Partnership's equipment portfolio of
approximately $20.5 million. Since the Partnership may no longer purchase
additional equipment, these disposals represent a permanent reduction in the
Partnership's equipment portfolio.
(b) Nonperforming Lessees: In 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. This aircraft
remained off lease throughout 1997 and is currently being marketed for sale. In
addition, another aircraft lessee was unable to continue paying its obligations
to the Partnership, and as payment for the past due receivables, the Partnership
received a 23% interest in a trust that owns a Boeing 727 aircraft. The fair
market value of the Partnership's interest in this aircraft approximated its
outstanding receivable from the lessee. This plane was sold at its approximate
net book value in January 1998. In addition, another aircraft lessee filed for
bankruptcy in 1998. The General Partner fully reserved the accounts receivable
outstanding from this lessee as of December 31, 1997. The General Partner is
taking action to regain possession of this aircraft. Other equipment, such as
railcars, trailers, and some of the marine containers, experienced minor
nonperforming issues that had no significant impact on the Partnership.
(3) 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, since the
beginning of 1996 the Partnership may no longer reinvest in equipment. The
Partnership will continue to operate for an additional three years, and then
begin an orderly liquidation over an anticipated two-year period.
(4) 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. No reductions were required to the carrying
values of equipment in 1996 or 1997.
As of December 31, 1997, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including equipment owned by the
unconsolidated special-purpose entities, to be approximately $38.1 million.
(C) Financial Condition -- Capital Resources and Liquidity
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering and permanent debt financing. No
further capital contributions from original partners are permitted under the
terms of the limited partnership agreement. The Partnership's total outstanding
indebtedness has been reduced from its original balance of $35.0 million to its
current level of $2.5 million. The Partnership intends to repay the remaining
balance outstanding on its notes payable in the first quarter of 1998. The
Partnership relies on operating cash flow to meet its operating obligations and
make cash distributions to the limited partners.
For the year ended December 31, 1997, the Partnership generated sufficient
operating cash (net cash provided by operating activities plus cash
distributions from unconsolidated special-purpose entities) to meet its
operating obligations, but used undistributed available cash from prior periods
of approximately $2.0 million to maintain the level of distributions (total of
$6.2 million in 1997) to the partners.
As of the third quarter of 1997, the General Partner reduced the cash
distribution rate from an annual rate of 5% to an annual rate of 3% to more
closely reflect current and expected net cash flows from operations. Equipment
sales have reduced overall lease revenues in the Partnership to the point where
reductions in distribution levels were necessary. During the year, the General
Partner sold aircraft, marine containers, railcars, and trailers owned by the
Partnership and used these proceeds and proceeds from 1996 equipment sales to
prepay $10.5 million in principal payments on its outstanding debt.
The General Partner has remaining notes payable of $2.5 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 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
either prior to or 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.
(D) Results of Operations -- Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years
Ended 1997 and 1996
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance and
asset-specific insurance expenses) on owned equipment decreased during the year
ended 1997 when compared to 1996. The following table presents lease revenues
less direct expenses by owned equipment type (in thousands of dollars):
For the Years Ended
December 31,
1997 1996
-------------------------------
Rail equipment $ 3,251 $ 3,111
Trailers 2,787 3,382
Aircraft 1,848 2,390
Marine containers 666 1,255
Rail equipment: Railcar lease revenues and direct expenses were $4.5 million and
$1.2 million, respectively, for 1997, compared to $4.6 million and $1.5 million,
respectively, during 1996. Lease revenues decreased due to the sale of railcars
in 1997 and 1996. Railcar expenses decreased due to railcar dispositions and
lower running repairs required on certain of the railcars during 1996 that were
not needed during 1997.
Trailers: Trailer lease revenues and direct expenses were $3.5 million and $0.7
million, respectively, for 1997, compared to $4.1 million and $0.7 million,
respectively, during 1996. The decrease in net contribution was due to the sale
of trailers in 1997 and 1996 and to increased refurbishments made to trailers in
1997.
Aircraft: Aircraft lease revenues and direct expenses were $1.9 million and $0.1
million, respectively, for 1997, compared to $2.4 million and $47,000,
respectively, for 1996. Aircraft contribution decreased in 1997, compared to
1996, due to the sale of aircraft in the second and third quarters of 1997.
Marine containers: Marine container lease revenues were $0.7 million and $1.3
million for 1997 and 1996, respectively. The number of marine containers owned
by the Partnership has been declining over the past two years 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 $7.5 million for 1997 decreased from $10.6 million
for 1996. Significant variances are explained as follows:
(i) A $1.3 million decrease in depreciation and amortization expense from
1996 levels reflects the effect of asset sales in 1996 and 1997.
(ii) A $1.2 million decrease in interest expense resulted from a decrease
in the level of outstanding debt during 1997 and 1996. In 1997, the Partnership
prepaid $10.5 million of the outstanding notes payable. In 1996, the Partnership
prepaid $14.0 million of the outstanding notes payable.
(iii) A $0.3 million decrease in bad debt expense is the result of a
decrease in uncollectible amounts owing from certain lessees.
(iv) A $0.3 million decrease in administrative expenses reflects the effect
of asset sales in 1996 and 1997 that resulted in lower license and registration
costs, lower taxes on leased property, lower professional services expenses, and
reduced data processing and administrative charges for services provided to the
Partnership.
(c) Net Gain on Disposition of Owned Equipment
Net gain on disposition of equipment for 1997 totaled $1.9 million and resulted
from the sale or disposal of aircraft, marine containers, trailers, and
railcars, with an aggregate net book value of $3.2 million, for aggregate
proceeds of $5.1 million. For 1996, the $2.1 million net gain on disposition of
equipment resulted from the sale or disposal of aircraft, marine containers,
trailers, and railcars, with an aggregate net book value of $2.7 million, for
aggregate proceeds of $4.8 million.
(d) Interest and Other Income
Interest and other income decreased $0.1 million during 1997 due to lower
average cash balances in 1997, compared to 1996.
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Equity in net income (loss) of unconsolidated special-purpose entities
represents net income (loss) generated from the operation of jointly-owned
assets accounted for under the equity method (see Note 4 to the financial
statements) (in thousands of dollars).
For the Years Ended
December 31,
1997 1996
------------------------------
Aircraft $ (519 ) $ (712)
Mobile offshore drilling unit -- 6,979
Aircraft: During 1997 and 1996, the Partnership owned a 50% investment in an
entity that owns a commercial aircraft. Revenues and expenses were $0.2 million
and $0.7 million, respectively, for 1997, compared to $0.4 million and $1.1
million, respectively, for 1996. The Partnership's share of revenues decreased
$0.2 million due to the off-lease status of this aircraft during 1997, which was
on lease for the first six months of 1996. The Partnership's share of expenses
decreased due to a decrease in bad debt and repair expenses. In 1996, the
General Partner fully reserved the uncollectible accounts receivable from the
aircraft's lessee that encountered financial difficulties, and made repairs to
the aircraft to meet airworthiness conditions.
Mobile offshore drilling unit: During 1996, the General Partner sold the
Partnership's 55% investment in an entity that owned a mobile offshore drilling
unit, resulting in a $7.1 million net gain, which was offset by a loss from
operations of $0.1 million.
(f) Net Income
As a result of the foregoing, the Partnership's net income of $2.7 million for
1997 decreased from net income of $8.2 million for 1996. The Partnership's
ability to operate and liquidate assets, secure leases, and re-lease those
assets whose leases expire during the life of the Partnership is subject to many
factors, and the Partnership's performance in the year ended December 31, 1997
is not necessarily indicative of future periods. In 1997, the Partnership
distributed $5.9 million to the limited partners, or $0.80 per weighted-average
depositary unit.
(2) Comparison of the Partnership's Operating Results
for the Years Ended 1996 and 1995
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
decreased for the year ended 1996 when compared to 1995. The following table
presents lease revenues less direct expenses by owned equipment type (in
thousands of dollars):
For the Years Ended
December 31,
1996 1995
------------------------------
Trailers $ 3,382 $ 4,301
Rail equipment 3,111 3,336
Aircraft 2,390 2,160
Marine containers 1,255 1,487
Trailers: Trailer lease revenues and direct expenses were $4.1 million and $0.7
million, respectively, for 1996, compared to $5.0 million and $0.7 million,
respectively, for 1995. The decrease in net contribution was due to the sale of
trailers in 1996 and 1995. In addition, the trailer fleet experienced lower
utilization in the PLM affiliated short-term rental yards in 1996.
Rail equipment: Railcar lease revenues and direct expenses were $4.6 million and
$1.5 million, respectively, for 1996, compared to $4.8 million and $1.5 million,
respectively, for 1995. The decrease in railcar contribution resulted from the
sale of railcars in 1996 and 1995. In addition, expenses increased due to
running repairs required on certain of the railcars during 1996 that were not
needed during 1995.
Aircraft: Aircraft lease revenues and direct expenses were $2.4 million and
$47,000, respectively, for 1996, compared to $2.8 million and $0.6 million,
respectively, for 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 1995 to refurbish another
aircraft prior to being re-leased in 1995.
Marine containers: Marine container lease revenues were $1.3 million and $1.5
million for 1996 and 1995, respectively. The number of marine containers owned
by the Partnership has been declining over the past 12 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 1996 decreased from $11.5 million
for 1995. Significant variances are explained as follows:
(i) A $0.5 million decrease in depreciation and amortization expense from
1995 levels reflects the effect of asset sales in 1995 and 1996.
(ii) A $0.5 million decrease in interest expense resulted from a lower base
rate of interest charged on the Partnership's floating rate debt during 1996, as
compared to 1995. In 1996, the Partnership also prepaid $14.0 million of the
notes payable.
(iii) A $0.1 million decrease in management fees to affiliates reflects the
lower levels of lease revenues in 1996, as compared to 1995.
(iv) A $0.2 million increase in bad debt expense reflects 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 1996.
(d) Net Gain on Disposition of Owned Equipment
Net gain on disposition of equipment for 1996 totaled $2.1 million, which
resulted from the sale or disposal of aircraft, marine containers, trailers, and
railcars, with an aggregate net book value of $2.7 million, for aggregate
proceeds of $4.8 million. For 1995, the $0.9 million net gain on disposition of
equipment resulted from the sale or disposal of marine containers, trailers, a
tractor, and a 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 1996, due primarily to
lower interest rates earned on cash equivalents when compared to 1995.
(f) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Equity in net income (loss) of unconsolidated special-purpose entities
represents net income (loss) generated from the operation of jointly-owned
assets accounted for under the equity method (see Note 4 to the financial
statements) (in thousands of dollars).
For the Years Ended
December 31,
1996 1995
------------------------------
Mobile offshore drilling unit $ 6,979 $ (367)
Aircraft (712 ) 254
Marine vessel -- 398
Mobile offshore drilling unit: As of December 31, 1995, the Partnership owned an
investment in an entity that owned a mobile offshore drilling unit (rig). The
rig was sold in 1996, resulting in a $7.1 million net gain to the Partnership,
which was offset by a net loss from operations of $0.1 million.
Aircraft: As of December 31, 1996 and 1995, the Partnership owned an investment
in an entity that owns a commercial aircraft. Revenues and expenses were $0.4
million and $1.1 million, respectively, for 1996, compared to $0.7 million and
$0.5 million, respectively, for 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 all of 1995. The Partnership's
share of expenses increased $0.6 million due to the increase in bad debt
expense, reflecting the General Partner's evaluation of the collectibility of
receivables due from the aircraft's lessee that encountered financial
difficulties, along with repairs to meet airworthiness conditions. During 1995,
the General Partner sold the Partnership's investment in an entity that owned a
DC-9 aircraft, resulting in a $47,000 net gain.
Marine vessel: In the second quarter of 1995, the General Partner sold the
Partnership's investment in an entity that owned a marine vessel, resulting in a
$0.6 million gain, which was 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
1996 increased from a net income of $0.9 million for 1995. In 1996, the
Partnership distributed $8.5 million to the limited partners, or $1.15 per
weighted-average depositary unit.
(E) Geographic Information
Certain of the Partnership's equipment operates in international markets.
Although these operations expose the Partnership to certain currency, political,
credit and economic risks, the General Partner believes that these risks are
minimal or has implemented strategies to control the risks. Currency risks are
at a minimum because all invoicing, with the exception of a small number of
railcars operating in Canada, is conducted in U.S. dollars. Political risks are
minimized by avoiding operations in countries that do not have a stable judicial
system and established commercial business laws. Credit support strategies for
lessees range from letters of credit supported by 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 Note 3 to the
financial statements for information on the revenues, income, and net book value
of equipment 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 of
ownership due to the use the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to significantly change in the future as 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 United States-domiciled lessees consists
of trailers, railcars, and aircraft. During 1997, lease revenues generated by
wholly and partially owned equipment in the United States accounted for 73% of
the lease revenues, while net operating income accounted for $3.5 million of the
$2.7 million aggregate net income for the Partnership. The primary reason for
this relationship is that the Partnership sold trailers, railcars, and aircraft
during 1997 that were operated in the United States, which resulted in $1.7
million in net gains.
The Partnership's equipment leased to Canadian-domiciled lessees consists of
railcars. During 1997, lease revenues in Canada accounted for 11% of total lease
revenues, while the operations accounted for $0.5 million of the aggregate net
income generated by wholly and partially owned equipment.
The Partnership's investment in equipment owned by a USPE in South Asia
accounted for none of the lease revenues and $0.5 million of operating net loss,
due to the aircraft being off lease in 1997.
In 1997, marine containers, which were leased in various regions throughout the
year, accounted for 6% of the lease revenues and $0.2 million of the aggregate
net operating profit generated by wholly and partially owned equipment for the
Partnership.
European operations consisted of an aircraft that accounted for 9% of lease
revenues, while net income generated by this equipment accounted for $0.3
million of the aggregate net income generated by wholly and partially owned
equipment for the Partnership in 1997.
Year 2000 Compliance
The General Partner is currently addressing the Year 2000 computer software
issue. The General Partner is creating a timetable for carrying out any program
modifications that may be required. The General Partner does not anticipate that
the cost of these modifications allocable to the Partnership will be material.
(G) Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new
statements: SFAS No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in equity
from nonowner sources; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for a public entities's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Partnership's fiscal year ended
December 31, 1998, with earlier application permitted. The effect of adoption of
these statements will be limited to the form and content of the Partnership's
disclosures and will not impact the Partnership's results of operations, cash
flow, or financial position.
(H) Inflation
Inflation had no significant impact on the Partnership's operations during 1997,
1996, or 1995.
(I) 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.
(J) 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 that 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.
(1) 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 United States 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.
Under U.S. Federal Aviation Regulations, after December 31, 1999, no person
shall operate an aircraft to or from any airport in the contiguous United States
unless that airplane has been shown to comply with Stage III noise levels. The
Partnership is scheduled to sell its remaining Stage II aircraft by the year
2000.
(2) Distributions
During the passive liquidation phase, the Partnership will use operating cash
flow and proceeds from the sale of equipment to meet its operating obligations,
make loan principal payments on debt, 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 third quarter of 1997, the cash distribution rate was reduced from
$1.00 per depositary unit to $0.60 per depositary unit to more closely reflect
current and expected net cash flows from operations. 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 have been 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 on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
(This space intentionally left blank.)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM INTERNATIONAL
AND PLM FINANCIAL SERVICES, INC.
As of the date of this annual report, the directors and executive officers of
PLM International (and key executive officers of its subsidiaries) and of PLM
Financial Services, Inc. are as follows:
Name Age Position
- -------------------------------------------------------------------------------------------------------------------------
Robert N. Tidball 59 Chairman of the Board, Director, President,
and Chief Executive Officer, PLM International, Inc.;
Director, PLM Financial Services, Inc.;
Vice President, PLM Railcar Management Services, Inc.;
President, PLM Worldwide Management Services Ltd.
Randall L.-W. Caudill 50 Director, PLM International, Inc.
Douglas P. Goodrich 51 Director and Senior Vice President, PLM International;
Director and President, PLM Financial Services, Inc.;
President, PLM Transportation Equipment Corporation;
President, PLM Railcar Management Services, Inc.
Harold R. Somerset 63 Director, PLM International, Inc.
Robert L. Witt 57 Director, PLM International, Inc.
J. Michael Allgood 49 Vice President and Chief Financial Officer,
PLM International, Inc. and PLM Financial Services, Inc.
Stephen M. Bess 51 President, PLM Investment Management, Inc.
and PLM Securities Corp.; Vice President and Director,
PLM Financial Services, Inc.
Richard K Brock 35 Vice President and Corporate Controller,
PLM International, Inc. and PLM Financial Services, Inc.
Frank Diodati 43 President, PLM Railcar Management Services Canada Limited
Steven O. Layne 43 Vice President, PLM Transportation Equipment Corporation;
Vice President, PLM Worldwide Management Services Ltd.
Susan C. Santo 35 Vice President, Secretary, and General Counsel,
PLM International, Inc. and PLM Financial Services, Inc.
Thomas L. Wilmore 55 Vice President, PLM Transportation Equipment Corporation;
Vice President, PLM Railcar Management Services, Inc.
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment to President and Chief Excecutive Officer, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989. Mr. Tidball was appointed Director of PLM
Financial Services, Inc. in July 1997 and was elected President of PLM Worldwide
Management Services Limited in February 1998. He has served as an officer of PLM
Railcar Management Services, Inc. since June 1987. 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, he was Vice
President, General Manager, and Director of North American Car Corporation and a
director of the American Railcar Institute and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997.
He is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm serving emerging growth companies in the United States
and abroad, as well as a senior advisor to the investment banking firm of
Prudential Securities, where he has been employed since 1987. Mr. Caudill also
serves as a director of VaxGen, Inc. and SBE, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Senior Vice President of PLM International in March 1994, and
appointed Director and President of PLM Financial Services, Inc. in June 1996.
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 Corporation of
Chicago, Illinois, from December 1980 to September 1985.
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 Sugar),
a recently acquired subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined
C&H Sugar 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 of
Agriculture and 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 US Naval Academy. Mr. Somerset also serves on the boards of directors
for various other companies and organizations, including Longs Drug Stores,
Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993,
Mr. Witt has been a principal with WWS Associates, a consulting and investment
group specializing in start-up situations and private organizations about to go
public. Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel Corporation, an international advanced materials company with sales
primarily in the aerospace, transportation, and general industrial markets. Mr.
Witt also serves on the boards of directors for various other companies and
organizations.
J. Michael Allgood was appointed Vice President and Chief Financial Officer of
PLM International in October 1992 and Vice President and Chief Financial Officer
of PLM Financial Services, Inc. in December 1992. Between July 1991 and October
1992, Mr. Allgood was a consultant to various private and public-sector
companies and institutions specializing in financial operations 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 Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Securities Corporation 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 Corporation, a manufacturer of computer peripheral equipment, from
October 1975 to November 1978.
Richard K Brock was appointed Vice President and Corporate Controller of PLM
International and PLM Financial Services, Inc. in June 1997, having served as an
accounting manager beginning in September 1991 and as Director of Planning and
General Accounting beginning in February 1994. Mr. Brock was a division
controller of Learning Tree International, a technical education company, from
February 1988 through July 1991.
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 of PLM Transportation Equipment
Corporation's Air Group in November 1992, and was appointed Vice President and
Director of PLM Worldwide Management Services Limited in September 1995. Mr.
Layne was its Vice President, Commuter and Corporate Aircraft beginning in July
1990. Prior to joining PLM, Mr. Layne was Director of 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 a senior pilot with 13 years of accumulated
service.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM
International and PLM Financial Services, Inc. in November 1997. She has worked
as an attorney for PLM International since 1990 and served as its Senior
Attorney since 1994. Previously, Ms. Santo was engaged in the private practice
of law in San Francisco. Ms. Santo received her J.D. from the University of
California, Hastings College of the Law.
Thomas L. Wilmore was appointed Vice President, Rail of PLM Transportation
Equipment Corporation in March 1994, and has served as Vice President of
Marketing for PLM Railcar Management Services, Inc. since May 1988. Prior to
joining PLM, Mr. Wilmore was Assistant Vice President and Regional Manager for
MNC Leasing Corporation in Towson, Maryland from February 1987 to April 1988.
From July 1985 to February 1987, he was President and co-owner of Guardian
Industries Corporation, Chicago, 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 PLM International are elected for a three-year term. The
directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM International or PLM Financial
Services, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership has no
pension, profit-sharing, retirement, or similar benefit plan in effect as of
December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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. As of December 31, 1997, 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 4, 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 4
Name Depositary Units Percent of Units
Robert N. Tidball 400 *
All directors and officers
as a group (1 person) 400 *
* Less than 1% of the depositary units outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
During 1997, management fees to IMI were $0.5 million. During 1997, the
Partnership reimbursed FSI and its affiliates $0.6 million for administrative
services and data processing expenses performed on behalf of the Partnership.
During 1997, the USPEs paid or accrued $9,000 to FSI or its affiliates (based on
the Partnership's proportional share of ownership) for administrative services
and data processing expenses.
(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 on Form 10-K.
(B) Reports on Form 8-K
None.
(C) Exhibits
4. Limited Partnership Agreement of Registrant, incorporated by reference
to the Partnership's Registration Statement on Form S-1 (Reg. No.
33-13113), which became effective with the Securities and Exchange
Commission on June 5, 1987.
4.1 Amendment, dated November 18, 1991, to Limited Partnership Agreement of
the Partnership.
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.
24. 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: March 24, 1998 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/ Richard K Brock
---------------------------
Richard K Brock
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
*_____________________
Robert N. Tidball Director, FSI March 24, 1998
*_____________________
Douglas P. Goodrich Director, FSI March 24, 1998
*_____________________
Stephen M. Bess Director, FSI March 24, 1998
* Susan C. Santo, by signing her 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/ Susan C. Santo
- -------------------------
Susan C. Santo
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Report of independent auditors 26
Balance sheets as of December 31, 1997 and 1996 27
Statements of income for the years ended
December 31, 1997, 1996, and 1995 28
Statements of changes in partners' capital for the years
ended December 31, 1997, 1996, and 1995 29
Statements of cash flows for the years ended
December 31, 1997, 1996, and 1995 30
Notes to financial statements 31-39
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 financial statements of PLM Equipment Growth Fund II as
listed in the accompanying index. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth Fund II as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
- -------------------------------
SAN FRANCISCO, CALIFORNIA
March 12, 1998
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
BALANCE SHEETS
December 31,
(in thousands of dollars, except per unit amounts)
1997 1996
------------------------------------
Assets
Equipment held for operating lease, at cost $ 50,707 $ 82,856
Less accumulated depreciation (38,170) (62,114)
------------------------------------
12,537 20,742
Equipment held for sale 788 --
Net equipment 13,325 20,742
Cash and cash equivalents 556 7,962
Restricted cash 395 295
Accounts receivable, less allowance for doubtful
accounts of $1,146 in 1997 and $882 in 1996 1,626 1,765
Investments in unconsolidated special-purpose entities 2,680 1,665
Deferred charges, net of accumulated amortization
of $197 in 1996 -- 157
Prepaid expenses and other assets 49 1,009
Total assets $ 18,631 $ 33,595
====================================
Liabilities and partners' capital
Liabilities:
Accounts payable and accrued expenses $ 365 $ 412
Due to affiliates 195 110
Lessee deposits and reserve for repairs 1,846 2,827
Notes payable 2,500 13,000
------------------------------------
Total liabilities 4,906 16,349
------------------------------------
Partners' capital (deficit):
Limited partners (7,381,805 depositary units as of
December 31, 1997 and 1996) 13,725 17,434
General Partner -- (188)
------------------------------------
Total partners' capital 13,725 17,246
------------------------------------
Total liabilities and partners' capital $ 18,631 $ 33,595
====================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
STATEMENTS OF INCOME
For the Years Ended December 31,
(in thousands of dollars, except weighted-average unit amounts)
1997 1996 1995
-------------------------------------------------
Revenues
Lease revenue $ 10,583 $ 12,379 $ 16,830
Interest and other income 243 355 668
Net gain on disposition of equipment 1,922 2,085 1,485
-------------------------------------------------
Total revenues 12,748 14,819 18,983
Expenses
Depreciation and amortization 4,407 5,698 8,552
Repairs and maintenance 1,959 2,172 2,867
Equipment operating expenses -- -- 152
Interest expense 650 1,815 2,349
Insurance expense to affiliate (5 ) -- 87
Other insurance expenses 120 112 171
Management fees to affiliate 518 583 818
General and administrative expenses to affiliate 575 727 1,026
Other general and administrative expenses 934 1,078 895
Provision for bad debt 376 715 462
Loss on revaluation of equipment -- -- 667
-------------------------------------------------
Total expenses 9,534 12,900 18,046
Equity in net income (loss) of unconsolidated
special-purpose entities (519 ) 6,267 --
-------------------------------------------------
Net income $ 2,695 $ 8,186 $ 937
=================================================
Partners' share of net income
Limited partners $ 2,196 $ 7,464 $ 75
General Partner 499 722 862
Total $ 2,695 $ 8,186 $ 937
=================================================
Net income per weighted-average depositary unit
(7,381,805 in 1997, 7,384,738 in 1996, and
7,443,910 in 1995) $ 0.30 $ 1.01 $ 0.01
=================================================
Cash distribution $ 6,216 $ 8,957 $ 12,549
=================================================
Cash distribution per weighted-average depositary unit $ 0.80 $ 1.15 $ 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,
1997, 1996, and 1995 (in thousands of dollars)
Limited General
Partners Partner Total
----------------------------------------------------
Partners' capital (deficit) as of December 31, 1994 $ 30,850 $ (697) $ 30,153
Net income 75 862 937
Cash distribution (11,922 ) (627) (12,549 )
Repurchase of depositary units (345 ) -- (345 )
------------------------------------------------------
Partners' capital (deficit) as of December 31, 1995 18,658 (462) 18,196
Net income 7,464 722 8,186
Cash distribution (8,509 ) (448) (8,957 )
Repurchase of depositary units (179 ) -- (179 )
------------------------------------------------------
Partners' capital (deficit) as of December 31, 1996 17,434 (188) 17,246
Net income 2,196 499 2,695
Cash distribution (5,905 ) (311) (6,216 )
Partners' capital (deficit) as of December 31, 1997 $ 13,725 $ -- $ 13,725
======================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(in thousands of dollars)
Operating activities 1997 1996 1995
--------------------------------------------------
Net income $ 2,695 $ 8,186 $ 937
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,407 5,698 8,552
Net gain on disposition of equipment (1,922) (2,085) (1,485)
Loss on revaluation of equipment -- -- 667
Equity in net (income) loss of unconsolidated
special-purpose entities 519 (6,267) --
Changes in operating assets and liabilities:
Restricted cash (100) 253 (252)
Accounts receivable, net (277) 385 (166)
Prepaid expenses and other assets 960 (957) 34
Accounts payable and accrued expenses (47) 3 (473)
Due to affiliates 85 (288) 308
Accrued drydock expenses -- -- 271
Lessee deposits and reserve for repairs (954) (127) (217)
--------------------------------------------------
Net cash provided by operating activities 5,366 4,801 8,176
--------------------------------------------------
Investing activities
Proceeds from disposition of equipment 5,076 4,761 7,005
Liquidation distributions from unconsolidated
special-purpose entities -- 14,272 --
(Additional investments in) distributions from
unconsolidated special-purpose entities (1,145) 845 --
Payments for capital improvements and other 13 (8) (11)
Net cash provided by investing activities 3,944 19,870 6,994
--------------------------------------------------
Financing activities
Principal payments on notes payable (10,500) (14,000) (8,000)
Cash distribution paid to limited partners (5,905) (8,509) (11,922)
Cash distribution paid to General Partner (311) (448) (627)
Repurchase of depositary units -- (179) (345)
--------------------------------------------------
Net cash used in financing activities (16,716) (23,136) (20,894)
--------------------------------------------------
Net (decrease) increase in cash and cash equivalents (7,406) 1,535 (5,724)
Cash and cash equivalents at beginning of year (see Note 4) 7,962 6,427 12,348
--------------------------------------------------
Cash and cash equivalents at end of year $ 556 $ 7,962 $ 6,624
==================================================
Supplemental information
Interest paid $ 653 $ 1,815 $ 2,302
=====================================================================================
Receipt of interest in unconsolidated special-purpose
entity in settlement of receivables $ 389 $ -- $ --
=====================================================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
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 and
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 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 or repayment of debt, except to the extent used
to maintain reasonable reserves.
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 after the limited partners have received
a certain minimum rate of return.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operations
The equipment of the Partnership is managed under a continuing management
agreement by PLM Investment Management, Inc. (IMI), a wholly-owned
subsidiary of FSI. IMI receives a monthly management fee from the
Partnership for managing the equipment (see Note 2). FSI, in conjunction
with its subsidiaries, sells transportation equipment to investor programs
and third parties, manages pools of transportation equipment under
agreements with the investor programs, and is a General Partner of other
programs
Accounting for Leases
The Partnership's leasing operations generally consist of operating leases.
Under the operating lease method of accounting, the leased asset is
recorded at cost and depreciated over its estimated useful life. Rental
payments are recorded as revenue over the lease term. 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. Certain aircraft are depreciated
under the double-declining balance depreciation method over the lease term.
.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Basis of Presentation (continued)
Depreciation and Amortization (continued)
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. Lease negotiation fees were amortized over the
initial equipment lease term. Debt issuance costs were amortized over the
term of the loan for which they are paid. Major expenditures that are
expected to extend the useful lives or reduce future operating expenses of
equipment are capitalized and amortized over the estimated remaining life
of the equipment.
Transportation Equipment
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). In accordance with
SFAS 121, the General Partner reviews the carrying value of the
Partnership's 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. No reductions to the carrying value of equipment were required
during 1997 or 1996. A $0.7 million reduction to the carrying value of one
aircraft was recorded in 1995.
Equipment held for operating leases is stated at cost. Equipment held for
sale is stated at the lower of the equipment's depreciated cost or fair
value, less cost to sell, and is subject to a pending contract for sale.
Investments in Unconsolidated Special-Purpose Entities
The Partnership has interests in unconsolidated special-purpose entities
(USPEs) that own transportation equipment. These interests are accounted
for using the equity method.
The Partnership's investment in USPEs includes acquisition and lease
negotiation fees paid by the Partnership to PLM Transportation Equipment
Corporation (TEC), a wholly-owned subsidiary of FSI. The Partnership's
equity interest in net income (loss) of the 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.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Basis of Presentation (continued)
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. The
limited partners' net income (loss) and distributions are allocated among
the limited partners based on the number of depository units owned by each
limited partner. During 1997, the General Partner received a special
allocation of income of $0.4 million ($0.3 million in 1996 and $0.8 million
in 1995).
Cash distributions are recorded when paid. Cash distributions of $1.2
million ($0.16 per weighted-average depositary unit in 1997), $1.9 million
($0.25 per weighted-average depositary unit in 1996), and $3.1 million
($0.40 per weighted-average depositary unit in 1995) were declared on
December 31, 1997, 1996, and 1995, respectively. These distributions were
paid on February 15, 1998, 1997, and 1996, respectively, to the unitholders
of record as of December 31, 1997, 1996, and 1995, respectively.
Cash distributions to investors in excess of net income are considered to
represent a return of capital. Cash distributions to the limited partners
of $3.7 million, $1.0 million, and $11.8 million in 1997, 1996, and 1995,
respectively, were deemed to be a return of capital.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three
months or less as cash equivalents. The carrying amount of cash and cash
equivalents approximates fair market value due to the short-term nature of
the investments.
Restricted Cash
Lessee security deposits held by the Partnership are considered restricted
cash.
Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 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 USPEs 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 $0.2 million and $0.1 million, were payable
as of December 31, 1997 and 1996, respectively. The Partnership's
proportional share of the USPE's management fee expenses during 1997 and
1996 were $0 and $44,000, respectively. The Partnership reimbursed FSI and
its affiliates $0.6 million, $0.7 million, and $1.0 million for
administrative and data processing services performed on behalf of the
Partnership in 1997, 1996, and 1995, respectively. The Partnershi s
proportional share of the USPE's administrative and data processing
expenses were $9,000 and $23,000 during 1997 and 1996, respectively.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
2. General Partner and Transactions with Affiliates (continued)
The Partnership paid $0.1 million in 1995 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. No amounts were paid to TEI in 1996 or 1997 for
owned equipment.
As of December 31, 1997, approximately 27% of the Partnership's trailer
equipment was in rental facilities operated by an affiliate of the General
Partner. 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 indirect expenses of the
rental yard operations is charged to the Partnership monthly.
3. Equipment
The components of owned equipment as of December 31, 1997 and 1996, were as
follows (in thousands of dollars):
Equipment Held for Operating Leases 1997 1996
- -----------------------------------
-------------------------------------
Rail equipment $ 17,401 $ 18,183
Trailers 17,144 21,173
Marine containers 8,308 10,640
Aircraft 7,854 32,860
-------------------------------------
50,707 82,856
Less accumulated depreciation (38,170) (62,114 )
----------------------------------
12,537 20,742
Equipment held for sale 788 --
-------------------------------------
Net equipment $ 13,325 $ 20,742
=====================================
Revenues are earned by placing the equipment under operating leases that
are generally billed monthly or quarterly. Some of the Partnership's marine
containers are leased to operators of utilization-type leasing pools that
include equipment owned by unaffiliated parties. In such instances,
revenues received by the Partnership consist of a specified percentage of
revenues generated by leasing the equipment to sublessees, after deducting
certain direct operating expenses of the pooled equipment. 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, 1997, all owned equipment in the Partnership's portfolio
was operating in short-term rental facilities or on lease, except for 3
railcars and 168 marine containers with an aggregate net book value of $0.4
million. As of December 31, 1996, all owned equipment in the Partnership
portfolio was either on lease or operating in PLM-affiliated short-term
trailer rental facilities, except for 3 railcars and 71 marine containers
with an aggregate net book value of $0.2 million.
During 1997, the General Partner sold or disposed of aircraft, marine
containers, trailers, and railcars owned by the Partnership, with an
aggregate net book value of $3.2 million, for proceeds of $5.1 million.
During 1996, the General Partner sold or disposed of marine containers,
trailers, railcars, and an aircraft owned by the Partnership, with an
aggregate net book value of $2.7 million, for proceeds of $4.8 million.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
3. Equipment (continued)
As of December 31, 1997, equipment held for sale included a commercial
aircraft with a net book value of $0.6 million and 44 covered hopper
railcars with a net book value of $0.2 million. No equipment was held for
sale as of December 31, 1996.
The Partnership reduced the carrying value of one aircraft by $0.7 million
during 1995 to its estimated net realizable value. There were no reductions
to the carrying values of equipment in 1996 or 1997.
All leases for owned and partially-owned equipment are being accounted for
as operating leases. Future minimum rents under noncancelable operating
leases as of December 31, 1997 during each of the next five years are
approximately $5.5 million in 1998, $4.3 million in 1999, $2.2 million in
2000, $0.6 million in 2001, and $8,000 in 2002. Contingent rentals based
upon utilization were approximately $1.3 million, $1.3 million, and $2.0
million in 1997, 1996, and 1995, respectively.
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Partnership leases or leased its aircraft, railcars, and trailers to
lessees domiciled in five geographic regions: South Asia, Canada, the
United States, Asia, and Europe. Marine vessels and marine containers are
leased to multiple lessees in different regions that operate the marine
vessels and marine containers worldwide. The tables below set forth
geographic information about the Partnership's owned equipment and
investments in USPEs grouped by domiciles of the lessees as of and for the
years ended December 31, 1997, 1996, and 1995 (in thousands of dollars):
Lease Revenues Investments in USPEs Owned Equipment
----------------------------- -------------------------------------------
Region 1997 1996 1997 1996 1995
------------------------------------------------------------ --------------------------------------------
United States $ -- $ -- $ 7,762 $ 8,516 $ 9,591
Canada -- -- 1,208 1,765 1,760
Europe -- -- 940 840 686
South Asia -- 1,284 -- -- 2,192
Asia -- -- -- -- 630
Rest of the world -- -- 673 1,258 1,971
------------------------------- ------------------------------------------------
Total lease revenues $ -- $ 1,284 $ 10,583 $ 12,379 $ 16,830
=============================== ================================================
The following table sets forth identifiable net income (loss) information
by region for the years ended December 31, 1997, 1996, and 1995 (in thousands of
dollars):
Net Income (Loss) Investments in USPEs Owned Equipment
--------------------------- --------------------------------------------
Region 1997 1996 1997 1996 1995
--------------------------------------------------------------- ----------------------------------------------
United States $ -- $ -- $ 3,533 $ 2,075 $ 2,876
Canada -- -- 470 927 897
Europe -- -- 260 162 (728)
South Asia (519) 6,267 -- -- (10)
Asia -- -- -- 763 173
Rest of the world -- -- 218 320 1,445
Total identifiable income (loss) (519) 6,267 4,481 4,247 4,653
Administrative and other -- -- (1,267) (2,328) (3,716)
---------------------------- ----------------------------------------------
Total net income (loss) $ (519) $ 6,267 $ 3,214 $ 1,919 $ 937
============================ ==============================================
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
3. Equipment (continued)
The net book value of these assets as of December 31, 1997, 1996, and 1995
are as follows (in thousands of dollars):
Net Book Value Investments in USPEs Owned Equipment
----------------------------------------- ---------------------------------------
Region 1997 1996 1995 1997 1996 1995
-------------------------------------------------------------------- ---------------------------------------
United States $ -- $ -- $ -- $ 9,760 $ 14,538 $ 19,632
Canada -- -- -- 1,016 2,215 1,912
Europe -- -- -- -- 1,241 1,844
Asia -- -- -- -- -- 1,641
South Asia 1,235 1,665 10,515 -- -- --
Rest of the world -- -- -- 1,761 2,748 3,951
1,235 1,665 10,515 12,537 20,742 28,980
Equipment held for sale 1,445 -- -- 788 -- --
------------------------------------------ -----------------------------------------
Total net book value $ 2,680 $ 1,665 $ 10,515 $ 13,325 $ 20,742 $ 28,980
========================================== =========================================
No lessees accounted for more than 10% of total lease revenues in 1997,
1996, and 1995.
4. Investments in Unconsolidated Special-Purpose Entities
Prior to 1996, the Partnership accounted for operating activities
associated with joint ownership of transportation equipment as undivided
interests, including its proportionate share of each asset with similar
wholly-owned assets, in its financial statements. Under generally accepted
accounting principles, the effects of such activities, if material, should
be reported using the equity method of accounting. Therefore, effective
January 1, 1996, the Partnership adopted the equity method to account for
its investment in such jointly-held assets.
The principal differences between the previous accounting method and the
equity method concern the presentation of activities relating to these
assets in the statement of operations. Whereas under the equity method of
accounting the Partnership's proportionate share is presented as a single
net amount, equity in net income (loss) of USPEs, under the previous method
the Partnership's statement of operations reflected its proportionate share
of each individual item of revenue and expense. Accordingly, the effect of
adopting the equity method of accounting has no cumulative effect on
previously reported 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 the
statement of cash flows due to the reclassification.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
4. Investments in Unconsolidated Special-Purpose Entities (continued)
The following summarizes the financial information for the special-purpose
entities and the Partnership's interests therein as of and for the year ended
December 31 (in thousands of dollars):
1997 1996
------------ ------------
Net Interest Net Interest
Total of Partnership Total of Partnership
USPEs USPEs
-------------------------------- ----------------------------------
Net Investments $ 8,891 $ 2,680 $ 3,354 $ 1,665
Lease revenues -- -- 2,418 1,284
Net income (loss) (1,039) (519) 11,295 6,267
The net investments in USPEs include the following jointly-owned equipment
as of December 31 (and related assets and liabilities) (in thousands of
dollars):
1997 1996
-------------------------------
23% interest in a Boeing 727-200 aircraft $ 1,445 $ --
50% interest in a Boeing 737-200 aircraft 1,235 1,665
Net investments $ 2,680 $ 1,665
================================================================
During the year ended December 31, 1996, the General Partner sold a mobile
offshore drilling unit in which the Partnership owned a 55% interest, which
had a net book value of $7.2 million, for proceeds of $14.3 million. The
Partnership received liquidating distributions from the USPE that owned the
asset during the third quarter of 1996.
The Partnership's 50% and 23% investments in commercial aircraft, included
in investments in unconsolidated special-purpose entities, were off lease
as of December 31, 1997.
An aircraft lessee encountered financial difficulties in 1996. The General
Partner established reserves against these receivables due to a
determination that ultimate collection of these rents was uncertain. As
payment for these past due receivables, the Partnership received a 23%
interest in a trust that owns a Boeing 727 aircraft. The fair market value
of the Partnership's interest in this aircraft approximated its outstanding
receivable from the lessee. This plane was sold at its approximate book
value in the first quarter of 1998.
5. Notes Payable
The Partnership has notes payable that are unsecured and nonrecourse, limit
additional borrowings, and specify covenants related to collateral
coverage, fixed-charge coverage, ratios for market value, and composition
of the equipment owned by the Partnership. The notes payable bear interest
at LIBOR plus 1.55% per annum (7.27% as of December 31, 1997 and 7.12% as
of December 31, 1996) and are payable quarterly in arrears. During 1997 and
1996, the Partnership prepaid $10.5 million and $14.0 million,
respectively, of the principal outstanding on the notes. The outstanding
notes payable balance was $2.5 million and $13.0 million as of December 31,
1997 and 1996, respectively. The remaining principal of $2.5 million is due
on March 31, 2000, but may be prepaid by the Partnership.
As of December 31, 1997, the General Partner believes that the book value
of the notes payable approximates fair market value due to its variable
interest rate.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
6. Income Taxes
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
As of December 31, 1997, there were temporary differences of approximately
$8.7 million 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
equipment reserves.
7. Depositary Unit Repurchase Plan
The Partnership had engaged in a program to repurchase up to 250,000
depositary units. No repurchases of depositary units were made during 1997.
During the year ended December 31, 1996, the Partnership repurchased 44,500
depositary units at a cost of $0.2 million. As of December 31, 1997, the
Partnership had cumulatively repurchased 117,800 depositary units at a cost
of $0.8 million. The General Partner does not plan any future repurchases
of depositary units.
8. Delisting of Partnership Units
The General Partner delisted the Partnership's depositary units from the
American Stock Exchange (AMEX) on April 8, 1996. The last day for trading
on the AMEX was March 22, 1996. Under the Internal Revenue Code (the Code)
then in effect, the Partnership was classified as a publicly traded
partnership. The Code treated all publicly traded partnerships as
corporations if they remained publicly traded after December 31, 1997.
Treating the Partnership as a corporation meant the Partnership itself
would have become a taxable rather than a flow-through entity. As a taxable
entity, the income of the Partnership would have become subject to federal
taxation at both the partnership level and at the investor level to the
extent that income would have 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.
As of March 11, 1998, there were 7,381,805 depositary units outstanding.
There are approximately 8,800 depositary unitholders of record as of the
date of this report.
Several secondary exchanges facilitate sales and purchases of limited
partnership units. Secondary markets are characterized as having few buyers
for limited partnership interests and therefore are generally viewed as
being inefficient vehicles for the sale of partnership units. There is
presently no public market for the units and none is likely to develop. To
prevent the units from being considered publicly traded and thereby to
avoid taxation of the Partnership as an association treated as a
corporation under the Code, the units will not be transferred without the
consent of the General Partner, which may be withheld in its absolute
discretion. The General Partner intends to monitor transfers of units in an
effort to ensure that they do not exceed the number permitted by certain
safe harbor provisions promulgated by the Internal Revenue Service. A
transfer may be prohibited if the intended transferee is not a U.S. citizen
or if the transfer would cause any portion of the units to be treated as
plan assets.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
9. Subsequent Events
In January 1998, the Partnership's 23% investment of $1.4 million in an
entity that owned a commercial aircraft was sold to an unaffiliated third
party at approximately its net book value.
In January 1998, 44 of the Partnership's covered hopper railcars, with a
net book value of $0.2 million, were sold to an unaffiliated third party
for a gain of $0.4 million. These railcars were included in equipment held
for sale as of December 31, 1997.
In January 1998, the Partnership's 727-200 commercial aircraft, with a net
book value of $0.6 million, was sold to an unaffiliated third party for a
gain $3.7 million. This aircraft was included in equipment held for sale as
of December 31, 1997.
On February 26, 1998, Pan American Airways Corporation (Pan Am) filed for
protection under Chapter 11 of the United States Bankruptcy Code in the
District Court of the Southern District of Florida (Case No.
98-11618-BKC-AJC). Pan Am was the lessee of a 727-200 owned by the
Partnership. According to its amended terms, the aircraft lease was
scheduled to terminate in December 1999. The Bankruptcy Court granted the
lessee motion to reject the lease, effective March 20, 1998. The General
Partner has reposessed the aircraft and intends to sell it. The General
Partner will continue to pursue remedies against the debtor in the
bankruptcy proceedings.
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 41-43
- --------------------------
*Incorporated by reference. See page 23 of this report.