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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, 1998.
[ ] 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
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock: N/A
Indicate the number of units outstanding of each of the issuer's classes of
depositary units, as of the latest practicable date:
Class Outstanding at March 17, 1999
----- -----------------------------
Limited partnership depositary units: 7,381,805
General Partnership units: 1
An index of exhibits filed with this Form 10-K is located at page 24.
Total number of pages in this report: 45.
PART I
ITEM 1. BUSINESS
(A) Background
On April 2, 1987, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly-owned subsidiary of PLM International, Inc. (PLM International or PLM),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 7,500,000 depositary units
(the units) in PLM Equipment Growth Fund II, a California limited partnership
(the Partnership, the Registrant, or EGF II). The Partnership's offering became
effective on June 5, 1987. FSI, as General Partner, owns a 5% interest in the
Partnership. The Partnership engages in the business of investing in a
diversified equipment portfolio consisting primarily of used, long-lived,
low-obsolescence capital equipment that is easily transportable by and among
prospective users.
The Partnership's primary objectives are:
(1) to maintain a diversified portfolio of long-lived, low-obsolescence,
high residual-value equipment which was purchased with the net proceeds of the
initial partnership offering, supplemented by debt financing, and surplus
operating cash during the investment phase of the Partnership. All transactions
of over $1.0 million must be approved by the PLM International Credit Review
Committee (the Committee), which is made up of members of PLM International
Senior Management. In determining a lessee's creditworthiness, the Committee
will consider, among other factors, its financial statements, internal and
external credit ratings, and letters of credit;
(2) to generate sufficient net operating cash flow from lease operations to
meet liquidity requirements and to generate cash distributions to the limited
partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(3) to selectively sell equipment when the General Partner believes that,
due to market conditions, market prices for equipment exceed inherent equipment
values or that expected future benefits from continued ownership of a particular
asset will have an adverse affect on the Partnership. As the Partnership is in
the liquidation phase, proceeds from these sales, together with excess net
operating cash flow from operations (net cash provided by operating activities
plus distributions from unconsolidated special-purpose entities (USPEs)), less
reasonable reserves to pay distributions to the partners;
(4) to preserve and protect the value of the portfolio through quality
management, maintaining the portfolio's diversity and constantly monitoring
equipment markets.
The offering of the Units of the Partnership closed on March 18, 1988. The
General Partner contributed $100 for its 5% general partner interest in the
Partnership. On November 20, 1990, the units of the Partnership began trading on
the American Stock Exchange (AMEX). Thereupon each unitholder received a
depositary receipt representing ownership of the number of units owned by such
unitholder. The General Partner delisted the Partnership's units from the AMEX
on April 8, 1996. The last day for trading on the AMEX was March 22, 1996.
As of December 31, 1998, there were 7,381,805 depositary units outstanding.
On January 1, 1999, the Partnership entered its liquidation phase and in
accordance with the limited partnership agreement, the General Partner intends
to commence an orderly liquidation of the Partnership's assets. The liquidation
phase will end on December 31, 2006, unless the Partnership is terminated
earlier upon sale of all of the equipment or by certain other events.
Table 1, below, lists the equipment and the cost of equipment in the
Partnership's portfolio, and the cost of investments in unconsolidated
special-purpose entities, as of December 31, 1998 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
- ----------------------------------------------------------------------------------------------------------------------
Owned equipment held for operating leases:
458 Box railcars Various $ 7,777
193 Mill gondolas railcars Various 4,459
148 Pressurized tank railcars Various 4,165
28 Non-Pressurized tank railcars Various 495
27 Covered hopper railcars ACF Industries 424
622 Dry piggyback trailers Various 9,572
41 Refrigerated trailers Various 1,362
77 Dry trailers Fruehauf 950
337 Refrigerated marine containers Various 7,008
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Total owned equipment held for operating lease $ 36,212
=============
Investment in unconsolidated special-purpose entity:
50% 737-200 Stage II commercial aircraft Boeing $ 8,046
==============
Includes equipment and investments purchased with the proceeds from capital
contributions, undistributed cash flow from operations, and Partnership
borrowings. Includes costs capitalized and equipment acquisition fees paid
to PLM Transportation Equipment Corporation (TEC), a wholly-owned
subsidiary of FSI, subsequent to the date of acquisition. All equipment was
used equipment at the time of purchase.
Jointly owned: EGF II (50%) and an affiliated program.
The equipment is generally leased under operating leases with terms of one to
six years. The Partnership's marine containers are leased to operators of
utilization-type leasing pools that include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. 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, 1998, approximately 16% of the of the Partnership's trailer
equipment was in rental facilities operated by PLM Rental, Inc., an affiliate of
the General Partner, doing business as PLM Trailer Leasing. The remaining
trailer fleet operated in the short-line railroad system. Revenues collected
under short-term rental agreements with the rental yards' customers are credited
to the owners of the related equipment as received. Direct expenses associated
with the equipment are charged directly to the Partnership. An allocation of
other indirect expenses of the rental yard operations is charged to the
Partnership monthly.
The lessees of the equipment include but are not limited to: Transamerica
Leasing, Union Pacific Railroad Company, Canadian Pacific Railway Company, and
Elgin, Jolieit & Eastern Railway.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the Partnership's equipment. The Partnership's management
agreement with IMI is to co-terminate with the dissolution of the Partnership,
unless the limited partners vote to terminate the agreement prior to that date
or at the discretion of the General Partner. IMI has agreed to perform all
services necessary to manage the equipment on behalf of the Partnership and to
perform or contract for the performance of all obligations of the 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 or invested in by the Partnership is leased out
on an operating lease basis wherein the rents received during the initial
noncancelable term of the lease are insufficient to recover the Partnership's
purchase price of the equipment. The short- to mid-term nature of operating
leases generally commands a higher rental rate than longer-term, full payout
leases and offers lessees relative flexibility in their equipment commitment. In
addition, the rental obligation under an operating lease need not be capitalized
on the lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize
full payout leases on new equipment, i.e. leases that have terms equal to the
expected economic life of the equipment. While some lessees prefer the
flexibility offered by a shorter-term operating lease, other lessees prefer the
rate advantages possible with a full payout lease. Competitors may write full
payout leases at considerably lower rates and for longer terms than the
Partnership offers, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers who offer operating leases
and full payout leases. Manufacturers may provide ancillary services that the
Partnership cannot offer, such as specialized maintenance services (including
possible substitution of equipment), training, warranty services, and trade-in
privileges.
The Partnership also competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), GATX, General Electric Railcar
Services Corporation, General Electric Capital Aviation Services Corporation,
and other investment programs that lease the same types of equipment.
(D) Demand
The Partnership operates in four primary operating segments: trailer leasing,
railcar leasing, aircraft leasing, and marine container leasing. Each equipment
leasing segment engages in short-term to mid-term operating leases to a variety
of customers. Except for the aircraft which may be leased to a passenger air
carrier, 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) Railcars
(a) Box Railcars
Box railcars are used primarily to transport paper and paper products.
Carloadings of paper and paper products fell slightly in 1998, compared to 1997,
decreasing by 2% both in the United States and Canada. Prices moved modestly
higher for most grades of paper during the year, and a variety of positive
industry factors indicates that the upturn could continue for some time.
However, the financial difficulties now being experienced in parts of Asia may
have a negative effect on future paper industry trends.
All of the Partnership's box cars continued to operate on long-term leases
during 1998.
(b) Mill Gondolas Railcars
Mill gondolas railcars are railcars that are typically used to carry scrap steel
from steel processors to small steel mills called minimills for recycling. In
1997, minimills were responsible for 43% of the total steel output in the United
States, relatively unchanged from the 42% level of 1996. North American car
loadings of scrap steel fell slightly in 1998, down 4% over 1997 levels.
All of the Partnership's mill gondolas railcars continued to operate on
long-term leases during 1998.
(c) Pressurized Tank Railcars
Pressurized tank railcars transport primarily two chemicals: liquefied petroleum
gas (natural gas) and anhydrous ammonia (fertilizer). Natural gas is used in a
variety of ways in businesses, electric plants, factories, homes, and now even
cars. The demand for fertilizer is driven by a number of factors, including
grain prices, the status of government farm subsidy programs, the amount of
farming acreage and mix of crops planted, weather patterns, farming practices,
and the value of the U.S. dollar.
In North America, 1998 carload originations of both chemicals and petroleum
products remained relatively constant, compared to 1997. The 98% utilization
rate of the Partnership's pressurized tank railcars was consistent with this
statistic.
(d) General Purpose (Nonpressurized) Tank Railcars
Tank cars that do not require pressurization are used to transport a variety of
bulk liquid commodities and chemicals, including certain petroleum fuels and
products, liquefied asphalt, lubricating and vegetable oils, molten sulfur, and
corn syrup. The largest consumers of chemical products are the manufacturing,
automobile, and housing sectors. Because the bulk liquid industry is so diverse,
its overall health is reflected by such general indicators as changes in the
Gross Domestic Product, personal consumption expenditures, retail sales,
currency exchange rates, and national and international economic forecasts.
In North America, railcar loadings for the commodity group that includes
chemicals and petroleum products remained essentially unchanged, compared to
1997. The Partnership's general purpose cars continue to be in high demand, with
utilization over 98% in 1998.
(e) Covered Hopper (Grain) Railcars
Covered hopper railcars are used to transport grain to domestic food processors,
poultry breeders, cattle feed lots, and for export. Demand for covered hopper
cars softened In 1998, as total North American grain shipments declined 8%,
compared to 1997, with grain shipments within Canada contributing to most of
this decrease. This has put downward pressure on lease rates, which has been
exacerbated by a significant increase in the number of covered hopper cars built
in the last few years. Since 1988, there has been a nearly 20% increase in rail
transportation capacity assigned to agricultural service. In 1996, just over
one-half of all new railcars built were covered hopper cars; in 1997, this
percentage dropped somewhat, to 38% of all cars built.
The Partnership's covered hopper cars were not impacted by the decrease in lease
rates during 1998, as all of the cars continued to operate on long-term leases.
(2) Trailers
(a) Intermodal (Piggyback) Trailers
Intermodal (piggyback) trailers are used to ship goods either by truck or by
rail. Activity within the North American intermodal trailer market declined
slightly in 1998, with trailer shipments down 4% from 1997 levels, due primarily
to rail service problems associated with the mergers in this area. Utilization
of the intermodal per diem rental fleet, consisting of approximately 170,000
units, was 73%. Intermodal utilization in 1999 is expected to decline another 2%
from 1998 levels, due to a slight leveling off of overall economic activity in
1999, after a robust year in 1998.
The General Partner has initiated expanded marketing and asset management
efforts for its intermodal trailers, from which it expects to achieve improved
trailer utilization and operating results. During 1998, average utilization
rates for the Partnership's intermodal trailer fleet approached 80%.
(b) Over-the Road Refrigerated Trailers
The temperature-controlled over-the-road trailer market remained strong in 1998
as freight levels improved and equipment oversupply was reduced. Many
refrigerated equipment users retired older trailers and consolidated their
fleets, making way for new, technologically improved units. Production of new
equipment is backlogged into the third quarter of 1999. In light of the current
tight supply of trailers available on the market, it is anticipated that
trucking companies and other refrigerated trailer users will look outside their
own fleets more frequently by leasing trailers on a short-term basis to meet
their equipment needs.
This leasing trend should benefit the Partnership, which makes most of its
trailers available for short-term leasing from rental yards owned and operated
by a PLM International subsidiary. The Partnership's utilization of refrigerated
trailers showed improvement in 1998, with utilization rates approaching 70%,
compared to 60% in 1997.
(c) Over-the-Road Dry Trailers
The U.S. over-the-road (dry) trailer market continued to recover in 1998, with a
strong domestic economy resulting in heavy freight volumes. The leasing outlook
continues to be positive, as equipment surpluses of recent years are being
absorbed by a buoyant market. In addition to high freight volumes, declining
fuel prices have led to a strong trucking industry and improved equipment
demand.
The Partnership's dry van fleet experienced strong utilization throughout 1998,
with utilization rates remaining well above 70% throughout the year.
(3) Marine Containers
The marine container market began 1998 with industrywide utilization in the low
80% range. This percentage eroded somewhat during the year, while per diem
rental rates remained steady. One factor affecting the market was the
availability of historically low-priced marine containers from Asian
manufacturers. This trend is expected to remain in 1999, and will continue to
put pressure on economic results fleetwide.
The trend toward industrywide consolidation continued in 1998, as the U.S.
parent company of one of the industry's top ten container lessors announced that
it would be outsourcing the management of its container fleet to a competitor.
While this announcement has yet to be finalized, over the 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.
(4) Commercial Aircraft
The world's major airlines experienced a fourth consecutive year of profits,
showing a combined marginal net income (net income measured as a percentage of
revenue) of 6%, compared to the industry's historical annual rate of 1%.
Airlines recorded positive marginal net annual income of 2% in 1995, 4% in 1996,
6% in 1997, and 6% in 1998. The two factors that have led to this increase in
profitability are improvements in yield management systems and reduced operating
costs, particularly lowered fuel costs. These higher levels of profitability
have allowed many airlines to re-equip their fleets with new aircraft, resulting
in a record number of orders for manufacturers.
Major airlines increased their fleets from 7,181 aircraft in 1997 to 7,323 in
1998, which has resulted in more used aircraft available on the secondary
market. Despite these increases, the number of Stage II aircraft in these fleets
(similar to those owned by the Partnership) decreased by 26% from 1997 to 1998,
and sharper decreases are expected in 1999. This trend is due to Federal
Aviation Regulation section C36.5, which requires airlines to convert 100% of
their fleets to Stage III aircraft, which have lower noise levels than Stage II
aircraft, by the year 2000 in the United States and the year 2002 in Canada and
Europe. Stage II aircraft can be modified to Stage III with the installation of
a hushkit that significantly reduces engine noise. The cost of hushkit
installation ranges from $1.0 to $2.0 million for the types of aircraft owned by
the Partnership.
Orders for new aircraft have risen rapidly worldwide in recent years: 691 in
1995, 1,182 in 1996, 1,328 in 1997, and an estimated 1,500 in 1998. As a result
of this increase in orders, manufacturers have expanded their production, and
new aircraft deliveries have increased from 482 in 1995, 493 in 1996, and 674 in
1997, to an estimated 825 in 1998.
The industry now has in place two of the three conditions that led to financial
problems in the early 1990s: potential excess orders and record deliveries. The
missing element is a worldwide recession. Should a recession occur, the industry
will experience another period of excess aircraft capacity and surplus aircraft
on the ground.
The Partnership has a 50% investment in a 1981 Boeing 737-200 aircraft that has
not had a hushkit installed. This aircraft is scheduled to be sold in 1999.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign government authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require its removal from service or extensive modifications 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's remaining aircraft is a Stage II aircraft
that does not meet Stage III requirements. The Partnership is scheduled to
sell its remaining Stage II aircraft by the year 1999;
(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 to the stratospheric ozone layer
and that 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
railcars).
As of December 31, 1998, the Partnership was in compliance with the above
government regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has either purchased or interests in entities which own equipment. As of
December 31, 1998, the Partnership owned a portfolio of transportation and
related equipment and investments in equipment owned by unconsolidated
special-purpose entities as described in Item I, Table 1. The Partnership
acquired equipment with the proceeds of the Partnership offering of $150.0
million, proceeds from the debt financing of $35.0 million and by reinvesting a
portion of its operating cash flow in additional equipment.
The Partnership maintains its principal office at 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
The Partnership, together with affiliates, has initiated litigation in various
official forums in India against a defaulting Indian airline lessee to repossess
Partnership property and to recover damages for failure to pay rent and failure
to maintain such property in accordance with relevant lease contracts. The
Partnership has repossessed all of its property previously leased to such
airline, and the airline has ceased operations. In response to the Partnership's
collection efforts, the airline filed counter-claims against the Partnership in
excess of the Partnership's claims against the airline. The General Partner
believes that the airline's counterclaims are completely without merit, and the
General Partner will vigorously defend against such counterclaims.
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, 1998.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT MATTERS
As of March 17, 1999, there were 7,381,805 depositary units outstanding. There
are approximately 6,290 depositary unitholders of record as of the date of this
report.
There are several secondary markets that will 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
inefficient vehicles for the sale of limited partnership units.
To prevent the units from being considered publicly traded and thereby to avoid
taxation of the Partnership as an association treated as a corporation under the
Internal Revenue Code, the limited partnership units will not be transferable
without the consent of the General Partner, which may be withheld in its
absolute discretion. The General Partner intends to monitor transfers of limited
partnership units in an effort to ensure that they do not exceed the percentage
or number permitted by certain safe harbors promulgated by the Internal Revenue
Service. A transfer may be prohibited if the intended transferee is not an U.S.
citizen or if the transfer would cause any portion of the units of a "Qualified
Plan" as defined by the Employee Retirement Income Security Act of 1974 and
Individual Retirement Accounts to exceed the allowable limit.
On January 14, 1999, the General Partner for the Partnership announced that it
has begun recognizing transfers involving trading of units in 1999. The
Partnership is listed on the OTC Bulletin Board under the symbols GFYPZ.
In making the announcement, the General Partner noted that, as in previous
years, it will continue to monitor the volume of such trades to ensure that the
Partnership remain in compliance with Internal Revenue Service (IRS) Notice
88-75 and IRS Code Section 7704. These IRS regulations contain safe harbor
provisions stipulating the maximum number of partnership units that can be
traded during a calendar year in order for a partnership not to be deemed a
publicly traded partnership for income tax purposes.
Should the Partnership approach the annual safe harbor limitation later on in
1999, the General Partner will, at that time, cease to recognize any further
transfers involving trading of Partnership units. Transfers specifically
excluded from the safe harbor limitations, referred to in the regulations as
"transfers not involving trading," which include transfers at death, transfers
between family members, and transfers involving distributions from a qualified
retirement plan, will continue to be recognized by the General Partner
throughout the year.
Pursuant to the terms of the amended limited partnership agreement, the General
Partner is generally entitled to a 5% interest in the profits and losses and
cash distributions of the Partnership. Special allocations of income are made to
the General Partner to the extent necessary to cause the Investment Account of
the General Partner to be zero. Such allocation may not cumulatively exceed five
ninety-fifths of the aggregate of the capital contributions made by the Limited
Partners and the reinvestment cash available for distribution. The General
Partner is the sole holder of such interests.
The Partnership engaged in a plan to repurchase up to 250,000 of the outstanding
depositary units. 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 or 1998. As of December 31, 1998, 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.
(this space intentionally left blank.)
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the Years Ended December 31,
(In thousands of dollars, except weighted-average depositary unit amounts)
1998 1997 1996 1995 1994
---------------------------------------------------------------------------
Operating results:
Total revenues $ 13,567 $ 12,748 $ 14,819 $ 18,983 $ 26,326
Net gain on disposition of equipment 5,990 1,922 2,085 1,485 2,347
Loss on revaluation of equipment -- -- -- (667 ) (887 )
Equity in net income (loss) of
unconsolidated special-purpose
Entities (1,484 ) (519 ) 6,267 -- --
Net income 6,031 2,695 8,186 937 67
At year-end:
Total assets $ 12,474 $ 18,631 $ 33,595 $ 48,957 $ 69,485
Total liabilities 1,207 4,906 16,349 30,761 39,332
Notes payable -- 2,500 13,000 27,000 35,000
Cash distribution $ 8,489 $ 6,216 $ 8,957 $ 12,549 $ 12,620
Cash distribution representing a
return of capital to the limited $ 2,458 $ 3,709 $ 1,045 $ 11,847 $ 11,989
partners
Per weighted-average depositary unit:
Net income (loss) $ 0.76 $ 0.30 $ 1.01 $ 0.01 $ (0.12 )
Cash distribution $ 1.09 $ 0.80 $ 1.15 $ 1.60 $ 1.60
Cash distribution representing a
return of capital $ 0.33 $ 0.50 $ 0.14 $ 1.59 $ 1.60
After reduction of income of $124 ($0.02 per weighted-average depositary
unit) in 1998, $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, and $963 ($0.13 per
weighted-average depositary unit) in 1994, representing special allocations
to the General Partner resulting from an amendment to the partnership
agreement (see Note 1 to the financial statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth Fund II
(the Partnership). The following discussion and analysis of operations focuses
on the performance of the Partnership's equipment in the various segments in
which it operates and its effect on the Partnership's overall financial
condition.
(B) Results of Operations -- Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Partnership's equipment portfolio to repricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and the
equipment must be remarketed. Major factors influencing the current market rate
for the Partnership's equipment include, but are not limited to, supply and
demand for similar or comparable types of transport capacity, desirability of
the equipment in the leasing market, market conditions for the particular
industry segment in which the equipment is to be leased, overall economic
conditions, and various regulations concerning the use of the equipment.
Equipment that is idle or out of service between the expiration of one lease and
the assumption of a subsequent lease can result in a reduction of contribution
to the Partnership. The Partnership experienced re-leasing or repricing activity
in 1998 primarily in its aircraft, railcar, trailer, and marine container
portfolios.
(a) Aircraft: The Partnership's 50% investment in a commercial aircraft was
off-lease throughout 1997 and 1998. This aircraft is currently being marketed
for sale or re-lease.
(b) Trailers: 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. The Partnership's trailer contributions declined from 1997
to 1998 due to the sale and disposition of trailers during 1997 and 1998, which
was partially offset by higher utilization for the remaining fleet.
(c) Marine containers: All of the Partnership's marine container
portfolio operates in utilization-based leasing pools and, as such, is exposed
to considerable repricing activity. The Partnership's marine container
contributions declined from 1997 to 1998 due to the disposition of marine
containers and lower utilization for the remaining fleet during 1997 and 1998.
(d) Railcars: The majority of the Partnership's railcar equipment remained
on-lease throughout the year, and thus was not adversely affected by re-leasing
and repricing exposure.
(2) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment and investment in unconsolidated special
purpose entities (USPEs) represents a reduction in the size of the equipment
portfolio and may 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 1998:
(a) Liquidations: During 1998, the Partnership disposed of aircraft, marine
containers, railcars, and trailers for total proceeds of $7.9 million.
(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 1998 and is currently being marketed for
sale. In addition, in 1997, 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.
This plane was sold for a net gain of $1.1 million in the second quarter of
1998. 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) Equipment Valuation and Write-downs
In accordance with Financial Accounting Standards Board's Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". The General Partner reviews the carrying value of the
Partnership's equipment portfolio at least quarterly in relation to expected
future market conditions for the purpose of assessing the recoverability of the
recorded amounts. If projected undiscounted future lease revenues plus residual
values are less than the carrying value of the equipment, a loss on revaluation
is recorded. No reductions to the equipment carrying values were required for
the years ended December 31, 1998, 1997, or 1996.
As of December 31, 1998, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including interest in equipment
owned by USPEs, to be $24.5 million. This estimate is based on recent market
transactions for equipment similar to the Partnership's equipment portfolio and
the Partnership's interest in equipment owned by USPEs. Ultimate realization of
fair market value by the Partnership may differ substantially from the estimate
due to specific market conditions, technological obsolescence, and government
regulations, among other factors that the General Partner cannot accurately
predict.
(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. As of December 31, 1998, the
Partnership had no outstanding indebtedness. The Partnership relies on operating
cash flow to meet its operating obligations and make cash distributions to the
limited partners.
In 1998, the Partnership used $2.5 million in proceeds from the sale of assets
to prepay the Partnership's remaining outstanding debt.
For the year ended December 31, 1998, the Partnership generated $3.1 million in
operating cash (net cash provided by operating activities plus non-liquidating
cash distributions from USPEs) to meet its operating obligations, but also used
undistributed available cash from prior periods to maintain the current level of
distributions (total in 1998 of $8.5 million) to the partners.
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
December 31, 1998 and 1997
(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 December 31, 1998, when compared to the same period of 1997. Gains or
losses from the sale of equipment and certain expenses such as depreciation and
amortization and general and administrative expenses relating to the operating
segments (see Note 5 to the audited financial statements), are not included in
the owned equipment operation discussion because they are more indirect in
nature, not a result of operations but more the result of owning a portfolio of
equipment. The following table presents lease revenues less direct expenses by
segment (in thousands of dollars):
For the Years Ended
December 31,
1998 1997
----------------------------
Rail equipment $ 2,991 $ 3,251
Trailers 2,074 2,787
Marine containers 246 666
Aircraft 47 1,848
Rail equipment: Railcar lease revenues and direct expenses were $4.2 million and
$1.2 million, respectively, for 1998, compared to $4.5 million and $1.2 million,
respectively, during 1997. Lease revenues decreased due to the sale of railcars
in 1998 and 1997.
Trailers: Trailer lease revenues and direct expenses were $2.8 million and $0.7
million, respectively, for 1998, compared to $3.5 million and $0.7 million,
respectively, during 1997. The decrease in net contribution was primarily due to
the sale of trailers in 1998 and 1997. Although the number of trailers has been
declining, the Partnership incurred higher expenses for trailers operating in
the short-line railroad system in 1998 compared to 1997.
Marine containers: Marine container lease revenues were $0.2 million and $0.7
million for 1998 and 1997, 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 has been a decrease in marine
container revenue.
Aircraft: Aircraft lease revenues and direct expenses were $0.1 million and
$36,000, respectively, for 1998, compared to $1.9 million and $0.1 million,
respectively, for 1997. Aircraft contribution decreased in 1998, compared to
1997, due to the sale of the remaining aircraft fleet in 1998 and 1997.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $4.0 million for the year ended December 31, 1998,
decreased from $7.5 million for the same period of 1997. Significant variances
are explained as follows:
(i) A $2.0 million decrease in depreciation and amortization expenses from
1997 levels reflects the effect of asset sales in 1997 and 1998.
(ii) A $0.6 million decrease in interest expense was due to the repayment of
the Partnership's outstanding debt during 1998.
(iii) A $0.4 million decrease in bad debt expense was due to a $0.1 million
decrease in reserves for a certain lessee, resulting from the application of
security deposits against uncollected outstanding receivables, and a $0.3
million decrease in bad debt expense due to the General Partner's evaluation of
the collectibility of receivables due from certain lessees.
(iv) A $0.3 million decrease in administrative expenses from 1997 levels was
due to reduced office expenses and professional services required by the
Partnership, resulting from the reduced equipment portfolio.
(v) A $0.2 million decrease in management fees to affiliates reflects the
lower levels of lease revenues in the year ended December 31, 1998, compared to
the same period in 1997.
(c) Net Gain on Disposition of Owned Equipment
Net gain on disposition of equipment for the year ended December 31, 1998
totaled $6.0 million, which resulted from the sale or disposal of aircraft,
marine containers, trailers, and railcars, with an aggregate net book value of
$1.9 million, for aggregate proceeds of $7.9 million. For the year ended
December 31, 1997, the $1.9 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 $3.2 million, for aggregate
proceeds of $5.1 million.
(d) Equity in Net Loss of USPEs
Net loss generated from the operation of jointly-owned assets accounted for
under the equity method is shown in the following table (in thousands of
dollars):
For the Years Ended
December 31,
1998 1997
----------------------------------------------------------------------------------------------------
Aircraft $ (1,484 ) $ (519 )
Aircraft: As of December 31, 1998, the Partnership owned a 50% investment in an
entity that owns a commercial aircraft. Expenses were $1.5 million for 1998,
compared to revenues and expenses of $0.2 million and $0.7 million,
respectively, for 1997. The Partnership's share of revenues decreased in 1998
due to the sale of its 50% investment in an entity that owned an aircraft engine
in the third quarter of 1997. The Partnership's share of expenses increased due
to repairs required during 1998, which were not required for the same period in
1997. During the first quarter of 1998, the General Partner sold for
approximately its book value the Partnership's 23% investment in an entity that
owned an aircraft. The aircraft in the Partnership's remaining interest in an
entity which owns an aircraft was off-lease during 1997 and 1998.
(e) Net Income
As a result of the foregoing, the Partnership's net income for the period ended
December 31, 1998 was $6.0 million, compared to net income of $2.7 million
during the same period in 1997. 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, 1998 is not necessarily
indicative of future periods. In the year ended December 31, 1998, the
Partnership distributed $8.1 million to the limited partners, or $1.09 per
weighted-average depositary unit.
(2) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1997 and 1996
(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 during the year ended December 31, 1997, when compared to 1996. Gains
or losses from the sale of equipment and certain expenses such as depreciation
and amortization and general and administrative expenses relating to the
operating segments (see Note 5 to the audited financial statements), are not
included in the owned equipment operation discussion because they are more
indirect in nature, not a result of operations but more the result of owning a
portfolio of equipment. The following table presents lease revenues less direct
expenses by segment (in thousands of dollars):
For the Years Ended
December 31,
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 the year ended December 31, 1997,
decreased from $10.6 million in 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) 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.
(d) 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.
(e) Equity in Net Income (Loss) of USPEs
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 or Loss
As a result of the foregoing, the Partnership's net income of $2.7 million for
the year ended December 31, 1997, decreased from net income of $8.2 million
during the same period for 1996. The Partnership's ability to operate and
liquidate assets, secure leases, and re-lease those assets whose leases expire
is subject to many factors, and the Partnership's performance in the year ended
December 31, 1997 is not necessarily indicative of future periods. In the year
ended December 31, 1997, the Partnership distributed $5.9 million to the limited
partners, or $0.80 per weighted-average limited partner 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 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
generally through the avoidance of operations in countries that do not have a
stable judicial system and established commercial business laws. Credit support
strategies for lessees range from letters of credit supported by U.S. banks to
cash deposits. Although these credit support mechanisms generally allow the
Partnership to maintain its lease yield, there are risks associated with
slow-to-respond judicial systems when legal remedies are required to secure
payment or repossess equipment. Economic risks are inherent in all international
markets and the General Partner strives to minimize this risk with market
analysis prior to committing equipment to a particular geographic area. Refer to
Note 6 to the financial statements for information on the revenues, net income,
and net book value of equipment in various geographic regions.
Revenues and net operating income by geographic region are impacted by the time
period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years of
ownership due to the use of the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to significantly change in the future as assets come
off lease and decisions are made to either redeploy the assets in the most
advantageous geographic location, or sell the assets.
The Partnership's owned equipment on lease to U.S.-domiciled lessees consists of
trailers and railcars. During 1998, lease revenues generated by wholly and
partially owned equipment in the United States accounted for 77% of the lease
revenues, while net operating income accounted for $3.3 million of the $6.0
million aggregate net income for the Partnership. This is primarily a result of
the fact that the Partnership sold trailers, railcars, and aircraft during 1998
that were operated in the United States, which resulted in $1.8 million in net
gains.
The Partnership's equipment leased to Canadian-domiciled lessees consists of
railcars. During 1998, lease revenues in Canada accounted for 19% of total lease
revenues, while the operations accounted for $1.2 million of the aggregate net
income generated by wholly and partially owned equipment. The primary reason for
this relationship is that the Partnership sold railcars during 1998, which
resulted in $0.6 million in net gains.
The Partnership's investment in equipment owned by a USPE in South Asia
accounted for none of the Partnership's lease revenue from wholly and partially
owned equipment. This equipment resulted in a $1.5 million of operating net
loss, due to the aircraft being off lease in 1998.
In 1998, marine containers, which were leased in various regions throughout the
year, accounted for 3% of the lease revenues from wholly and partially owned
equipment. This equipment resulted in $0.2 million of the aggregate net
operating loss in 1998, due to low utilization of the Partnership's aging fleet.
European operations consisted of an aircraft that accounted for none of the
lease revenues from wholly and partially owned equipment, while net income
generated by this equipment accounted for $3.7 million of the aggregate net
income generated by the Partnership in 1998. The primary reason for this
relationship is that the Partnership sold the remaining equipment in this region
during 1998, which resulted in $3.7 million in net gains.
(F) Effects of Year 2000
It is possible that the General Partner's currently installed computer systems,
software products, and other business systems, or the Partnership's vendors,
service providers, and customers, working either alone or in conjunction with
other software or systems, may not accept input of, store, manipulate, and
output dates on or after January 1, 2000 without error or interruption (a
problem commonly known as the "Year 2000" problem). Since the Partnership relies
substantially on the General Partner's software systems, applications, and
control devices in operating and monitoring significant aspects of its business,
any Year 2000 problem suffered by the General Partner could have a material
adverse effect on the Partnership's business, financial condition, and results
of operations.
The General Partner has established a special Year 2000 oversight committee to
review the impact of Year 2000 issues on its software products and other
business systems in order to determine whether such systems will retain
functionality after December 31, 1999. The General Partner (a) is currently
integrating Year 2000-compliant programming code into its existing internally
customized and internally developed transaction processing software systems and
(b) the General Partner's accounting and asset management software systems have
either already been made Year 2000-compliant or Year 2000-compliant upgrades of
such systems are planned to be implemented by the General Partner before the end
of fiscal 1999. Although the General Partner believes that its Year 2000
compliance program can be completed by the beginning of 1999, there can be no
assurance that the compliance program will be completed by that date. To date,
the costs incurred and allocated to the Partnership to become Year 2000
compliant have not been material. Also, the General Partner believes the future
cost allocable to the Partnership to become Year 2000 compliant will not be
material.
It is possible that certain of the Partnership's equipment lease portfolio may
not be Year 2000 compliant. The General Partner is currently contacting
equipment manufacturers of the Partnership's leased equipment portfolio to
assure Year 2000 compliance or to develop remediation strategies. The General
Partner does not expect that non-Year 2000 compliance of the Partnership's
leased equipment portfolio will have an adverse material impact on its financial
statements. Some risks associated with the Year 2000 problem are beyond the
ability of the General Partner or Partnership to control, including the extent
to which third parties can address the Year 2000 problem. The General Partner is
communicating with vendors, services providers, and customers in order to assess
the Year 2000 compliance readiness of such parties and the extent to which the
Partnership is vulnerable to any third-party Year 2000 issues. There can be no
assurance that the software systems of such parties will be converted or made
Year 2000 compliant in a timely manner. Any failure by the General Partner or
such other parties to make their respective systems Year 2000 compliant could
have a material adverse effect on the business, financial position, and results
of operations from the Partnership. The General Partner will make an ongoing
effort to recognize and evaluate potential exposure relating to third-party Year
2000 non-compliance, and will develop a contingency plan if the General Partner
determines that third-party non-compliance will have a material adverse effect
on the Partnership's business, financial position, or results of operation.
The General Partner is currently developing a contingency plan to address the
possible failure of any systems due to the Year 2000 problems. The General
Partner anticipates these plans will be completed by September 30, 1999.
(G) Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities," (SFAS No. 133), which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of December 31, 1998,
the General Partner is reviewing the effect this standard will have on the
Partnership's consolidated financial statements.
(H) Inflation
Inflation had no significant impact on the Partnership's operations during 1998,
1997, or 1996.
(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 entered its liquidation phase in January of 1999, 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.
Several factors may affect the Partnership's operating performance in 1999 and
beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
The Partnership's operation of a diversified equipment portfolio in a broad base
of markets is intended to reduce its exposure to volatility in individual
equipment sectors.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent on many factors, such
as specific market conditions and economic activity, technological obsolescence,
and government or other regulations. The unpredictability of these factors, or
of their occurrence, makes it difficult for the General Partner to clearly
define trends or influences that may impact the performance of the Partnership's
equipment. The General Partner continually monitors both the equipment markets
and the performance of the Partnership's equipment in these markets. The General
Partner may decide to reduce the Partnership's exposure to those equipment
markets in which it determines that it cannot operate equipment and achieve
acceptable rates of return.
The Partnership intends to use excess cash flow from operations to satisfy its
operating requirements, and to pay cash distributions to the investors.
(1) Repricing Risk
Certain of the Partnership's trailers, railcars, and marine containers will be
remarketed in 1999 as existing leases expire, exposing the Partnership to some
repricing risk/opportunity. Additionally, the General Partner may elect to sell
certain underperforming equipment or equipment whose continued operation may
become prohibitively expensive. In either case, the General Partner intends to
re-lease or sell equipment at prevailing market rates; however, the General
Partner cannot predict these future rates with any certainty at this time, and
cannot accurately assess the effect of such activity on future Partnership
performance.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Ongoing changes in the regulatory
environment, both in the 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, 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
aircraft has been shown to comply with Stage III noise levels. The Partnership
is scheduled to sell its remaining Stage II aircraft by the year 1999.
(3) Distributions
During the active liquidation phase, the Partnership will use operating cash
flow and proceeds from the sale of equipment to meet its operating obligations
and 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 existing distribution levels. In the long term, changing market
conditions and used equipment values precludes the General Partner from
accurately determining the impact of future re-leasing activity and equipment
sales on Partnership performance and liquidity.
Since the Partnership has entered the active liquidation phase, the size of the
Partnership's remaining equipment portfolio and, in turn, the amount of net cash
flows from operations will continue to become progressively smaller as assets
are sold. Although distribution levels may be reduced in the future, significant
asset sales may result in potential special distributions to unitholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of currency devaluation
risk. During 1998, 23% of the Partnership's total lease revenues from wholly-
and partially-owned equipment came from non-United States domiciled lessees.
Most of the leases require payment in United States (U.S.) currency. If these
lessees currency devalues against the U.S. dollar, the lessees could potentially
encounter difficulty in making the U.S.
dollar denominated lease payments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements included in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
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 of PLM Financial Services, Inc. (and key executive
officers of its subsidiaries) are as follows:
Name Age Position
- ---------------------------------------- ------- ------------------------------------------------------------------
Robert N. Tidball 60 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 51 Director, PLM International, Inc.
Douglas P. Goodrich 52 Director and Senior Vice President, PLM International, Inc.;
Director and President, PLM Financial Services, Inc.; President,
PLM Transportation Equipment Corporation; President, PLM Railcar
Management Services, Inc.
Warren G. Lichtenstein 33 Director, PLM International, Inc.
Howard M. Lorber 50 Director, PLM International, Inc.
Harold R. Somerset 63 Director, PLM International, Inc.
Robert L. Witt 58 Director, PLM International, Inc.
J. Michael Allgood 50 Vice President and Chief Financial Officer, PLM International,
Inc. and PLM Financial Services, Inc.
Robin L. Austin 52 Vice President, Human Resources, PLM International, Inc. and PLM
Financial Services, Inc.
Stephen M. Bess 52 President, PLM Investment Management, Inc.; Vice President and
Director, PLM Financial Services, Inc.
Richard K Brock 36 Vice President and Corporate Controller, PLM International, Inc.
and PLM Financial Services, Inc.
James C. Chandler 50 Vice President, Planning and Development, PLM International,
Inc. and PLM Financial Services, Inc.
Susan C. Santo 36 Vice President, Secretary, and General Counsel, PLM
International, Inc. and PLM Financial Services, Inc.
Janet M. Turner 42 Vice President, Investor Relations and Corporate Communications,
PLM International, Inc. and PLM Investment Management, 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 as President and Chief Executive Officer, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989. Mr. Tidball was appointed a 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. Prior to founding
Dunsford Hill Capital Partners, Mr. Caudill held senior investment banking
positions at Prudential Securities, Morgan Grenfell Inc., and The First Boston
Corporation. Mr. Caudill also serves as a director of Northwest Biotherapeutics,
Inc., VaxGen, Inc., SBE, Inc., and RamGen, 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 of Chicago, Illinois, a subsidiary of Guardian Industries
Corporation, from December 1980 to September 1985.
Warren G. Lichtenstein was elected to the Board of Directors in December 1998.
Mr. Lichtenstein is the Chief Executive Officer of Steel Partners II, L.P.,
which is PLM International's largest shareholder, currently owning 16% of the
Company's common stock. Additionally, Mr. Lichtenstein is Chairman of the Board
of Aydin Corporation, a NYSE-listed defense electronics concern, as well as a
director of Gateway Industries, Rose's Holdings, Inc., and Saratoga Beverage
Group, Inc. Mr. Lichtenstein is a graduate of the University of Pennsylvania,
where he received a Bachelor of Arts degree in economics.
Howard M. Lorber was elected to the Board of Directors in January 1999. Mr.
Lorber is President and Chief Operating Officer of New Valley Corporation, an
investment banking and real estate concern. He is also Chairman of the Board and
Chief Executive Officer of Nathan's Famous, Inc., a fast food company.
Additionally, Mr. Lorber is a director of United Capital Corporation and Prime
Hospitality Corporation and serves on the boards of several community service
organizations. He is a graduate of Long Island University, where he received a
Bachelor of Arts degree and a Masters degree in taxation. Mr. Lorber also
received charter life underwriter and chartered financial consultant degrees
from the American College in Bryn Mawr, Pennsylvania. He is a trustee of Long
Island University and a member of the Corporation of Babson College.
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 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. 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 and General Counsel. Mr. Somerset
holds a law degree from Harvard Law School as well as a degree in civil
engineering from the Rensselaer Polytechnic Institute and a degree in marine
engineering from the U.S. Naval Academy. Mr. Somerset also serves on the boards
of directors for various other companies and organizations, including Longs Drug
Stores, Inc., a publicly held company.
Robert 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.
Robin L. Austin became Vice President, Human Resources of PLM Financial
Services, Inc. in 1984, having served in various capacities with PLM Investment
Management, Inc., including Director of Operations, from February 1980 to March
1984. From June 1970 to September 1978, Ms. Austin served on active duty in the
United States Marine Corps and served in the United States Marine Corp Reserves
from 1978 to 1998. She retired as a Colonel of the United States Marine Corps
Reserves in 1998. Ms. Austin has served on the Board of Directors of the
Marines' Memorial Club and is currently on the Board of Directors of the
International Diplomacy Council.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Investment Management, Inc. in
August 1989, having served as Senior Vice President of PLM Investment
Management, Inc. beginning in February 1984 and as Corporate Controller of PLM
Financial Services, Inc. beginning in October 1983. 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.
James C. Chandler became Vice President, Planning and Development of PLM
International in April 1996. From 1994 to 1996 Mr. Chandler worked as a
consultant to public companies, including PLM, in the formulation of business
growth strategies. Mr. Chandler was Director of Business Development at Itel
Corporation from 1987 to 1994, serving with both the Itel Transportation Group
and Itel Rail.
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.
Janet M. Turner became Vice President of Investor Services of PLM International
in 1994, having previously served as Vice President of PLM Investment
Management, Inc. since 1990. Before 1990, Ms. Turner held the positions of
manager of systems development and manager of investor relations at the Company.
Prior to joining PLM in 1984, she was a financial analyst with The
Toronto-Dominion Bank in Toronto, Canada.
The directors of PLM International, Inc. are elected for a three-year term and
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 Inc. or PLM
Financial Services, Inc., PLM Transportation Equipment Corp., or PLM Investment
Management, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership has no
pension, profit sharing, retirement, or similar benefit plan in effect as of
December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 5% interest in the
profits and losses and distributions of the Partnership, subject to
certain special allocations of income. As of December 31, 1998, 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 3, 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 3
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
Transactions with Management and Others
During 1998, management fees to IMI were $0.4 million. During 1998, the
Partnership reimbursed FSI and its affiliates $0.4 million for
administrative services and data processing expenses performed on
behalf of the Partnership.
During 1998, the USPEs paid or accrued $12,000 to FSI or its affiliates
(based on the Partnership's proportional share of ownership) for
administrative services and data processing expenses.
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 17, 1999 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 17, 1999
*_____________________
Douglas P. Goodrich Director, FSI March 17, 1999
*_____________________
Stephen M. Bess Director, FSI March 17, 1999
* 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
Independent auditors' report 27
Balance sheets as of December 31, 1998 and 1997 28
Statements of income for the years ended
December 31, 1998, 1997, and 1996 29
Statements of changes in partners' capital for the years
ended December 31, 1998, 1997, and 1996 30
Statements of cash flows for the years ended
December 31, 1998, 1997, and 1996 31
Notes to financial statements 32-41
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.
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth Fund II:
We have audited the accompanying financial statements of PLM Equipment Growth
Fund II (the Partnership) as listed in the accompanying index to the financial
statements. 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 have 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.
As described in Note 1 to the financial statements, PLM Equipment Growth Fund
II, in accordance with the limited partnership agreement, entered its passive
phase on January 1, 1996 and as a result, the Partnership is not permitted to
reinvest in equipment. On January 1, 1999 the Partnership entered its
liquidation phase and has commenced an orderly liquidation of the Partnership
assets. The Partnership will terminate on December 31, 2006, unless terminated
earlier upon sale of all equipment or by certain other events.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth Fund II as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/S/ KPMG LLP
- -----------------------------
SAN FRANCISCO, CALIFORNIA
March 12, 1999
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
1998 1997
---------------------------------
Assets
Equipment held for operating lease, at cost $ 36,212 $ 50,707
Less accumulated depreciation (27,223 ) (38,170 )
---------------------------------
8,989 12,537
Equipment held for sale -- 788
-----------------------------------------------------------------------------------------------------------------
Net equipment 8,989 13,325
Cash and cash equivalents 1,986 556
Restricted cash -- 395
Accounts receivable, less allowance for doubtful
accounts of $91 in 1998 and $1,146 in 1997 975 1,626
Investments in unconsolidated special-purpose entities 494 2,680
Prepaid expenses and other assets 30 49
-----------------------------------------------------------------------------------------------------------------
Total assets $ 12,474 $ 18,631
=================================
Liabilities and partners' capital
Liabilities
Accounts payable and accrued expenses $ 352 $ 365
Due to affiliates 83 195
Lessee deposits and reserve for repairs 772 1,846
Notes payable -- 2,500
---------------------------------
Total liabilities 1,207 4,906
---------------------------------
Partners' capital
Limited partners (7,381,805 depositary units as of
December 31, 1998 and 1997) 11,267 13,725
General Partner -- --
---------------------------------
Total partners' capital 11,267 13,725
---------------------------------
Total liabilities and partners' capital $ 12,474 $ 18,631
=================================
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)
1998 1997 1996
--------------------------------------------
Revenues
Lease revenue $ 7,355 $ 10,583 $ 12,379
Interest and other income 222 243 355
Net gain on disposition of equipment 5,990 1,922 2,085
--------------------------------------------
Total revenues 13,567 12,748 14,819
Expenses
Depreciation and amortization 2,413 4,407 5,698
Repairs and maintenance 1,890 1,959 2,172
Equipment operating expenses 65 -- --
Insurance expense to affiliate 16 (5 ) --
Other insurance expenses 66 120 112
Management fees to affiliate 369 518 583
Interest expense 47 650 1,815
General and administrative expenses to affiliate 428 575 727
Other general and administrative expenses 807 934 1,078
(Recovery of) provision for bad debt (49 ) 376 715
-------------------------------------------------------------------------------------------------------------------
--------------------------------------------
Total expenses 6,052 9,534 12,900
Equity in net income (loss) of unconsolidated
special-purpose entities (1,484 ) (519 ) 6,267
--------------------------------------------
Net income $ 6,031 $ 2,695 $ 8,186
============================================
Partners' share of net income
Limited partners $ 5,606 $ 2,196 $ 7,464
General Partner 425 499 722
-------------------------------------------------------------------------------------------------------------------
Total $ 6,031 $ 2,695 $ 8,186
============================================
Net income per weighted-average depositary unit $ 0.76 $ 0.30 $ 1.01
===================================================================================================================
Cash distribution $ 4,604 $ 6,216 $ 8,957
Special cash distribution 3,885 -- --
===================================================================================================================
Total distribution $ 8,489 $ 6,216 $ 8,957
===================================================================================================================
Per weighted-average depositary unit:
Cash distribution $ 0.59 $ 0.80 $ 1.15
Special cash distribution 0.50 -- --
-------------------------------------------------------------------------------------------------------------------
Total distribution $ 1.09 $ 0.80 $ 1.15
============================================
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, 1998, 1997, and 1996
(in thousands of dollars)
Limited General
Partners Partner Total
--------------------------------------------------
Partners' capital (deficit) as of December 31, 1995 $ 18,658 $ (462 ) $ 18,196
Net income 7,464 722 8,186
Repurchase of depositary units (179 ) -- (179 )
Cash distribution (8,509 ) (448 ) (8,957 )
--------------------------------------------------
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 as of December 31, 1997 13,725 -- 13,725
Net income 5,606 425 6,031
Cash distribution (4,373 ) (231 ) (4,604 )
Special cash distribution (3,691 ) (194 ) (3,885 )
----------------------------------------------------------------------------------------------------------------
Partners' capital as of December 31, 1998 $ 11,267 $ -- $ 11,267
==================================================
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 1998 1997 1996
--------------------------------------------
Net income $ 6,031 $ 2,695 $ 8,186
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,413 4,407 5,698
Net gain on disposition of equipment (5,990 ) (1,922 ) (2,085 )
Equity in net (income) loss of unconsolidated
special-purpose entities 1,484 519 (6,267 )
Changes in operating assets and liabilities:
Restricted cash 395 (100 ) 253
Accounts receivable, net 684 (277 ) 385
Prepaid expenses and other assets 19 960 (957 )
Accounts payable and accrued expenses (13 ) (47 ) 3
Due to affiliates (112 ) 85 (288 )
Lessee deposits and reserve for repairs (1,074 ) (954 ) (127 )
--------------------------------------------
Net cash provided by operating activities 3,837 5,366 4,801
--------------------------------------------
Investing activities
Proceeds from disposition of equipment 7,880 5,089 4,761
Distribution from liquidation of unconsolidated
special-purpose entities 1,425 -- 14,272
(Additional investments in) distributions from
unconsolidated special-purpose entities (723 ) (1,145 ) 845
Payments for capital improvements and other -- -- (8 )
-------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 8,582 3,944 19,870
--------------------------------------------
Financing activities
Principal payments on notes payable (2,500 ) (10,500 ) (14,000 )
Cash distribution paid to limited partners (8,064 ) (5,905 ) (8,509 )
Cash distribution paid to General Partner (425 ) (311 ) (448 )
Repurchase of depositary units -- -- (179 )
--------------------------------------------
Net cash used in financing activities (10,989 ) (16,716 ) (23,136 )
--------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,430 (7,406 ) 1,535
Cash and cash equivalents at beginning of year 556 7,962 6,427
--------------------------------------------
Cash and cash equivalents at end of year $ 1,986 $ 556 $ 7,962
============================================
Supplemental information
Interest paid $ 47 $ 653 $ 1,815
===================================================================================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation
Organization
PLM Equipment Growth Fund II, a California limited partnership (the
Partnership), was formed on March 30, 1987. The Partnership engages
primarily in the business of owning, leasing, or otherwise investing in
predominately used transportation and related equipment. The Partnership
commenced significant operations in June 1987. PLM Financial Services, Inc.
(FSI) is the General Partner of the Partnership. FSI is a wholly-owned
subsidiary of PLM International, Inc. (PLM International).
The Partnership will terminate on December 31, 2006, unless terminated
earlier upon sale of all equipment or by certain other events. Since the
end of 1995, in accordance with the Partnership Agreement, the General
Partner may no longer reinvest cash flows and surplus funds in equipment.
All future cash flows and surplus funds if any, are to be used for
distributions to partners, except to the extent used to maintain reasonable
reserves. Beginning January 1, 1999, the General Partner will begin the
liquidation phase of the Partnership with the intent to commence an orderly
liquidation of the Partnership assets. During the liquidation phase, the
Partnership's assets will continue to be recorded at the lower of carrying
amount or fair value less cost to sell.
FSI manages the affairs of the Partnership. The net income (loss) and cash
distributions of the Partnership are generally allocated 95% to the limited
partners and 5% to the General Partner, (see Net Income (Loss) and
Distributions per Depositary Unit, below). The General Partner is also
entitled to a subordinated incentive fee equal to 7.5% of surplus
distributions, as defined in the limited partnership agreement, remaining
after the limited partners have received a certain minimum rate of return.
The accompanying 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, disclosures of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Operations
The equipment of the Partnership is managed under a continuing management
agreement by PLM Investment Management, Inc. (IMI), a wholly-owned
subsidiary of FSI. IMI receives a monthly management fee from the
Partnership for managing the equipment (see Note 2). FSI, in conjunction
with its subsidiaries, sells equipment to investor programs and third
parties, manages pools of equipment under agreements with the investor
programs, and is a general partner of other programs.
Accounting for Leases
The Partnership's leasing operations generally consist of operating leases.
Under the operating lease method of accounting, the leased asset is
recorded at cost and depreciated over its estimated useful life. Rental
payments are recorded as revenue over the lease term. Lease origination
costs are capitalized and amortized over the term of the lease.
Depreciation and Amortization
Depreciation of transportation equipment held for operating leases is
computed on the double-declining balance method, taking a full month's
depreciation in the month of acquisition, based upon estimated useful lives
of 15 years for railcars and typically 12 years for most other types of
equipment.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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
double-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 accordance with the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", the General Partner reviews the
carrying value of the Partnership's equipment at least quarterly in
relation to expected future market conditions for the purpose of assessing
recoverability of the recorded amounts. If projected undiscounted 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 1998, 1997 or 1996.
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 an interest in an unconsolidated special-purpose entity
(USPE) that owns an aircraft. This interest is 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
interests in USPEs are managed by IMI. The Partnership's equity interest in
the net income (loss) of USPEs is reflected net of management fees paid or
payable to IMI and the amortization of acquisition and lease negotiation
fees paid to TEC.
Repairs and Maintenance
Repair and maintenance cost to railcars and the 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, are usually the obligation of the Partnership. Maintenance
costs of most of the other equipment are the obligation of the lessee. If
they are not covered by the lessee, they are generally charged against
operations as incurred. 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, 1998
1. Basis of Presentation (continued)
Net Income (Loss) and Distributions per Depositary Unit
The net income (loss) of the Partnership is generally allocated 95% to the
limited partners and 5% to the General Partner. Special allocations of
income are made to the General Partner to the extent necessary to cause the
Investment Account of the General Partner to be zero. Such allocation may
not cumulatively exceed five ninety-fifths of the aggregate of the capital
contributions made by the Limited Partners and the reinvestment cash
available for distribution. Cash distributions of the Partnership are
generally allocated 95% to the limited partners and 5% to the General
Partner and may include amounts in excess of net income. The limited
partners' net income (loss) is allocated among the limited partners based
on the number of limited partnership units owned by each limited partner
and on the number of days of the year each limited partner is in the
Partnership. During 1998, the General Partner received a special allocation
of income of $0.1 million ($0.4 million in 1997 and $0.3 million in 1996).
Cash distributions are recorded when paid. Cash distributions relating to
the fourth quarter of 1998, 1997, and 1996 of $1.1 million ($0.15 per
weighted-average depositary unit), $1.2 million ($0.16 per weighted-average
depositary unit), and $1.9 million ($0.25 per weighted-average depositary
unit), respectively, were paid during the first quarter of 1999, 1998, and
1997.
Cash distributions to investors in excess of net income are considered a
return of capital. Cash distributions to the limited partners of $2.5
million, $3.7 million, and $1.0 million in 1998, 1997, and 1996,
respectively, were deemed to be a return of capital.
Net Income Per Weighted-Average Depositary Unit
Net income per weighted-average depositary unit was computed by dividing
net income attributable to limited partners by the weighted-average number
of depositary units deemed outstanding during the period. The
weighted-average number of depositary units deemed outstanding during the
years ended December 31, 1998, 1997, and 1996 were 7,381,805, 7,381,805,
and 7,384,738, respectively.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three
months or less as cash equivalents. The carrying amount of cash and cash
equivalents approximates fair market value due to the short-term nature of
the investments.
Comprehensive Income
During 1998, the Partnership adopted Financial Accounting Standards Board's
Statement No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in
equity from nonowner sources. The Partnership's net income (loss) is equal
to comprehensive income for the years ended December 31, 1998, 1997, and
1996.
Restricted Cash
Lessee security deposits held by the Partnership are considered restricted
cash.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
2. Transactions with General Partner and Affiliates
An officer of FSI contributed $100 of the Partnership's initial capital.
Under the equipment management agreement, IMI receives a monthly management
fee attributable to either owned equipment or interests in equipment owned
by the USPEs equal to the greater of (i) 5% of Gross Revenues (as defined
in the agreement) 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 $0.1 million and $0.2 million, were payable
as of December 31, 1998 and 1997, respectively. The Partnership's
proportional share of the USPE's management fee expenses were $0, $0, and
$44,000, respectively during 1998, 1997, and 1996. The Partnership
reimbursed FSI and its affiliates $0.4 million, $0.6 million, and $0.7
million in 1998, 1997, and 1996, respectively, for data processing expenses
and administrative services performed on behalf of the Partnership. The
Partnership's proportional share of the USPE's administrative and data
processing expenses reimbursed to FSI were $12,000, $9,000 and $23,000
during 1998, 1997 and 1996, respectively.
As of December 31, 1998, approximately 16% of the of the Partnership's
trailer equipment was in rental facilities operated by PLM Rental, Inc., an
affiliate of the General Partner, 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.
3. Equipment
The components of owned equipment as of December 31, were as follows (in
thousands of dollars):
Equipment held for operating leases 1998 1997
- -----------------------------------
----------------------------------
Rail equipment $ 17,320 $ 17,401
Trailers 11,884 17,144
Marine containers 7,008 8,308
Aircraft -- 7,854
----------------------------------
36,212 50,707
Less accumulated depreciation (27,223 ) (38,170 )
--------------------------------
8,989 12,537
Equipment held for sale -- 788
----------------------------------
Net equipment $ 8,989 $ 13,325
==================================
Revenues are earned by placing the equipment under operating leases. A
portion of the Partnership's marine containers are leased to operators of
utilization-type leasing pools 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, 1998, all owned equipment in the Partnership portfolio
was either on lease or operating in PLM-affiliated short-term trailer
rental facilities, except for 6 railcars and 115 marine containers with an
aggregate net book value of $0.2 million. As of December 31, 1997, 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 168 marine containers with an aggregate net book value
of $0.4 million.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
3. Equipment (continued)
During 1998, the General Partner sold or disposed of aircraft, marine
containers, trailers, and railcars owned by the Partnership, with an
aggregate net book value of $1.9 million, for proceeds of $7.9 million.
During 1997, 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 $3.2 million, for proceeds of $5.1 million.
No equipment was held for sale as of December 31, 1998. 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.
There were no reductions to the carrying values of equipment in 1998, 1997,
or 1996.
All owned equipment on lease is being accounted for as operating leases.
Future minimum rents under noncancelable operating leases as of December
31, 1998 during each of the next five years are approximately $3.3 million
in 1999, $2.5 million in 2000, $0.9 million in 2001, $0.3 million in 2002,
and $0.3 million in 2003. Contingent rentals based upon utilization were
approximately $0.9 million, $1.3 million, and $1.3 million in 1998, 1997,
and 1996, respectively.
4. Investments in Unconsolidated Special-Purpose Entities
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):
1998 1997 1996
-------- -------- --------
Net Net Net
Total Interest of Total Interest of Total Interest of
USPEs Partnership USPEs Partnership USPEs Partnership
---------------------------- ---------------------------- ---------------------------
Net investments $ 992 $ 494 $ 8,891 $ 2,680 $ 3,354 $ 1,665
Lease revenues -- -- -- -- 2,418 1,284
Net income (loss) (3,028 ) (1,484 ) (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):
1998 1997
---------------------------------
23% interest in a Boeing 727-200 aircraft $ -- $ 1,445
50% interest in a Boeing 737-200 aircraft 494 1,235
- --------------------------------------------------------------------------------------------
Net investments $ 494 $ 2,680
============================================================================================
During the year ended December 31, 1998, the General Partner sold a Boeing
727-200 aircraft in which the Partnership owned a 23% interest, at
approximately its net book value. The Partnership received liquidating
distributions of $1.4 million from this USPE during the first quarter of
1998.
During the year ended December 31, 1996, the General Partner sold a mobile
offshore drilling unit in which the Partnership owned a 55% interest, with
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.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
4. Investments in Unconsolidated Special-Purpose Entities (continued)
The Partnership's 50% interest in a commercial aircraft, included as an
investment in an unconsolidated special-purpose entity, was off lease as of
December 31, 1998.
5. Operating Segments
The Partnership operates in four primary operating segments: aircraft
leasing, marine container leasing, trailer leasing, and railcar leasing.
Each equipment leasing segment engages in short-term to mid-term operating
leases to a variety of customers.
The General Partner evaluates the performance of each segment based on
profit or loss from operations before allocation of general and
administrative expenses, interest expense, and certain other expenses. The
segments are managed separately due to different business strategies for
each operation.
The following tables present a summary of the operating segments (in
thousands of dollars):
Marine
Aircraft Container Trailer Railcar All
For the Year Ended December 31, 1998 Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 83 $ 251 $ 2,801 $ 4,220 $ -- $ 7,355
Interest income and other -- 3 -- 6 213 222
Net gain (loss) on disposition
of equipment 4,835 (21 ) 775 401 -- 5,990
--------------------------------------------------------------
Total revenues 4,918 233 3,576 4,627 213 13,567
Expenses
Operations support 36 5 727 1,229 40 2,037
Depreciation and amortization 74 379 1,143 817 -- 2,413
Interest expense -- -- -- -- 47 47
General and administrative expenses 48 31 590 372 563 1,604
Provision for bad debts (72 ) -- 11 12 -- (49 )
--------------------------------------------------------------
Total costs and expenses 86 415 2,471 2,430 650 6,052
--------------------------------------------------------------
Equity in net income (loss) of USPEs (1,484) -- -- -- -- (1,484 )
--------------------------------------------------------------
==============================================================
Net income (loss) $ 3,348 $ (182 ) $ 1,105 $ 2,197 $ (437 )$ 6,031
==============================================================
As of December 31, 1998
Total assets $ 494 $ 1,166 $ 4,677 $ 3,146 $ 2,991 $ 12,474
==============================================================
Includes costs not identifiable to a particular segment such as interest
expenses and certan interest income and other, operations suport expenses
and general and administrative expenses.
(this space intentionally left blank.)
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
5. Operating Segments (continued)
Marine
Aircraft Container Trailer Railcar All
For the Year Ended December 31, 1997 Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 1,903 $ 673 $ 3,479 $ 4,528 $ -- $ 10,583
Interest income and other -- 8 -- 12 223 243
Net gain (loss) on disposition
of equipment 1,349 245 310 18 -- 1,922
----------------------------------------------------------------
Total revenues 3,252 926 3,789 4,558 223 12,748
Expenses
Operations support 55 10 694 1,277 38 2,074
Depreciation and amortization 1,252 521 1,618 859 157 4,407
Interest expense -- -- -- -- 650 650
General and administrative expenses 132 59 769 420 647 2,027
Provision for bad debts 260 113 (5 ) 8 -- 376
----------------------------------------------------------------
Total costs and expenses 1,699 703 3,076 2,564 1,492 9,534
----------------------------------------------------------------
Equity in net income (loss) of USPEs (519 ) -- -- -- -- (519 )
----------------------------------------------------------------
================================================================
Net income (loss) $ 1,034 $ 223 $ 713 $ 1,994 $ (1,269 )$ 2,695
================================================================
As of December 31, 1997
Total assets $ 3,757 $ 1,760 $ 6,359 $ 4,129 $ 2,626 $ 18,631
================================================================
Includes costs not identifiable to a particular segment such as interest
expenses, and amortization expense, and certain interest income and other,
operations support expenses and general and administrative expenses.
Marine
Aircraft Container Trailer Railcar All
For the Year Ended December 31, 1996 Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 2,437 $ 1,254 $ 4,089 $ 4,599 $ -- $ 12,379
Interest income and other -- -- 8 3 344 355
Net gain (loss) on disposition
of equipment 1,188 345 (26 ) 578 -- 2,085
--------------------------------------------------------------
Total revenues 3,625 1,599 4,071 5,180 344 14,819
Expenses
Operations support 47 3 706 1,486 42 2,284
Depreciation and amortization 1,998 651 2,042 927 80 5,698
Interest expense -- -- -- -- 1,815 1,815
General and administrative expenses 202 81 905 465 735 2,388
Provision for bad debts 44 524 204 (57 ) -- 715
--------------------------------------------------------------
Total costs and expenses 2,291 1,259 3,857 2,821 2,672 12,900
--------------------------------------------------------------
Equity in net income (loss) of USPEs (713 ) -- -- -- 6,980 6,267
--------------------------------------------------------------
==============================================================
Net income (loss) $ 621 $ 340 $ 214 $ 2,359 $ 4,652 $ 8,186
==============================================================
As of December 31, 1996
Total assets $ 5,990 $ 2,748 $ 8,662 $ 5,007 $ 10,277 $ 32,684
==============================================================
Includes costs not identifiable to a particular segment such as interest
expenses, and amortization expense, and certain interest income and other,
operations support expenses and general and administrative expenses. Also
includes income from an investment in an entity owning a mobile offshore
drilling unit.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
6. Geographic Information
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Partnership leases or leased its aircraft, railcars, and trailers to
lessees domiciled in five geographic regions: South Asia, Canada, the
United States, Asia, and Europe. Marine containers are leased to multiple
lessees in different regions that operate 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, 1998, 1997, and 1996 (in thousands of dollars):
The following table sets forth lease revenue information by region for the
years ended December 31, are as follows (in thousands of dollars):
Owned Equipment Investments In USPEs
Region 1998 1997 1996 1998 1997 1996
---------------------------- ---------------------------------------- ---------------------------------------
United States $ 5,680 $ 7,762 $ 8,516 $ -- $ -- $ --
Canada 1,424 1,208 1,765 -- -- --
Europe -- 940 840 -- -- --
South Asia -- -- -- -- -- 1,284
Rest of the world 251 673 1,258 -- -- --
======================================== =======================================
Lease revenues $ 7,355 $ 10,583 $ 12,379 $ -- $ -- $ 1,284
======================================== =======================================
The following table sets forth net income (loss) information by region for
the years ended December 31, are as follows (in thousands of dollars):
Owned Equipment Investments in USPEs
--------------------------------------- ------------------------------------
Region 1998 1997 1996 1998 1997 1996
------------------------------------ --------------------------------------- ------------------------------------
United States $ 3,270 $ 3,533 $ 2,075 $ -- $ -- $ --
Canada 1,162 470 927 -- -- --
Europe 3,702 260 162 -- -- --
South Asia -- -- -- (1,484 ) (519 ) 6,267
Asia -- -- 763 -- -- --
Rest of the world (182 ) 218 320 -- -- --
--------------------------------------- ------------------------------------
Regional income (loss) 7,952 4,481 4,247 (1,484 ) (519 ) 6,267
Administrative and other (437 ) (1,267 ) (2,328 ) -- -- --
======================================= ====================================
Net income (loss) $ 7,515 $ 3,214 $ 1,919 $ (1,484 ) $ (519 ) $ 6,267
======================================= ====================================
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
6. Geographic Information (continued)
The net book value of these assets as of December 31, are as follows (in
thousands of dollars):
Owned Equipment Investments in USPEs
------------------------------------ -------------------------------------
Region 1998 1997 1996 1998 1997 1996
-------------------------- ------------------------------------ -------------------------------------
United States $ 7,014 $ 9,760 $ 14,538 $ -- $ -- $ --
Canada 809 1,016 2,215 -- -- --
Europe -- -- 1,241 -- -- --
South Asia -- -- -- 494 1,235 1,665
Rest of the world 1,166 1,761 2,748 -- -- --
---------------------------------- -------------------------------------
8,989 12,537 20,742 494 1,235 1,665
Equipment held for sale -- 788 -- -- 1,445 --
================================== =====================================
Net book value $ 8,989 $ 13,325 $ 20,742 $ 494 $ 2,680 $ 1,665
================================== =====================================
7. Debt
During the first quarter of 1998, the General Partner used a portion of the
Partnership's equipment sales proceeds to pay off the remaining $2.5
million secured note payable. The balance on this note was $2.5 million on
December 31, 1997. This note required quarterly interest payments. Interest
was charged at LIBOR plus 1.55% per annum.
8. Concentrations of Credit Risk
No single lessee accounted for more than 10% of the consolidated revenues
for the year ended December 31, 1998, 1997 and 1996. In 1998, however,
Sabre Airways purchased a commercial aircraft from the Partnership and the
gain from the sale accounted for 27.3% of total consolidated revenues from
wholly and partially owned equipment during 1998.
As of December 31, 1998 and 1997, the General Partner believes the
Partnership had no other significant concentrations of credit risk that
could have a material adverse effect on the Partnership.
9. Income Taxes
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
As of December 31, 1998, there were temporary differences of $8.6 million
between the financial statement carrying values of certain assets and
liabilities and the federal income tax basis of such assets and
liabilities, primarily due to differences in depreciation methods and
equipment reserves and the tax treatment of underwriting commissions and
syndication costs.
PLM EQUIPMENT GROWTH FUND II
A Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
10. Contingencies
The Partnership, together with affiliates, has initiated litigation in
various official forums in India against a defaulting Indian airline lessee
to repossess Partnership property and to recover damages for failure to pay
rent and failure to maintain such property in accordance with relevant
lease contracts. The Partnership has repossessed all of its property
previously leased to such airline, and the airline has ceased operations.
In response to the Partnership's collection efforts, the airline filed
counter-claims against the Partnership in excess of the Partnership's
claims against the airline. The General Partner believes that the airline's
counterclaims are completely without merit, and the General Partner will
vigorously defend against such counterclaims.
11. Subsequent Events
On January 14, 1999, the General Partner for the Partnership announced that
it has begun recognizing transfers involving trading of units in 1999. The
Partnership is listed on the OTC Bulletin Board under the symbols GFYPZ.
In making the announcement, the General Partner noted that, as in previous
years, it will continue to monitor the volume of such trades to ensure that
the Partnership remain in compliance with Internal Revenue Service (IRS)
Notice 88-75 and IRS Code Section 7704. These IRS regulations contain safe
harbor provisions stipulating the maximum number of partnership units that
can be traded during a calendar year in order for a partnership not to be
deemed a publicly traded partnership for income tax purposes.
Should the Partnership approach the annual safe harbor limitation later on
in 1999, the General Partner will, at that time, cease to recognize any
further transfers involving trading of Partnership units. Transfers
specifically excluded from the safe harbor limitations, referred to in the
regulations as "transfers not involving trading," which include transfers
at death, transfers between family members, and transfers involving
distributions from a qualified retirement plan, will continue to be
recognized by the General Partner throughout the year.
(This space intentionally left
blank.)
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 43-45
* Incorporated by reference. See page 24 of this report.