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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 33-27746
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PLM EQUIPMENT GROWTH FUND IV
(Exact name of registrant as specified in its charter)
California 94-3090127
(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 (Zip code)
executive offices)
Registrant's telephone number, including area code (415) 974-1399
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Aggregate market value of voting stock: N/A
An index of exhibits filed with this Form 10-K is located on page 27.
Total number of pages in this report: 51.
PART I
ITEM 1. BUSINESS
(A) Background
In March 1989, 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 8,750,000 limited partnership
units (including 1,250,000 option units) (the units) in PLM Equipment Growth
Fund IV, a California limited partnership (the Partnership, the Registrant, or
EGF IV). The Partnership's offering became effective on May 23, 1989. 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 with the net proceeds of the initial partnership
offering, supplemented by debt financing and reinvestment of cash generated by
operations. All transactions of over $1.0 million must be approved by 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 flows from operations (net cash provided by operating activities
plus distributions from unconsolidated special-purpose entities (USPEs)), are
used to repay the Partnership's outstanding indebtedness and 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 28, 1990. As of
December 31, 1998, there were 8,628,420 limited partnership units outstanding.
The General Partner contributed $100 for its 5% general partner interest in the
Partnership.
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, 2009, 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:
3 737-200 stage II commercial aircraft Boeing $ 26,945
1 DC-9-32 stage II commercial aircraft McDonnell-Douglas 10,041
1 Dash 8-300 commuter aircraft Dehavilland 5,748
334 Pressurized tank railcars Various 9,712
98 Woodchip gondola railcars General Electric 2,341
110 Bulkhead flat railcars Marine Industries Ltd. 2,153
26 Nonpressurized tank railcars Various 546
395 Refrigerated marine containers Various 9,978
305 Dry marine containers Various 1,034
1 Bulk carrier Namura Shipping 9,719
98 Refrigerated trailers Various 2,244
133 Dry trailers Various 1,817
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Total owned equipment held for operating leases $ 82,278
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Investments in unconsolidated special-purpose entities:
0.50 Bulk carrier Nipponkai & Toyama $ 9,705
0.35 Equipment on direct finance lease:
Two DC-9 stage III commercial aircraft McDonnell-Douglas 3,901
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Total investments in unconsolidated special-purpose entities $ 13,606
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Includes equipment and investments purchased with the proeeds from capital
contributions, undistributed cashflow from operations, and Partnership
borrowings. Includes costs capitalized subsequent to the date of
acquisition and equipment acquisition fees paid to PLM Transportation
Equipment Corporation, a wholly-owned subsidiary of FSI. All equipment was
used equipment at the time of purchase.
Jointly owned: EGF IV and an affiliated program.
Jointly owned: EGF IV and two affiliated programs.
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, which include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. 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 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 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: Aero California,
Continental Airlines, Inc., Transamerica Leasing, and Canadian Pacific Railways.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the Partnership's equipment. The Partnership's management
agreement with IMI is to co-terminate with the dissolution of the Partnership,
unless the limited partners vote to terminate the agreement prior to that date
or at the discretion of the General Partner. IMI has agreed to perform all
services necessary to manage the equipment on behalf of the Partnership and to
perform or contract for the performance of all obligations of the lessor under
the Partnership's leases. In consideration for its services and pursuant to the
partnership agreement, IMI is entitled to a monthly management fee (see Notes 1
and 2 to the financial statements).
(C) Competition
(1) Operating Leases versus Full Payout Leases
Generally the equipment owned by or invested in 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 the 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 Corporation, General
Electric Railcar Services Corporation, General Electric Capital Aviation
Services Corporation, Xtra Corporation and other investments programs that lease
the same types of equipment.
(D) Demand
The Partnership operates in five primary operating segments: aircraft leasing,
marine container leasing, marine vessel leasing, trailer leasing, and railcar
leasing. Each equipment leasing segment engages in short-term to mid-term
operating leases to a variety of customers. Except for those aircraft leased to
passenger air carriers, the Partnership's equipment and investments are 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) Aircraft
(a) 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's narrowbody (single-aisle) fleet is a mix of Stage II and Stage
III aircraft. The Stage II aircraft are either positioned with air carriers that
are outside Stage III-legislated areas or anticipated to be sold or leased
outside Stage III areas before the year 2000.
(b) Commuter Aircraft
Major changes have occurred in the commuter market due to the 1993 introduction
of small regional jets. The original concept for regional jets was to take over
the North American hub-and-spoke routes served by the large turboprops, but they
are also finding successful niches in point-to-point routes. The introduction of
this smaller aircraft has allowed major airlines to shift the regional jets to
those marginal routes previously operated by narrowbody (single-aisle) aircraft,
allowing larger-capacity aircraft to be more efficiently employed in an
airline's route system.
The Partnership leases commuter turboprops containing from 36 to 50 seats. These
aircraft all fly in North America, which continues to be the fastest-growing
market for commuter aircraft in the world. The Partnership's aircraft possess
unique performance capabilities, compared to other turboprops, which allow them
to readily operate at maximum payloads from unimproved surfaces, hot and high
runways, and short runways. However, the growing use of regional jets in the
commuter market has resulted in an increase in demand for regional jets at the
expense of turboprops. Several major turboprop programs have been terminated and
all turboprop manufacturers are cutting back on production due to reduced
demand.
(2) Railcars
(a) Pressurized Tank Railcars
Pressurized tank cars 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 cars was consistent with this
statistic.
(b) Woodchip Gondolas Railcars
These 6,600-cubic-foot-capacity railcars are used to transport woodchips from
sawmills to pulp mills, where the woodchips are converted into pulp. The demand
for woodchip gondolas is directly related to demand for paper and paper
products, particleboard, and plywood. In Canada, where the Partnership's
woodchip gondolas operate, 1998 carload originations for primary forest products
remained relatively unchanged over 1997 levels.
All of the Partnership's woodchip gondolas continued to operate on long-term
leases during 1998.
(c) Bulkhead Flat Railcars
Bulkhead flatcars are used to transport pulpwood from sawmills to pulp mills.
High-grade pulpwood is used to manufacture paper, while low-grade pulpwood is
used to make particleboard and plywood. In Canada, where the Partnership's
bulkhead flatcars operate, carload originations for pulp, paper, and allied
products dropped slightly in 1998, declining by 2% over 1997 levels.
The Partnership's bulkhead flatcars continued to operate on a long-term lease
during 1998.
(d) Nonpressurized, General Purpose 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.
(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) Dry Bulk Vessels
The Partnership owns or has investments in small to medium-sized dry bulk
vessels that trade in worldwide markets and carry commodity cargoes. Demand for
commodity shipping closely follows worldwide economic growth patterns, which can
alter demand by causing changes in volume on trade routes. The General Partner
operates the Partnership's vessels through time charters, an operating approach
that provides the flexibility to adapt to changing market situations.
Freight rates for dry bulk vessels decreased for all ship sizes in 1998, with
the largest vessels experiencing the greatest declines. After a relatively
stable year in 1997, rates declined due to a decrease in cargo tonnage moving
from the Pacific Basin and Asia to western ports. The size of the overall dry
bulk carrier fleet decreased by 3%, as measured by the number of vessels, but
increased by 1%, as measured by deadweight (dwt) tonnage. While scrapping of
ships was a significant factor in 1998 (scrapping increased by 50% over 1997)
overall there was no material change in the size of the dry bulk vessel fleet,
as deliveries and scrappings were nearly equal.
Total dry trade (as measured in deadweight tons) was flat, compared to a 3%
growth in 1997. As a result, the market had no foundation for increasing freight
rates, and charter rates declined as trade not only failed to grow, but actually
declined due to economic disruptions in Asia. Overall activity is expected to
remain flat in 1999, with trade in two of the three major commodities static or
decreasing in volume. Iron ore volume is expected to decrease, and grain trade
is anticipated to be flat, while a bright spot remains in an estimated increase
in steam coal trade.
Ship values experienced a significant decline in 1998, as expectations for trade
growth were dampened. The decline in ship values was also driven by bargain
pricing for newbuilding in Asian yards.
The uncertainty in forecasts is the Asian economic situations; if there is some
recovery from the economic shake-up that started in the second half of 1997,
then 1999 has prospects for improvement. The delivery of ships in 1999 is
expected to be less than in 1998, and high scrapping levels should continue. Dry
bulk shipping is a cyclical business -- inducing capital investment during
periods of high freight rates and discouraging investment during periods of low
rates. The current environment thus discourages investment. However, the history
of the industry implies that this period will be followed by one of increasing
rates and investment in new ships, driven by growth in demand. Over time, demand
grows at an average of 3% a year, so when historic levels of growth in demand
resume, the industry is expected to experience a significant increase in freight
rates and ship values.
(5) Trailers
(a) 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.
(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.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require its removal from service or extensive modification of such equipment to
meet these regulations, at considerable cost to the Partnership. Such
regulations include but are not limited to:
(1) the U.S. Oil Pollution Act of 1990, which established liability for
operators and owners of vessels and mobile offshore drilling units that
create environmental pollution. This regulation has resulted in higher oil
pollution liability insurance. The lessee of the equipment typically
reimburses the Partnership for these additional costs;
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990,
which limits or eliminates the operation of commercial aircraft in the
United States that do not meet certain noise, aging, and corrosion
criteria. In addition, under U.S. Federal Aviation Regulations, after
December 31, 1999, no person shall operate an aircraft to or from any
airport in the contiguous United States unless that airplane has been shown
to comply with Stage III noise levels. The Partnership has Stage II
aircraft that do not meet Stage III requirements. These Stage II aircraft
are scheduled to be either sold or re-leased by the year 2000. The
Partnership plans on re-leasing the Stage II aircraft in countries that do
not require this regulation. The cost to husk-kit a Stage II aircraft is
approximately $1.5 million;
(3) the Montreal Protocol on Substances that Deplete the Ozone Layer and
the United States Clean Air Act Amendments of 1990, which call for the
control and eventual replacement of substances that have been found to
cause or contribute significantly to harmful effects on the stratospheric
ozone layer and that are used extensively as refrigerants in refrigerated
marine cargo containers and over-the-road refrigerated trailers;
(4) the U.S. Department of Transportation's Hazardous Materials
Regulations, which regulate the classification and packaging requirements
of hazardous materials and that apply particularly to the Partnership's
tank railcars, issued a statement which requires the owner to check for a
protective coating to the outside of the tank, as well as the inside of the
metal tank jacket whenever a tank is insulated. If any of the inspected
tank railcars fail to meet the requirements, an additional percentage of
the tank railcars will need to be inspected. If all the tank railcars in
the initial inspection meet the issued requirements, the remaining railcars
will be eliminated from the inspection program. The Partnership owns 21
tank railcars that need to be inspected. Tank railcars that fail the
inspection will have to be repaired at a cost of approximately $25,000 each
before it can go back into service by August 2000. The Partnership plans to
complete the initial inspection of the tank railcars by the end of March
1999
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 purchased and its interests in entities that own equipment for leasing
purposes. 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 (USPEs) as described in Item I, Table 1.
The Partnership acquired equipment with the proceeds of the Partnership offering
of $174.8 million through the first half of 1990, proceeds from the debt
financing of $33.0 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
PLM International, (the Company) and various of its affiliates are named as
defendants in a lawsuit filed as a purported class action on January 22, 1997 in
the Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251 (the
Koch action). Plaintiffs, who filed the complaint on their own and on behalf of
all class members similarly situated, are six individuals who invested in
certain California limited partnerships (the Partnerships) for which the
Company's wholly-owned subsidiary, PLM Financial Services, Inc. (FSI), acts as
the general partner, including the Partnership, PLM Equipment Growth Funds V,
and VI, and PLM Equipment Growth & Income Fund VII (the Growth Funds). The state
court ex parte certified the action as a class action (i.e., solely upon
plaintiffs' request and without the Company being given the opportunity to file
an opposition). The complaint asserts eight causes of action against all
defendants, as follows: fraud and deceit, suppression, negligent
misrepresentation and suppression, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, unjust enrichment, conversion, and
conspiracy. Additionally, plaintiffs allege a cause of action against PLM
Securities Corp. for breach of third party beneficiary contracts in violation of
the National Association of Securities Dealers rules of fair practice.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, and
control persons. Based on these duties, plaintiffs assert liability against
defendants for improper sales and marketing practices, mismanagement of the
Growth Funds, and concealing such mismanagement from investors in the Growth
Funds. Plaintiffs seek unspecified compensatory and recissory damages, as well
as punitive damages, and have offered to tender their units back to the
defendants.
In March 1997, the defendants removed the Koch action from the state court to
the United States District Court for the Southern District of Alabama, Southern
Division (Civil Action No. 97-0177-BH-C) based on the district court's diversity
jurisdiction, following which plaintiffs filed a motion to remand the action to
the state court. Removal of the action to federal court automatically nullified
the state court's ex parte certification of the class. In September 1997, the
district court denied plaintiffs' motion to remand the action to state court and
dismissed without prejudice the individual claims of the California plaintiff,
reasoning that he had been fraudulently joined as a plaintiff. In October 1997,
defendants filed a motion to compel arbitration of plaintiffs' claims, based on
an agreement to arbitrate contained in the limited partnership agreement of each
Growth Fund, and to stay further proceedings pending the outcome of such
arbitration. Notwithstanding plaintiffs' opposition, the district court granted
defendants' motion in December 1997.
Following various unsuccessful requests that the district court reverse, or
otherwise certify for appeal, its order denying plaintiffs' motion to remand the
case to state court and dismissing the California plaintiff's claims, plaintiffs
filed with the U.S. Court of Appeals for the Eleventh Circuit a petition for a
writ of mandamus seeking to reverse the district court's order. The Eleventh
Circuit denied plaintiffs' petition in November of 1997, and further denied
plaintiffs subsequent motion in the Eleventh Circuit for a rehearing on this
issue. Plaintiffs also appealed the district court's order granting defendants'
motion to compel arbitration, but in June of 1998 voluntarily dismissed their
appeal pending settlement of the Koch action, as discussed below.
On June 5, 1997, the Company and the affiliates who are also defendants in the
Koch action were named as defendants in another purported class action filed in
the San Francisco Superior Court, San Francisco, California, Case No. 987062
(the Romei action). The plaintiff is an investor in PLM Equipment Growth Fund V,
and filed the complaint on her own behalf and on behalf of all class members
similarly situated who invested in certain California limited partnerships for
which FSI acts as the general partner, including the Growth Funds. The complaint
alleges the same facts and the same nine causes of action as in the Koch action,
plus five additional causes of action against all of the defendants, as follows:
violations of California Business and Professions Code Sections 17200, et seq.
for alleged unfair and deceptive practices, constructive fraud, unjust
enrichment, violations of California Corporations Code Section 1507, and a claim
for treble damages under California Civil Code Section 3345.
On July 31, 1997, defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition) under
the Federal Arbitration Act seeking to compel arbitration of plaintiff's claims
and for an order staying the state court proceedings pending the outcome of the
arbitration. In connection with this motion, plaintiff agreed to a stay of the
state court action pending the district court's decision on the petition to
compel arbitration. In October 1997, the district court denied the Company's
petition to compel arbitration, but in November 1997, agreed to hear the
Company's motion for reconsideration of this order. The hearing on this motion
has been taken off calendar and the district court has dismissed the petition
pending settlement of the Romei action, as discussed below. The state court
action continues to be stayed pending such resolution. In connection with her
opposition to the petition to compel arbitration, plaintiff filed an amended
complaint with the state court in August 1997 alleging two new causes of action
for violations of the California Securities Law of 1968 (California Corporations
Code Sections 25400 and 25500) and for violation of California Civil Code
Sections 1709 and 1710. Plaintiff also served certain discovery requests on
defendants. Because of the stay, no response to the amended complaint or to the
discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a memorandum
of understanding (MOU) related to the settlement of those actions (the Monetary
Settlement). The Monetary Settlement contemplated by the MOU provides for
stipulating to a class for settlement purposes, and a settlement and release of
all claims against defendants and third party brokers in exchange for payment
for the benefit of the Class of up to $6.0 million. The final settlement amount
will depend on the number of claims filed by authorized claimants who are
members of the Class, the amount of the administrative costs incurred in
connection with the settlement, and the amount of attorneys' fees awarded by the
Alabama district court. The Company will pay up to $0.3 million of the Monetary
Settlement, with the remainder being funded by an insurance policy.
The parties to the Monetary Settlement have also agreed in principal to an
equitable settlement (the Equitable Settlement) which provides, among other
things, (a) for the extension of the operating lives of PLM Equipment Growth
Fund V, PLM Equipment Growth Fund VI, and PLM Equipment Growth & Income Fund VII
(the Funds) by judicial amendment to each of their partnership agreements, such
that FSI, the general partner of each such Fund, will be permitted to reinvest
cash flow, surplus partnership funds or retained proceeds in additional
equipment into the year 2004, and will liquidate the partnerships' equipment in
2006; (b) that FSI be entitled to earn front end fees (including acquisition and
lease negotiation fees) in excess of the compensatory limitations set forth in
the NASAA Statement of Policy by judicial amendment to the Partnership
Agreements for each Fund; (c) for a one time redemption of up to 10% of the
outstanding units of each Fund at 80% of such partnership's net asset value; and
(d) for the deferral of a portion of FSI's management fees. The Equitable
Settlement also provides for payment of the Equitable Class attorneys' fees from
Partnership funds in the event that distributions paid to investors in the Funds
during the extension period reach a certain internal rate of return.
Defendants will continue to deny each of the claims and contentions and admit no
liability in connection with the proposed settlements. The Monetary Settlement
remains subject to numerous conditions, including but not limited to: (a)
agreement and execution by the parties of a settlement agreement (the Settlement
Agreement), (b) notice to and certification of the Monetary Class for purposes
of the Monetary Settlement, and (c) preliminary and final approval of the
Monetary Settlement by the Alabama district court. The Equitable Settlement
remains subject to numerous conditions, including but not limited to: (a)
agreement and execution by the parties of the Settlement Agreement, (b) notice
to the current unitholders (the Equitable Class) in the Funds and certification
of the Equitable Class for purposes of the Equitable Settlement, (c)
preparation, review by the Securities and Exchange Commission (SEC), and
dissemination to the members of the Equitable Class of solicitation statements
regarding the proposed extensions, (d) disapproval by less than 50% of the
limited partners in each of the Funds of the proposed amendments to the limited
partnership agreements, (e) judicial approval of the proposed amendments to the
limited partnership agreements, and (f) preliminary and final approval of the
Equitable Settlement by the Alabama district court. The parties submitted the
Settlement Agreement to the Alabama district court on February 12, 1999, and the
preliminary class certification hearing is scheduled for March 24, 1999. If the
district court grants preliminary approval, notices to the Monetary Class and
Equitable Class will be sent following review by the SEC of the solicitation
statements to be prepared in connection with the Equitable Settlement. The
Monetary Settlement, if approved, will go forward regardless of whether the
Equitable Settlement is approved or not. The Company continues to believe that
the allegations of the Koch and Romei actions are completely without merit and
intends to continue to defend this matter vigorously if the Monetary Settlement
is not consummated.
The Partnership, together with affiliates, has initiated litigation in various
official forums in India against each of two defaulting Indian airline lessees
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 airlines, and the airlines have ceased operations. In response to the
Partnership's collection efforts, the two airlines each filed counter-claims
against the Partnership in excess of the Partnership's claims against the
airlines. The General Partner believes that the airlines' counterclaims are
completely without merit, and the General Partner will vigorously defend against
such counterclaims.
The Partnership is involved as plaintiff or defendant in various other legal
actions incident to its business. Management does not believe that any of these
actions will be material to the financial condition of the Company.
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 UNITHOLDER MATTERS
Pursuant to the terms of the partnership agreement, the General Partner is
generally entitled to a 5% interest in the profits and losses and distributions
of the Partnership. The General Partner is the sole holder of such interest.
Special allocations of income are made to the General Partner equal to the
deficit balance, if any, in the capital account of the General Partner. The
General Partner's annual allocation of net income will generally be equal to the
General Partner's cash distributions paid during the current year. The remaining
interests in the profits and losses and distributions of the Partnership are
owned, as of December 31, 1998, by the 9,448 holders of units in the
Partnership.
There are several secondary markets that will facilitate sales and purchases of
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 units. Presently, there is no public market for the
units and none is likely to develop. To prevent the units from being considered
publicly traded and thereby to avoid taxation of the Partnership as an
association treated as a corporation under the Internal Revenue Code, the units
will not be transferable without the consent of the General Partner, which may
be withheld at its absolute discretion. The General Partner intends to monitor
transfers of 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" and IRA to exceed the limit allowable. The Partnership may redeem a
certain number of units each year. As of December 31, 1998, the Partnership had
repurchased a cumulative total of 121,580 units at a cost of $1.6 million. The
General Partner does not intend to repurchase any additional units on behalf of
the Partnership during 1999.
(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 unit
amounts)
1998 1997 1996 1995 1994
------------------------------------------------------------------------
Operating results:
Total revenues $ 10,768 $ 16,378 $ 22,120 $ 21,410 $ 24,367
Net gain (loss) on disposition of
Equipment (464 ) 2,830 3,179 530 3,336
Loss on revaluation of equipment -- -- -- (417 ) (820 )
Equity in net income (loss) of uncon-
solidated special-purpose entities 348 2,952 (331 ) -- --
Net income (loss) (1,127 ) 2,098 (4,119 ) (3,611 ) (5,112 )
At year-end:
Total assets $ 31,250 $ 46,089 $ 59,009 $ 71,924 $ 82,773
Total liabilities 14,683 24,862 34,100 35,449 35,997
Notes payable 12,750 21,000 29,250 30,800 30,800
Cash distribution $ 3,533 $ 5,780 $ 7,271 $ 6,443 $ 7,523
Cash distribution representing a
return of capital to the limited
partners $ 3,351 $ 3,682 $ 6,908 $ 6,124 $ 7,135
Per weighted-average limited partnership unit:
Net income (loss) $ (0.15 ) $ 0.21 $ (0.52 ) $ (0.45 ) $ (0.63 )
Cash distribution $ 0.39 $ 0.64 $ 0.80 $ 0.71 $ 0.82
Cash distribution representing a
return of capital $ 0.39 $ 0.43 $ 0.80 $ 0.71 $ 0.82
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 IV
(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, marine vessel, trailer, marine container and
railcars portfolios.
(a) Aircraft: The Partnership owns two Boeing 737-200 Stage II aircraft
that have been off-lease throughout 1998. These aircraft are currently being
marketed for sale or re-lease.
(b) Marine vessels: The Partnership's marine vessel and interest in an
entity which owns a marine vessel operated in the time charter markets
throughout 1998. Time charters are generally of a short duration (such as a
single voyage of 10 - 45 days), or may be of extended duration (as much as three
years) in weaker cheaper markets. Short duration charters are the dominant forms
of contract. During 1998, the Partnership's marine vessels experienced a
decrease in contribution due to lower re-lease rates as a result of a soft bulk
carrier vessel market.
(c) Trailers: The Partnership's trailer portfolio operates in short-term
rental facilities. The relatively short duration of most of the leases in these
operations exposes the trailers to considerable re-leasing and repricing
activity. The Partnership's trailer contributions declined from 1997 to 1998,
due to equipment sales and dispositions during 1997 and 1998, offset, in part,
by higher utilization and lease rates for the remaining fleet.
(d) Marine containers: All of the Partnership's marine container portfolio
operates in utilization-based leasing pools and was highly exposed to re-leasing
and repricing activity. The Partnership's marine container contributions
declined from 1997 to 1998, due to equipment sales during 1997 and 1998 and soft
market conditions that caused a decline in re-leasing activity.
(e) Railcars: The Partnership's railcar contributions declined from 1997 to
1998, due to equipment sales during 1997 and 1998 and soft market conditions for
several types of railcars that caused a decline in re-leasing activity.
(2) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment and investments in unconsolidated
special-purpose entities (USPEs) represents a reduction in the size of the
equipment portfolio, and may result in reduction of contributions 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 lease terms,
can result not only in reductions in net 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 proceeds of $1.5 million. The Partnership
used these proceeds to partially fund a required principal payment of $8.3
million.
(b) Nonperforming lessees: In 1997, the Partnership repossessed one
aircraft from a lessee that did not comply with the terms of the lease
agreement. The Partnership incurred legal fees, repossession costs, and repair
costs associated with this aircraft. In addition, the Partnership wrote off all
outstanding receivables from this lessee. This aircraft remained off lease
throughout 1998 and is currently being marketed for sale.
(3) Equipment Valuation and Write-downs
In accordance with Financial Accounting Standards Board 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 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 the Partnership's
interest in equipment owned by USPEs, to be $49.0 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, Liquidity, and Unit Redemption
Plan
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering and permanent debt financing. No
further capital contributions from the limited partners are permitted under the
terms of the Partnership's limited partnership agreement. In addition, the
Partnership, under its current loan agreement, does not have the capacity to
incur additional debt. The Partnership relies on operating cash flow to meet its
operating obligations and make cash distributions to limited partners.
For the year ended December 31, 1998, the Partnership generated $4.0 million in
operating cash (net cash provided by operating activities plus non-liquidating
cash distributions from USPEs) to meet its operating obligations and to make
distributions (total of $3.5 million in 1998) to the partners.
As of December 31, 1998, the Partnership's outstanding debt had a balance of
$12.8 million. The remaining balance of this loan is due in an annual principal
payment of $8.3 million on July 1, 1999, and a final payment of $4.5 million in
2000. The Partnership expects that the proceeds from equipment sales and
operating cash flows will be sufficient to make these payments. The interest on
the loan is fixed at 9.75%. The loan agreement requires the Partnership to
maintain certain debt coverage ratios.
Pursuant to the terms of the limited partnership agreement, beginning January 1,
1993, if the number of units made available for purchase by limited partners in
any calendar year exceeds the number that can be purchased with reinvestment
plan proceeds during any calendar year, then the Partnership may redeem up to 2%
of the outstanding units each year, subject to certain terms and conditions. The
purchase price to be offered for such units is to be equal to 110% of the
unrecovered principal attributed to the units. Unrecovered principal is defined
as the excess of the capital contribution attributable to a unit over the
distributions from any source paid with respect to that unit. The Partnership
does not intend to repurchase any units in 1999.
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 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,
equipment operating, and asset-specific insurance expenses) on owned equipment
decreased during the year ended December 31, 1998, 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
----------------------------
Aircraft $ 3,038 $ 3,938
Rail equipment 2,607 2,526
Trailers 1,132 1,244
Marine containers 712 935
Marine vessel 623 445
Aircraft: Aircraft lease revenues and direct expenses were $3.5 million and $0.4
million, respectively, for the year ended December 31, 1998, compared to $4.2
million and $0.2 million, respectively, during the same period of 1997. The
decrease in lease revenues in 1998 was due to the off-lease status of an
aircraft, when compared to 1997 when the aircraft was on lease for eight months.
The decrease caused by the off-lease status of this plane was offset, in part,
by an increase in the re-lease rate for another aircraft. Direct expenses
increased due to repairs done in 1998, on two off-lease aircraft to meet
airworthiness conditions prior to being sold.
Rail equipment: Railcar lease revenues and direct expenses were $3.5 million and
$0.9 million, respectively, in 1998, compared to $3.6 million and $1.1 million,
respectively, during 1997. The decrease in lease revenues in 1998 was due to
sales and dispositions of railcars in 1997 and 1998 and lower re-lease rates for
certain railcars, when compared to 1997. Direct expenses decreased due to
running repairs required on certain railcars in the fleet during 1997, which
were not needed during 1998.
Trailers: Trailer lease revenues and direct expenses were $1.6 million and $0.4
million, respectively, for the year ended December 31, 1998, compared to $2.0
million and $0.7 million, respectively, during the same period of 1997. Trailer
contribution decreased due to sales and dispositions during 1998 and 1997.
Marine containers: Marine container lease revenues and direct expenses were $0.7
million and $8,000, respectively, in 1998, compared to $0.9 million and $13,000,
respectively, during 1997. Marine container contributions decreased due to sales
and dispositions over the past two years.
Marine vessel: Marine vessel lease revenues and direct expenses were $1.7
million and $1.0 million, respectively, in 1998, compared to $2.0 million and
$1.5 million, respectively, in 1997. Marine vessel contributions increased due
to a $0.1 million loss-of-hire insurance refund received during the second
quarter of 1998 from Transportation Equipment Indemnity Company Ltd. (TEI) due
to lower claims from the insured Partnership and other insured affiliated
partnerships. The increase in marine contribution was offset, in part, by the
sale of a marine vessel in 1997 and lower re-lease rates for the remaining
marine vessel as a result of a softer bulk carrier vessel market.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $9.3 million for the year ended December 31, 1998,
decreased from $13.6 million for the same period in 1997. The significant
variances are explained as follows:
(i) A $1.5 million decrease in depreciation and amortization expenses from
1997 levels reflects the sale of certain assets during 1998 and 1997 and the use
of the double-declining balance depreciation method, which results in greater
depreciation in the first years an asset is owned.
(ii)A $1.0 million decrease in bad debt expenses due to the General
Partner's evaluation of the collectibility of receivables due from certain
lessees.
(iii) A $0.9 million decrease in administrative expenses from 1997 levels
resulted primarily from reduced legal fees to collect outstanding receivables
due from aircraft lessees.
(iv)A $0.8 million decrease in interest expense was due to lower average
borrowings outstanding during 1998, compared to 1997. In July 1998, the
Partnership paid the second annual principal payment of $8.3 million of the
outstanding debt.
(c) Interest and Other Income
Interest and other income decreased $0.6 million in 1998, compared to 1997, due
to the following:
(i) The recognition in 1997 of $0.5 million in loss of hire and general
claims insurance recovery relating to generator repairs on one marine vessel. A
similar recovery did not occur in 1998.
(ii)A decrease of $0.1 million in interest income due to lower average cash
balances in 1998 compared to 1997.
(d) Net Gain (Loss) on Disposition of Owned Equipment
The net loss on disposition of equipment in 1998 totaled $0.5 million, which
resulted from the sale of trailers with a net book value of $1.4 million, for
proceeds of $0.9 million. In addition, the Partnership sold or disposed of
marine containers and railcars with an aggregate net book value of $0.6 million,
for aggregate proceeds of $0.6 million. In 1997, the gain on disposition of
equipment totaled $2.8 million, which resulted from the sale or disposal of
marine containers, trailers, railcars, an aircraft engine, and a marine vessel,
with an aggregate net book value of $6.7 million, and unused drydock reserves of
$1.0 million, for aggregate proceeds of $8.5 million.
(e) Equity in Net Income (Loss) of Unconsolidated Special Purpose Entities
(USPEs)
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Years Ended
December 31,
1998 1997
----------------------------
Aircraft $ 654 $ 3,924
Marine vessels (306 ) (972 )
===================================================================================================
Equity in Net Income (Loss) of USPEs $ 348 $ 2,952
===================================================================================================
Aircraft: As of December 31, 1998 and 1997, the Partnership had an interest in a
trust that owns two commercial aircraft on direct finance lease. During the year
ended December 31, 1998, revenues of $0.6 million were offset by administrative
expenses of $0 million. During the same period of 1997, lease revenues of $1.5
million and the gain from the sale of the Partnership's interest in a trust that
owned six commercial aircraft of $3.4 million sold during December were offset
by depreciation, direct and administrative expenses of $1.0 million. The
decrease in lease revenues and depreciation, direct and administrative expenses
during the year ended December 31, 1998 was due to the sale of the Partnership's
interest in the trust that owned six commercial aircraft during the fourth
quarter of 1997.
Marine vessel: As of December 31, 1998 and 1997, the Partnership had an interest
in an entity owning a marine vessel. Marine vessel revenues and expenses were
$1.2 million and $1.5 million, respectively, for the year ended December 31,
1998, compared to $1.1 million and $2.1 million, respectively, during the same
period in 1997. Lease revenue increased in the year ended December 31, 1998
primarily due to the marine vessel being off-hire for 19 days in the year ended
December 31, 1997 compared to 4 days in the same period of 1998. Expenses
decreased in the year ended December 31, 1998 due to lower survey and repairs
and maintenance expenses and lower depreciation expense caused by the
double-declining balance method of depreciation, which results in greater
depreciation in the first years an asset is owned.
(f) Net Income (Loss)
As a result of the foregoing, the Partnership's net loss was $1.1 million for
the year ended December 31, 1998, compared to net income of $2.1 million during
the same period of 1997. 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, 1998 is not necessarily indicative of future periods. In the year ended
December 31, 1998, the Partnership distributed $3.4 million to the limited
partners, or $0.39 per weighted-average limited partnership unit.
(2) Comparison of Partnership's Operating Results for the Years Ended December
31, 1997 and 1996
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance,
equipment operating expenses, and asset-specific insurance expenses) on owned
equipment decreased during the year ended December 31, 1997, compared to the
same period of 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
----------------------------
Aircraft $ 3,938 $ 2,478
Rail equipment 2,526 2,266
Trailers 1,244 1,621
Marine containers 935 1,191
Marine vessels 445 2,232
Mobile offshore drilling unit -- 163
Aircraft: Aircraft lease revenues and direct expenses were $4.2 million and $0.2
million, respectively, for the year ended December 31, 1997, compared to $5.1
million and $2.6 million, respectively, during the same period of 1996. The
decrease in lease revenues in the year ended December 31, 1997 was due to the
off-lease status of an aircraft, when compared to the same period in 1996 when
the aircraft was on lease for the first eight months. The decrease was also
attributable to another aircraft coming off lease in August 1997, which was on
lease for the year ended December 31, 1996. The decrease caused by these
off-lease aircraft, was offset, in part, by the purchase of a Dash 8-300
aircraft at the end of the second quarter of 1996, which was on lease for the
entire year of 1997. Direct expenses decreased due to costs incurred for repairs
on an aircraft and the overhaul of four engines on another aircraft in the year
ended December 31, 1996, which were not required in 1997.
Rail equipment: Railcar lease revenues and direct expenses were $3.6 million and
$1.1 million, respectively, for the year ended December 31, 1997, compared to
$3.6 million and $1.4 million, respectively, during the same period of 1996. The
increase in railcar contribution resulted from running repairs required on
certain of the railcars in the fleet during 1996, which were not needed during
1997.
Trailers: Trailer lease revenues and direct expenses were $2.0 million and $0.7
million, respectively, for the year ended December 31, 1997, compared to $2.0
million and $0.4 million, respectively, during the same period of 1996. Trailer
contributions decreased in the year ended December 31, 1997, compared to the
same period in 1996, due to a group of trailers that required refurbishment in
1997 prior to making the transition into short-term rental facilities operated
by an affiliate of the General Partner. There were no similar expenses in 1996.
Marine containers: Marine container lease revenues and direct expenses were $0.9
million and $13,000, respectively, for the year ended December 31, 1997,
compared to $1.2 million and $23,000, respectively, during the same period of
1996. Marine container contributions decreased due to sales and dispositions
over the past 12 months.
Marine vessels: Marine vessel lease revenues and direct expenses were $2.0
million and $1.5 million, respectively, for the year ended December 31, 1997,
compared to $6.6 million and $4.4 million, respectively, during the same period
of 1996. Marine vessel contributions decreased due to the sale of a marine
vessel in January 1997. In addition, lease revenues declined during 1997 for the
remaining marine vessel, due to lower re-lease rates as a result of a softer
bulk-carrier vessel market.
Mobile offshore drilling unit (rig): The rig was sold in the second quarter of
1996, resulting in the elimination of any contribution in the year ended
December 31, 1997. Revenues and expenses were $0.2 million and $1,000,
respectively, in the year ended December 31, 1996.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $13.6 million for the year ended December 31, 1997
decreased from $17.0. million for the same period in 1996. The significant
variances are explained as follows:
(i) A $2.5 million decrease in depreciation and amortization expenses from
1996 levels reflects the sale of certain assets during 1997 and 1996 and the use
of the double-declining balance depreciation method, which results in greater
depreciation in the first years an asset is owned.
(ii)The $0.6 million decrease in bad debt expenses was due to the General
Partner's evaluation of the collectibility of receivables due from certain
lessees.
(iii) A $0.7 million decrease in interest expense was due to lower average
borrowings outstanding during the year ended December 31, 1997, compared to the
same period in 1996. In November 1996, the Partnership prepaid $1.5 million of
its outstanding debt. In addition, in July 1997 the Partnership paid the first
annual principal payment of $8.3 million of the outstanding debt.
(iv)A $0.2 million decrease in management fees to affiliates reflects the
lower levels of lease revenues in the year ended December 31, 1997.
(v) A $0.5 million increase in administrative expenses from 1996 levels
resulted from additional legal fees to collect outstanding receivables due from
aircraft lessees.
(c) Interest and Other Income
Interest and other income increased $0.6 million in the year ended December 31,
1997, compared to the same period in 1996, due to the following:
(i) The recognition in 1997 of $0.5 million in loss of hire and general
claims insurance recovery relating to generator repairs on one marine vessel.
(ii)An increase of $0.1 million in interest income due to higher average
cash balances compared to the same period in 1996.
(d) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment for the year ended December 31, 1997
totaled $2.8 million, which resulted from the sale or disposal of marine
containers, trailers, railcars, an aircraft engine, and a marine vessel, with an
aggregate net book value of $6.7 million, and unused drydock reserves of $1.0
million, for aggregate proceeds of $8.5 million. For the year ended December 31,
1996, the $3.2 million net gain on disposition of equipment resulted from the
sale or disposal of marine containers, railcars, a trailer, an aircraft, and a
mobile offshore drilling unit, with an aggregate net book value of $9.9 million,
for aggregate proceeds of $13.1 million.
(e) Equity in Net Income (Loss) of USPEs
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Years Ended
December 31,
1997 1996
----------------------------
Aircraft $ 3,924 $ (315 )
Marine vessels (972 ) (16 )
===================================================================================================
Equity in Net Income (Loss) of USPEs $ 2,952 $ (331 )
===================================================================================================
Aircraft: As of December 31, 1997, the Partnership had an interest in a trust
that owns two commercial aircraft on direct finance lease. As of December 31,
1996, the Partnership owned an interest in a trust that owns six commercial
aircraft and had an interest in a trust that owns two commercial aircraft on
direct finance lease. During the year ended December 31, 1997, revenues of $1.5
million and the gain from the sale of the Partnership's interest in the trust
that owned six commercial aircraft of $3.4 million during December were offset
by depreciation, direct and administrative expenses of $1.0 million. During the
same period of 1996, revenues of $1.1 million were offset by depreciation,
direct and administrative expenses of $1.4 million. Lease revenues increased in
the year ended December 31, 1997 due to the investment in the trust owning two
aircraft on a direct finance lease, which was acquired in the latter part of
1996, and thus it had no contribution for the year ended December 31, 1996. The
contribution for the investment in a trust owning commercial aircraft on an
operating lease was significantly impacted by depreciation charges, which are
greatest in the early years due to the use of the double-declining balance
method of depreciation. The trust depreciated this aircraft investment over a
period of six years.
Marine vessel: As of December 31, 1997 and 1996, the Partnership had an interest
in an entity owning a marine vessel. Marine vessel revenues and expenses were
$1.1 million and $2.1 million, respectively, for the year ended December 31,
1997, compared to $1.7 million and $1.7 million, respectively, during the same
period in 1996. Lease revenue decreased in the year ended December 31, 1997 due
to lower re-lease rates as a result of a softer bulk-carrier vessel market.
Direct expenses increased in the year ended December 31, 1997 due to increased
survey, repairs, and maintenance expenses.
(f) Net Income (Loss)
As a result of the foregoing, the Partnership's net income was $2.1 million for
the year ended December 31, 1997, compared to a net loss of $4.1 million during
the same period of 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 $5.5 million to the limited
partners, or $0.64 per weighted-average limited partnership 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
(loss), 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. An explanation of the
current relationships is presented below.
The Partnership's owned equipment on lease to United States (U.S.)-domiciled
lessees consists of trailers, railcars, and aircraft. During 1998, lease
revenues in the U.S. accounted for 37% of the lease revenues from wholly and
partially owned equipment, while net income accounted for $0.8 million compared
to a loss for the Partnership of $1.1 million. The primary reason for this
relationship is that the Partnership sold trailers and railcars during 1998 that
operated in the United States, which resulted in $0.6 million in net loss.
The Partnership's owned equipment on lease to Canadian-domiciled lessees
consists of railcars and aircraft. During 1998, lease revenues accounted for 22%
of total lease revenues from wholly and partially owned equipment, while net
income accounted for $0.7 million compared to a loss for the Partnership of $1.1
million.
The Partnership's owned equipment on lease to South Asia-domiciled lessees
accounted for none of the lease revenues from wholly and partially owned
equipment while a net loss accounted for $2.0 million of the total aggregate net
loss for the Partnership of $1.1 million. The primary reason for this
relationship is that the aircraft in this region was off-lease throughout 1998
and incurred repair costs of $0.4 million.
South American operations consisted of an owned aircraft. Lease revenues
accounted for 11% of total lease revenues from wholly and partially owned
equipment, while net income accounted for $0.8 million in net income, compared
to total aggregate net loss of $1.1 million for the entire Partnership.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to lessees in the rest of the world consists of marine containers and
marine vessels and accounted for 30% of lease revenues from wholly and partially
owned equipment, while the net loss in this region accounted for $0.1 million,
compared to total aggregate net loss of $1.1 million for the entire Partnership.
(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). As 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 year 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. In addition, the General Partner believes
the future costs 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
Partnership or General Partner to control, including the extent to which third
parties can address the Year 2000 problem. The General Partner is communicating
with vendors, service 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 of 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 some 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.
As of December 31, 1998, the Partnership's outstanding debt had a balance of
$12.8 million. The remaining balance of this loan is due in an annual principal
payment of $8.3 million on July 1, 1999, and $4.5 million in 2000. The
Partnership expects that the proceeds from equipment sales and operating cash
flows will be sufficient to make these payments.
The Partnership intends to use cash flow from operations to satisfy its
operating requirements, pay principal and interest on debt, and pay cash
distributions to the partners.
(1) Repricing Risk
Certain of the Partnership's aircraft, marine vessel, marine containers,
railcars and trailers 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
airplane has been shown to comply with Stage III noise levels. The Partnership
is scheduled to either sell or re-lease its remaining Stage II aircraft by the
year 2000. The Partnership plans on re-leasing the Stage II aircraft in
countries that do not require this regulation. Furthermore, 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, issued a statement which
requires the owner to inspect a certain percentage of the tank railcars for a
protective coating to the outside of the tank and the inside of the metal tank
jacket whenever a tank is insulated. The Partnership owns tank railcars that
need to be inspected and, if needed, repaired before it can go back into service
by August 2000.
(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,
make loan principal payments on debt, and make distributions to the partners.
Although the General Partner intends to maintain a sustainable level of
distributions prior to final liquidation of the Partnership, actual Partnership
performance and other considerations may require adjustments to then-existing
distribution levels. In the long term, changing market conditions and used
equipment values preclude 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, significant asset sales
may result in special distributions to unitholders.
The Partnership's permanent debt obligation began to mature in July 1997. The
General Partner believes that sufficient cash flow from operations and equipment
sales will be available in the future for repayment of debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of currency devaluation
risk. During 1998, 63% 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 payment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements included in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 December 31, 1998, no
investor was known by the General Partner to beneficially own more than
5% of the limited partnership units.
(B) Security Ownership of Management
Neither the General Partner and its affiliates nor any executive
officer or director of the General Partner and its affiliates own any
limited partnership units of the Partnership as of December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
During 1998, management fees to IMI were $0.6 million. The Partnership
reimbursed FSI and its affiliates $0.6 million for administrative and
data processing services performed on behalf of the Partnership in
1998. In 1998, the Partnership paid Transportation Equipment Indemnity
Company Ltd. (TEI), a wholly-owned, Bermuda-based subsidiary of PLM
International, $2,000 for insurance coverages during 1998, which
amounts were paid substantially to third-party reinsurance underwriters
or placed in risk pools managed by TEI on behalf of affiliated
partnerships and PLM International, which provide threshold coverages
on marine vessel loss of hire and hull and machinery damage. All
pooling arrangement funds are either paid out to cover applicable
losses or refunded pro rata by TEI. During 1998, the Partnership
received a $0.1 million loss-of-hire insurance refund from TEI due to
lower claims from the insured Partnership and other insured affiliated
programs.
During 1998, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Partnership's proportional share of
ownership): management fees, $0.1 million, and administrative and data
processing services, $18,000. The USPEs also paid TEI $17,000 for
insurance coverages during 1998. The Partnership's USPE's proportional
share of a refund of $14,000 was received during 1998 from lower
loss-of-hire claims.
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. 33-27746), which became effective with the Securities
and Exchange Commission on May 23, 1989.
10.1 Management Agreement between Partnership and PLM Investment
Management, Inc., incorporated by reference to the Partnership's
Registration Statement on Form S-1 (Reg. No. 33-27746), which
became effective with the Securities and Exchange Commission on
May 23, 1989.
10.2 Note Agreement, dated as of July 1, 1990, regarding $33.0 million
in 9.75% senior notes due July 1, 2000, incorporated by reference
to the Partnership's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 1991.
24. Powers of Attorney.
(This space intentionally left blank.)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on
behalf of the Partnership by duly authorized officers.
Date: March 17, 1999 PLM EQUIPMENT GROWTH FUND IV
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 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 IV
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' report 30
Balance sheets as of December 31, 1998 and 1997 31
Statements of operations for the years ended
December 31, 1998, 1997, and 1996 32
Statements of changes in partners' capital for the years
ended December 31, 1998, 1997, and 1996 33
Statements of cash flows for the years ended
December 31, 1998, 1997, and 1996 34
Notes to financial statements 35-47
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 IV:
We have audited the accompanying financial statements of PLM Equipment Growth
Fund IV (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
IV, in accordance with the limited partnership agreement, entered its passive
phase on January 1, 1997 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, 2009, 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 IV 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 IV
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
1998 1997
---------------------------------
Assets
Equipment held for operating leases, at cost $ 82,278 $ 87,520
Less accumulated depreciation (58,674 ) (56,215 )
---------------------------------
Net equipment 23,604 31,305
Cash and cash equivalents 778 3,650
Restricted cash 147 247
Accounts receivable, less allowance for doubtful
accounts of $3,126 in 1998 and $3,332 in 1997 874 954
Investments in unconsolidated special-purpose entities 5,739 9,756
Lease negotiation fees to affiliate, less accumulated
amortization of $203 in 1997 -- 23
Debt placement fees to affiliate, less accumulated
amortization of $321 in 1998 and $283 in 1997 58 96
Prepaid expenses and other assets 50 58
---------------------------------
Total assets $ 31,250 $ 46,089
=================================
Liabilities and partners' capital
Liabilities
Accounts payable and accrued expenses $ 563 $ 1,097
Due to affiliates 244 256
Lessee deposits and reserve for repairs 1,126 2,509
Notes payable 12,750 21,000
---------------------------------
Total liabilities 14,683 24,862
Partners' capital
Limited partners (8,628,420 limited partnership units
as of December 31, 1998 and 1997) 16,567 21,227
General Partner -- --
---------------------------------
Total partners' capital 16,567 21,227
---------------------------------
Total liabilities and partners' capital $ 31,250 $ 46,089
=================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
(in thousands of dollars except weighted-average unit amounts)
1998 1997 1996
-------------------------------------------
Revenues
Lease revenue $ 10,981 $ 12,684 $ 18,671
Interest and other income 251 864 270
Net gain (loss) on disposition of equipment (464 ) 2,830 3,179
-------------------------------------------
Total revenues 10,768 16,378 22,120
Expenses
Depreciation and amortization 5,802 7,268 9,791
Repairs and maintenance 1,905 2,219 5,482
Equipment operating expenses 805 795 2,497
Insurance expense to affiliate (88 ) 70 180
Other insurance expenses 285 566 622
Management fees to affiliate 622 649 895
Interest expense 1,652 2,450 3,109
General and administrative expenses to affiliates 584 519 606
Other general and administrative expenses 667 1,669 1,098
Provision for bad debts 9 1,027 1,628
------------------------------------------------------------------------------------------------------------------
-------------------------------------------
Total expenses 12,243 17,232 25,908
Equity in net income (loss) of unconsolidated
special-purpose entities 348 2,952 (331 )
-------------------------------------------
Net income (loss) $ (1,127 ) $ 2,098 $ (4,119 )
===========================================
Partners' share of net income (loss)
Limited partners $ (1,309 ) $ 1,803 $ (4,482 )
General Partner 182 295 363
-------------------------------------------
Total $ (1,127 ) $ 2,098 $ (4,119 )
===========================================
Net income (loss) per weighted-average limited partnership unit $ (0.15 ) $ 0.21 $ (0.52 )
===========================================
Cash distribution $ 3,533 $ 5,780 $ 7,271
===========================================
Cash distribution per weighted-average limited partnership unit $ 0.39 $ 0.64 $ 0.80
===========================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND IV
(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 as of December 31, 1995 $ 36,475 $ -- $ 36,475
Net income (loss) (4,482 ) 363 (4,119 )
Repurchase of limited partnership units (176 ) -- (176 )
Cash distribution (6,908 ) (363 ) (7,271 )
------------------------------------------------------------------------------------------------------
Partners' capital as of December 31, 1996 24,909 -- 24,909
Net income 1,803 295 2,098
Cash distribution (5,485 ) (295 ) (5,780 )
------------------------------------------------------------------------------------------------------
Partners' capital as of December 31, 1997 21,227 -- 21,227
Net income (loss) (1,309 ) 182 (1,127 )
Cash distribution (3,351 ) (182 ) (3,533 )
------------------------------------------------------------------------------------------------------
Partners' capital as of December 31, 1998 $ 16,567 $ -- $ 16,567
=================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(in thousands of dollars)
1998 1997 1996
--------------------------------------------
Operating activities
Net income (loss) $ (1,127 ) $ 2,098 $ (4,119 )
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,802 7,268 9,791
Net loss (gain) on disposition of equipment 464 (2,830 ) (3,179 )
Equity in net (income) loss of unconsolidated special-
purpose entities (348 ) (2,952 ) 331
Changes in operating assets and liabilities:
Restricted cash 100 305 23
Accounts and notes receivable, net 127 523 2,204
Prepaid expenses and other assets 8 82 (29 )
Due from affiliates -- 357 (25 )
Accounts payable and accrued expenses (534 ) 70 624
Due to affiliates (12 ) (48 ) (694 )
Lessee deposits and reserve for repairs (1,383 ) (19 ) 279
----------------
----------------------------
Net cash provided by operating activities 3,097 4,854 5,206
--------------------------------------------
Investing activities
Purchase of equipment and capital repairs -- (621 ) (5,542 )
Equipment purchased for unconsolidated special-
purpose entity -- -- (4,247 )
Payments of acquisition fees to affiliate -- -- (247 )
Payments of lease negotiation fees to affiliate -- -- (12 )
Proceeds from disposition of equipment 1,449 8,493 13,065
Distribution from liquidation of unconsolidated
special-purpose entities 3,470 1,736 --
Distribution from unconsolidated special-purpose entities 895 1,076 1,680
--------------------------------------------
Net cash provided by investing activities 5,814 10,684 4,697
--------------------------------------------
Financing activities
Repayment of notes payable (8,250 ) (8,250 ) (1,550 )
Cash distribution paid to limited partners (3,351 ) (5,485 ) (6,908 )
Cash distribution paid to General Partner (182 ) (295 ) (363 )
Repurchase of limited partnership units -- -- (176 )
--------------------------------------------
Net cash used in financing activities (11,783 ) (14,030 ) (8,997 )
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,872 ) 1,508 906
Cash and cash equivalents at beginning of year 3,650 2,142 1,236
--------------------------------------------
Cash and cash equivalents at end of year $ 778 $ 3,650 $ 2,142
============================================
Supplemental information
Interest paid $ 1,652 $ 2,450 $ 3,159
============================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation
Organization
PLM Equipment Growth Fund IV, a California limited partnership (the
Partnership), was formed on March 25, 1989. 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 September 1989. 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, 2009, unless terminated
earlier upon sale of all equipment or by certain other events. At the
conclusion of the Partnership's sixth year of operations, on December 31,
1996, the General Partner stopped reinvesting excess cash and started
distributing any funds remaining after payment of normal operating expenses
and debt payments to the partners. 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
Distribution per Limited Partnership 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
on, and a return of, their invested capital.
The General Partner has determined that it will not adopt a reinvestment
plan for the Partnership. If the number of units made available for
purchase by limited partners in any calendar year exceeds the number that
can be purchased with reinvestment plan proceeds, then the Partnership may
redeem up to 2% of the outstanding units each year, subject to certain
terms and conditions. The purchase price to be offered by the Partnership
for these units will be equal to 110% of the unrecovered principal
attributable to the units. The unrecovered principal for any unit will be
equal to the excess of (a) the capital contribution attributable to the
units over (b) the distributions from any source paid with respect to the
units. As of December 31, 1998, the Partnership had repurchased a
cumulative total of 121,580 units at a cost of $1.6 million. The General
Partner does not intend to repurchase any additional units on behalf of the
Partnership during 1999.
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.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Accounting for Leases
The Partnership's leasing operations generally consist of operating leases.
Under the operating lease method of accounting, the leased asset is
recorded at cost and depreciated over its estimated useful life. Rental
payments are recorded as revenue over the lease term. Lease origination
costs were capitalized and amortized over the term of the lease.
Periodically, the Partnership leases equipment with lease terms that
qualify for direct finance lease classification, as required by Statement
of Financial Accounting Standards No. 13, "Accounting for Leases".
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. 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 placement fees
and issuance costs are amortized over the term of the related loan (see
Note 7). 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
equipment carrying values were required for the years ended December 31,
1998, 1997, or 1996.
Equipment held for operating leases is stated at cost.
Investments in Unconsolidated Special-Purpose Entities
The Partnership has interests in unconsolidated special-purpose entities
(USPEs) that own transportation equipment. These interests are accounted
for using the equity method.
The Partnership's investment in USPEs includes acquisition and lease
negotiation fees paid by the Partnership to PLM Transportation Equipment
Corporation (TEC), a wholly-owned subsidiary of FSI, and PLM Worldwide
Management Services (WMS), a wholly-owned subsidiary of PLM International.
The Partnership's interests in USPEs are managed by IMI. The Partnership's
equity interest in the net income of USPEs is reflected net of management
fees paid or payable to IMI and the amortization of acquisition and lease
negotiation fees paid to TEC or WMS.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Repairs and Maintenance
Repair and maintenance costs related to marine vessels, railcars, and
trailers 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. Estimated costs associated with marine vessel
drydockings are accrued and charged to income ratably over the period prior
to such drydocking. The reserve accounts are included in the balance sheet
as lessee deposits and reserve for repairs.
Net Income (Loss) and Distribution per Limited Partnership 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 equal to the deficit balance, if
any, in the capital account of the General Partner. 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.
Cash distributions are recorded when paid. Monthly unitholders receive a
distribution check 15 days after the close of the previous month's business
and quarterly unitholders receive a distribution check 45 days after the
close of the quarter.
Cash distributions to investors in excess of net income are considered a
return of capital. Cash distributions to the limited partners of $3.4
million, $3.7 million, and $6.9 million in 1998, 1997, and 1996,
respectively, were deemed to be a return of capital.
Cash distributions of $0.9 million, $0.8 million and $1.7 million for 1998,
1997, and 1996, respectively, relating to the fourth quarter of that year,
were paid during the first quarter of 1999, 1998, or 1997, respectively.
Net Income (Loss) Per Weighted-Average Partnership Unit
Net income (loss) per weighted-average Partnership unit was computed by
dividing net income (loss) attributable to limited partners by the
weighted-average number of Partnership units deemed outstanding during the
period. The weighted-average number of Partnership units deemed outstanding
during the year ended December 31, 1998 and 1997 was 8,628,420. The
weighted-average number of Partnership units deemed outstanding during the
year ended December 31, 1996 was 8,633,331.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three
months or less as cash equivalents. 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
As of December 31, 1998 and 1997, restricted cash represented lessee
security deposits held by the Partnership.
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1998 presentations.
2. General Partner and Transactions with Affiliates
An officer of PLM Securities Corp., a wholly-owned subsidary of the General
Partner, contributed $100 of the Partnership's initial capital. Under the
equipment management agreement, IMI, subject to certain reductions,
receives a monthly management fee attributable to either owned equipment or
interests in equipment owned by the USPEs equal to the lesser of (a) the
fees that would be charged by an independent third party for similar
services for similar equipment or (b) the sum of (i) 5% of the gross lease
revenues attributable to equipment that is subject to operating leases,
(ii) 2% of the gross lease revenues attributable to equipment that is
subject to full payout net leases, and (iii) 7% of the gross lease revenues
attributable to equipment for which IMI provides both management and
additional services relating to the continued and active operation of
program equipment, such as on-going marketing and re-leasing of equipment,
hiring or arranging for the hiring of crew or operating personnel for
equipment, and similar services. Partnership management fees of $0.1
million and $0.1 million were payable as of December 31, 1998 and 1997,
respectively. The Partnership's proportional share of the USPE management
fees of $9,000 and $11,000 were payable as of December 31, 1998 and 1997,
respectively. The Partnership's proportional share of USPE management fees
was $0.1 million, $0.1 million and $0.2 million during 1998, 1997, and
1996, respectively. The Partnership reimbursed FSI and its affiliates $0.6
million, $0.5 million, and $0.6 million during 1998, 1997, and 1996,
respectively, for data processing expenses and administrative services
performed on behalf of the Partnership. The Partnership's proportional
share of USPE administrative and data processing expenses was $18,000,
$35,000 and $38,000 during 1998, 1997 and 1996, respectively.
Debt placement fees were paid to the General Partner in an amount equal to
1% of the Partnership's long-term borrowings, less any costs paid to
unaffiliated parties related to obtaining the borrowing. TEC received a fee
for arranging the acquisition of equipment and negotiating the initial
lease of the equipment. The Partnership and USPEs paid or accrued lease
negotiation and equipment acquisition fees of $0.5 million to TEC and WMS
in 1996. The Partnership did not accrue lease negotiation and equipment
acquisition fees during 1998 and 1997.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
2. General Partner and Transactions with Affiliates (continued)
The Partnership paid $2,000, $0.1 million, and $0.2 million in 1998, 1997,
and 1996, respectively, to Transportation Equipment Indemnity Company Ltd.
(TEI), which provides marine insurance coverage for Partnership equipment
and other insurance brokerage services. TEI is an affiliate of the General
Partner. The Partnership's proportional share of USPE marine insurance
coverage paid to TEI was $17,000, $0.1 million and $0.1 million during
1998, 1997 and 1996, respectively. A substantial portion of this amount was
paid to third-party reinsurance underwriters or placed in risk pools
managed by TEI on behalf of affiliated programs and PLM International,
which provide threshold coverages on marine vessel loss of hire and hull
and machinery damage. All pooling arrangement funds are either paid out to
cover applicable losses or refunded pro rata by TEI. Also, during 1998, the
Partnership and the USPEs received a $0.1 million loss-of-hire insurance
refund from TEI due to lower claims from the insured Partnership and other
insured affiliated programs. PLM International plans to liquidate TEI in
1999. During 1998, TEI did not provide the same level of insurance coverage
as had been provided during 1997 and 1996. These services were provided by
an unaffiliated third party.
As of December 31, 1998, all 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.
The Partnership had an interest in certain equipment in conjunction with
affiliated programs during 1998, 1997 and 1996 (see Note 4).
The balance due to affiliates as of December 31, 1998 and 1997 includes
$0.1 million due to FSI and its affiliates for management fees and $0.1
million due to affiliated USPEs.
3. Equipment
The components of owned equipment as of December 31, are as follows (in
thousands of dollars):
Equipment held for operating leases 1998 1997
----------------------------------
Aircraft $ 42,734 $ 42,734
Rail equipment 14,752 14,828
Marine containers 11,012 13,384
Marine vessels 9,719 9,719
Trailers 4,061 6,855
----------------------------------
82,278 87,520
Less accumulated depreciation (58,674 ) (56,215 )
--------------------------------
Net equipment $ 23,604 $ 31,305
==================================
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.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
3. Equipment (continued)
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 2 commercial aircraft, 46 marine containers,
and 5 railcars with a net book value of $4.6 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 a commercial aircraft, 108 marine containers, and 2 railcars with a net
book value of $3.2 million.
During 1998, the Partnership sold or disposed of marine containers,
railcars, and trailers, with an aggregate net book value of $2.0 million,
for proceeds of $1.5 million. During 1997, the Partnership sold or disposed
of an aircraft engine, marine containers, railcars, trailers, and a marine
vessel, with an aggregate net book value of $6.6 million, and unused
drydock reserves of $1.0, for proceeds of $8.5 million.
Periodically, PLM International will purchase groups of assets whose
ownership may be allocated among affiliated programs and PLM International.
Generally in these cases, only assets that are on lease will be purchased
by the affiliated programs. PLM International will generally assume the
ownership and remarketing risks associated with off-lease equipment.
Allocation of the purchase price will be determined by a combination of
third-party industry sources and recent transactions or published fair
market value references. During 1996, PLM International realized a $0.7
million gain on the sale of 69 off-lease railcars purchased by PLM
International as part of a group of assets in 1994 that had been allocated
to the Partnership, PLM Equipment Growth Funds IV and VI, Professional
Lease Management Income Fund I, LLC (Fund I), and PLM International.
All owned equipment on lease is being accounted for as operating leases.
Future minimum rentals receivable under noncancelable operating leases, as
of December 31, 1998, for owned equipment during each of the next five
years, are approximately $6.6 million in 1999, $4.3 million in 2000, $3.9
million in 2001, $1.3 million in 2002, and $0.9 million in 2003 and
thereafter. Contingent rentals based upon utilization were approximately
$0.7 million, $0.9 million, and $1.0 million in 1998, 1997, and 1996,
respectively.
4. Investments in Unconsolidated Special-Purpose Entities
The net investments in USPEs include the following jointly-owned equipment
(and related assets and liabilities) as of December 31, (in thousands of
dollars):
1998 1997
---------------------------
35% interest in two Stage II commercial aircraft on a direct
finance lease $ 3,880 $ 4,008
50% interest in an entity owning a bulk carrier 1,859 2,264
17% interest in a trust from a sold commercial aircraft -- 3,484
--------------------------------------------------------------------------------------------------
Net investments $ 5,739 $ 9,756
==========================
The Partnership had an interest in one USPE that owned multiple aircraft
(the Trust). This Trust contained provisions, under certain circumstances,
for allocating specific aircraft to the beneficial owners. During December
1997, the Partnership and an affiliated program each sold the aircraft
designated to it. The Partnership's 17% interest in the Trust owning the
commercial aircraft was sold for proceeds of $5.2 million for its net
investment of $1.8 million. The Partnership received liquidating proceeds
of $1.7 million during 1997;the remaining liquidating proceeds of $3.5 were
received during January 1998.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
4. Investments in Unconsolidated Special-Purpose Entities (continued)
The following summarizes the financial information for the special-purpose
entities and the Partnership's interests therein as of and for the years
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 $ 14,339 5,739 $ 32,310 $ 9,756 $ 33,250 $ 9,616
Lease revenues 4,066 1,233 7,995 1,961 10,623 2,782
Net income (loss) 9,921 348 6,819 2,952 (2.350 ) (331 )
5. Operating Segments
The Partnership operates in five primary operating segments: aircraft
leasing, marine container leasing, marine vessel leasing, trailer leasing,
and railcar leasing. Each equipment leasing segment engages in short-term
to mid-term operating leases to a variety of customers.
The General Partner evaluates the performance of each segment based on
profit or loss from operations before allocation of 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 Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1998 Leasing Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 3,484 $ 720 $ 1,666 $ 1,578 $ 3,533 $ -- $ 10,981
Interest income and other 15 -- -- -- 21 215 251
Gain (loss) on disposition of (2 ) 77 -- (530 ) (9 ) -- (464 )
equipment
-------------------------------------------------------------------------
Total revenues 3,497 797 1,666 1,048 3,545 215 10,768
Costs and expenses
Operations support 446 8 1,043 446 926 38 2,907
Depreciation and amortization 3,314 699 383 498 846 62 5,802
Interest expense 6 -- -- -- -- 1,646 1,652
General and administrative expenses 492 56 109 464 390 362 1,873
Provision for bad debts (95 ) -- -- 154 (50 ) -- 9
-------------------------------------------------------------------------
Total costs and expenses 4,163 763 1,535 1,562 2,112 2,108 12,243
-------------------------------------------------------------------------
Equity in net income (loss) of USPEs 654 -- (306 ) -- -- -- 348
-------------------------------------------------------------------------
=========================================================================
Net income (loss) $ (12 ) $ 34 $ (175 )$ (514 ) $ 1,433 $ (1,893 ) $ (1,127 )
=========================================================================
As of December 31, 1998
Total assets $ 15,434 $ 2,169 $ 3,727 $ 2,035 $ 5,978 $ 1,907 $ 31,250
=========================================================================
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.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
5. Operating Segments (continued)
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1997 Leasing Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 4,154 $ 948 $ 1,978 $ 1,980 $ 3,624 $ -- $ 12,684
Interest income and other 13 8 574 -- 4 265 864
Gain (loss) on disposition of 559 (86 ) 2,337 17 3 -- 2,830
equipment
-------------------------------------------------------------------------
Total revenues 4,726 870 4,889 1,997 3,631 265 16,378
Costs and expenses
Operations support 216 13 1,533 736 1,097 55 3,650
Depreciation and amortization 3,993 850 455 812 1,057 101 7,268
Interest expense -- -- -- -- -- 2,450 2,450
General and administrative expenses 1,098 70 183 406 369 711 2,837
Provision for bad debts 855 55 -- 94 23 -- 1,027
-------------------------------------------------------------------------
Total costs and expenses 6,162 988 2,171 2,048 2,546 3,317 17,232
-------------------------------------------------------------------------
Equity in net income (loss) of USPEs 3,924 -- (972 ) -- -- -- 2,952
-------------------------------------------------------------------------
=========================================================================
Net income (loss) $ 2,488 $ (118 ) $ 1,746 $ (51 ) $ 1,085 $ (3,052 ) $ 2,098
=========================================================================
As of December 31, 1997
Total assets $ 22,360 $ 3,362 $ 4,515 $ 3,968 $ 6,857 $ 5,027 $ 46,089
=========================================================================
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 Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1996 Leasing Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 5,053 $ 1,214 $ 6,613 $ 2,016 $ 3,611 $ 164 $ 18,671
Interest income and other 27 -- 24 -- -- 219 270
Gain (loss) on disposition of 555 48 -- (3 ) 9 2,570 3,179
equipment
-------------------------------------------------------------------------
Total revenues 5,635 1,262 6,637 2,013 3,620 2,953 22,120
Costs and expenses
Operations support 2,575 23 4,381 395 1,345 62 8,781
Depreciation and amortization 4,362 1,042 1,647 988 1,221 531 9,791
Interest expense -- -- (50 ) -- -- 3,159 3,109
General and administrative expenses 575 72 436 368 425 723 2,599
Provision for bad debts 1,520 85 (73 ) 88 8 -- 1,628
-------------------------------------------------------------------------
Total costs and expenses 9,032 1,222 6,341 1,839 2,999 4,475 25,908
-------------------------------------------------------------------------
Equity in net income (loss) of USPEs (315 ) -- (16 ) -- -- -- (331 )
-------------------------------------------------------------------------
=========================================================================
Net income (loss) $ (3,712) $ 40 $ 280 $ 174 $ 621 $ (1,522 ) $ (4,119 )
=========================================================================
As of December 31, 1996
Total assets $ 25,171 $ 4,816 $ 11,396 $ 4,839 $ 7,929 $ 4,858 $ 59,009
=========================================================================
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 or gain on disposition from a mobile offshore drilling unit.
PLM EQUIPMENT GROWTH FUND IV
(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, mobile offshore drilling
unit, railcars, and trailers to lessees domiciled in eight geographic
regions: Canada, the United States, the Gulf of Mexico, South Asia, South
America, Europe, Australia, and Mexico. Marine vessels and marine
containers are leased to multiple lessees in different regions that operate
the marine vessels and marine containers worldwide.
The following table sets forth lease revenue information by region for the
owned equipment and investments in USPEs for the years ended December 31,
are as follows (in thousands of dollars):
Region Owned Equipment Investments in USPEs
---------------------------
--------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
--------------------------------------- -------------------------------------
United States $ 4,516 $ 5,369 $ 5,307 $ -- $ -- $ --
Canada 2,698 2,339 2,042 -- 846 1,083
Gulf of Mexico -- -- 164 -- -- --
South Asia -- 850 2,221 -- -- --
South America 1,380 1,200 1,110 -- -- --
Rest of the world 2,387 2,926 7,827 1,233 1,115 1,699
======================================= =====================================
Lease revenues $ 10,981 $ 12,684 $ 18,671 $ 1,233 $ 1,961 $ 2,782
======================================= =====================================
The following table sets forth net income (loss) information by region for
the owned equipment and investments in USPEs for the years ended December
31, are as follows (in thousands of dollars):
Region Owned Equipment Investments in USPEs
---------------------------------- -------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
-------------------------------------- -------------------------------------
United States $ 847 $ 1,131 $ 832 $ -- $ -- $ --
Canada 622 14 309 84 3,305 (313 )
Gulf of Mexico -- -- 2,327 -- -- --
South Asia (2,021 ) (2,034 ) (2,938 ) -- -- --
South America 805 532 328 -- -- --
Europe -- -- (1,676 ) -- -- --
Australia -- -- 555 -- -- --
Mexico -- -- -- 570 618 (2 )
Rest of the world 164 2,594 356 (306 ) (971 ) (16 )
------------------------------------ -------------------------------------
Regional net income (loss) 417 2,237 93 348 2,952 (331 )
Administrative and other (1,892 ) (3,091 ) (3,881 ) -- -- --
====================================== =====================================
Net income (loss) $ (1,475 ) $ (854 $ (3,788 $ 348 $ 2,952 $ (331 )
====================================== =====================================
PLM EQUIPMENT GROWTH FUND IV
(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):
Region Owned Equipment Investments in USPEs
---------------------------
--------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
--------------------------------- ---------------------------------
United States $ 6,550 $ 12,848 $ 12,168 $ -- $ -- $ --
Canada 5,728 6,580 8,145 -- 3,484 2,575
South Asia 4,519 2,989 7,273 -- -- --
South America 2,770 3,275 3,873 -- -- --
Mexico -- - -- 3,880 4,008 3,876
Rest of the world 4,037 5,613 7,523 1,859 2,264 3,165
--------------------------------- ---------------------------------
23,604 31,305 38,982 5,739 9,756 9,616
Equipment held for sale -- -- 5,524 -- -- --
--------------------------------- =================================
Net book value $ 23,604 $ 31,305 $ 44,506 $ 5,739 $ 9,756 $ 9,616
================================= =================================
7. Notes Payable
On July 1, 1990, the Partnership entered into an agreement to issue notes
totaling $33.0 million to two institutional investors. The notes accrue
interest at a rate equal to 9.75% per annum and mature July 1, 2000.
Interest on the notes is payable monthly. The outstanding principal balance
of $12.8 million as of December 31, 1998 is payable in an annual
installment of $8.3 million on July 1, 1999, with a final payment of $4.5
million on July 1, 2000.
The General Partner's estimates, based on recent transactions, that the
fair market value of the $12.8 million in notes payable outstanding as of
December 31, 1998 is $13.3 million.
The agreement requires the Partnership to maintain certain financial
covenants related to fixed-charge coverage and limits additional
borrowings. The loan agreements require the Partnership to maintain certain
minimum net worth ratios.
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 1997, however,
Noblesse Maritime Limited purchased a marine vessel from the Partnership
and the gain from the sale accounted for 10% of total consolidated revenues
from wholly and partially owned equipment, and Viking Supply Ships
purchased a mobile offshore drilling unit from the Partnership and the gain
from the sale accounted for 10% of total consolidated revenues from wholly
and partially owned equipment during 1996.
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.
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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 $26.1 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.
10. Contingencies
PLM International, (the Company) and various of its affiliates are named as
defendants in a lawsuit filed as a purported class action on January 22,
1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case No.
CV-97-251 (the Koch action). Plaintiffs, who filed the complaint on their
own and on behalf of all class members similarly situated, are six
individuals who invested in certain California limited partnerships (the
Partnerships) for which the Company's wholly-owned subsidiary, PLM
Financial Services, Inc. (FSI), acts as the general partner, including the
Partnership, PLM Equipment Growth Funds V, and VI, and PLM Equipment Growth
& Income Fund VII (the Growth Funds). The state court ex parte certified
the action as a class action (i.e., solely upon plaintiffs' request and
without the Company being given the opportunity to file an opposition). The
complaint asserts eight causes of action against all defendants, as
follows: fraud and deceit, suppression, negligent misrepresentation and
suppression, intentional breach of fiduciary duty, negligent breach of
fiduciary duty, unjust enrichment, conversion, and conspiracy.
Additionally, plaintiffs allege a cause of action against PLM Securities
Corp. for breach of third party beneficiary contracts in violation of the
National Association of Securities Dealers rules of fair practice.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, and
control persons. Based on these duties, plaintiffs assert liability against
defendants for improper sales and marketing practices, mismanagement of the
Growth Funds, and concealing such mismanagement from investors in the
Growth Funds. Plaintiffs seek unspecified compensatory and recissory
damages, as well as punitive damages, and have offered to tender their
units back to the defendants.
In March 1997, the defendants removed the Koch action from the state court
to the United States District Court for the Southern District of Alabama,
Southern Division (Civil Action No. 97-0177-BH-C) based on the district
court's diversity jurisdiction, following which plaintiffs filed a motion
to remand the action to the state court. Removal of the action to federal
court automatically nullified the state court's ex parte certification of
the class. In September 1997, the district court denied plaintiffs' motion
to remand the action to state court and dismissed without prejudice the
individual claims of the California plaintiff, reasoning that he had been
fraudulently joined as a plaintiff. In October 1997, defendants filed a
motion to compel arbitration of plaintiffs' claims, based on an agreement
to arbitrate contained in the limited partnership agreement of each Growth
Fund, and to stay further proceedings pending the outcome of such
arbitration. Notwithstanding plaintiffs' opposition, the district court
granted defendants' motion in December 1997.
Following various unsuccessful requests that the district court reverse, or
otherwise certify for appeal, its order denying plaintiffs' motion to
remand the case to state court and dismissing the California plaintiff's
claims, plaintiffs filed with the U.S. Court of Appeals for the Eleventh
Circuit a petition for a writ of mandamus seeking to reverse the district
court's order. The Eleventh Circuit denied plaintiffs' petition in November
of 1997, and further denied plaintiffs subsequent motion in the Eleventh
Circuit for a rehearing on this issue. Plaintiffs also appealed the
district court's order granting defendants'
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
10. Contingencies (continued)
motion to compel arbitration, but in June of 1998 voluntarily dismissed
their appeal pending settlement of the Koch action, as discussed below.
On June 5, 1997, the Company and the affiliates who are also defendants in
the Koch action were named as defendants in another purported class action
filed in the San Francisco Superior Court, San Francisco, California, Case
No. 987062 (the Romei action). The plaintiff is an investor in PLM
Equipment Growth Fund V, and filed the complaint on her own behalf and on
behalf of all class members similarly situated who invested in certain
California limited partnerships for which FSI acts as the general partner,
including the Growth Funds. The complaint alleges the same facts and the
same nine causes of action as in the Koch action, plus five additional
causes of action against all of the defendants, as follows: violations of
California Business and Professions Code Sections 17200, et seq. for
alleged unfair and deceptive practices, constructive fraud, unjust
enrichment, violations of California Corporations Code Section 1507, and a
claim for treble damages under California Civil Code Section 3345.
On July 31, 1997, defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition)
under the Federal Arbitration Act seeking to compel arbitration of
plaintiff's claims and for an order staying the state court proceedings
pending the outcome of the arbitration. In connection with this motion,
plaintiff agreed to a stay of the state court action pending the district
court's decision on the petition to compel arbitration. In October 1997,
the district court denied the Company's petition to compel arbitration, but
in November 1997, agreed to hear the Company's motion for reconsideration
of this order. The hearing on this motion has been taken off calendar and
the district court has dismissed the petition pending settlement of the
Romei action, as discussed below. The state court action continues to be
stayed pending such resolution. In connection with her opposition to the
petition to compel arbitration, plaintiff filed an amended complaint with
the state court in August 1997 alleging two new causes of action for
violations of the California Securities Law of 1968 (California
Corporations Code Sections 25400 and 25500) and for violation of California
Civil Code Sections 1709 and 1710. Plaintiff also served certain discovery
requests on defendants. Because of the stay, no response to the amended
complaint or to the discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a
memorandum of understanding (MOU) related to the settlement of those
actions (the Monetary Settlement). The Monetary Settlement contemplated by
the MOU provides for stipulating to a class for settlement purposes, and a
settlement and release of all claims against defendants and third party
brokers in exchange for payment for the benefit of the Class of up to $6.0
million. The final settlement amount will depend on the number of claims
filed by authorized claimants who are members of the Class, the amount of
the administrative costs incurred in connection with the settlement, and
the amount of attorneys' fees awarded by the Alabama district court. The
Company will pay up to $0.3 million of the Monetary Settlement, with the
remainder being funded by an insurance policy.
The parties to the Monetary Settlement have also agreed in principal to an
equitable settlement (the Equitable Settlement) which provides, among other
things, (a) for the extension of the operating lives of PLM Equipment
Growth Fund V, PLM Equipment Growth Fund VI, and PLM Equipment Growth &
Income Fund VII (the Funds) by judicial amendment to each of their
partnership agreements, such that FSI, the general partner of each such
Fund, will be permitted to reinvest cash flow, surplus partnership funds or
retained proceeds in additional equipment into the year 2004, and will
liquidate the partnerships' equipment in 2006; (b) that FSI be entitled to
earn front end fees (including acquisition and lease negotiation fees) in
excess of the compensatory limitations set forth in the NASAA Statement of
Policy by judicial amendment to the Partnership Agreements for each Fund;
(c) for a one time redemption of up to 10% of the outstanding units of each
Fund at 80% of such
PLM EQUIPMENT GROWTH FUND IV
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
10. Contingencies (continued)
partnership's net asset value; and (d) for the deferral of a portion of
FSI's management fees. The Equitable Settlement also provides for payment
of the Equitable Class attorneys' fees from Partnership funds in the event
that distributions paid to investors in the Funds during the extension
period reach a certain internal rate of return.
Defendants will continue to deny each of the claims and contentions and
admit no liability in connection with the proposed settlements. The
Monetary Settlement remains subject to numerous conditions, including but
not limited to: (a) agreement and execution by the parties of a settlement
agreement (the Settlement Agreement), (b) notice to and certification of
the Monetary Class for purposes of the Monetary Settlement, and (c)
preliminary and final approval of the Monetary Settlement by the Alabama
district court. The Equitable Settlement remains subject to numerous
conditions, including but not limited to: (a) agreement and execution by
the parties of the Settlement Agreement, (b) notice to the current
unitholders (the Equitable Class) in the Funds and certification of the
Equitable Class for purposes of the Equitable Settlement, (c) preparation,
review by the Securities and Exchange Commission (SEC), and dissemination
to the members of the Equitable Class of solicitation statements regarding
the proposed extensions, (d) disapproval by less than 50% of the limited
partners in each of the Funds of the proposed amendments to the limited
partnership agreements, (e) judicial approval of the proposed amendments to
the limited partnership agreements, and (f) preliminary and final approval
of the Equitable Settlement by the Alabama district court. The parties
submitted the Settlement Agreement to the Alabama district court on
February 12, 1999, and the preliminary class certification hearing is
scheduled for March 24, 1999. If the district court grants preliminary
approval, notices to the Monetary Class and Equitable Class will be sent
following review by the SEC of the solicitation statements to be prepared
in connection with the Equitable Settlement. The Monetary Settlement, if
approved, will go forward regardless of whether the Equitable Settlement is
approved or not. The Company continues to believe that the allegations of
the Koch and Romei actions are completely without merit and intends to
continue to defend this matter vigorously if the Monetary Settlement is not
consummated.
The Partnership, together with affiliates, has initiated litigation in
various official forums in India against each of two defaulting Indian
airline lessees 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 airlines, and the airlines have ceased
operations. In response to the Partnership's collection efforts, the two
airlines each filed counter-claims against the Partnership in excess of the
Partnership's claims against the airlines. The General Partner believes
that the airlines' counterclaims are completely without merit, and the
General Partner will vigorously defend against such counterclaims.
The Partnership is involved as plaintiff or defendant in various other
legal actions incident to its business. Management does not believe that
any of these actions will be material to the financial condition of the
Company.
(This space intentionally left blank)
PLM EQUIPMENT GROWTH FUND IV
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Registrant *
10.1 Management Agreement between Registrant and *
PLM Investment Management, Inc.
10.2 Note Agreement, dated as of July 1, 1990, regarding *
$33.0 million in 9.75% senior notes due July 1, 2000
24. Powers of Attorney 49 - 51
* Incorporated by reference. See page 24 of this report.