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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
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, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-26594
_______________________
PLM EQUIPMENT GROWTH & INCOME FUND VII
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3168838
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
235 3RD STREET SOUTH, SUITE 200
ST. PETERSBURG, FL 33701
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (727) 803-1800
_______________________
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 26.
Total number of pages in this report: 84
PART I
ITEM 1. BUSINESS
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(A) Background
In December 1992, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly owned subsidiary of PLM International, Inc. (PLM International or PLMI),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 7,500,000 limited partnership
units (the units) in PLM Equipment Growth & Income Fund VII, a California
limited partnership (the Partnership, the Registrant, or EGF VII). The
Partnership's offering became effective on May 25, 1993. FSI, as General
Partner, owns a 5% interest in the Partnership. The Partnership engages in the
business of investing in a diversified equipment portfolio consisting primarily
of used, long-lived, low-obsolescence capital equipment that is easily
transportable by and among prospective users.
The Partnership's primary objectives are:
(1) to invest in a diversified portfolio of low-obsolescence equipment
having long lives and high residual values, at prices that the General Partner
believes to be below inherent values, and to place the equipment on lease or
under other contractual arrangements with creditworthy lessees and operators of
equipment;
(2) to generate cash distributions, which may be substantially
tax-deferred (i.e., distributions that are not subject to current taxation)
during the early years of the Partnership;
(3) to create a significant degree of safety relative to other
equipment leasing investments through the purchase of a diversified equipment
portfolio. This diversification reduces the exposure to market fluctuations in
any one sector. The purchase of used, long-lived, low-obsolescence equipment,
typically at prices that are substantially below the cost of new equipment, also
reduces the impact of economic depreciation and can create the opportunity for
appreciation in certain market situations, where supply and demand return to
balance from oversupply conditions; and
(4) to increase the Partnership's revenue base by reinvesting a portion
of its operating cash flow in additional equipment during the investment phase
of the Partnership's operation in order to grow the size of its portfolio.
Since net income and distributions are affected by a variety of factors,
including purchase prices, lease rates, and costs and expenses, growth in the
size of the Partnership's portfolio does not necessarily mean that the
Partnership's aggregate net income and distributions will increase upon the
reinvestment of operating cash flow.
The offering of units of the Partnership closed on April 25, 1995. As of
December 31, 2002, there were 4,981,450 limited partnership units outstanding.
The General Partner contributed $100 for its 5% general partner interest in the
Partnership.
The Partnership is currently in its investment phase during which the
Partnership uses cash generated from operations and proceeds from asset
dispositions to purchase additional equipment. The General Partner believes
these acquisitions may cause the Partnership to generate additional earnings and
cash flow for the Partnership. The Partnership may reinvest its cash flow,
surplus cash and equipment disposition proceeds in additional equipment,
consistent with the objectives of the Partnership, until December 31, 2004. The
Partnership will terminate on December 31, 2011, unless terminated earlier upon
the sale of all of the equipment or by certain other events.
Table 1, below, lists the equipment and the original cost of equipment in the
Partnership's portfolio, and the Partnership's proportional share of equipment
owned by unconsolidated special-purpose entities as of December 31, 2002 (in
thousands of dollars):
TABLE 1
-------
Units Type Manufacturer Cost
- ----------------------------------------------------------------- -------
Owned equipment held for operating leases:
13,891 .. Marine containers Various $31,598
431. . . Refrigerated marine containers Various 7,213
2. . . . Dry-bulk marine vessels Ishikawa Jima 22,212
323. . . Pressurized tank railcars Various 8,587
67 . .. . Woodchip gondola railcars National Steel 1,028
1. . . . 737-200 Stage II commercial aircraft Boeing 5,483
243. . . Intermodal trailers Various 3,728
-------
Total owned equipment held for operating leases $79,849 1
=======
Equipment owned by unconsolidated special-purpose entities:
0.38 . . 737-300 Stage III commercial aircraft Boeing $ 9,095 2
0.50 . . MD-82 Stage III commercial aircraft McDonnell Douglas 8,125 2
0.50 . . MD-82 Stage III commercial aircraft McDonnell Douglas 7,132 2
-------
Total investments in unconsolidated special-purpose entities $24,352 1
=======
Equipment is generally leased under operating leases for a term of one to six
years. Some of the Partnership's marine containers are leased to operators of
utilization-type leasing pools, which include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. The remaining Partnership marine container leases are based on a
fixed rate. Lease revenues for intermodal trailers are based on a per-diem
lease in the free running interchange with the railroads. Rents for all other
equipment are based on fixed rates.
(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).
1 Includes equipment and investments purchased with the proceeds from capital
contributions, undistributed cash flow from operations, and Partnership
borrowings invested in equipment. Includes costs capitalized subsequent to the
date of purchase, and equipment acquisition fees paid to PLM Transportation
Equipment Corporation (TEC) or PLM Worldwide Management Services (WMS).
2 Jointly owned:EGF VII and an affiliated program.
(C) Competition
(1) Operating Leases versus Full Payout Leases
Generally, the equipment owned or invested in by the Partnership is leased out
on an operating lease basis wherein the rents received during the initial
noncancelable term of the lease are insufficient to recover the Partnership's
purchase price of the equipment. The short to mid-term nature of operating
leases generally commands a higher rental rate than longer-term full payout
leases and offers lessees relative flexibility in their equipment commitment.
In addition, the rental obligation under an operating lease need not be
capitalized on the lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize
full payout leases on new equipment, i.e., leases that have terms equal to the
expected economic life of the equipment. While some lessees prefer the
flexibility offered by a shorter-term operating lease, other lessees prefer the
rate advantages possible with a full payout lease. Competitors may write full
payout leases at considerably lower rates and for longer terms than the
Partnership offers, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers that offer operating
leases and full payout leases. Manufacturers may provide ancillary services
that the Partnership cannot offer, such as specialized maintenance services
(including possible substitution of equipment), training, warranty services, and
trade-in privileges.
The Partnership also competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), GATX Corp., General Electric
Railcar Services Corporation, General Electric Capital Aviation Services
Corporation, Xtra Corporation, and other investment programs that may lease the
same types of equipment.
(D) Demand
The Partnership currently operates in the following operating segments: marine
container leasing, marine vessel leasing, railcar leasing, commercial aircraft
leasing, and intermodal trailer leasing. Each equipment-leasing segment engages
in short-term to mid-term operating leases to a variety of customers. Except
for those aircraft leased to passenger air carriers, the Partnership's
transportation equipment is used to transport materials and commodities, rather
than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Marine Containers
Marine containers are used to transport a variety of types of cargo. They
typically travel on marine vessels but may also travel on railroads loaded on
certain types of railcars and highways loaded on a trailer.
The Partnership purchased new standard dry cargo containers from 1998 to 2000
that were placed on mid-term leases and into revenue-sharing agreements. The
marine containers that were placed into revenue-sharing agreements experienced a
decrease in lease rates of approximately 15% during 2002. The decrease in lease
rates on these marine containers was partially offset by an increase in
utilization. At the beginning of the year, utilization averaged approximately
70% but increased to 85% by year-end. Average lease rates and utilization in
2003 are expected to marginally improve compared to 2002.
The Partnership's marine containers that were originally placed on mid-term
leases from 1998-2000 will come off lease between 2003-2005 at which time they
will be placed into revenue-sharing agreements. As the market for marine
containers is considerably softer than the period during which they were placed
on mid-term leases, lease revenue on these containers is expected to decrease up
to 40% when the original mid-term leases expire.
(2) Marine Vessels
The Partnership's has two dry-bulk marine vessels that are on mid term fixed
rate charters carrying aluminum. One marine vessel's lease expired in 2002 and
the other expires in 2003, but both leases were renewed for a two-year period
with the existing lessee at current market rates (slightly below their previous
rates).
(3) Railcars
(a) Pressurized Tank Railcars
Pressurized tank railcars are used to transport liquefied petroleum gas (LPG)
and anhydrous ammonia (fertilizer). The North American markets for LPG include
industrial applications, residential use, electrical generation, commercial
applications, and transportation. LPG consumption is expected to grow over the
next few years as most new electricity generation capacity is expected to be gas
fired. Within any given year, consumption is particularly influenced by the
severity of winter temperatures.
Within the fertilizer industry, demand is a function of several factors,
including the level of grain prices, status of government farm subsidy programs,
amount of farming acreage and mix of crops planted, weather patterns, farming
practices, and the value of the United States (US) dollar. Population growth
and dietary trends also play an indirect role.
On an industry-wide basis, North American carloadings of the commodity group
that includes petroleum and chemicals decreased over 2% in 2002 after a 5%
decline in 2001. Even with this further decrease in industry-wide demand, the
utilization of pressurized tank railcars across the Partnership was in the 85%
range during the year. The desirability of the railcars in the Partnership is
affected by the advancing age of this fleet and related corrosion issues on foam
insulated cars.
(b) Woodchip Gondola Railcars
These railcars are used to transport woodchips from sawmills to pulp mills,
where the woodchips are converted into pulp. Thus, demand for woodchip railcars
is directly related to demand for paper, paper products, particleboard, and
plywood.
(4) Commercial Aircraft
The Partnership owns 100% of a Boeing 737-200 aircraft that is currently
off-lease. The market for Boeing 737-200 aircraft is very soft and the credit
quality of the airlines interested in this type of aircraft is, generally
speaking, poor. The Partnership also owns a 38% interest in a Boeing 737-300
aircraft which was placed on lease in late 2001 and 50% of two MD-82 aircraft,
which are on long-term lease to a major US carrier at above market rates.
Since the terrorist events of September 11, 2001, the commercial aviation
industry has experienced significant losses that escalated with a weakened
economy. This in turn has led to the bankruptcy filing of two of the largest
airlines in the United States, and to an excess supply of commercial aircraft.
The current state of the aircraft industry, with significant excess capacity for
both new and used aircraft continues to be extremely weak, and is expected by
the General Partner to remain weak. The Partnership's 737-200 does not meet
certain noise guidelines that would allow for it to fly in the US and other
countries.
The decrease in value of the Partnership's aircraft since September 11, 2001
will have a negative impact on the ability of the Partnership to achieve its
original objectives as lower values will also result in significantly lower
lease rates than the Partnership has been able to achieve for these assets in
the past.
(5) Intermodal Trailers
Intermodal trailers are used to transport a variety of dry goods by rail on
flatcars, usually for distances of over 400 miles. Over the past seven years,
intermodal trailers have continued to be rapidly displaced by domestic
containers as the preferred method of transport for such goods. This
displacement occurs because railroads offer approximately 20% lower wholesale
freight rates on domestic containers compared to intermodal trailers. During
2002, demand for intermodal trailers was much more depressed than historic
norms. Unusually low demand occurred over the first half of the year due to a
rapidly slowing economy and low rail freight rates for 53-foot domestic
containers. Due to the decline in demand, shipments for the year within the
intermodal pool trailer market declined approximately 10% compared to the prior
year. Average utilization of the entire US intermodal trailer pool fleet
declined from 77% in 1999 to 75% in 2000 to 63% in 2001 and further declined to
a record low of 50% in 2002.
The General Partner continued its aggressive marketing program in a bid to
attract new customers for the Partnership's intermodal trailers during 2002. The
largest Fund trailer customer, Consolidated Freightways, abruptly shut down
their operations and declared bankruptcy during 2002. This situation was largely
offset by extensive efforts with other carriers to increase market share. Even
with these efforts, average utilization of the Partnership's intermodal trailers
for the year 2002 dropped 12% from 2001 to approximately 61%, still 11% above
the national average.
The trend towards using domestic containers instead of intermodal trailers is
expected to accelerate in the future. Due to the anticipated continued weakness
of the overall economy, intermodal trailer shipments are forecast to decline by
10% to 15% in 2003, compared to 2002. As such, the nationwide supply of
intermodal trailers is expected to have approximately 27,000 units in surplus
for 2003. The maintenance costs have increased approximately 12% from 2001 due
to improper repair methods performed by the railroads' vendors and billed to
owners.
The General Partner will continue to seek to expand its customer base and
undertake significant efforts to reduce cartage and maintenance costs, such as
minimizing trailer downtime at repair shops and terminals.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in governmental regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require its removal from service or extensive modification of such equipment to
meet these regulations, at considerable cost to the Partnership. Such
regulations include:
(1) in 2004, new maritime and port security laws that have already been
passed by US Congress and International Maritime Organizations are scheduled to
be implemented. The United States Coast Guard is currently holding hearings
with international shipping industry representatives to discuss the
implementation of the new code and regulations, which are to apply to all
shipping, ports and terminals both in the US and abroad. The new regulations are
aimed at improving security aboard marine vessels. These regulations may
require additional security equipment being added to marine vessels as well as
additional training being provided to the crew. The final code, which is
expected to have a significant impact on the industry, will apply to all ships
over 500 dead weight tons that include those owned by the Partnership. The
requirements of these new regulations have to be met by July 2004. The deadline
for compliance by ports is planned to be 2005. As the methodology of how these
regulations will be applied is still being determined, the General Partner is
unable to determine the impact on the Partnership at this time.
(2) the US Department of Transportation's Aircraft Capacity Act of
1990, which limits or eliminates the operation of commercial aircraft in the
United States that does not meet certain noise, aging, and corrosion criteria.
In addition, under US Federal Aviation Regulations, after December 31, 1999, no
person shall operate an aircraft to or from any airport in the contiguous United
States unless that airplane has been shown to comply with Stage III noise
levels. The Partnership has one Stage II aircraft that does not meet Stage III
requirements. The cost to install a hushkit to meet quieter Stage III
requirements is approximately $1.5 million, depending on the type of aircraft.
Currently, the Partnership's Stage II aircraft is off-lease and being stored in
a country that does have these regulations. This aircraft will either be leased
in a country that does not have these regulations or sold;
(3) the Montreal Protocol on Substances that Deplete the Ozone Layer and the
US Clean Air Act Amendments of 1990, which call for the control and eventual
replacement of substances that have been found to cause or contribute
significantly to harmful effects to the stratospheric ozone layer and that are
used extensively as refrigerants in refrigerated marine cargo containers; and
(4) the US Department of Transportation's Hazardous Materials Regulations
regulates the classification and packaging requirements of hazardous materials
that apply particularly to Partnership's tank railcars. The Federal Railroad
Administration has mandated that effective July 1, 2000 all tank railcars must
be re-qualified every ten years from the last test date stenciled on each
railcar to insure tank shell integrity. Tank shell thickness, weld seams, and
weld attachments must be inspected and repaired if necessary to re-qualify the
tank railcar for service. The average cost of this inspection is $3,600 for
jacketed tank railcars, not including any necessary repairs. This inspection is
to be performed at the next scheduled tank test and every ten years thereafter.
The Partnership currently owns 252 jacketed tank railcars. As of December 31,
2002, 32 jacketed tank railcars will need to be re-qualified during 2003 or
2004.
During the fourth quarter of 2002, the Partnership reduced the net book value of
71 owned tank railcars in its railcar fleet to their fair value of $2,000 per
railcar, and recorded a $0.6 million impairment loss. The impairment was caused
by a general recall due to a manufacturing defect allowing extensive corrosion
of the railcars' internal lining. Repair of the railcars were determined to be
cost prohibitive. The fair value of railcars with this defect was determined by
using industry expertise. These railcars were off lease.
As of December 31, 2002, the Partnership was in compliance with the above
governmental regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
----------
The Partnership neither owns nor leases any properties other than the equipment
it has purchased and its interest in entities that own equipment for leasing
purposes. As of December 31, 2001, the Partnership owned a portfolio of
transportation and related equipment and investments in equipment owned by
unconsolidated special-purpose entities (USPEs), as described in Item 1, Table
1. The Partnership acquired equipment with the proceeds of the Partnership
offering of $107.4 million through the third quarter of 1995, proceeds from the
debt financing of $23.0 million, and by reinvesting a portion of its operating
cash flow in additional equipment.
The Partnership maintains its principal office at 235 3rd Street South, Suite
200, St. Petersburg, FL 33701.
ITEM 3. LEGAL PROCEEDINGS
------------------
The Partnership is involved as plaintiff or defendant in various legal actions
incidental to its business. Management does not believe that any of these
actions will be material to the financial condition or results of operations of
the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS
-------------------------------------------------------------------
Pursuant to the terms of the partnership agreement, the General Partner is
entitled to 5% of the cash distributions of the Partnership. The General
Partner is the sole holder of such interests. Net income is allocated to the
General Partner to the extent necessary to cause the General Partner's capital
account to equal zero. The remaining interests in the profits, losses, and cash
distributions of the Partnership are allocated to the limited partners. As of
December 31, 2002, there were 5,412 limited partners holding units in the
Partnership.
There are several secondary markets in which limited partnership units trade.
Secondary markets are characterized as having few buyers for limited partnership
interests and, therefore, are generally viewed as inefficient vehicles for the
sale of limited partnership units. Presently, there is no public market for the
limited partnership units and none is likely to develop.
To prevent the limited partnership units from being considered publicly traded
and thereby to avoid taxation of the Partnership as an association treated as a
corporation under the Internal Revenue Code, the limited partnership units will
not be transferable without the consent of the General Partner, which may be
withheld in its absolute discretion. The General Partner intends to monitor
transfers of limited partnership units in an effort to ensure that they do not
exceed the percentage or number permitted by certain safe harbors promulgated by
the Internal Revenue Service. A transfer may be prohibited if the intended
transferee is not a US citizen or if the transfer would cause any portion of the
units of a "Qualified Plan" as defined by the Employee Retirement Income
Security Act of 1974 and Individual Retirement Accounts to exceed the allowable
limit.
ITEM 6. SELECTED FINANCIAL DATA
-------------------------
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
-------
For the Year Ended December 31,
(In thousands of dollars, except weighted-average unit amounts)
2002 2001 2000 1999 1998
--------------------------------------------
Operating results:
Total revenues . . . . . . . . . . . . $15,357 $16,120 $19,801 $20,849 $18,200
Gain on disposition of equipment . . . 42 41 3,614 1,171 9
Loss on disposition of equipment . . . -- -- -- 31 40
Impairment loss on equipment . . . . . 616 -- -- -- --
Equity in net income (loss) of uncon-
solidated special-purpose entities 154 1,255 (621) 6,067 6,493
Net income . . . . . . . . . . . . . . 694 2,147 4,059 6,708 5,824
At year-end:
Total assets . . . . . . . . . . . . . $48,324 $50,742 $56,208 $65,966 $76,537
Notes payable. . . . . . . . . . . . . 11,000 14,000 17,000 20,000 23,000
Total liabilities. . . . . . . . . . . 13,317 16,513 19,493 23,219 26,505
Cash distribution. . . . . . . . . . . . $ -- $ 1,422 $10,088 $10,083 $10,127
Cash distribution representing
a return of capital to the limited
partners . . . . . . . . . . . . . . $ -- $ -- $ 6,029 $ 3,375 $ 4,303
Per weighted-average limited
partnership unit:
Net income . . . . . . . . . . . . . . . $ 0.14 1 $ 0.38 1 $ 0.67 1 $1.16 1 $0.99 1
Cash distribution. . . . . . . . . . . . $ -- $ 0.24 $ 1.80 $ 1.80 $ 1.80
Cash distribution representing
a return of capital. . . . . . . . . $ -- $ -- $ 1.13 $ 0.64 $ 0.81
1. After an increase in income of $35,000 necessary to cause the General
Partner's capital account to equal zero ($0.01 per weighted-average limited
partnership unit) in 2002, after reduction of income necessary to cause the
General Partner's capital account to equal zero of $19,000 ($0.00 per
weighted-average limited partnership unit) in 2001, $0.3 million ($0.06 per
weighted-average limited partnership unit) in 2000, $0.2 million ($0.03 per
weighted-average limited partnership unit) in 1999, and $0.2 million ($0.04 per
weighted-average limited partnership unit) in 1998 (see Note 1 to the financial
statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------
RESULTS OF OPERATIONS
-------------------
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth & Income
Fund VII (the Partnership). The following discussion and analysis of operations
focuses on the performance of the Partnership's equipment in various segments in
which it operates and its effect on the Partnership's overall financial
condition.
(B) Results of Operations - Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic
Conditions
The exposure of the Partnership's equipment portfolio to repricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and the
equipment must be remarketed. Major factors influencing the current market rate
for Partnership equipment include supply and demand for similar or comparable
types of transport capacity, desirability of the equipment in the leasing
market, market conditions for the particular industry segment in which the
equipment is to be leased, overall economic conditions, and various regulations
concerning the use of the equipment. Equipment that is idle or out of service
between the expiration of one lease and the assumption of a subsequent lease can
result in a reduction of contribution to the Partnership. The Partnership
experienced re-leasing or repricing activity in 2002 for its railcar, marine
container, marine vessel, aircraft and trailer portfolios.
(a) Railcars: This equipment experienced significant re-leasing activity.
Lease rates in this market are showing signs of weakness and this has led to
lower utilization and lower contribution to the Partnership as existing leases
expire and renewal leases are negotiated.
(b) Marine containers: Some of the Partnership's marine containers are
leased to operators of utilization-type leasing pools and, as such, are highly
exposed to re-leasing and repricing activity. Starting in 2003 and continuing
through 2006, a significant number of the Partnership's marine containers
currently on a fixed rate lease will be switching to a lease based on
utilization. The General Partner anticipates that this will result in a
significant decrease in lease revenue.
(c) Marine vessel: One of the Partnership's owned marine vessels was
re-leased at a lower rate during 2002. The remaining marine vessel's lease
expires in 2003 exposing it to re-leasing and repricing risk.
(d) Aircraft: The Partnership's owned aircraft lease expired during 2002
exposing it to re-leasing and repricing activity. At December 31, 2002, this
aircraft is off-lease. There continues to be an excess supply of commercial
aircraft in the United States and re-leasing of these assets is expected to be
difficult and at severely lower lease rates than the Partnership has been able
to earn in the past.
(e) Trailers: The Partnership's trailer portfolio operates within short-line
railroad systems. The relatively short duration of most leases in these
operations exposes the trailers to considerable re-leasing and repricing
activity.
(2) Equipment Liquidations
Liquidation of Partnership owned equipment and of investments in unconsolidated
special-purpose entities (USPEs), unless accompanied by an immediate replacement
of additional equipment earning similar rates (see Reinvestment Risk, below),
represents a reduction in the size of the equipment portfolio and may result in
a reduction of contribution to the Partnership.
During 2002, the Partnership disposed of owned equipment that included marine
containers and a trailer for total proceeds of $0.1 million.
(3) Nonperforming Lessees
Lessees not performing under the terms of their leases, either by not paying
rent, not maintaining or operating the equipment in accordance with the
conditions of the leases, or other possible departures from the lease terms, can
result not only in reductions in contribution, but also may require the
Partnership to assume additional costs to protect its interests under the
leases, such as repossession or legal fees.
During 2001, the lessee of a Stage II Boeing 737-200 commercial aircraft
notified the General Partner of its intention to return this aircraft. The
lessee is located in Brazil, a country experiencing severe economic difficultly.
The Partnership has a security deposit from this lessee that could be used to
pay a portion of the amount due. During October 2001, the General Partner sent
a notification of default to the lessee. The lease, which expired in October
2002, had certain return condition requirements for the aircraft. The General
Partner recorded an allowance for bad debts for the amount due less the security
deposit. During October 2002, the General Partner reached an agreement with the
lessee of this aircraft for the past due lease payments. In order to give the
lessee an incentive to make timely payments in accordance with the agreement,
the General Partner gave the lessee a discount on the total amount due. If the
lessee fails to comply with the payment schedule in the agreement, the discount
provision will be waived and the full amount again becomes payable. The lessee
made an initial payment during October 2002, to be followed by 23 equal monthly
installments beginning in November 2002. Unpaid outstanding amounts will accrue
interest at a rate of 5%. The balance outstanding at December 31, 2002 was $1.2
million. Due to the uncertainty of ultimate collection, the General Partner
will continue to fully reserve the unpaid outstanding balance less the security
deposit from this lessee. As of December 31, 2002, the former lessee was
current with all payments due under the agreement.
As of March 25, 2003, the installment payment due from the lessee to the
Partnership during March was not received. The General Partner has not yet
placed the lessee into default, however, is currently reviewing the options
available under the agreement.
(4) Reinvestment Risk
Reinvestment risk occurs when the Partnership cannot generate sufficient surplus
cash after fulfillment of operating obligations to reinvest in additional
equipment during the reinvestment phase of the Partnership, equipment is
disposed of for less than threshold amounts, proceeds from the dispositions, or
surplus cash available for reinvestment cannot be reinvested at the threshold
lease rates, or proceeds from sales or surplus cash available for reinvestment
cannot be deployed in a timely manner.
The Partnership intends to increase its equipment portfolio by investing surplus
cash in additional equipment, after fulfilling operating requirements, until
December 31, 2004.
Other nonoperating funds for reinvestment are generated from the sale of
equipment prior to the Partnership's planned liquidation phase, the receipt of
funds realized from the payment of stipulated loss values on equipment lost or
disposed of while it was subject to lease agreements, or from the exercise of
purchase options in certain lease agreements. Equipment sales generally result
from evaluations by the General Partner that continued ownership of certain
equipment is either inadequate to meet Partnership performance goals, or that
market conditions, market values, and other considerations indicate it is the
appropriate time to sell certain equipment.
(5) Equipment Valuation
In accordance with the Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121),
the General Partner reviewed the carrying values of the Partnership's equipment
portfolio at least quarterly and whenever circumstances indicated that the
carrying value of an asset may not be recoverable due to expected future market
conditions. If the projected undiscounted cash flows and the fair value of the
equipment was less than the carrying value of the equipment, an impairment loss
was recorded.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144), which replaces SFAS No. 121. In
accordance with SFAS No. 144, the Partnership evaluates long-lived assets for
impairment whenever events or circumstances indicate that the carrying values of
such assets may not be recoverable. Losses for impairment are recognized when
the undiscounted cash flows estimated to be realized from a long-lived asset are
determined to be less than the carrying value of the asset and the carrying
amount of long-lived assets exceed its fair value. The determination of fair
value for a given investment requires several considerations, including but not
limited to, income expected to be earned from the asset, estimated sales
proceeds, and holding costs excluding interest. The Partnership applied the new
rules on accounting for the impairment or disposal of long-lived assets
beginning January 1, 2002.
The estimate of the fair value for the Partnership's owned and partially owned
equipment is based on the opinion of Partnership's equipment managers using
data, reasoning, and analysis of prevailing market conditions of similar
equipment, data from recent purchases, independent third party valuations and
discounted cash flows. The events of September 11, 2001, along with the change
in general economic conditions in the United States, have continued to adversely
affect the market demand for both new and used commercial aircraft and weakened
the financial position of several airlines.
During the fourth quarter of 2002, the Partnership reduced the net book value of
71 owned tank railcars in its railcar fleet to their fair value of $2,000 per
railcar, and recorded a $0.6 million impairment loss. The impairment was caused
by a general recall due to a manufacturing defect allowing extensive corrosion
of the railcars' internal lining. Repair of the railcars were determined to be
cost prohibitive. The fair value of railcars with this defect was determined by
using industry expertise. These railcars were off lease. There were no
reductions to the carrying values of owned equipment in 2001 or 2000 nor
partially-owned equipment during 2002, 2001, or 2000.
(C) Financial Condition - Capital Resources and Liquidity
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering of $107.4 million and permanent
debt financing of $23.0 million. No further capital contributions from the
limited partners are permitted under the terms of the Partnership's limited
partnership agreement. The debt agreement with the five institutional investors
of the senior notes requires the Partnership to maintain certain financial
covenants related to fixed-charge coverage and maximum debt.
The Partnership relies on operating cash flow to meet its operating obligations,
make cash distributions, and increase the Partnership's equipment portfolio with
any remaining available surplus cash.
For the year ended December 31, 2002, the Partnership generated operating cash
of $8.0 million to meet its operating obligations, pay debt and interest
payments and maintain working capital reserves.
During the year ended December 31, 2002, the Partnership disposed of owned
equipment for aggregate proceeds of $0.1 million.
Accounts receivable increased $5,000 in the year ended December 31, 2002. An
increase of $0.8 million during the year ended December 31, 2002 was due to the
timing of cash receipts. This increase was offset by an increase in the
allowance for bad debts of $0.8 million due to the General Partner's evaluation
of the collectibility of accounts receivable.
Investments in USPEs decreased $1.7 million during 2002 due to cash
distributions of $1.8 million from the USPEs to the Partnership offset, in part,
by $0.2 million in income that was recorded by the Partnership for its equity
interests in the USPEs.
Prepaid expenses increased $0.3 million during 2002 due to the payment of
insurance and certain administrative expenses during 2002 that relate to 2003.
Accounts payable decreased $0.7 million during 2002. The decrease was due to
the payment of $0.8 million due to the purchasing agent that was accrued at
December 31, 2001 resulting from the purchase of Partnership units offset, in
part, by an increase of $40,000 due to the timing of cash payments.
During 2002, due to affiliates increased $0.2 million primarily due to
additional engine reserves due to a USPE.
During 2002, lessee deposits and reserve for repairs increased $0.3 million due
to an increase in the reserve for marine vessel dry docking
The Partnership made the annual debt payment of $3.0 million to the lenders of
the notes payable during 2002.
The Partnership has a remaining outstanding balance of $11.0 million on the
notes payable. The remaining balance of the notes will be repaid in one
principal payment of $3.0 million on December 31, 2003, and in two principal
payments of $4.0 million on December 31, 2004 and 2005. The agreement requires
the Partnership to maintain certain financial covenants related to fixed-charge
coverage and maximum debt.
The Partnership is a participant in a $10.0 million warehouse facility. The
warehouse facility is shared by the Partnership, PLM Equipment Growth Fund V,
PLM Equipment Growth Fund VI, Professional Lease Management Income Fund I, LLC
and Acquisub LLC, a wholly owned subsidiary of PLM International Inc. (PLMI).
In July 2002, PLMI reached an agreement with the lenders of the $10.0 million
warehouse facility to extend the expiration date of the facility to June 30,
2003. The facility provides for financing up to 100% of the cost of the
equipment. Any borrowings by the Partnership are collateralized by equipment
purchased with the proceeds of the loan. Outstanding borrowings by one borrower
reduce the amount available to each of the other borrowers under the facility.
Individual borrowings may be outstanding for no more than 270 days, with all
advances due no later than June 30, 2003. Interest accrues either at the prime
rate or LIBOR plus 2.0% at the borrower's option and is set at the time of an
advance of funds. Borrowings by the Partnership are guaranteed by PLMI. The
Partnership is not liable for the advances made to the other borrowers.
As of March 26, 2003, the Partnership had no borrowings outstanding under this
facility and there were no other borrowings outstanding under this facility by
any other eligible borrower.
In October 2002, PLM Transportation Equipment Corp. Inc. (TEC), a wholly owned
subsidiary of FSI, arranged for the lease or purchase of a total of 1,050
pressurized tank railcars by (i) partnerships and managed programs in which FSI
serves as the general partner or manager and holds an ownership interest
(Program Affiliates) or (ii) partnerships or managed programs in which FSI
provides management services but does not hold an ownership interest
(Non-Program Affiliates). These railcars will be delivered over the next three
years. A leasing company affiliated with the manufacturer will acquire
approximately 70% of the railcars and lease them to a Non-Program Affiliate.
The remaining approximately 30% will either be purchased by other third parties
to be managed by PLMI or by the Program Affiliates. Neither TEC nor its
affiliate will be liable for these railcars. TEC estimates that the total value
of purchased railcars will not exceed $26.0 million with one third of the
railcars being purchased in each of 2002, 2003, and 2004. As of December 31,
2002, FSI committed one Program Affiliate, other than the Partnership, to
purchase $11.3 million in railcars that were purchased by TEC in 2002 or will be
purchased in 2003. Although FSI has neither determined which Program Affiliates
will purchase the remaining railcars nor the timing of any purchases, it is
possible the Partnership may purchase some of the railcars.
Commitment and contingencies as of December 31, 2002 are as follows (in
thousands of dollars):
Less than 1-3 4-5 After 5
Current Obligations Total 1 Year Years Years Years
- ---------------------------------------------------------------------------
Commitment to purchase railcars $14,699 $ 6,257 $ 8,442 $ -- $ --
Notes payable 11,000 3,000 8,000 -- --
Line of credit -- -- -- -- --
------- ------- -------- ------- ------
$25,699 $ 9,257 $ 16,442 $ -- $ --
======= ======= ======== ======= ======
The General Partner has not planned any expenditures, nor is it aware of any
contingencies that would cause it to require any additional capital to that
mentioned above.
(D) Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the General Partner
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On a regular basis, the General Partner reviews
these estimates including those related to asset lives and depreciation methods,
impairment of long-lived assets, allowance for doubtful accounts, reserves
related to legally mandated equipment repairs and contingencies and litigation.
These estimates are based on the General Partner's historical experience and on
various other assumptions believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. The General Partner believes, however, that the estimates,
including those for the above-listed items, are reasonable and that actual
results will not vary significantly from the estimated amounts.
The General Partner believes the following critical accounting policies affect
the more significant judgments and estimates used in the preparation of the
Partnership's financial statements:
Asset lives and depreciation methods: The Partnership's primary business
involves the purchase and subsequent lease of long-lived transportation and
related equipment. The General Partner has chosen asset lives that it believes
correspond to the economic life of the related asset. The General Partner has
chosen a deprecation method that it believes matches the benefit to the
Partnership from the asset with the associated costs. These judgments have been
made based on the General Partner's expertise in each equipment segment that the
Partnership operates. If the asset life and depreciation method chosen does not
reduce the book value of the asset to at least the potential future cash flows
from the asset to the Partnership, the Partnership would be required to record
an impairment loss. Likewise, if the net book value of the asset was reduced by
an amount greater than the economic value has deteriorated, the Partnership may
record a gain on sale upon final disposition of the asset.
Impairment of long-lived assets: Whenever circumstances indicate that an
impairment may exist, the General Partner reviews the carrying value of its
equipment and investments in USPEs to determine if the carrying value of the
assets may not be recoverable due to current economic conditions. This requires
the General Partner to make estimates related to future cash flows from each
asset as well as the determination if the deterioration is temporary or
permanent. If these estimates or the related assumptions change in the future,
the Partnership may be required to record additional impairment charges.
Allowance for doubtful accounts: The Partnership maintains allowances for
doubtful accounts for estimated losses resulting from the inability of the
lessees to make the lease payments. These estimates are primarily based on the
amount of time that has lapsed since the related payments were due as well as
specific knowledge related to the ability of the lessees to make the required
payments. If the financial condition of the Partnership's lessees were to
deteriorate, additional allowances could be required that would reduce income.
Conversely, if the financial condition of the lessees were to improve or if
legal remedies to collect past due amounts were successful, the allowance for
doubtful accounts may need to be reduced and income would be increased.
Reserves for repairs: The Partnership accrues for legally required repairs to
equipment such as dry docking for marine vessels and engine overhauls to
aircraft engines over the period prior to the required repairs. The amount that
is reserved is based on the General Partner's expertise in each equipment
segment, the past history of such costs for that specific piece of equipment and
discussions with independent, third party equipment brokers. If the amount
reserved for is not adequate to cover the cost of such repairs or if the repairs
must be performed earlier than the General Partner estimated, the Partnership
would incur additional repair and maintenance or equipment operating expenses.
Contingencies and litigation: The Partnership is subject to legal proceedings
involving ordinary and routine claims related to its business. The ultimate
legal and financial liability with respect to such matters cannot be estimated
with certainty and requires the use of estimates in recording liabilities for
potential litigation settlements. Estimates for losses from litigation are
disclosed if considered possible and accrued if considered probable after
consultation with outside counsel. If estimates of potential losses increase or
the related facts and circumstances change in the future, the Partnership may be
required to record additional litigation expense.
(E) Recent Accounting Pronouncements
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142), was approved by the FASB. SFAS No. 142 changes the accounting for
goodwill and other intangible assets determined to have an indefinite useful
life from an amortization method to an impairment-only approach. Amortization
of applicable intangible assets will cease upon adoption of this statement. The
Partnership implemented SFAS No. 142 on January 1, 2002. SFAS No. 142 had no
impact on the Partnership's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections" (SFAS No.
145). The provisions of SFAS No. 145 are effective for fiscal years beginning
after May 15, 2002. As permitted by the pronouncement, the Partnership has
elected early adoption of SFAS No. 145 as of January 1, 2002. SFAS No. 145 had
no impact on the Partnership's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146), which is based on the general
principle that a liability for a cost associated with an exit or disposal
activity should be recorded when it is incurred and initially measured at fair
value. SFAS No. 146 applies to costs associated with (1) an exit activity that
does not involve an entity newly acquired in a business combination, or (2) a
disposal activity within the scope of SFAS No. 146. These costs include certain
termination benefits, costs to terminate a contract that is not a capital lease,
and other associated costs to consolidate facilities or relocate employees.
Because the provisions of this statement are to be applied prospectively to exit
or disposal activities initiated after December 31, 2002, the effect of adopting
this statement cannot be determined.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). This interpretation requires the guarantor to
recognize a liability for the fair value of the obligation at the inception of
the guarantee. The provisions of FIN 45 will be applied on a prospective basis
to guarantees issued after December 31, 2002.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46). This interpretation clarifies existing accounting
principles related to the preparation of consolidated financial statements when
the owners of an USPE do not have the characteristics of a controlling financial
interest or when the equity at risk is not sufficient for the entity to finance
its activities without additional subordinated financial support from others.
FIN 46 requires the Partnership to evaluate all existing arrangements to
identify situations where the Partnership has a "variable interest," commonly
evidenced by a guarantee arrangement or other commitment to provide financial
support, in a "variable interest entity," commonly a thinly capitalized entity,
and further determine when such variable interest requires the Partnership to
consolidate the variable interest entities' financial statements with its own.
The Partnership is required to perform this assessment by September 30, 2003 and
consolidate any variable interest entities for which the Partnership will absorb
a majority of the entities' expected losses or receive a majority of the
expected residual gains. The Partnership has determined that it is not
reasonably possible that it will be required to consolidate or disclose
information about a variable interest entity upon the effective date of FIN 46.
(F) Results of Operations - Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 2002 and 2001
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
decreased during the year ended December 31, 2002, compared to 2001. Gains or
losses from the sale of equipment, interest and other income, and certain
expenses such as depreciation and amortization and general and administrative
expenses relating to the operating segments (see Note 5 to the financial
statements), are not included in the owned equipment operation discussion
because they are indirect in nature and not a result of operations, but the
result of owning a portfolio of equipment. The following table presents lease
revenues less direct expenses by segment (in thousands of dollars):
For the Years
Ended December 31,
2002 2001
---------------------
Marine containers $ 6,225 $ 6,185
Marine vessels. . 2,425 2,903
Railcars. . . . . 1,411 1,798
Aircraft. . . . . 894 1,079
Trailers. . . . . 238 318
Marine containers: Lease revenues and direct expenses for marine containers
were $6.3 million and $0.1 million, respectively, for the year ended December
31, 2002 and 2001. As a signigant number of the Partnership's marine containers
are coming off a fixed term lease and converting to utilization, marine
container lease revenues is expected to decline in 2003.
Marine vessels: Marine vessel lease revenues and direct expenses were $5.3
million and $2.9 million, respectively, for the year ended December 31, 2002,
compared to $5.5 million and $2.6 million, respectively, during the same period
of 2001. The decrease in lease revenues of $0.2 million during the year ended
December 31, 2002 compared to 2001 was due to lower lease rates earned on the
Partnership's marine vessels. The increase in direct expenses of $0.3 million
was caused by higher repair and operating costs to one of the owned marine
vessels during 2002 compared to 2001.
Railcars: Railcar lease revenues and direct expenses were $2.1 million and
$0.6 million, respectively, for the year ended December 31, 2002, compared to
$2.4 million and $0.6 million, respectively, during the same period of 2001.
The decrease in lease revenues of $0.3 million during the year ended December
31, 2002 compared to 2001 was due to an increase in the number of off-lease
railcars.
Aircraft: Aircraft lease revenues and direct expenses were $0.9 million and
$10,000, respectively, for the year ended December 31, 2002, compared to $1.1
million and $6,000, respectively, during the same period of 2001. The decrease
in lease revenues of $0.2 million was due to the Partnership's owned aircraft
being off-lease for two months during 2002.
Trailers: Trailer lease revenues and direct expenses were $0.6 million and
$0.4 million, respectively, for the year ended December 31, 2002, compared to
$0.6 million and $0.3 million, respectively, during the same period of 2001.
The decrease in the contribution from trailers of $0.1 million was the result of
an increase of $0.1 million in repairs and maintenance.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $10.9 million for the year ended December 31, 2002
decreased from $11.6 million for the same period in 2001. Significant variances
are explained as follows:
(i) A $1.4 million decrease in depreciation and amortization expenses
from 2001 levels reflects the decrease of approximately $1.0 million caused by
the double-declining balance method of depreciation which results in greater
depreciation in the first years an asset is owned and a decrease of $0.4 million
resulting from certain assets being fully depreciated during 2001;
(ii) A $0.3 million decrease in interest expense was due to a lower
average outstanding debt balance in the year ended December 31, 2002 compared to
2001;
(iii) A $0.1 million decrease in management fees was due to lower lease
revenues earned by the Partnership during the year ended December 31, 2002
compared to the same period of 2001;
(iv) A $0.1 million decrease in general and administrative expenses due
to a decease in administrative services costs during 2002;
(v) A $0.5 million increase in the provision for bad debts was based on the
General Partner's evaluation of the collectability of receivables compared to
2001. The provision for bad debt recorded in the year ended December 31, 2002
was primarily related to one aircraft lessee; and
(vi) Impairment loss increased $0.6 million during 2002 and resulted
from the Partnership reducing the carrying value of 71 tank railcars to their
estimated fair value. No impairment of equipment was required during 2001.
(c) Interest and Other Income
Interest and other income decreased $0.1 million due to a one time insurance
settlement of $36,000 and a one-time dividend of $33,000 that was earned during
the year ended December 31, 2001. Similar revenues were not earned during 2002.
(d) Gain on Disposition of Owned Equipment
The gain on disposition of owned equipment for the year ended December 31, 2002
totaled $42,000 and resulted from the sale of marine containers and a trailer
with a net book value of $0.1 million for $0.1 million. The gain on disposition
of equipment for the year ended December 31, 2001 totaled $41,000, and resulted
from the sale of marine containers and a trailer with an aggregate net book
value of $34,000 for proceeds of $0.1 million.
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Equity in net income (loss) of USPEs represents the Partnership's share of net
income or loss generated from the operation of jointly owned assets accounted
for under the equity method of accounting. These entities are single purpose
and have no debt or other financial encumbrances. The following table presents
equity in net income by equipment type (in thousands of dollars):
For the Years
Ended December 31,
2002 2001
--------------------
Aircraft. . . . . . . . . . . . $ 110 $ (747)
Marine vessel . . . . . . . . . 44 2,002
-------- ---------
Equity in net income of USPEs $ 154 $ 1,255
======== =========
The following USPE discussion by equipment type is based on the Partnership's
proportional share of revenues, gain on equipment dispositions, depreciation
expense, direct expenses, and administrative expenses in the USPEs:
Aircraft: As of December 31, 2002 and 2001, the Partnership owned an interest
in trusts that owned a total of three commercial aircraft. During the year
ended December 31, 2002, lease revenues of $2.0 million were offset by
depreciation expense, direct expenses, and administrative expenses of $1.9
million. During the same period of 2001, lease revenues of $2.2 million and
other income of $0.8 million were offset by depreciation expense, direct
expenses, and administrative expenses of $3.7 million.
Lease revenues decreased $0.2 million due to the leases for two commercial
aircraft in the trusts being renegotiated at a lower rate. Other income
decreased $0.8 million during the year ended December 31, 2002 due to the
recognition of an engine reserve liability as income upon termination of the
previous lease agreement during 2001. A similar event did not occur during the
same period of 2002.
The decrease in expenses of $1.9 million was due to required repairs and
maintenance of $0.3 million to the Boeing 737-300 that were not required during
2002, $0.9 million in lower depreciation expense resulting from one aircraft
being fully depreciated during 2001, and $0.5 million in lower depreciation
expense as the result of the double declining-balance method of depreciation
which results in greater depreciation in the first years an asset is owned.
Marine vessel: As of December 31, 2002 and 2001, the Partnership had sold its
interest in an entity that owned a marine vessel. During the year ended
December 31, 2002, income of $45,000 was the result of an insurance settlement
of $32,000 and actual administrative expenses in a previous year being lower by
$13,000 than had been estimated. During the same period of 2001, lease revenues
of $0.7 million and the gain of $2.1 million from the sale of the Partnership's
interest in an entity that owned a marine vessel were offset by depreciation
expense, direct expenses, and administrative expenses of $0.8 million.
The decrease in marine vessel contribution was due to the sale of the
Partnership's interest in an entity that owned a marine vessel during 2001.
(f) Net Income
As a result of the foregoing, the Partnership had a net income of $0.7 million
for the year ended December 31, 2002, compared to net income of $2.1 million
during the same period of 2001. The Partnership's ability to acquire, operate,
and liquidate assets, secure leases and re-lease those assets whose leases
expire is subject to many factors. Therefore, the Partnership's performance in
the year ended December 31, 2002 is not necessarily indicative of future
periods.
(2) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 2001 and 2000
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
increased during the year ended December 31, 2001, compared to 2000. The
following table presents lease revenues less direct expenses by segment (in
thousands of dollars):
For the Years
Ended December 31,
2001 2000
--------------------
Marine containers $ 6,185 $ 3,905
Marine vessels. . 2,903 2,681
Railcars. . . . . 1,798 1,927
Aircraft. . . . . 1,079 1,053
Trailers. . . . . 318 1,998
Marine containers: Lease revenues and direct expenses for marine containers
were $6.3 million and $0.1 million, respectively, for 2001, compared to $3.9
million and $20,000, respectively, during 2000. An increase in lease revenues
of $1.5 million was due to the purchase of additional equipment during 2001 and
2000. Additionally, an increase of $0.8 million was due to the transfer of the
Partnership's interest in an entity that owned marine containers from an USPE to
owned equipment during 2000.
Marine vessels: Marine vessel lease revenues and direct expenses were $5.5
million and $2.6 million, respectively, for 2001, compared to $5.5 million and
$2.8 million, respectively, during 2000.
Marine vessel direct expenses decreased $0.2 million during 2001. The decrease
in direct expenses was caused by lower depreciation expense of $0.1 million as
the result of the double declining-balance method of depreciation which results
in greater depreciation in the first years an asset is owned and lower marine
operating expenses of $0.1 million.
Railcars: Railcar lease revenues and direct expenses were $2.4 million and
$0.6 million, respectively, for 2001, compared to $2.5 million and $0.5 million,
respectively, during 2000. A decrease in railcar lease revenues of $0.1 million
was due to lower re-lease rates earned on railcars whose leases expired during
2001.
Aircraft: Aircraft lease revenues and direct expenses were $1.1 million and
$6,000, respectively, for 2001, compared to $1.1 million and $32,000,
respectively, during 2000.
Trailers: Trailer lease revenues and direct expenses were $0.6 million and
$0.3 million, respectively, for 2001, compared to $2.9 million and $0.9 million,
respectively, during 2000. A decrease in trailer contribution of $1.7 million
was due to the sale of 78% of the Partnership's trailers during 2000.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $11.6 million for 2001 increased from $10.8 million
for 2000. Significant variances are explained as follows:
(i) A $1.2 million increase in depreciation and amortization expenses
from 2000 levels reflects an increase of $2.6 million in depreciation and
amortization expenses resulting from the purchase of additional equipment during
2001 and 2000 and an increase of $0.5 million resulting from the transfer of the
Partnership's interest in an entity that owned marine containers from an USPE to
owned equipment during 2000. These increases were offset, in part, by a
decrease of $1.1 million caused by the double-declining balance method of
depreciation which results in greater depreciation in the first years an asset
is owned and a decrease of $0.8 million due to the sale of equipment during 2001
and 2000.
(ii) A $0.2 million increase in the provision for bad debts was based
on the General Partner's evaluation of the collectability of receivables
compared to 2000;
(iii) A $0.1 million decrease in interest and amortization expense was
due to lower average borrowings outstanding during 2001 compared to 2000; and
(iv) A $0.4 million decrease in general and administrative expenses
during the year ended December 31, 2001 was due to lower costs of $0.5 million
resulting from the sale of 78% of the Partnership's trailers during 2000.
(c) Gain on Disposition of Owned Equipment
The gain on disposition of equipment for the year ended December 31, 2001
totaled $41,000, and resulted from the sale of marine containers and a trailer
with an aggregate net book value of $34,000 for proceeds of $75,000. The gain
on disposition of equipment for the year ended December 31, 2000 totaled $3.6
million, and resulted from the sale of a commuter aircraft, railcars, marine
containers, and trailers with an aggregate net book value of $6.9 million for
proceeds of $10.5 million.
(d) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Equity in net income (loss) of USPEs represents the Partnership's share of the
net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method of accounting. These entities were single purpose
and had no debt or other financial encumbrances. The following table presents
equity in net income (loss) by equipment type (in thousands of dollars):
For the Years
Ended December 31,
2001 2000
----------------------
Marine vessels . . . . . . . . . . . . $ 2,002 $ 826
Aircraft . . . . . . . . . . . . . . . (747) (1,605)
Marine containers. . . . . . . . . . . -- 129
Mobile offshore drilling unit. . . . . -- 29
---------- ----------
Equity in net income (loss) of USPEs $ 1,255 $ (621)
========== ==========
The following USPE discussion by equipment type is based on the Partnership's
proportional share of revenues, gain on equipment dispositions, depreciation
expense, direct expenses, and administrative expenses in the USPEs:
Marine vessels: During 2001, lease revenues of $0.7 million and the gain of
$2.1 million from the sale of the Partnership's interest in an entity that owned
a marine vessel were offset by depreciation expense, direct expenses, and
administrative expenses of $0.8 million. During 2000, lease revenues of $2.9
million and the gain of $0.9 million from the sale of the Partnership's interest
in an entity that owned a marine vessel were offset by depreciation expense,
direct expenses, and administrative expenses of $2.9 million.
The decrease in marine vessel lease revenues of $2.1 million and depreciation
expense, direct expenses, and administrative expenses of $2.1 million during
2001, was caused by the sale of the Partnership's interest in an entity that
owned a marine vessel during 2001 and the sale of a Partnership's interest in an
entity that owned a marine vessel during 2000.
Aircraft: During 2001, lease revenues of $2.2 million and other income of $0.8
million were offset by depreciation expense, direct expenses, and administrative
expenses of $3.7 million. During 2000, lease revenues of $2.7 million were
offset by depreciation expense, direct expenses, and administrative expenses of
$4.3 million.
Lease revenues decreased $0.6 million due to the reduction of the lease rate on
both MD-82s as part of a new lease agreement for these commercial aircraft.
This decrease in lease revenues was partially offset by an increase of $0.1
million due to the Boeing 737-300 being on-lease during 2001 that was off-lease
for four months during 2000. Other income increased $0.8 million during 2001
due to the recognition of $0.8 million in engine reserve liability as income
upon termination of a previous lease agreement. A similar event did not occur
during 2000.
During 2001, depreciation expense, direct expenses, and administrative expenses
decreased $0.5 million resulting from the double declining-balance method of
depreciation which results in greater depreciation in the first years an asset
is owned.
Marine containers: During 2000, the Partnership's interest in an entity that
owned marine containers was transferred to owned equipment.
(e) Net Income
As a result of the foregoing, the Partnership had a net income of $2.1 million
for the year ended December 31, 2001, compared to net income of $4.1 million
during 2000. The Partnership's ability to acquire, operate, and liquidate
assets, secure leases, and re-lease those assets whose leases expire is subject
to many factors. Therefore, the Partnership's performance in the year ended
December 31, 2001 is not necessarily indicative of future periods. In the year
ended December 31, 2001, the Partnership distributed $1.3 million to the limited
partners, or $0.24 per weighted-average limited partnership unit.
(G) Geographic Information
Certain of the Partnership's equipment operates in international markets.
Although these operations expose the Partnership to certain currency, political,
credit, and economic risks, the General Partner believes these risks are minimal
or has implemented strategies to control the risks. Currency risks are at a
minimum because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in United States (US) dollars. Political
risks are minimized by avoiding operations in countries that do not have a
stable judicial system and established commercial business laws. Credit support
strategies for lessees range from letters of credit supported by US banks to
cash deposits. Although these credit support mechanisms generally allow the
Partnership to maintain its lease yield, there are risks associated with
slow-to-respond judicial systems when legal remedies are required to secure
payment or repossess equipment. Economic risks are inherent in all
international markets and the General Partner strives to minimize this risk with
market analysis prior to committing equipment to a particular geographic area.
Refer to Note 6 to the financial statements for information on the lease
revenues, net income (loss), and net book value of equipment in various
geographic regions.
Revenues and net operating income (loss) by geographic region are impacted by
the time period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years of
ownership due to the use of the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to change significantly in the future, as assets come
off lease and decisions are made either to redeploy the assets in the most
advantageous geographic location or sell the assets.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to US-domiciled lessees consists of aircraft, trailers, and railcars.
During 2002, US lease revenues accounted for 16% of the total lease revenues of
wholly and jointly owned equipment. This region reported a net income of $0.1
million.
The Partnership's owned equipment on lease to Canadian-domiciled lessees
consists of railcars. During 2002, Canadian lease revenues accounted for 7% of
the total lease revenues of wholly- and jointly-owned equipment. This region
reported a net income of $0.4 million.
The Partnership's owned equipment and investments in equipment owned by an USPE
on lease to a South American-domiciled lessee consists of aircraft. During
2002, South American lease revenues accounted for 9% of the total lease revenues
of wholly and jointly owned equipment. This region reported a net loss of $0.3
million.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to lessees in the rest of the world consists of marine vessels and marine
containers. During 2002, lease revenues for these operations accounted for 68%
of the total lease revenues of wholly and jointly owned equipment while this
region reported a net income of $2.3 million.
(H) Inflation
Inflation had no significant impact on the Partnership's operations during 2002,
2001, or 2000.
(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
The Partnership's operation of a diversified equipment portfolio in a broad base
of markets is intended to reduce its exposure to volatility in individual
equipment sectors.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent upon many factors,
such as specific market conditions and economic activity, technological
obsolescence, and government or other regulations. The unpredictability of these
factors makes it difficult for the General Partner to clearly define trends or
influences that may impact the performance of the Partnership's equipment. The
General Partner continually monitors both the equipment markets and the
performance of the Partnership's equipment in these markets. The General
Partner may make an evaluation to reduce the Partnership's exposure to those
equipment markets in which it determines that it cannot operate equipment and
achieve acceptable rates of return. Alternatively, the General Partner may make
a determination to enter those equipment markets in which it perceives
opportunities to profit from supply/demand instabilities or other market
imperfections.
The Partnership intends to use excess cash flow, if any, after payment of
operating expenses, to pay principal and interest on debt and acquire additional
equipment until December 31, 2004. The General Partner believes that these
acquisitions may cause the Partnership to generate additional earnings and cash
flow for the Partnership.
Due to a weak economy, and specifically weakness in the transportation industry,
the General Partner has not purchased additional equipment for the Partnership
since 2001. The General Partner believes prices on certain transportation
assets, particularly rail equipment, have reached attractive levels and is
actively looking to make investments in 2003. The General Partner believes that
transportation assets purchased in today's economic environment may appreciate
when the economy returns to historical growth rates. Accordingly, the General
Partner believes that most of the cash currently held by the Partnership will be
used to purchase equipment over the next 18 months.
Factors that may affect the Partnership's contribution in 2003 and beyond
include:
(i) The cost of new marine containers has been at historic lows for the past
several years, which has caused downward pressure on per diem lease rates for
this type of equipment. Starting in 2003 and continuing through 2004, a
significant number of the Partnership's marine containers currently on a fixed
rate lease will be switching to a lease based on utilization. The General
Partner anticipates that this will result in a significant decrease in lease
revenues;
(ii) Railcar freight loadings in the United States and Canada decreased 1%
and 3%, respectively, through most of 2002. There has been, however, a recent
increase for some of the commodities that drive demand for those types of
railcars owned by the Partnership. It will be some time, however, before this
translates into new leasing demand by shippers since most shippers have idle
railcars in their fleets;
(iii) Marine vessel freight rates are dependent upon the overall condition
of the international economy. The mid-term leases for the Partnership's mirine
vessels expired in 2002 and the first quarter of 2003 and were released at a
lower rate;
(iv) Utilization of intermodal trailers owned by the Partnership decreased
12% in 2002 compared to 2001. This decline was similar to the decline in
industry-wide utilization. As the Partnership's trailers are smaller than many
shippers prefer, the General Partner expects continued declines in utilization
over the next few years. Additionally, one of the major shippers that leased
the Partnership's trailers has entered bankruptcy. While the Partnership did
not have any outstanding receivables from the company, its bankruptcy may cause
a further decline in performance of the trailer fleet in the future;
(v) The airline industry began to see lower passenger travel during 2001.
The events of September 11, 2001, along with a recession in the United States
have continued to adversely affect the market demand for both new and used
commercial aircraft and to significantly weaken the financial position of most
major domestic airlines. The General Partner believes that there is a
significant oversupply of commercial aircraft available and that this oversupply
will continue for some time. These events have had a negative impact on the
fair value of the Partnership's owned and partially owned aircraft. Although no
impairments were required during 2002 to these aircraft, the General Partner
does not expect these aircraft to return to their September 11, 2001 values.
During 2001, the lessee of a Stage II Boeing 737-200 commercial aircraft
notified the General Partner of its intention to return this aircraft and
stopped making lease payments. The lessee is located in Brazil, a country
experiencing severe economic difficultly. The Partnership has a security
deposit from this lessee that could be used to pay a portion of the amount due.
During October 2001, the General Partner sent a notification of default to the
lessee. The lease, which expired in October 2002, had certain return condition
requirements for the aircraft. The General Partner recorded an allowance for
bad debts for the amount due less the security deposit.
During October 2002, the General Partner reached an agreement with the lessee of
this aircraft for the past due lease payments. In order to give the lessee an
incentive to make timely payments in accordance with the agreement, the General
Partner gave the lessee a discount on the total amount due. If the lessee fails
to comply with the payment schedule in the agreement, the discount provision
will be waived and the full amount again becomes payable. The lessee made an
initial payment during October 2002, to be followed by 23 equal monthly
installments beginning in November 2002. Unpaid outstanding amounts will accrue
interest at a rate of 5%. The balance outstanding at December 31, 2002 was $1.2
million. Due to the uncertainty of ultimate collection, the General Partner
will continue to fully reserve the unpaid outstanding balance less the security
deposit from this lessee. As of December 31, 2002, the lessee was current
with all payments due under the note. As of March 26,2003, the installment
payment due from the lessee to the Partnership during March was not received.
The General Partner has not yet placed the lessee into default, however, is
currently reviewing the options available under the agreement.
(vi) The General Partner has seen an increase in its insurance premiums on
its equipment portfolio and is finding it more difficult to find an insurance
carrier with which to place the coverage. Premiums for aircraft insurance have
increased over 50% and for other types of equipment the increases have been over
25%. The increase in insurance premiums caused by the increased rate will be
partially mitigated by the reduction in the value of the Partnership's equipment
portfolio caused by the events of September 11, 2001 and other economic factors.
The General Partner has also experienced an increase in the deductible required
to obtain coverage. This may have a negative impact on the Partnership in the
event of an insurance claim.
Several other factors may affect the Partnership's operating performance in the
year 2003 and beyond, including changes in the markets for the Partnership's
equipment and changes in the regulatory environment in which that equipment
operates.
(1) Repricing and Reinvestment Risk
Certain portions of the Partnership's aircraft, marine vessels, marine
containers, railcars, and trailers portfolios will be remarketed in 2003 as
existing leases expire, exposing the Partnership to repricing risk/opportunity.
Additionally, the General Partner may elect to sell certain underperforming
equipment or equipment whose continued operation may become prohibitively
expensive. In either case, the General Partner intends to re-lease or sell
equipment at prevailing market rates; however, the General Partner cannot
predict these future rates with any certainty at this time, and cannot
accurately assess the effect of such activity on future Partnership performance.
The proceeds from the sold or liquidated equipment will be redeployed to
purchase additional equipment, as the Partnership is in its reinvestment phase.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries.
Under US Federal Aviation Regulations, after December 31, 1999, no person shall
operate an aircraft to or from any airport in the contiguous United States
unless that airplane has been shown to comply with Stage III noise levels. The
Partnership's Stage II aircraft is currently off-lease and stored in a country
that does not require this regulation.
The US Department of Transportation's Hazardous Materials Regulations regulates
the classification and packaging requirements of hazardous materials that apply
particularly to Partnership's tank railcars. The Federal Railroad
Administration has mandated that effective July 1, 2000 all tank railcars must
be re-qualified every ten years from the last test date stenciled on each
railcar to insure tank shell integrity. Tank shell thickness, weld seams, and
weld attachments must be inspected and repaired if necessary to re-qualify the
tank railcar for service. The average cost of this inspection is $3,600 for
jacketed tank railcars and $1,800 for non-jacketed tank railcars, not including
any necessary repairs. This inspection is to be performed at the next scheduled
tank test and every ten years thereafter. The Partnership currently owns 252
jacketed tank railcars. As of December 31, 2002, 32 jacketed tank railcars will
need to be re-qualified during 2003 or 2004.
During the fourth quarter of 2002, the Partnership reduced the net book value of
71 owned tank railcars in its railcar fleet to their fair value of $2,000 per
railcar, and recorded a $0.6 million impairment loss. The impairment was caused
by a general recall due to a manufacturing defect allowing extensive corrosion
of the railcars' internal lining. Repair of the railcars were determined to be
cost prohibitive. The fair value of railcars with this defect was determined by
using industry expertise. These railcars were off lease.
Ongoing changes in the regulatory environment, both in the United States and
internationally, cannot be predicted with accuracy, and preclude the General
Partner from determining the impact of such changes on Partnership operations,
purchases, or sale of equipment.
(K) Distribution Levels and Additional Capital Resources
Pursuant to the amended limited partnership agreement, the Partnership will
cease to reinvest surplus cash in additional equipment beginning on January 1,
2005. Prior to that date, the General Partner intends to continue its strategy
of selectively redeploying equipment to achieve competitive returns, or selling
equipment that is underperforming or whose operation becomes prohibitively
expensive. During this time, the Partnership will use operating cash flow,
proceeds from the sale of equipment, and additional debt to meet its operating
obligations, make distributions to the partners, and acquire additional
equipment. In the long term, changing market conditions and used-equipment
values may preclude the General Partner from accurately determining the impact
of future re-leasing activity and equipment sales on Partnership performance and
liquidity. Consequently, the General Partner cannot establish future
distribution levels with any certainty at this time.
The General Partner believes that sufficient cash flow will be available in the
future for repayment of debt and to meet Partnership operating cash flow
requirements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------
The Partnership's primary market risk exposure is that of currency devaluation
risk. During 2002, 84% of the Partnership's total lease revenues from wholly-
and jointly-owned equipment came from non-United States domiciled lessees. Most
of the Partnership's leases require payment in US currency. If these lessees'
currency devalues against the US dollar, the lessees could potentially encounter
difficulty in making the US dollar denominated lease payments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
The financial statements for the Partnership are listed in the Index to
Financial Statements included in Item 15(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------------------------------------------------------------------
FINANCIAL DISCLOSURE
-----------------
(A) Disagreements with Accountants on Accounting and Financial Disclosures
None.
(B) Changes in Accountants
In September 2001, the General Partner announced that the Partnership had
engaged Deloitte & Touche LLP as the Partnership's auditors and had dismissed
KPMG LLP. KPMG LLP issued an unqualified opinion on the 2000 financial
statements. During 2000 and the subsequent interim period preceding such
dismissal, there were no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM FINANCIAL SERVICES, INC.
------------------------------------------------------------------
As of the date of this annual report, the directors and executive officers of
PLM Financial Services, Inc. (and key executive officers of its subsidiaries)
are as follows:
Name Age Position
- ----------------------------------------------------------------------------
Gary D. Engle 53 Director, PLM Financial Services, Inc., PLM Investment
Management, Inc., and PLM Transportation Equipment Corp.
James A. Coyne 42 Director, Secretary and President, PLM Financial Services,
Inc. and PLM Investment Management, Inc., Director and
Secretary, PLM Transportation Equipment Corp.
Richard K Brock 40 Director and Chief Financial Officer, PLM Financial
Services, Inc., PLM Investment Management, Inc. and
PLM Transportation Equipment Corp.
Gary D. Engle was appointed a Director of PLM Financial Services, Inc. in
January 2002. He was appointed a director of PLM International, Inc. in
February 2001. He is a director and President of MILPI Holdings, LLC (MILPI).
Since November 1997, Mr. Engle has been Chairman and Chief Executive Officer of
Semele Group Inc. ("Semele"), a publicly traded company. Mr. Engle is President
and Chief Executive Officer of Equis Financial Group ("EFG"), which he joined in
1990 as Executive Vice President. Mr. Engle purchased a controlling interest in
EFG in December 1994. He is also President of AFG Realty, Inc.
James A. Coyne was appointed President of PLM Financial Services, Inc. in August
2002. He was appointed a Director and Secretary of PLM Financial Services, Inc.
in April 2001. He was appointed a director of PLM International, Inc. in
February 2001. He is a director, Vice President and Secretary of MILPI. Mr.
Coyne has been a director, President and Chief Operating Officer of Semele since
1997. Mr. Coyne is Executive Vice President of Equis Corporation, the general
partner of EFG. Mr. Coyne joined EFG in 1989, remained until 1993, and rejoined
in November 1994.
Richard K Brock was appointed a Director and Chief Financial Officer of PLM
Financial Services, Inc. in August 2002. From June 2001 through August 2002,
Mr. Brock was a consultant to various leasing companies including PLM Financial
Services, Inc. From October 2000 through June 2001, Mr. Brock was a Director of
PLM Financial Services, Inc. Mr. Brock was appointed Vice President and Chief
Financial Officer of PLM International, Inc. and PLM Financial Services, Inc. in
January 2000, having served as Acting Chief Financial Officer since June 1999
and as Vice President and Corporate Controller of PLM International, Inc. and
PLM Financial Services, Inc. since June 1997. Prior to June 1997, Mr. Brock
served as an accounting manager at PLM Financial Services, Inc. beginning in
September 1991 and as Director of Planning and General Accounting beginning in
February 1994.
The directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM Financial Services, Inc., PLM
Transportation Equipment Corp., or PLM Investment Management, Inc.
ITEM 11. EXECUTIVE COMPENSATION
-----------------------
The Partnership has no directors, officers, or employees. The Partnership had
no pension, profit sharing, retirement, or similar benefit plan in effect as of
December 31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------
(A) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 5% interest in the profits and
losses (subject to certain allocations of income), and distributions. As of
December 31, 2002, no investor was known by the General Partner to beneficially
own more than 5% of the limited partnership units of the Partnership.
(B) Security Ownership of Management
Neither the General Partner and its affiliates nor any executive officer or
director of the General Partner and its affiliates owned any limited partnership
units of the Partnership as of December 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
(A) Transactions with Management and Others
During 2002, the Partnership paid or accrued the following fees to FSI or its
affiliates: management fees, $0.8 million; and administrative and data
processing services performed on behalf of the Partnership, $0.2 million.
During 2002, the Partnership's proportional share of ownership in 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, $19,000.
The balance due to affiliates as of December 31, 2002 includes $0.2 million due
to FSI and its affiliates for management fees and $0.7 million due to an USPE.
ITEM 14. CONTROLS AND PROCEDURES
-------------------------
Based on their evaluation as of a date within 90 days of the filing of this Form
10-K, the Partnership's principal Executive Officer and Chief Financial Officer
have concluded that the Partnership's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that the Partnership files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. There
have been no significant changes in the Partnership's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
------------------------------------------------------------------
(A) 1. Financial Statements
The financial statements listed in the accompanying Index to Financial
Statements are filed as part of this Annual Report on Form 10-K.
2. Financial Statements required under Regulation S-X Rule 3-09
The following financial statements are filed as Exhibits of this Annual Report
on Form 10-K:
a. Boeing 737-200 Trust S/N 24700
b. Pacific Source Partnership
(B) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
All other financial statement schedules have been omitted, as the required
information is not pertinent to the registrant or is not material, or because
the information required is included in the financial statements and notes
thereto.
(C) Reports on Form 8-K
None.
(D) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated by reference
to the Partnership's Registration Statement on Form S-1 (Reg. No. 33-55796),
which became effective with the Securities and Exchange Commission on May 25,
1993.
4.1 First Amendment to the Third Amended and Restated Partnership Agreement
dated May 28, 1993, incorporated by reference to the Partnership's Form 10-K
dated December 31, 2000 filed with the Securities and Exchange Commission on
March 16, 2001.
4.2 Second Amendment to the Third Amended and Restated Partnership
Agreement, dated January 21, 1994, incorporated by reference to the
Partnership's Form 10-K dated December 31, 2000 filed with the Securities and
Exchange Commission on March 16, 2001.
4.3 Third Amendment to the Third Amended and Restated Partnership Agreement,
dated March 25, 1999, incorporated by reference to the Partnership's Form 10-K
dated December 31, 2000 filed with the Securities and Exchange Commission on
March 16, 2001.
4.4 Fourth Amendment to the Third Amended and Restated Partnership
Agreement, dated August 24, 2001, incorporated by reference to the Partnership's
Annual Report on Form 10-K dated December 31, 2001 filed with the Securities and
Exchange Commission on March 27, 2002.
10.1 Management Agreement between Partnership and PLM Investment Management,
Inc., incorporated by reference to the Partnership's Registration Statement on
Form S-1 (Reg. No. 33-55796), which became effective with the Securities and
Exchange Commission on May 25, 1993.
10.2 Note Agreement, dated as of December 1, 1995, regarding $23.0 million
of 7.27% senior notes due December 21, 2005, incorporated by reference to the
Partnership's Annual Report on Form 10-K dated December 31, 1995 filed with the
Securities and Exchange Commission on March 20, 1996.
10.3 Warehousing Credit Agreement, dated as of April 13, 2001, incorporated
by reference to the Partnership's Form 10-Q dated March 31, 2001 filed with the
Securities and Exchange Commission on May 9, 2001.
10.4 First amendment to the Warehouse Credit Agreement, dated December 21,
2001, incorporated by reference to the Partnership's Form 10-K dated December
31, 2001 filed with the Securities and Exchange Commission on March 27, 2002.
10.5 Second amendment to the Warehouse Credit Agreement, dated April 12,
2002, incorporated by reference to the Partnership's Form 10-Q dated March 31,
2002 filed with the Securities and Exchange Commission on May 8, 2002.
10.6 Third amendment to the Warehouse Credit Agreement, dated July 11, 2002,
incorporated by reference to the Partnership's Form 10-Q dated June 30, 2002
filed with the Securities and Exchange Commission on August 14, 2002.
10.7 October 2002 purchase agreement between PLM Transportation Equipment
Corp., Inc. and Trinity Tank Car, Inc. incorporated by reference to the
Partnership's Form 10-Q dated September 30, 2002 filed with the Securities and
Exchange Commission on November 14, 2002.
10.8 Settlement Agreement between PLM Worldwide Leasing Corp. and Varig S.A.
dated October 11, 2002, incorporated by reference to the Partnership's Form 10-Q
dated September 30, 2002 filed with the Securities and Exchange Commission on
November 14, 2002.
Financial Statements required under Regulation S-X Rule 3-09:
99.1 Boeing 737-200 Trust S/N 24700.
99.2 Pacific Source Partnership
- ------
CONTROL CERTIFICATION
- ----------------------
I, James A. Coyne, certify that:
1. I have reviewed this annual report on Form 10-K of PLM Equipment Growth &
Income Fund VII.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others,
particularly during the period in which this annual report is prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and board of Managers:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ James A. Coyne
---------------------
James A. Coyne
President
(Principal Executive Officer)
CONTROL CERTIFICATION
- ----------------------
I, Richard K Brock, certify that:
1. I have reviewed this annual report on Form 10-K of PLM Equipment Growth &
Income Fund VII.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others,
particularly during the period in which this annual report is prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and board of Managers:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ Richard K Brock
----------------------
Richard K Brock
Chief Financial Officer
(Principal Financial Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on
behalf of the Partnership by duly authorized officers.
Dated: March 26, 2003 PLM EQUIPMENT GROWTH & INCOME FUND VII
PARTNERSHIP
By: PLM Financial Services, Inc.
General Partner
By: /s/ James A. Coyne
---------------------
James A. Coyne
President
By: /s/ Richard K Brock
----------------------
Richard K Brock
Chief Financial Officer
CERTIFICATION
The undersigned hereby certifies, in their capacity as an officer of the General
Partner of PLM Equipment Growth Fund & Income VII (the Partnership), that the
Annual Report of the Partnership on Form 10-K for the year ended December 31,
2002, fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934 and that the information contained in such report fairly
presents, in all material respects, the financial condition of the Partnership
at the end of such period and the results of operations of the Partnership for
such period.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
- ---- -------- ----
/s/ Gary D. Engle
- --------------------
Gary D. Engle Director, FSI March 26, 2003
/s/ James A. Coyne
- ---------------------
James A. Coyne Director, FSI March 26, 2003
/s/ Richard K Brock
- ----------------------
Richard K Brock Director, FSI March 26, 2003
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
INDEX TO FINANCIAL STATEMENTS
(Item 15(a))
Page
----
Independent auditors' reports 31-32
Balance sheets as of December 31, 2002 and 2001 33
Statements of income for the years ended
December 31, 2002, 2001, and 2000 34
Statements of changes in partners' capital for the
years ended December 31, 2002, 2001, and 2000 35
Statements of cash flows for the years ended
December 31, 2002, 2001, and 2000 36
Notes to financial statements 37-51
Independent auditors' report on financial statement schedule 52
Schedule II valuation and qualifying accounts 53
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth & Income Fund VII:
We have audited the accompanying balance sheets of PLM Equipment Growth & Income
Fund VII, a limited partnership (the "Partnership"), as of December 31, 2002 and
2001, and the related statements of income, changes in partners' capital, and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 2002 and
2001, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 7, 2003
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth & Income Fund VII:
We have audited the accompanying statements of income, changes in partners'
capital and cash flows of PLM Equipment Growth & Income Fund VII ("the
Partnership") for the year ended December 31, 2000. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of PLM Equipment
Growth & Income Fund VII for the year ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
SAN FRANCISCO, CALIFORNIA
March 12, 2001
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31,
(in thousands of dollars, except unit amounts)
2002 2001
--------------------
ASSETS
Equipment held for operating leases, at cost . . . . . . . . . . . . . . . $ 79,849 $ 79,955
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . (49,918) (42,910)
--------- ---------
Net equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,931 37,045
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 9,339 3,129
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 75
Accounts and note receivable, less allowance for doubtful accounts of
$1,133 in 2002 and $306 in 2001. . . . . . . . . . . . . . . . . . . . 1,769 1,764
Investments in unconsolidated special-purpose entities . . . . . . . . . . 6,757 8,409
Lease negotiation fees to affiliate, less accumulated
amortization of $274 in 2002 and $169 in 2001. . . . . . . . . . . . . 23 129
Debt issuance costs, less accumulated amortization
of $180 in 2002 and $155 in 2001 . . . . . . . . . . . . . . . . . . . 75 100
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . 370 91
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,324 $ 50,742
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . $ 221 $ 959
Due to affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 847 609
Lessee deposits and reserve for repairs. . . . . . . . . . . . . . . . . . 1,249 945
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 14,000
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,317 16,513
--------- ---------
Commitments and contingencies
Partners' capital
Limited partners (4,981,450 limited partnership units outstanding in 2002
and 5,041,936 limited partnership units outstanding in 2001) . . . . 35,007 34,229
General Partner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
--------- ---------
Total partners' capital. . . . . . . . . . . . . . . . . . . . . . . . . 35,007 34,229
--------- ---------
Total liabilities and partners' capital. . . . . . . . . . . . . . . $ 48,324 $ 50,742
========= =========
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of dollars, except weighted-average unit amounts)
2002 2001 2000
--------------------------
REVENUES
Lease revenue . . . . . . . . . . . . . . . . . . $15,150 $15,842 $15,870
Interest and other income . . . . . . . . . . . . 165 237 317
Gain on disposition of equipment. . . . . . . . . 42 41 3,614
------- ------- --------
Total revenues. . . . . . . . . . . . . . . . . 15,357 16,120 19,801
------- ------- --------
EXPENSES
Depreciation and amortization . . . . . . . . . . 6,541 7,913 6,697
Repairs and maintenance . . . . . . . . . . . . . 1,791 1,629 2,189
Equipment operating expenses. . . . . . . . . . . 1,745 1,643 1,847
Insurance expenses. . . . . . . . . . . . . . . . 484 396 308
Management fees to affiliate. . . . . . . . . . . 765 827 858
Interest expense. . . . . . . . . . . . . . . . . 1,045 1,333 1,480
General and administrative expenses to affiliates 200 471 824
Other general and administrative expenses . . . . 870 737 816
Impairment loss on equipment. . . . . . . . . . . 616 -- --
Provision for bad debts . . . . . . . . . . . . . 760 279 102
------- ------- --------
Total expenses. . . . . . . . . . . . . . . . . 14,817 15,228 15,121
------- ------- --------
Equity in net income (loss) of unconsolidated
special-purpose entities. . . . . . . . . . . 154 1,255 (621)
------- ------- --------
Net income. . . . . . . . . . . . . . . . . . . . $ 694 $ 2,147 $ 4,059
======= ======= ========
PARTNERS' SHARE OF NET INCOME
Limited partners. . . . . . . . . . . . . . . . . $ 694 $ 2,021 $ 3,555
General Partner . . . . . . . . . . . . . . . . . -- 126 504
------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . . $ 694 $ 2,147 $ 4,059
======= ======= ========
Limited partners' net income per
weighted-average limited partnership unit . . $ 0.14 $ 0.38 $ 0.67
======= ======= ========
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(in thousands of dollars)
Limited General
Partners Partner Total
--------------------------------
Partners' capital as of December 31, 1999. . $ 42,747 $ -- $ 42,747
Net income . . . . . . . . . . . . . . . . . . 3,555 504 4,059
Purchase of limited partnership units. . . . . (3) -- (3)
Cash distribution. . . . . . . . . . . . . . . (9,584) (504) (10,088)
---------- --------- ---------
Partners' capital as of December 31, 2000. . 36,715 -- 36,715
Net income . . . . . . . . . . . . . . . . . . 2,021 126 2,147
Purchase of limited partnership units. . . . . (3,211) -- (3,211)
Cash distribution. . . . . . . . . . . . . . . (1,296) (126) (1,422)
---------- --------- ---------
Partners' capital as of December 31, 2001. . 34,229 -- 34,229
Net income . . . . . . . . . . . . . . . . . . 694 -- 694
Canceled purchase of limited partnership units 84 -- 84
---------- --------- ---------
Partners' capital as of December 31, 2002. . $ 35,007 $ -- $ 35,007
========== ========= =========
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of dollars)
2002 2001 2000
-----------------------------
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 694 $ 2,147 $ 4,059
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 6,541 7,913 6,697
Amortization of debt issuance costs. . . . . . . . . . . . . . 25 25 26
Provision for bad debts. . . . . . . . . . . . . . . . . . . . 760 279 102
Impairment loss on equipment . . . . . . . . . . . . . . . . . 616 -- --
Gain on disposition of equipment . . . . . . . . . . . . . . . (42) (41) (3,614)
Equity in net (income) loss from unconsolidated
special-purpose entities . . . . . . . . . . . . . . . . . . (154) (1,255) 621
Changes in operating assets and liabilities:
Accounts and note receivable . . . . . . . . . . . . . . . . (765) (557) (490)
Prepaid expenses and other assets. . . . . . . . . . . . . . (279) 9 (46)
Accounts payable and accrued expenses. . . . . . . . . . . . 40 (230) 70
Due to affiliates. . . . . . . . . . . . . . . . . . . . . . 293 (631) 623
Lessee deposits and reserve for repairs. . . . . . . . . . . 304 46 (492)
-------- -------- ---------
Net cash provided by operating activities. . . . . . . . . 8,033 7,705 7,556
-------- -------- ---------
INVESTING ACTIVITIES
Payments for purchase of equipment and capitalized repairs . . . (13) (8,017) (10,729)
Investment in and equipment purchased and placed in
unconsolidated special-purpose entities. . . . . . . . . . . -- (86) --
Distribution from unconsolidated special-purpose entities. . . . 1,751 2,387 4,411
Payments of acquisition fees to affiliate. . . . . . . . . . . . -- (366) (440)
Reimbursement (payments) of lease negotiation fees to affiliate. 2 (82) (98)
Distributions from liquidation of unconsolidated special-purpose
entities . . . . . . . . . . . . . . . . . . . . . . . . . . -- 5,293 2,433
Proceeds from disposition of equipment . . . . . . . . . . . . . 116 90 10,487
-------- -------- ---------
Net cash provided by (used in) investing activities. . . . 1,856 (781) 6,064
-------- -------- ---------
FINANCING ACTIVITIES
Proceeds from short-term notes payable to affiliate. . . . . . . -- 5,500 --
Payments of short-term notes payable to affiliate. . . . . . . . -- (5,500) --
Decrease (increase) in restricted cash . . . . . . . . . . . . . 15 119 (83)
Cash distribution paid to limited partners . . . . . . . . . . . -- (1,296) (9,584)
Cash distribution paid to General Partner. . . . . . . . . . . . -- (126) (504)
Payment for limited partnership units. . . . . . . . . . . . . . (778) (2,433) (3)
Canceled purchase of limited partnership units . . . . . . . . . 84 -- --
Principal payments on notes payable. . . . . . . . . . . . . . . (3,000) (3,000) (3,000)
-------- -------- ---------
Net cash used in financing activities. . . . . . . . . . . (3,679) (6,736) (13,174)
-------- -------- ---------
Net increase in cash and cash equivalents. . . . . . . . . . . . 6,210 188 446
Cash and cash equivalents at beginning of year . . . . . . . . . 3,129 2,941 2,495
-------- -------- ---------
Cash and cash equivalents at end of year . . . . . . . . . . . . $ 9,339 $ 3,129 $ 2,941
======== ======== =========
SUPPLEMENTAL INFORMATION
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,020 $ 1,308 $ 1,454
======== ======== =========
Noncash transfer of equipment at net book value from
unconsolidated special-purpose entities. . . . . . . . . . . . $ -- $ -- $ 5,688
======== ======== =========
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
-----------------------
Organization
------------
PLM Equipment Growth & Income Fund VII, a California limited partnership
(the Partnership), was formed on December 2, 1992 to engage in the business of
owning, leasing, or otherwise investing in predominately used transportation and
related equipment. PLM Financial Services, Inc. (FSI) is the General Partner of
the Partnership. FSI is a wholly owned subsidiary of PLM International, Inc.
(PLM International or PLMI).
FSI manages the affairs of the Partnership. The cash distributions of the
Partnership are generally allocated 95% to the limited partners and 5% to the
General Partner. Net income is allocated to the General Partner to the extent
necessary to cause the General Partner's capital account to equal zero (see Net
Income and Distributions Per Limited Partnership Unit below). The General
Partner is also entitled to receive a subordinated incentive fee as defined in
the limited partnership agreement after the limited partners receive a minimum
return on, and a return of, their invested capital.
The Partnership is currently in its investment phase during which it may invest
cash from operations and equipment sale proceeds into additional equipment until
December 31, 2004. During that time, the General Partner may purchase
additional equipment, consistent with the objectives of the Partnership. The
Partnership will terminate December 31, 2013 unless terminated earlier upon the
sale of all equipment or by certain other events.
Estimates
- ---------
These financial statements have been prepared on the accrual basis of accounting
in accordance with accounting principles generally accepted in the United States
of America. This requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Operations
- ----------
The equipment of the Partnership is managed, under a continuing management
agreement, by PLM Investment Management, Inc. (IMI), a wholly owned subsidiary
of FSI. IMI receives a monthly management fee from the Partnership for managing
the equipment (see Note 2). FSI, in conjunction with its subsidiaries, sells
equipment to investor programs and third parties, manages pools of equipment
under agreements with investor programs, and is a general partner of other
programs.
Accounting for Leases
-----------------------
The Partnership's leasing operations generally consist of operating leases.
Under the operating lease method of accounting, the lessor records the leased
asset at cost and depreciates the leased asset over its estimated useful life.
Rental payments are recorded as revenue over the lease term as earned in
accordance with Statement of Financial Accounting Standards (SFAS) No. 13,
"Accounting for Leases" (SFAS No. 13). Lease origination costs are capitalized
and amortized over the term of the lease.
Depreciation and Amortization
-------------------------------
Depreciation of transportation equipment held for operating leases is
computed on the double-declining balance method, taking a full month's
depreciation in the month of acquisition, based upon estimated useful lives of
15 years for railcars and 12 years for all other equipment. The depreciation
method is changed to straight line when annual depreciation expense using the
straight-line method exceeds that calculated by the double-declining balance
method. Acquisition fees and certain other acquisition costs have been
capitalized as part of the cost of the equipment. 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. Lease negotiation fees are amortized over the initial
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
-----------------------
Depreciation and Amortization (continued)
-------------------------------
equipment lease term. Debt issuance costs are amortized over the term of the
related loan using the straight-line method that approximates the effective
interest method and are included in interest expense in the accompanying
statements of income (see Note 7).
Transportation Equipment
- -------------------------
Equipment held for operating leases is stated at cost.
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), the General
Partner reviewed the carrying values of the Partnership's equipment portfolio at
least quarterly and whenever circumstances indicated that the carrying value of
an asset may not be recoverable due to expected future market conditions. If
the projected undiscounted cash flows and the fair value of the equipment were
less than the carrying value of the equipment, an impairment loss was recorded.
In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No. 144), which replaces SFAS No. 121. In accordance with SFAS No. 144, the
Partnership evaluates long-lived assets for impairment whenever events or
circumstances indicate that the carrying values of such assets may not be
recoverable. Losses for impairment are recognized when the undiscounted cash
flows estimated to be realized from a long-lived asset are determined to be less
than the carrying value of the asset and the carrying amount of long-lived
assets exceed its fair value. The determination of fair value for a given
investment requires several considerations, including but not limited to, income
expected to be earned from the asset, estimated sales proceeds, and holding
costs excluding interest. The Partnership applied the new rules on accounting
for the impairment or disposal of long-lived assets beginning January 1, 2002.
The estimate of the fair value of the Partnership's owned and partially owned
equipment is based on the opinion of the Partnership's equipment managers using
data, reasoning and analysis of prevailing market conditions of similar
equipment, data from recent purchases, independent third party valuations and
discounted cash flows. The events of September 11, 2001, along with the change
in general economic conditions in the United States, have continued to adversely
affect the market demand for both new and used commercial aircraft and weakened
the financial position of several airlines. Aircraft condition, age, passenger
capacity, distance capability, fuel efficiency, and other factors influence
market demand and market values for passenger jet aircraft.
During the fourth quarter of 2002, the Partnership reduced the net book value of
71 owned tank railcars in its railcar fleet to their fair value of $2,000 per
railcar, and recorded a $0.6 million impairment loss. The impairment was caused
by a general recall due to a manufacturing defect allowing extensive corrosion
of the railcars' internal lining. Repair of the railcars were determined to be
cost prohibitive. The fair value of railcars with this defect was determined by
using industry expertise. These railcars were off lease. There were no
reductions to the carrying values of owned equipment in 2001 or 2000 nor
partially-owned equipment during 2002, 2001, or 2000.
Investments in Unconsolidated Special-Purpose Entities
- ----------------------------------------------------------
The Partnership has interests in unconsolidated special-purpose entities (USPEs)
that own transportation equipment. These are single purpose entities that do
not have any debt or other financial encumbrances and are accounted for using
the equity method.
The Partnership's investment in USPEs includes acquisition and lease negotiation
fees paid by the Partnership to PLM Transportation Equipment Corporation (TEC)
and PLM Worldwide Management Services (WMS). TEC is a wholly owned subsidiary
of FSI and WMS is a wholly owned subsidiary of PLM International. The
Partnership's interest in USPEs are managed by IMI. The Partnership's equity
interest
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
-----------------------
Investments in Unconsolidated Special-Purpose Entities (continued)
- ----------------------------------------------------------
in the net income (loss) of USPEs is reflected net of management fees paid or
payable to IMI and the amortization of acquisition and lease negotiation fees
paid to TEC or WMS.
Repairs and Maintenance
- -------------------------
Repairs and maintenance costs related to marine vessels, railcars, and trailers
are usually the obligation of the Partnership and are charged against operations
as incurred. Costs associated with marine vessel dry-docking are estimated and
accrued ratably over the period prior to such dry-docking. If a marine vessel
is sold and there is a balance in the dry-docking reserve account for that
marine vessel, the balance in the reserve account is included as additional gain
on disposition. Maintenance costs of aircraft and certain marine containers are
the obligation of the lessee. To meet the maintenance requirements of aircraft
airframes and engines, reserve accounts are prefunded by the lessee over the
period of the lease based on the number of hours this equipment is used, times
the estimated rate to repair this equipment. If repairs exceed the amount
prefunded by the lessee, the Partnership may have the obligation to fund and
accrue the difference. In certain instances if an aircraft is sold and there is
a balance in the reserve account for repairs to that aircraft, the balance in
the reserve account is included as additional gain on disposition. The aircraft
reserve accounts and marine vessel dry-docking reserve accounts are included in
the accompanying balance sheets as lessee deposits and reserve for repairs.
Net Income and Distributions Per Limited Partnership Unit
----------------------------------------------------------------
Special allocations of income are made to the General Partner to the extent
necessary to cause the capital account balance of the General Partner to be zero
as of the close of such year. The limited partners' net income is allocated
among the limited partners based on the number of limited partnership units
owned by each limited partner and on the number of days of the year each limited
partner is in the Partnership.
Cash distributions of the Partnership are allocated 95% to the limited partners
and 5% to the General Partner and may include amounts in excess of net income.
Cash distributions are recorded when declared. Cash distributions are generally
paid in the same quarter they are declared. 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.
For the years ended December 31, 2001 and 2000, cash distributions totaled $1.4
million and $10.1 million, respectively, or $0.24 and $1.80 per weighted-average
limited partnership unit, respectively. No cash distributions were declared or
paid during 2002.
Cash distributions to investors in excess of net income are considered a return
of capital. Cash distributions to the limited partners of $6.0 million for the
year ended December 31, 2000, were deemed to be a return of capital. None of
the cash distributions to the limited partners during 2001 were deemed to be a
return of capital.
Cash distributions relating to the fourth quarter of 2000 of $1.4 million
were declared and paid during the first quarter of 2001. There were no cash
distributions related to the fourth quarter of 2002 or 2001 paid during the
first quarter of 2003 or 2002.
Net Income Per Weighted-Average Limited Partnership Unit
- --------------------------------------------------------------
Net income per weighted-average limited partnership unit was computed by
dividing net income attributable to limited partners by the weighted-average
number of limited partnership units deemed outstanding during the year. The
weighted-average number of limited partnership units deemed
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
-----------------------
Net Income Per Weighted-Average Limited Partnership Unit (continued)
- --------------------------------------------------------------
outstanding during the years ended December 31, 2002, 2001, and 2000 was
4,986,587; 5,321,254, and 5,323,610, respectively.
Cash and Cash Equivalents
----------------------------
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three months or
less as cash equivalents. The carrying amount of cash equivalents approximates
fair value due to the short-term nature of the investments.
Comprehensive Income
- ---------------------
The Partnership's comprehensive income is equal to net income for the years
ended December 31, 2002, 2001, and 2000.
Restricted Cash
- ----------------
As of December 31, 2002, restricted cash consists of bank accounts and
short-term investments that are subject to withdrawal restrictions per loan
agreements.
New Accounting Standards
- --------------------------
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142), was approved by the FASB. SFAS No. 142 changes the accounting for
goodwill and other intangible assets determined to have an indefinite useful
life from an amortization method to an impairment-only approach. Amortization
of applicable intangible assets will cease upon adoption of this statement. The
Partnership implemented SFAS No. 142 on January 1, 2002. SFAS No. 142 had no
impact on the Partnership's financial position or results of operations.
In April 2002, the FASB adopted SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections" (SFAS No.
145). The provisions of SFAS No. 145 are effective for fiscal years beginning
after May 15, 2002. As permitted by the pronouncement, the Partnership has
elected early adoption of SFAS No. 145 as of January 1, 2002. SFAS No. 145 had
no impact on the Partnership's financial provision or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146), which is based on the general
principle that a liability for a cost associated with an exit or disposal
activity should be recorded when it is incurred and initially measured at fair
value. SFAS No. 146 applies to costs associated with (1) an exit activity that
does not involve an entity newly acquired in a business combination, or (2) a
disposal activity within the scope of SFAS No. 146. These costs include certain
termination benefits, costs to terminate a contract that is not a capital lease,
and other associated costs to consolidate facilities or relocate employees.
Because the provisions of this statement are to be applied prospectively to exit
or disposal activities initiated after December 31, 2002, the effect of adopting
this statement cannot be determined.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). This interpretation requires the guarantor to
recognize a liability for the fair value of the obligation at the inception of
the guarantee. The provisions of FIN 45 will be applied on a prospective basis
to guarantees issued after December 31, 2002.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46). This interpretation clarifies existing accounting
principles related to the preparation of consolidated
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
-----------------------
New Accounting Standards (continued)
- --------------------------
financial statements when the owners of an USPE do not have the characteristics
of a controlling financial interest or when the equity at risk is not sufficient
for the entity to finance its activities without additional subordinated
financial support from others. FIN 46 requires the Partnership to evaluate all
existing arrangements to identify situations where the Partnership has a
"variable interest," commonly evidenced by a guarantee arrangement or other
commitment to provide financial support, in a "variable interest entity,"
commonly a thinly capitalized entity, and further determine when such variable
interest requires the Partnership to consolidate the variable interest entities'
financial statements with its own. The Partnership is required to perform this
assessment by September 30, 2003 and consolidate any variable interest entities
for which the Partnership will absorb a majority of the entities' expected
losses or receive a majority of the expected residual gains. The Partnership
has determined that it is not reasonably possible that it will be required to
consolidate or disclose information about a variable interest entity upon the
effective date of FIN 46.
Reclassifications
- -----------------
Certain amounts in the 2001 and 2000 financial statements have been reclassified
to conform to the 2002 presentations.
2. Transactions with General Partner and Affiliates
-----------------------------------------------------
An officer of FSI contributed $100 of the Partnership's initial capital.
The equipment management agreement, subject to certain reductions, requires the
payment of a monthly management fee attributable to either owned equipment or
interests in equipment owned by the USPEs to be paid to IMI in an amount equal
to the lesser of (i) the fees that would be charged by an independent third
party for similar services for similar equipment or (ii) the sum of (A) for that
equipment for which IMI provides only basic equipment management services, (a)
2% of the gross lease revenues, as defined in the agreement, attributable to
equipment that is subject to full payout net leases and (b) 5% of the gross
lease revenues attributable to equipment that is subject to operating leases,
and (B) for that equipment for which IMI provides supplemental equipment
management services, 7% of the gross lease revenues attributable to such
equipment. The Partnership management fee in 2002, 2001 and 2000 was $0.8
million, $0.8 million and $0.9 million, respectively. Partnership management
fees will be reduced 25% for the period January 1, 2005 through June 30, 2006.
The Partnership reimbursed FSI and its affiliates $0.2 million during 2002, $0.5
million during 2001, and $0.8 million during 2000 for data processing expenses
and other administrative services performed on behalf of the Partnership.
The Partnership's proportional share of USPEs' management fees to affiliate was
$0.1 million during 2002 and 2001 and $0.3 million during 2000. The
Partnership's proportional share of administrative and data processing expenses
to affiliates during 2002 was $19,000 and $0.1 million during 2001 and 2000.
Both of these affiliate expenses reduced the Partnership's proportional share of
the equity interest in income in USPEs.
The Partnership and USPEs paid or accrued lease negotiation and equipment
acquisition fees of $(2,000), $0.5 million, and $0.5 million, during 2002, 2001,
and 2000, respectively, to FSI.
TEC will also be entitled to receive an equipment liquidation fee equal to the
lesser of (i) 3% of the sales price of equipment sold on behalf of the
Partnership or (ii) 50% of the "Competitive Equipment Sale Commission," as
defined in the agreement, if certain conditions are met. In certain
circumstances, the General Partner will be entitled to a monthly re-lease fee
for re-leasing services following the expiration of the initial lease, charter,
or other contract for certain equipment equal to the lesser of (a) the fees that
would be charged by an independent third party for comparable services for
comparable equipment or (b) 2% of gross lease revenues derived from such
re-lease, provided, however, that no re-lease fee shall be payable if such
re-lease fee would cause the combination of the equipment management fee paid to
IMI and the re-lease fee with respect to such transaction to exceed 7% of gross
lease revenues.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
2. Transactions with General Partner and Affiliates (continued)
-----------------------------------------------------
The Partnership owned certain equipment in conjunction with affiliated
partnerships during 2002, 2001, and 2000 (see Note 4).
The Partnership had borrowings from the General Partner from time to time and
was charged market interest rates effective at the time of the borrowing.
During 2001, the Partnership borrowed $5.5 million for 70 days from the General
Partner to fund the purchase of marine containers and paid a total of $0.1
million in interest to the General Partner. There were no similar borrowings
during 2002 or 2000.
The balance due to affiliates as of December 31, 2002 includes $0.2 million due
to FSI and its affiliates for management fees and $0.7 million due to affiliated
USPEs. The balance due to affiliates as of December 31, 2001 includes $0.2
million due to FSI and its affiliates for management fees and $0.4 million due
to affiliated USPEs.
3. Equipment
---------
The components of owned equipment as of December 31 are as follows (in thousands
of dollars):
Equipment Held for Operating Leases 2002 2001
- ---------------------------------------------------------
Marine containers . . . . . . . . . $ 38,811 $ 38,915
Marine vessels. . . . . . . . . . . 22,212 22,212
Rail equipment. . . . . . . . . . . 9,615 9,602
Aircraft. . . . . . . . . . . . . . 5,483 5,483
Trailers. . . . . . . . . . . . . . 3,728 3,743
--------- ---------
79,849 79,955
Less accumulated depreciation . . . (49,918) (42,910)
--------- ---------
Net equipment . . . . . . . . . . $ 29,931 $ 37,045
========= =========
Revenues are earned by placing the equipment under operating leases. A portion
of the Partnership's marine containers are leased to operators of
utilization-type leasing pools, which include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. The remaining Partnership leases for marine containers are based on
a fixed rate. Lease revenues for trailers operating with short-line railroad
systems are based on a per-diem lease in the free running railroad interchange.
Rents for all other equipment are based on fixed rates.
As of December 31, 2002, all owned equipment was on lease except for a
commercial aircraft and 110 railcars with a net book value of $0.5 million. As
of December 31, 2001, all owned equipment was on lease except for 8 railcars
with a net book value of $0.1 million.
Equipment held for operating leases is stated at cost less any reductions to the
carrying value as required by SFAS No. 144. During 2002, the Partnership
recorded a write-down of tank railcars representing impairment to the carrying
value. The Partnership reduced the net book value of 71 owned tank railcars in
its railcar fleet to their fair value of $2,000 per railcar, and recorded a $0.6
million impairment loss. The impairment was caused by a general recall due to a
manufacturing defect allowing extensive corrosion of the railcars' internal
lining. Repair of the railcars were determined to be cost prohibitive. The
fair value of railcars with this defect was determined by using industry
expertise. These railcars were off lease. There were no reductions to the
carrying values of owned equipment in 2001 or 2000.
During 2001, the Partnership purchased marine containers for $8.0 million and
paid acquisition fees of $0.4 million to FSI. No equipment was purchased during
2002.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
3. Equipment (continued)
---------
During 2002, the Partnership disposed of marine containers and a trailer with a
net book value of $0.1 million for proceeds of $0.1 million. During 2001, the
Partnership disposed of marine containers and a trailer with a net book value of
$34,000 for proceeds of $0.1 million.
All owned equipment leases are accounted for as operating leases. Future
minimum rent under noncancelable operating leases as of December 31, 2002 for
this equipment during each of the next five years are approximately $8.7 million
in 2003; $7.7 million in 2004; $2.8 million in 2005; $1.3 million in 2006; $0.2
million in 2007; and $19,000 thereafter. Per diem and short-term rentals
consisting of utilization rate lease payments included in lease revenues
amounted to $1.9 million in 2002, $2.8 million in 2001, and $6.2 million in
2000.
4. Investments in Unconsolidated Special-Purpose Entities (USPEs)
-------------------------------------------------------------------
The Partnership owns equipment jointly with affiliated programs. These are
single purpose entities that do not have any debt or other financial
encumbrances.
Ownership interest is based on the Partnership's contribution towards the cost
of the equipment in the USPEs. The Partnership's proportional share of equity
and income (loss) in each entity is not necessarily the same as its ownership
interest. The primary reason for this difference has to do with certain fees
such as management, re-lease and acquisition and lease negotiation fees that
vary among the owners of the USPEs.
The tables below set forth 100% of the assets, liabilities, and equity of the
entities in which the Partnership has an interest and the Partnership's
proportional share of equity in each entity as of December 31, 2002 and 2001 (in
thousands of dollars):
TWA TWA Boeing
S/N 49183 MD-82 737-300
As of December 31, 2002 . . . . . . . . . Trust1 Trust2 Trust3 Total
- ---------------------------------------------------------------------------
Assets
Equipment less accumulated depreciation $ -- $ 4,192 $12,355
Receivables -- -- 1,825
Other assets -- -- 3
------- ------- -------
Total assets $ -- $ 4,192 $14,183
======= ======= =======
Liabilities
Accounts Payable $ 1 1 --
Due to affiliates $ 5 $ 5 $ 7
Lessee deposits and reserve for repairs -- -- 1,825
------- ------- -------
Total liabilities 6 6 1,832
------- ------- -------
Equity (6) 4,186 12,351
------- ------- -------
Total liabilities and equity $ -- $ 4,192 $14,183
======= ======= =======
Partnership's share of equity $ -- $ 2,139 $ 4,618 $6,757
======= ======= ======= ======
1 The Partnership owns a 50% interest of the TWA S/N 49183 Trust that owns
an MD-82 stage III commercial aircraft.
2 The Partnership owns a 50% interest in the TWA MD-82 Trust that owns an
MD-82 stage III commercial aircraft.
3 The Partnership owns a 38% interest in the Boeing 737-300 Trust that owns
a Boeing stage III commercial aircraft.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
4. Investments in Unconsolidated Special-Purpose Entities (continued)
----------------------------------------------------------
TWA TWA Boeing
S/N 49183 MD-82 737-300
As of December 31, 2001 Trust1 Trust2 Trust3 Total
- ---------------------------------------------------------------------------
Assets
Equipment less accumulated depreciation $ -- $5,590 $14,768
Receivables -- -- 1,078
Other assets -- -- 12
------- ------ -------
Total assets $ -- $5,590 $15,858
======= ====== =======
Liabilities
Accounts payable $ 7 $ 7 $ 70
Due to affiliates 5 16 20
Lessee deposits and reserve for repairs -- -- 1,027
------- ------ -------
Total liabilities 12 23 1,117
------- ------ -------
Equity (12) 5,567 14,741
------- ------ -------
Total liabilities and equity $ -- $5,590 $15,858
======= ====== =======
Partnership's share of equity $ -- $2,845 $ 5,564 $8,409
======= ====== ======= ======
The tables below set forth 100% of the revenues, gain on disposition of
equipment, direct and indirect expenses, and net income (loss) of the entities
in which the Partnership has an interest, and the Partnership's proportional
share of income (loss) in each entity for the years ended December 31, 2002,
2001, and 2000 (in thousands of dollars):
TWA TWA Boeing Pacific
For the year ended S/N 49183 MD-82 737-300 Source
December 31, 2002 Trust1 Trust2 Trust3 Partnership4 Other Total
- --------------------------------------------------------------------------------------
Revenues $ 1,260 $ 1,260 $1,860 $ -- $ 73
Less: Direct expenses (1) -- 36 (18) --
Indirect expenses 78 1,478 2,763 2 --
-------- ------- ------ ----------- ------
Net income (loss) $ 1,183 $ (218) $(939) $ 16 $ 73
======== ======= ====== =========== ======
Partnership's share of
net income (loss) $ 630 $ (126) $(395) $ 13 $ 32 $ 154
======== ======= ====== =========== ====== =======
TWA TWA Boeing Pacific
For the year ended S/N 49183 MD-82 737-300 Source
December 31, 2001 Trust1 Trust2 Trust3 Partnership4 Other Total
- -------------------------------------------------------------------------------------------
Revenues $ 1,477 $ 3,126 $ 1,813 $ 925 $ 10
Gain on disposition of equipment -- -- -- 2,586 --
Less: Direct expenses 26 22 980 556 24
Indirect expenses 1,888 2,077 3,487 448 9
-------- ------- ------- ---------- --------
Net income (loss) $ (437) $ 1,027 $(2,654) $ 2,507 $ (23)
======== ======= ======= ========== ========
Partnership's share of
net income (loss) $ (248) $ 467 $ (966) $ 2,009 $ (7) $1,255
======== ======= ======= ========== ======== ======
1 The Partnership owns a 50% interest of the TWA S/N 49183 Trust that owns
an MD-82 stage III commercial aircraft.
2 The Partnership owns a 50% interest in the TWA MD-82 Trust that owns an
MD-82 stage III commercial aircraft.
3 The Partnership owns a 38% interest in the Boeing 737-300 Trust that owns
a Boeing stage III commercial aircraft.
4 The Partnership owned an 80% interest in the Pacific Source Partnership
that owned a handymax dry bulk carrier.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
4. Investments in Unconsolidated Special-Purpose Entities (continued)
----------------------------------------------------------
TWA TWA Boeing Pacific
For the year ended S/N 49183 MD-82 737-300 Source Ulloa
December 31, 2000 Trust1 Trust2 Trust3 Partnership4 Partnership5
- --------------------------------------------------------------------------------------------
Revenues $ 2,402 $ 1,847 $ 1,399 $ 2,907 $ 1,274
Gain on disposition of equipment -- -- -- -- 1,937
Less: Direct expenses 23 26 1,261 1,542 1,081
Indirect expenses 1,913 2,607 3,687 1,211 532
-------- -------- -------- ------------ -----------
Net income (loss) $ 466 $ (786) $(3,549) $ 154 $ 1,598
======== ======== ======== ============ ===========
Partnership's share of
net income (loss) $ 205 $ (425) $(1,407) $ 123 $ 703
======== ======== ======== ============ ===========
For the year ended Boeing 767
December 31, 2000 Container Hyde Canadian Canadian Tenancy in
(continued) Partnership6 Partnership7 Trust #2 8 Trust #3 9 Common10 Total
- ----------------------------------------------------------------------------------------------------------------
Revenues. . . . . . . . . . . . . $ 1,087 $ -- $ 31 $ 14 $ --
Gain on disposition of equipment. 3 300 -- -- --
Less: Direct expenses . . . . . . -- -- -- -- --
Indirect expenses . . . 917 13 -- -- (56)
------------- ------------- ----------- ----------- ------------
Net income (loss) . . . . . . . $ 173 $ 287 $ 31 $ 14 $ 56
============= ============= =========== =========== ============
Partnership's share of
net income (loss) . . . . . . . $ 129 $ 29 $ 5 $ 4 $ 13 $ (621)
============= ============= =========== =========== ============ =======
During 2001, the Partnership increased its interest in a trust that owned a
commercial aircraft by paying $0.1 million in lease negotiation fees to FSI.
This payment did not affect the Partnership's percentage of ownership in this
trust.
As of December 31, 2002 and 2001, all jointly owned equipment in the
Partnership's USPE portfolio was on lease.
During 2001, the General Partner sold the entity owning a dry bulk-carrier
marine vessel in which the Partnership had an 80% interest. The Partnership's
interest in this entity was sold for proceeds of $5.3 million for its net
investment of $3.4 million. Included in the gain on sale of this entity was the
unused portion of marine vessel dry-docking of $0.2 million. During 2000, the
General Partner sold the Partnership's interest in an entity that owned a dry
bulk-carrier marine vessel for $2.4 million for its net investment of $1.7
million, and received additional sales proceeds of $30,000 from the 1999 sale of
a mobile offshore drilling unit. The General Partner also transferred the
Partnership's interest in an entity that owned marine containers to owned
equipment.
All jointly-owned equipment leases are accounted for as operating leases. The
Partnership's proportionate share of future minimum rent under noncancelable
operating leases as of December 31, 2002 for this equipment during each of the
next five years are approximately $2.0 million in 2003; $2.0 million in 2004;
$1.5 million in 2005; $1.3 million in 2006; $1.3 million in 2007; and $1.0
million thereafter. The Partnership's proportionate share of per diem and
short-term rentals consisting of utilization rate lease payments included in
lease revenues amounted to $0.7 million in 2001.
1 The Partnership owns a 50% interest of the TWA S/N 49183 Trust that owns
an MD-82 stage III commercial aircraft.
2 The Partnership owns a 50% interest in the TWA MD-80 Trust that owns an
MD-82 stage III commercial aircraft.
3 The Partnership owns a 38% interest in the Boeing 737300 Trust that owns a
Boeing stage III commercial aircraft.
4 The Partnership owned an 80% interest in the Pacific Source Partnership
that owned a handymax dry bulk carrier.
5 The Partnership owned an 44% interest in the Ulloa Partnership that owned
a dry bulk carrier.
6 The Partnership's had a 75% interest in an entity owning marine
containers.
7 The Partnership owned a 10% interest in the Hyde Partnership that owned a
mobile offshore drilling unit.
8 The Partnership owned a 50% interest in the Canadian Air Trust #2 that
owned two Boeing 737-200 commercial aircraft.
9 The Partnership owned a 25% interest in the Canadian Air Trust #3 that
owned four Boeing 737-200 commercial aircraft.
10 The Partnership owned a 24% interest in the Boeing 767 Tenancy in Common that
owned a stage III commercial aircraft.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
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 interest expense, and certain general
and administrative, operations support, and other expenses. The segments are
managed separately due to the utilization of different business strategies for
each operation. The accounting policies of the Partnership's operating segments
are the same as described in Note 1, Basis of Presentation. There were no
intersegment revenues for the years ended December 31, 2002, 2001 and 2000.
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, 2002 Leasing Leasing Leasing Leasing Leasing Other 1 Total
- ------------------------------------------------------------------------------------------------------------------
REVENUES
Lease revenue. . . . . . . . . . . . . $ 904 $ 6,288 $ 5,284 $ 616 $ 2,058 $ -- $15,150
Interest income and other. . . . . . . 11 -- -- -- 30 124 165
Gain on disposition of equipment . . . -- 38 -- 4 -- -- 42
--------- ---------- -------- --------- --------- --------- -------
Total revenues. . . . . . . . . . . 915 6,326 5,284 620 2,088 124 15,357
--------- ---------- -------- --------- --------- --------- -------
EXPENSES
Operations support . . . . . . . . . . 10 63 2,859 378 647 63 4,020
Depreciation and amortization. . . . . -- 4,581 1,240 209 473 38 6,541
Interest expense . . . . . . . . . . . -- -- -- -- -- 1,045 1,045
Management fees to affiliate . . . . . 7 315 264 32 147 -- 765
General and administrative expenses. . 33 -- 74 111 103 749 1,070
Impairment loss. . . . . . . . . . . . -- -- -- -- 616 -- 616
Provision for (recovery of) bad debts. 771 -- -- 10 (21) -- 760
--------- ---------- -------- --------- --------- --------- -------
Total expenses. . . . . . . . . . . 821 4,959 4,437 740 1,965 1,895 14,817
--------- ---------- -------- --------- --------- --------- -------
Equity in net income of USPEs. . . . . . 109 -- 45 -- -- -- 154
--------- ---------- -------- --------- --------- --------- -------
Net income (loss). . . . . . . . . . . . $ 203 $ 1,367 $ 892 $ (120) $ 123 $ (1,771) $ 694
========= ========== ======== ========= ========= ========= =======
Total assets as of December 31, 2002 . . $ 6,823 $ 23,749 $ 4,563 $ 776 $ 2,546 $ 9,867 $48,324
========= ========== ======== ========= ========= ========= =======
Includes certain assets not identifiable to a specific segment, such as cash,
restricted cash, lease negotiation fees, debt placement fees, and prepaid
expenses. Also includes interest income and costs not identifiable to a
particular segment, such as interest expense, certain amortization, general and
administrative, and operations support expenses.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
5. Operating Segments (continued)
-------------------
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 2001 Leasing Leasing Leasing Leasing Leasing Other 1 Total
- ------------------------------------------------------------------------------------------------------------------
REVENUES
Lease revenue. . . . . . . . . . . . . $ 1,085 $ 6,256 $ 5,496 $ 626 $ 2,379 $ -- $15,842
Interest income and other. . . . . . . 33 -- 1 -- 6 197 237
Gain on disposition of equipment . . . -- 39 -- 2 -- -- 41
---------- ---------- -------- --------- -------- --------- -------
Total revenues. . . . . . . . . . . 1,118 6,295 5,497 628 2,385 197 16,120
---------- ---------- -------- --------- -------- --------- -------
EXPENSES
Operations support . . . . . . . . . . 6 71 2,593 308 581 109 3,668
Depreciation and amortization. . . . . 410 5,509 1,240 209 541 4 7,913
Interest expense . . . . . . . . . . . -- -- -- -- -- 1,333 1,333
Management fees to affiliate . . . . . 41 313 275 32 166 -- 827
General and administrative expenses. . 39 -- 104 118 64 883 1,208
Provision for (recovery of) bad debts. 257 -- -- (11) 33 -- 279
---------- ---------- -------- --------- -------- --------- -------
Total expenses. . . . . . . . . . . 753 5,893 4,212 656 1,385 2,329 15,228
---------- ---------- -------- --------- -------- --------- -------
Equity in net income (loss) of USPEs . . (747) -- 2,002 -- -- -- 1,255
---------- ---------- -------- --------- -------- --------- -------
Net income (loss). . . . . . . . . . . . $ (382) $ 402 $ 3,287 $ (28) $ 1,000 $ (2,132) $ 2,147
========== ========== ======== ========= ======== ========= =======
Total assets as of December 31, 2001 . . $ 8,572 $ 28,366 $ 5,676 $ 1,038 $ 3,566 $ 3,524 $50,742
========== ========== ======== ========= ======== ========= =======
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 2000 Leasing Leasing Leasing Leasing Leasing Other 2 Total
- ------------------------------------------------------------------------------------------------------------------
REVENUES
Lease revenue. . . . . . . . . . . . . $ 1,085 $ 3,925 $ 5,519 $ 2,878 $ 2,463 $ -- $15,870
Interest income and other. . . . . . . -- -- -- -- -- 317 317
Gain on disposition of equipment . . . 1,118 33 -- 2,462 1 -- 3,614
---------- ---------- -------- -------- --------- --------- --------
Total revenues. . . . . . . . . . . 2,203 3,958 5,519 5,340 2,464 317 19,801
---------- ---------- -------- -------- --------- --------- --------
EXPENSES
Operations support . . . . . . . . . . 32 20 2,838 880 536 38 4,344
Depreciation and amortization. . . . . 661 3,050 1,364 996 626 -- 6,697
Interest expense . . . . . . . . . . . -- -- -- -- -- 1,480 1,480
Management fees to affiliate . . . . . 54 196 276 157 175 -- 858
General and administrative expenses. . 13 -- 57 655 88 827 1,640
Provision for (recovery of) bad debts. -- -- -- 123 (21) -- 102
---------- ---------- -------- -------- --------- --------- --------
Total expenses. . . . . . . . . . . 760 3,266 4,535 2,811 1,404 2,345 15,121
---------- ---------- -------- -------- --------- --------- --------
Equity in net income (loss) of USPEs . . (1,605) 129 826 -- -- 29 (621)
---------- ---------- -------- -------- --------- --------- --------
Net income (loss). . . . . . . . . . . . $ (162) $ 821 $ 1,810 $ 2,529 $ 1,060 $ (1,999) $ 4,059
========== ========== ======== ======== ========= ========= ========
Includes certain assets not identifiable to a specific segment, such as cash,
restricted cash, lease negotiation fees, debt placement fees, and prepaid
expenses. Also includes interest income and costs not identifiable to a
particular segment, such as interest expense, certain amortization, general and
administrative, and operations support expenses.
2 Includes interest income and costs not identifiable to a particular
segment, such as interest expense, certain amortization, general and
administrative, and operations support expenses. Also includes gain from the
sale from an investment in an entity that owned a mobile offshore drilling unit.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
6. Geographic Information
-----------------------
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Partnership leases or leased its aircraft, railcars, and trailers to lessees
domiciled in four geographic regions: the United States, Canada, Iceland, and
South America. Marine vessels and marine containers are leased to multiple
lessees in different regions that operate worldwide.
The table below sets forth lease revenues by geographic region for the
Partnership's owned equipment and investments in USPEs, grouped by domicile of
the lessees, as of and for the years ended December 31 (in thousands of
dollars):
Owned Equipment Investments in USPEs
--------------- --------------------
Region 2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------
United States . . . $ 1,428 $ 1,583 $ 3,152 $ 1,260 $ 1,505 $ 2,124
Canada. . . . . . . 1,246 1,421 2,188 -- -- --
Iceland . . . . . . -- -- -- -- 621 530
South America . . . 904 1,086 1,085 707 59 --
Rest of the world . 11,572 11,752 9,445 -- 740 3,646
------- ------- ------- ------- ------- -------
Lease revenues $15,150 $15,842 $15,870 $ 1,967 $ 2,925 $ 6,300
======= ======= ======= ======= ======= =======
The following table sets forth net income (loss) information by region for the
owned equipment and investments in USPEs for the years ended December 31 (in
thousands of dollars):
Owned Equipment Investments in USPEs
---------------- ----------------------
Region 2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------------
United States . . . . . . $ (444) $ 306 $ 3,511 $ 504 $ 219 $ (220)
Canada. . . . . . . . . . 445 666 1,196 -- -- 9
Iceland . . . . . . . . . -- -- -- -- (769) (1,407)
South America . . . . . . 95 365 326 (395) (197) 13
Rest of the world . . . . 2,215 1,688 1,676 45 2,002 984
-------- ------ ------- ------- ------ --------
Regional income (loss) 2,311 3,025 6,709 154 1,255 (621)
Administrative and other. (1,771) (2,133) (2,029) -- -- --
-------- ------ ------- ------- ------ --------
Net income (loss). . . $ 540 $ 892 $ 4,680 $ 154 $1,255 $ (621)
======== ====== ======= ======= ====== ========
The net book value of these assets as of December 31, are as follows (in
thousands of dollars):
Owned Equipment Investments in USPEs
---------------- ---------------------
Region 2002 2001 2002 2001
- -----------------------------------------------------
United States . . $ 1,188 $ 2,156 $ 2,139 $ 2,845
Canada. . . . . . 1,877 2,198 -- --
South America . . -- -- 4,618 5,564
Rest of the world 26,866 32,691 -- --
------- ------- ------- -------
Net book value $29,931 $37,045 $ 6,757 $ 8,409
======= ======= ======= =======
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
7. Debt
----
In December 1995, the Partnership entered into an agreement to issue long-term
notes totaling $23.0 million to five institutional investors. The notes bear
interest at a fixed rate of 7.27% per annum and have a final maturity in 2005.
During 1995, the Partnership paid lender fees of $0.2 million in connection with
this loan. Proceeds from the notes were used to fund equipment acquisitions.
The Partnership's wholly and jointly owned equipment is used as collateral to
the notes.
Interest on the notes is payable semiannually. The remaining balance of the
notes will be repaid in one principal payment of $3.0 million on December 31,
2003, and in two principal payments of $4.0 million on December 31, 2004 and
2005.
The General Partner estimates, based on recent transactions, that the fair value
of the $11.0 million fixed-rate note is $12.7 million.
The Partnership made the regularly scheduled principal payments and semiannual
interest payments to the lenders of the notes during 2002.
The Partnership is a participant in a $10.0 million warehouse facility. The
warehouse facility is shared by the Partnership, PLM Equipment Growth Fund V,
PLM Equipment Growth Fund VI, Professional Lease Management Income Fund I, LLC
and Acquisub LLC, a wholly owned subsidiary of PLMI. In July 2002, PLMI reached
an agreement with the lenders of the $10.0 million warehouse facility to extend
the expiration date of the facility to June 30, 2003. The facility provides for
financing up to 100% of the cost of the equipment. Any borrowings by the
Partnership are collateralized by equipment purchased with the proceeds of the
loan. Outstanding borrowings by one borrower reduce the amount available to
each of the other borrowers under the facility. Individual borrowings may be
outstanding for no more than 270 days, with all advances due no later than June
30, 2003. Interest accrues either at the prime rate or LIBOR plus 2.0% at the
borrower's option and is set at the time of an advance of funds. Borrowings by
the Partnership are guaranteed by PLMI. The Partnership is not liable for the
advances made to the other borrowers.
As of December 31, 2002, the Partnership had no borrowings outstanding under
this facility and there were no other borrowings outstanding under this facility
by any other eligible borrower.
8. Concentrations of Credit Risk
--------------------------------
For the years ended December 31, 2002, 2001 and 2000, the Partnership's
customers that accounted for 10% or more of the total revenues for the owned
equipment and jointly owned equipment were Alcoa Steamships Company, Inc. (30%
in 2002, 23% in 2001 and 22% in 2000) and Capital Leasing (20% in 2002 and 18%
in 2001).
During 2001, the lessee of a Stage II Boeing 737-200 commercial aircraft
notified the General Partner of its intention to return this aircraft. The
lessee is located in Brazil, a country experiencing severe economic difficultly.
The Partnership has a security deposit from this lessee that could be used to
pay a portion of the amount due. During October 2001, the General Partner sent
a notification of default to the lessee. The lease, which expired in October
2002, had certain return condition requirements for the aircraft. The General
Partner recorded an allowance for bad debts for the amount due less the security
deposit. During October 2002, the General Partner reached an agreement with the
lessee of this aircraft for the past due lease payments. In order to give the
lessee an incentive to make timely payments in accordance with the agreement,
the General Partner gave the lessee a discount on the total amount due. If the
lessee fails to comply with the payment schedule in the agreement, the discount
provision will be waived and the full amount again becomes payable. The lessee
made an initial payment during October 2002, to be followed by 23 equal monthly
installments beginning in November 2002. Unpaid outstanding amounts will accrue
interest at a rate of 5%. The balance outstanding at December 31, 2002 was $1.2
million. Due to the
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
8. Concentrations of Credit Risk (continued)
--------------------------------
uncertainty of ultimate collection, the General Partner will continue to fully
reserve the unpaid outstanding balance less the security deposit from this
lessee. As of December 31, 2002, the former lessee was current with all
payments due under the agreement.
As of December 31, 2002 and 2001, the General Partner believed the Partnership
had no other significant concentrations of credit risk that could have a
material adverse effect on the Partnership.
9. Income Taxes
-------------
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
As of December 31, 2002, the financial statement carrying amount of assets and
liabilities was approximately $29.1 million lower than the federal income tax
basis of such assets and liabilities, primarily due to differences in
depreciation methods, equipment reserves, provisions for bad debts, lessees'
prepaid deposits, and the tax treatment of underwriting commissions and
syndication costs.
10. Commitments and Contingencies
-------------------------------
Commitment to Purchase Railcars
- ----------------------------------
TEC arranged for the lease or purchase of a total of 1,050 pressurized tank
railcars by (i) partnerships and managed programs in which FSI serves as the
general partner or manager and holds an ownership interest (Program Affiliates)
or (ii) managed programs in which FSI provides management services but does not
hold an ownership interest or third parties (Non-Program Affiliates). These
railcars will be delivered over the next three years. A leasing company
affiliated with the manufacturer will acquire approximately 70% of the railcars
and lease them to a Non-Program Affiliate. The remaining 30% will either be
purchased by other third parties to be managed by PLMI, or by the Program
Affiliates. An affiliate of TEC will manage the leased and purchased railcars.
Neither TEC nor its affiliate will be liable for these railcars. TEC estimates
that the total value of purchased railcars will not exceed $26.0 million with
one third of the railcars being purchased in each of 2002, 2003, and 2004. As
of December 31, 2002, FSI committed one Program Affiliate, other than the
Partnership, to purchase $11.3 million in railcars that were purchased by TEC in
2002 or will be purchased in 2003. Although FSI has neither determined which
Program Affiliates will purchase the remaining railcars nor the timing of any
purchases, it is possible the Partnership may purchase some of the railcars.
Warehouse Credit Facility
- ---------------------------
See Note 7 for discussion of the Partnership's warehouse facility.
Commitments and contingencies as of December 31, 2002 are as follows (in
thousands of dollars):
Less than 1-3 4-5 After 5
Current Obligations Total 1 Year Years Years Years
- ---------------------------------------------------------------------
Commitment to purchase railcars $14,699 $ 6,257 $ 8,442 $ -- $ --
Notes payable 11,000 3,000 8,000 -- --
Line of credit -- -- -- -- --
------- ------- ------- ------ ------
$25,699 $ 9,257 $16,442 $ -- $ --
======= ======= ======= ====== ======
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
11. Quarterly Results of Operations (unaudited)
----------------------------------
The following is a summary of the quarterly results of operations for the year
ended December 31, 2002 (in thousands of dollars, except weighted-average unit
amounts):
March June September December
31, 30, 30, 31, Total
Operating results:
Total revenues. . . . . . . . . . . . . . . . $3,961 $3,783 $ 3,896 $ 3,717 $15,357
Net income (loss) . . . . . . . . . . . . . . 407 242 208 (163) 694
Per weighted-average limited partnership unit:
Net income (loss) . . . . . . . . . . . . . . . $ 0.08 $ 0.05 $ 0.04 $ (0.03) $ 0.14
The following is a list of the major events that affected the Partnership's
performance during 2002:
(i) In the second quarter of 2002, lease revenues decreased $0.2
million due to lower lease rates earned on the Partnership's marine container
portfolio; and
(ii) In the fourth quarter of 2002, an increase in the impairment
loss of $0.6 million was partially offset by a decrease in indirect expenses of
$0.2 million due to lower provision for bad debts.
The following is a summary of the quarterly results of operations for the year
ended December 31, 2001 (in thousands of dollars, except weighted-average unit
amounts):
March June September December
31, 30, 30, 31, Total
Operating results:
Total revenues. . . . . . . . . . . . . . . . $4,070 $4,199 $ 4,059 $ 3,792 $16,120
Net income (loss) . . . . . . . . . . . . . . (202) 2,860 (139) (372) 2,147
Per weighted-average limited partnership unit:
Net income (loss) . . . . . . . . . . . . . . . $(0.06) $ 0.54 $ (0.03) $ (0.07) $ 0.38
The following is a list of the major events that affected the Partnership's
performance during 2001:
(i) In the second quarter of 2001, the Partnership sold its
interest in an entity that owned a marine vessel for a gain of $2.1 million and
recognized a USPE engine reserve liability of $0.8 million as income; and
(ii) In the fourth quarter of 2001, Partnership lease revenues
decreased $0.3 million due to lower utilization earned on marine container and
trailers, and expenses increased $0.3 million due to an increase in the
provision for bad debts for an aircraft lessee.
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth & Income Fund VII:
We have audited the financial statements of PLM Equipment Growth & Income Fund
VII, a limited partnership (the "Partnership"), as of December 31, 2002 and
2001, and for each of the two years in the period ended December 31, 2002, and
have issued our report thereon dated March 7, 2003; such report is included
elsewhere in this Form 10-K. Our audits also included the financial statement
schedules of PLM Equipment Growth & Income Fund VII, listed in Item 15(B).
These financial statement schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such 2002 and 2001 financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 7, 2003
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A LIMITED PARTNERSHIP)
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(in thousands of dollars)
Balance at Additions Other Balance at
Beginning of Charged to Increases End of
Year Expense (Deductions) Year
- -------------------------------------------------------------------------------------------
Year Ended December 31, 2002
Allowance for doubtful accounts . $ 306 $ 760 $ 67 $ 1,133
Marine vessel dry-docking reserve 278 385 6 669
Aircraft engine reserves. . . . . 500 -- -- 500
Year Ended December 31, 2001
Allowance for doubtful accounts . $ 27 $ 279 $ -- $ 306
Marine vessel dry-docking reserve 307 527 (556) 278
Aircraft engine reserves. . . . . 425 -- 75 500
Year Ended December 31, 2000
Allowance for doubtful accounts . $ 382 $ 102 $ (457) $ 27
Marine vessel dry-docking reserve 807 372 (128) 307
Aircraft engine reserves. . . . . 325 -- 100 425
PLM EQUIPMENT GROWTH & INCOME FUND VII
INDEX OF EXHIBITS
Exhibit Page
- ------- ----
4.. . Limited Partnership Agreement of Partnership. *
4.1 First Amendment to the Third Amended and Restated
Limited Partnership Agreement *
4.2 Second Amendment to the Third Amended and Restated
Limited Partnership Agreement *
4.3 Third Amendment to the Third Amended and Restated Limited
Partnership Agreement *
4.4 Fourth Amendment to the Third Amended and Restated
Partnership Agreement *
10.1 Management Agreement between Partnership and PLM
Investment Management, Inc. *
10.2 Note Agreement, dated as of December 1, 1995, regarding
$23.0 million of 7.27% senior notes due December 21, 2005. *
10.3 Warehousing Credit Agreement dated as of April 13, 2001. *
10.4 First Amendment to Warehousing Credit Agreement, dated
as of December 21, 2001. *
10.5 Second amendment to the Warehouse Credit Agreement,
dated April 12, 2002. . . *
10.6 Third amendment to the Warehouse Credit Agreement,
dated July 11, 2002. *
10.7 October 2002 purchase agreement between PLM Transportation
Equipment Corp., Inc. and Trinity Tank Car, Inc. *
10.8 Settlement Agreement between PLM Worldwide Leasing Corp.
and Varig S.A. dated October 11, 2002. *
Financial Statements required under Regulation S-X Rule 3-09:
99.1 Boeing 737-200 Trust S/N 24700. 56-67
99.2 Pacific Source Partnership 68-76
* incorporated by reference. See page 26 of this report.