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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 0-28376
_______________________
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3209289
(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 at page 26-27.
Total number of pages in this report: 65.
PART I
ITEM 1. BUSINESS
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(A) Background
In August 1994, PLM Financial Services, Inc. (FSI or the Manager), a
wholly-owned subsidiary of PLM International, Inc. (PLMI International or PLMI),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 5,000,000 Class A units (the
units) in Professional Lease Management Income Fund I, L.L.C., a Delaware
Limited Liability Company (the Fund). The Fund's offering became effective on
January 23, 1995. The Fund 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 Fund'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 Manager 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 Fund.
(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.
(4) to increase the Fund's revenue base by reinvesting a portion of its
operating cash flow generated prior to December 31, 2002 in additional
equipment. 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 Fund's portfolio does not necessarily mean that the Fund's
aggregate net income and distributions will increase upon the reinvestment of
operating cash flow.
The offering of units of the Fund closed on May 13, 1996. As of December 31,
2002, there were 4,971,311 units outstanding. The Manager contributed $100 for
its Class B Member interest in the Fund. The Manager paid out of its own
corporate funds (as a capital contribution to the Fund) all organization and
syndication expenses incurred in connection with the offering; therefore, 100%
of the net cash proceeds received by the Fund from the sale of Class A Units
were used to purchase equipment and establish any required cash reserves.
The Fund may not reinvest cash flow generated from operations after January 1,
2003 into additional equipment. The Fund will terminate on December 31, 2010
unless terminated earlier upon 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
Fund's portfolio and the Fund'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:
14,537 . Marine containers Various $29,777
84 . . . Refrigerated marine containers Various 1,344
3. . . . 737-200A stage II commercial
aircraft Boeing 15,358
345. . . Pressurized tank railcars Various 9,230
97 . . . .Covered hopper railcars Various 5,281
245. . . .Box railcars Various 4,952
1. . . . Oil tanker marine vessel Hyundai 17,000
434. . Intermodal trailers Various 6,530
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Total owned equipment held for operating leases $89,472 1
========
Equipment owned by unconsolidated special-purpose entities:
0.50 . . Trust owning an MD-82
stage III commercial aircraft McDonnell Douglas $ 7,775 2
0.50 . . Trust owning an MD-82
stage III commercial aircraft McDonnell Douglas 6,825 2
--------
Total investments in unconsolidated special-purpose entities $14,600 1
========
Equipment is generally leased under operating leases for a term of one to six
years except for the marine vessel which is usually leased for less than one
year. Some of the Fund'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 Fund 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 Fund marine containers 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 Fund Equipment
The Fund has entered into an equipment management agreement with PLM Investment
Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the management of
the Fund's equipment. The Fund's management agreement with IMI is to
co-terminate with the dissolution of the Fund unless the Class A Members vote to
terminate the agreement prior to that date, or at the discretion of the Manager.
IMI has agreed to perform all services necessary to manage the equipment on
behalf of the Fund and to perform or contract for the performance of all
obligations of the lessor under the Fund's leases. In consideration for its
services and pursuant to the Operating 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 Fund borrowings.
Includes costs capitalized subsequent to the date of purchase.
2. Jointly owned by the Fund and an affiliated program.
(C) Competition
(1) Operating Leases Versus Full Payout Leases
Generally, the equipment owned by or invested in the Fund 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 Fund's purchase
price of the equipment. The short to mid-term nature of operating leases
generally command 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 Fund 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 Fund
offers, or larger competitors with a lower cost of capital may offer operating
leases at lower rates, which may put the Fund at a competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Fund competes with equipment manufacturers who offer operating leases and
full payout leases. Manufacturers may provide ancillary services that the Fund
cannot offer, such as specialized maintenance services (including possible
substitution of equipment), training, warranty services, and trade-in
privileges.
The Fund also competes with many equipment lessors, including ACF Industries,
Inc. (Shippers Car Line Division), GATX Corporation, General Electric Railcar
Services Corporation, General Electric Capital Aviation Services Corporation,
Xtra Corporation, and other investment programs that lease the same types of
equipment.
(D) Demand
The Fund currently operates in the following operating segments: marine
containers leasing, commercial aircraft leasing, railcar leasing, marine vessel
leasing, and intermodal trailer leasing. Each equipment leasing segment engages
in short-term to mid-term operating leases to a variety of customers. The
Fund's equipment and investments are primarily used to transport materials and
commodities, except for those aircraft leased to passenger air carriers.
The following section describes the international and national markets in which
the Fund'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 Fund purchased new standard dry cargo containers were from 1998 to 2000 that
were placed primarily 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 Fund's marine containers that were originally placed on mid-term leases in
1999 and 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) Commercial Aircraft
The Fund owns 100% of three Boeing 737-200 aircraft. 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 Fund also owns 50%
of two MD-82 aircraft, which are on long-term lease to a major US carrier.
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 Manager to remain weak. Most of the Fund's aircraft are of older vintage
with limited demand, and most of the 737's do not meet certain noise guidelines
that would allow for them to fly in the US and other countries.
The decrease in value of the Fund's aircraft since September 11, 2001 will have
a negative impact on the ability of the Fund to achieve its original objectives
as lower values will also result in significantly lower lease rates than the
Fund has been able to achieve for these assets in the past.
(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 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 Fund was in the 85% range
during the year. The desirability of the railcars in the Fund is affected by
the advancing age of this fleet and related corrosion issues on foam insulated
railcars.
(b) Covered Hopper (Grain) Railcars
Demand for covered hopper railcars, which are specifically designed to service
the grain industry, continued to experience weakness during 2002; carloadings
were down 3% when compared to 2001 volumes. There has been a consistent pattern
of decline in the number of carloadings over the last several years.
The US agribusiness industry serves a domestic market that is relatively mature,
the future growth of which is expected to be consistent but modest. Most
domestic grain rail traffic moves to food processors, poultry breeders, and
feedlots. The more volatile export business, which accounts for approximately
30% of total grain shipments, serves emerging and developing nations. In these
countries, demand for protein-rich foods is growing more rapidly than in the US,
due to higher population growth, a rapid industrialization pace, and rising
disposable income.
Other factors contributing to the softness in demand for covered hopper railcars
are the large number of new railcars built in the late 1990s and the more
efficient utilization of covered hoppers by the railroads. As in prior years,
any covered hopper railcars that were leased were done so at considerably lower
rental rates.
Many of the Fund's railcars are smaller and thus less desirable than those
currently being built. Because of this factor, the lack of any prospect for
improvement in car demand, and the large number of idle cars throughout the
industry. Utilization of the Fund's covered hopper railcars remained 100%
during 2002.
(c) Box Railcars
Box railcars are primarily used to transport paper and paper products. The
Funds railcars of this type have a smaller load capacity than those currently in
demand for paper service. The utilization of the Fund's box railcars was 80% at
year-end.
(4) Marine Vessel
The Fund owns a double-hull product tanker that operates in international
markets carrying a variety of commodity-type cargos. Demand for commodity-based
shipping is closely tied to worldwide economic growth patterns, which can affect
demand by causing changes in volume on trade routes. The Manager operates the
Fund's product tanker in the spot chartering markets, carrying mostly fuel oil
and similar petroleum distillates, an approach that provides the flexibility to
adapt to changes in market conditions.
The market for product tankers was weak throughout most of 2002 with lower than
anticipated rates. The Fund's product tanker, built in 1985, has continued to
operate with very little idle time between charters; rates, however, have
continued to be softer throughout the year when compared to rates experienced in
2001. In the fourth quarter of 2002 and into 2003, freight rates for the Fund's
marine vessel started to increase due to an increase in oil prices caused by
political instability in the Middle East.
(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 Manager continued its aggressive marketing program in a bid to attract new
customers for the Fund's intermodal trailers during 2002. The largest 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 Fund'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, overall, 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 Manager 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 and/or foreign governmental authorities. Such regulations may
impose restrictions and financial burdens on the Fund's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Fund's equipment portfolio are either
registered or operated internationally. Such equipment may be subject to
adverse political, governmental, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Fund'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 Fund. 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 Fund. 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 Manager is unable to
determine the impact on the Fund 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 do not meet certain noise, aging, and corrosion criteria. In
addition, under US Federal Aviation Regulations, after December 31, 1999, no
person may operate an aircraft to or from any airport in the contiguous United
States unless that aircraft has been shown to comply with Stage III noise
levels. The Fund has three Stage II aircraft that do not meet Stage III
requirements. The cost to install a hush kit to meet quieter Stage III
requirements is approximately $1.5 million, depending on the type of aircraft.
The Fund's wholly-owned aircraft that do not meet stage III requirements are on
lease or stored in a country that does not have this regulation. Upon lease
expiration, these 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 on the stratospheric ozone layer and that are
used extensively as refrigerants in refrigerated marine containers; and
(4) the US Department of Transportation's Hazardous Materials Regulations
which regulates the classification and packaging requirements of hazardous
materials which apply particularly to the Fund'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 a tank railcar for service. The average cost of this inspection is
$1,800 for non-jacketed tank railcars and $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 Fund currently owns 267
jacketed tank railcars. As of December 31, 2002, 28 jacketed tank railcars will
need to be re-qualified during 2003 or 2004.
During the fourth quarter of 2002, the Fund reduced the net book value of 80
owned tank railcars in its railcar fleet to their fair value of $2,000 per
railcar, and recorded a $0.7 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 Fund 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 Fund neither owns nor leases any properties other than the equipment it has
purchased or interests in entities which own equipment for leasing purposes. As
of December 31, 2002, the Fund owned a portfolio of transportation and related
equipment and investments in equipment owned by unconsolidated special-purpose
entities (USPEs), as described in Item I, Table 1. The Fund acquired equipment
with the proceeds of the Fund offering of $100.0 million, proceeds of debt
financing of $25.0 million, and by reinvesting a portion of its operating cash
flow in additional equipment.
The Fund maintains its principal office at 235 3rd Street South, Suite 200, St.
Petersburg, FL. 33701.
ITEM 3. LEGAL PROCEEDINGS
------------------
The Fund 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 Fund.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
No matters were submitted to a vote of the Fund's Members during the fourth
quarter of its fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR THE FUND'S EQUITY AND RELATED UNITHOLDER MATTERS
--------------------------------------------------------------
Pursuant to the terms of the operating agreement, the Manager is generally
entitled to a 1% interest in the profits and losses and 15% of cash
distributions. The Manager will be specially allocated (i) 100% of the Fund's
organizational and offering cost amortization expenses and (ii) income equal to
the excess of cash distribution over the Manager's 1% share of net profits. The
effect on the Class A Members of this special income allocation will be to
increase the net loss or decrease the net profits allocable to the Class A
Members by an equal amount. After the investors receive cash distributions
equal to their original capital contributions, the Manager's interest in the
cash distributions of the Fund will increase to 25%. The Manager is the sole
holder of such interests. The remaining interests in the profits and losses and
distributions of the Fund are owned as of December 31, 2001, by the 5,076
holders of Units in the Fund.
There are several secondary markets in which Class A units trade. Secondary
markets are characterized as having few buyers for Class A units and, therefore,
are generally viewed as inefficient vehicles for the sale of units. Presently,
there is no public market for the units and none is likely to develop. To
prevent the units from being considered publicly traded and thereby to avoid
taxation of the Fund as an association treated as a corporation under the
Internal Revenue Code, the units will not be transferable without the consent of
the Manager, which may be withheld in its absolute discretion. The Manager
intends to monitor transfers of units in an effort to ensure that they do not
exceed the percentage or number permitted by certain safe harbors promulgated by
the Internal Revenue Service. A transfer may be prohibited if the intended
transferee is not an 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.
The Fund may redeem a certain number of units each year under the terms of the
Fund's operating agreement. The purchase price paid by the Fund for outstanding
Class A Units upon redemption will be equal to 105% of the amount Class A
Members paid for the Class A Units, less the amount of cash distributions Class
A Members have received relating to such Class A Units. The price may not bear
any relationship to the fair value of a Class A Unit. As of December 31, 2002,
the Fund has purchased a cumulative total of 28,270 Class A units for a cost of
$0.4 million. No Class A units were purchased during 2002. The Manager does
not anticipate additional units being purchased under this plan in the future.
ITEM 6. SELECTED FINANCIAL DATA
-------------------------
Table 2, below, lists selected financial data for the Fund:
TABLE 2
-------
For the Years Ended December 31,
(In thousands of dollars, except weighted-average unit amounts)
2002 2001 2000 1999 1998
-----------------------------------------------------
Operating results:
Total revenues . . . . . . . . . . . . $ 18,746 $27,818 $ 27,988 $26,483 $28,301
Gain on disposition of equipment . . . 171 7,812 3,956 23 2,759
Loss on disposition of equipment . . . 12 -- -- -- --
Impairment loss on equipment . . . . . 719 -- -- -- --
Equity in net income (loss) of
unconsolidated special-purpose
entities . . . . . . . . . . . . . . 463 601 (176) 1,761 2,390
Net income (loss). . . . . . . . . . . (780) 8,585 4,821 (2,401) 4,316
At year-end:
Total assets . . . . . . . . . . . . . $ 59,673 $69,256 $ 71,683 $80,533 $99,635
Note payable . . . . . . . . . . . . . 16,000 19,000 22,000 25,000 25,000
Total liabilities. . . . . . . . . . . 20,730 23,628 28,013 29,935 28,905
Cash distribution. . . . . . . . . . . . $ 5,905 $ 6,627 $ 11,701 $11,690 $11,765
Cash distribution representing
a return of capital to Class A
members . . . . . . . . . . . . . . . $ 5,028 $ -- $ 6,880 $ 9,930 $ 7,405
Per weighted-average Class A unit:
Net income (loss). . . . . . . . . . . . $(0.33)1 $ 1.51 1 $ 0.62 1 $(0.81)1 $0.52 1
Cash distribution. . . . . . . . . . . . $ 1.01 $ 1.11 $ 2.00 $ 1.99 $ 2.00
Cash distribution representing a return
of capital to Class A members. . . . . $ 1.01 $ -- $ 1.38 $ 1.99 $ 1.48
1. After reduction of income of $0.9 million ($0.18 per weighted-average
Class A unit) in 2002, $1.0 million ($0.20 per weighted-average Class A unit) in
2001, $1.7 million ($0.34 per weighted-average Class A unit) in 2000, $1.7
million ($0.33 per weighted-average Class A unit) in 1999, and $1.6 million
($0.33 per weighted-average Class A 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 Professional Lease Management
Income Fund I, L.L.C. (the Fund). The following discussion and analysis of
operations focuses on the performance of the Fund's equipment in various
segments in which it operates and its effect on the Fund'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 Fund's equipment portfolio to repricing risk occurs whenever
the leases for the equipment expire or are otherwise terminated and the
equipment must be remarketed. Major factors influencing the current market rate
for the Fund's equipment include, but are not limited to, supply and demand for
similar or comparable types of transport capacity, desirability of the equipment
in the leasing market, market conditions for the particular industry segment in
which the equipment is to be leased, overall economic conditions, and various
regulations concerning the use of the equipment. Equipment that is idle or out
of service between the expiration of one lease and the assumption of a
subsequent lease can result in a reduction of contribution to the Fund. The
Fund experienced re-leasing or repricing activity in 2002 for its trailer,
marine container, marine vessel, aircraft, and railcar portfolios.
(a) Trailers: The Fund's trailer portfolio operates on per diem leases with
short-line railroad systems. The relatively short duration of these leases in
these operations exposes the trailers to considerable re-leasing and repricing
activity.
(b) Marine containers: Some of the Fund'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
2005, a significant number of the Fund's marine containers currently on a fixed
rate lease will be switching to a lease based on utilization. The Manager
anticipates that this will result in a significant decrease in lease revenue.
(c) Marine vessel: The Fund's owned marine vessel operated in the short-term
leasing market throughout 2002. As a result of this, the Fund's owned marine
vessel was remarketed several times during 2002 exposing it to re-leasing and
repricing activity.
(d) Aircraft: The lessee of three of the Fund's 737-200's defaulted on its
lease in September 2001. The Fund reached a settlement with this lessee in 2002
which included the continued re-lease of two of the aircraft at significantly
lower rates, and for an agreed upon stream of past due lease payments to be paid
over time. Due to the credit quality of that lessee, it is not certain that all
of the amounts agreed to in the settlement will be recovered. The remaining
stage II commercial aircraft is currently 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 Fund has been able to earn in the past.
(e) 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 Fund as existing leases expire
and renewal leases are negotiated.
(2) Equipment Liquidations
Liquidation of Fund 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 Fund.
During 2002, the Fund disposed of owned equipment that included marine
containers, trailers, and railcars for total proceeds of $0.4 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 leases, can
result not only in reductions in contribution, but also may require the Fund to
assume additional costs to protect its interests under the leases, such as
repossession or legal fees.
During 2001, the lessee of three Stage II Boeing 737-200 commercial aircraft
notified the Manager of its intention to return these aircraft and stopped
making lease payments. The lessee is located in Brazil, a country experiencing
severe economic difficultly. The Fund has a security deposit from this lessee
that could be used to pay a portion of the amount due. During October 2001, the
Manager sent a notification of default to the lessee. The lease, which expired
in October 2002, had certain return condition requirements for the aircraft.
The Manager recorded an allowance for bad debts for the amount due less the
security deposit. During October 2002, the Manager reached an agreement with
the lessee of this aircraft for the past due lease payments and agreed to
re-lease two of these aircraft to this lessee until March 2003 at a lower lease
rate. In order to give the lessee an incentive to make timely payments in
accordance with the agreement, the Manager 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 $3.6 million. Due to the uncertainty of
ultimate collection, the Manager 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 26, 2003, the installment payment due from the lessee to the Fund
during March was not received. The Manager 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 Fund cannot generate sufficient surplus cash
after fulfillment of operating obligations to reinvest in additional equipment
during the reinvestment phase of the Fund; equipment is disposed of for less
than threshold amounts; proceeds from disposition or surplus cash available for
reinvestment cannot be reinvested at the threshold lease rates; or proceeds from
the dispositions or surplus cash available for reinvestment cannot be deployed
in a timely manner.
The Fund will not reinvest cash flows generated from operations after January 1,
2003 into additional equipment.
Other nonoperating funds for reinvestment are generated from the sale of
equipment, the receipt of funds realized from the payment of stipulated loss
values on equipment lost or disposed of during the time it is subject to lease
agreements, or from the exercise of purchase options in certain lease
agreements. Equipment sales generally result from evaluations by the Manager
that continued ownership of certain equipment is either inadequate to meet Fund
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 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 Manager reviewed the carrying values of the Fund'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 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 Fund 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 Fund 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 Fund's owned and partially owned
equipment is based on the opinion of the Fund'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 Fund reduced the net book value of 80
owned tank railcars in its railcar fleet to their fair value of $2,000 per
railcar, and recorded a $0.7 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, Liquidity, and Unit Redemption
Plan
The Manager purchased the Fund's equipment portfolio with capital raised from
its initial equity offering of $100.0 million and permanent debt financing of
$25.0 million. No further capital contributions from Class A Members are
permitted under the terms of the Fund's operating agreement. The Fund relies on
operating cash flow to meet its operating obligations, make cash distributions
to Members, and increase the Fund's equipment portfolio. The total outstanding
debt, currently $16.0 million, can be increased with short-term borrowings not
to exceed the lesser of $10.0 million or 50% of the aggregate principal amount
of the Notes outstanding at the time and the total aggregate debt can not exceed
$25.0 million.
For the year ended December 31, 2002, the Fund generated operating cash of $5.9
million to meet its operating obligations, pay debt and interest payments and
make distributions (total of $5.9 million for year ended December 31, 2002) to
the members.
During the year ended December 31, 2002, the Fund disposed of marine containers,
railcars and trailers for proceeds of $0.4 million.
Cash held in escrow accounts increased during 2002 due to the deposit of $19.8
million into escrow accounts related to binding commitments to purchase railcars
entered into in 2002 that the Manager anticipates will be paid for in 2003.
Accounts receivable decreased $0.2 million during 2002. This decrease was due
to increase in the allowance for bad debts of $2.2 million due to the Manager's
evaluation of the collectibility of accounts receivable. This decrease was
partially offset by an increase of $2.0 million during 2002 due to the timing of
cash receipts.
Investments in USPEs decreased $0.7 million during 2002 due to cash
distributions of $1.2 million from the USPEs to the Fund being partially offset
by income of $0.5 million that was recorded by the Fund 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.
Lessee deposits and reserve for repairs increased $0.2 million during 2002 due
to the accrual of marine vessel dry-docking reserves.
Cash distributions of $0.8 million related to the results from the fourth
quarter of 2002 will be paid during the first quarter of 2003.
The Fund made the required annual debt payment of $3.0 million to the lender of
the note payable during 2002.
The Fund has a remaining outstanding balance of $16.0 million on the note
payable. The note bears interest at a fixed rate of 7.33% per annum and has a
final maturity in 2006. Interest on the note is payable semi-annually. The
remainder of the note payable will be repaid in two principal payments of $3.0
million on December 31, 2003, and 2004 and two principal payments of $5.0
million on December 31, 2005, and 2006. The agreement requires the Fund to
maintain certain financial covenants.
The Fund is a participant in a $10.0 million warehouse facility. The warehouse
facility is shared by the Fund, PLM Equipment Growth Fund V, PLM Equipment
Growth Fund VI, PLM Equipment Growth & Income Fund VII, 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 Fund 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 Fund are guaranteed by PLMI. The Fund is not liable for the advances made
to other borrowers.
As of March 26, 2003, the Fund had no borrowings outstanding under this facility
and there were no other borrowings outstanding under this facility by any other
eligible borrower.
The Manager has committed the Fund to purchase a total of $19.8 million in
railcar equipment. The funds to purchase these railcars were placed with an
unaffiliated escrow agent and are reported as cash held in escrow accounts in
the accompanying balance sheet. From January 1, 2003 through March 26, 2003,
the Fund paid $14.6 million for railcars that it had committed to purchase in
2002. The Manager believes these purchases will be completed in 2003.
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 $19,792 $ 19,792 $ -- $ -- $ --
Notes payable 16,000 3,000 8,000 5,000 --
Line of credit -- -- -- -- --
------- -------- ------- ------ ------
$35,792 $ 22,792 $ 8,000 $5,000 $ --
======= ======== ======= ====== ======
The Manager 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 Manager 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 Manager 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 Manager'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 Manager 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 Manager believes the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of the Fund's
financial statements:
Asset lives and depreciation methods: The Fund's primary business involves the
purchase and subsequent lease of long-lived transportation and related
equipment. The Manager has chosen asset lives that it believes correspond to
the economic life of the related asset. The Manager has chosen a deprecation
method that it believes matches the benefit to the Fund from the asset with the
associated costs. These judgments have been made based on the Manager's
expertise in each equipment segment that the Fund 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 Fund, the Fund 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 Fund may record a gain on sale upon final disposition of the
asset.
Impairment of long-lived assets: Whenever there is an indicator that an
impairment may exists, the Manager reviews the carrying value of its equipment
and investments in USPEs to determine if the carrying value of the assets may
not be recoverable in consideration of the current economic conditions. This
requires the Manager 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 Fund may be required to record additional impairment charges.
Allowance for doubtful accounts: The Fund 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 Fund'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 Fund 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 Manager'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 is not
adequate to cover the cost of such repairs or if the repairs must be performed
earlier than the Manager estimated, the Fund would incur additional repair and
maintenance or equipment operating expenses.
Contingencies and litigation: The Fund 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 Fund 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
Fund implemented SFAS No. 142 on January 1, 2002 and has determined that this
statement has no impact on its financial position or results of operations.
SFAS No. 142 had no impact on the Fund'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 Fund has elected
early adoption of SFAS No. 145 as of January 1, 2002. SFAS No. 145 had no
impact on the Fund'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 Fund to evaluate all existing arrangements to identify
situations where the Fund 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 Fund to consolidate the
variable interest entities' financial statements with its own. The Fund is
required to perform this assessment by September 30, 2003 and consolidate any
variable interest entities for which the Fund will absorb a majority of the
entities' expected losses or receive a majority of the expected residual gains.
The Fund 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 Detail Comparison
(1) Comparison of the Fund'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 6 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 $ 4,968 $ 5,124
Aircraft. . . . . 2,618 3,946
Railcars. . . . . 2,284 2,686
Marine vessels. . 1,138 1,835
Trailers. . . . . 596 614
Marine containers: Marine container lease revenues and direct expenses were
$5.0 million and $0.1 million, respectively, for the year ended December 31,
2002, compared to $5.2 million and $0.1 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 the same period of 2001 was due to lower
utilization on the Fund's marine containers.
Aircraft: Aircraft lease revenues and direct expenses were $2.6 million and
$27,000, respectively, for the year ended December 31, 2002, compared to $4.0
million and $25,000, respectively, during the same period of 2001. Aircraft
lease revenues decreased $1.3 million in 2002 compared to 2001. A decrease in
lease revenues of $0.9 million during the year ended December 31, 2002 was due
to the disposition of an owned aircraft during 2001 and the decrease of $0.4
million was due to the reduction of the lease rate compared to 2001.
Railcars: Railcar lease revenues and direct expenses were $3.0 million and
$0.7 million, respectively, for the year ended December 31, 2002, compared to
$3.4 million and $0.7 million, respectively, during the same period of 2001.
The decrease in lease revenues of $0.4 million during the year ended December
31, 2002 compared to the same period of 2001 was due to the increase in the
number of railcars off-lease.
Marine vessels: Marine vessel lease revenues and direct expenses were $6.3
million and $5.1 million, respectively, for the year ended December 31, 2002,
compared to $5.5 million and $3.7 million, respectively, during the same period
of 2001. Lease revenue increased $0.7 million during the year ended December
31, 2002 due a to higher lease rate earned on the marine vessel resulting from a
change in lease type from a time charter under which it operated during the year
ended December 31, 2001, to a voyage charter under which it operated during the
year ended December 31, 2002. Under a voyage charter, the marine vessel earns a
higher lease rate but is responsible for additional operating costs. The
increase in lease revenues was offset by a $1.4 million increase in operating
expenses resulting from higher costs for fuel of $0.7 million, higher port
charges of $0.5 million and higher operating expenses of $0.2 million.
Trailers: Trailer lease revenues and direct expenses were $1.2 million and
$0.6 million, respectively, for the year ended December 31, 2002, compared to
$1.1 million and $0.5 million, respectively, during the same period of 2001.
Lease revenue increased $0.1 million in the year ended December 31, 2002
compared to 2001 due to lease revenues in 2001 being higher than previously
reported on the Fund's trailer fleet. Direct expenses increased $0.1 million in
the year ended December 31, 2002 compared to 2001 due to higher repair costs.
(b) Interest and Other Income
Interest and other income decreased $0.4 million due to a decrease in the
interest rate earned on cash balances in the year ended December 31, 2002
compared to the same period in 2001.
(c) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $13.4 million for the year ended December 31, 2002
decreased from $14.7 million for the same period in 2001. Significant variances
are explained as follows:
(i) A $2.9 million decrease in depreciation expense from 2001 levels
reflects the decrease of $1.5 million resulting from certain assets becoming
fully depreciated during 2001 and a decrease of $1.4 million caused by the
double-declining balance method of depreciation which results in greater
depreciation in the first years an asset is owned;
(ii) A $0.4 million decrease in management fees was the result of a
decrease of $0.3 million due to lower lease revenues earned in the year ended
December 31, 2002 compared to 2001 and a decrease of $0.1 million due to a
higher provision for bad debts during the year ended December 31, 2002 compared
to 2001;
(iii) A $0.2 million decrease in interest expense was due to lower
average borrowings outstanding during the year ended December 31, 2002 compared
to 2001;
(iv) A $0.3 million increase in administrative expenses was due to
higher professional services;
(v) A $1.2 million increase in the provision for bad debts was based on
the Manager's evaluation of the collectability of receivables compared to 2001.
The provision for bad debt expense recorded in the year ended December 31, 2002
was primarily related to one aircraft lessee; and
(vi) Impairment loss increased $0.7 million during 2002 and resulted
from the Fund reducing the carrying value of 80 tank railcars to their estimated
fair value. No impairment of equipment was required during 2001.
Net gain on disposition of owned equipment for the year ended December 31, 2002
totaled $0.2 million which resulted from the sale or disposition of marine
containers, railcars, and trailers with a net book value of $0.2 million for
proceeds of $0.4 million. The gain on disposition of equipment for 2001 totaled
$7.8 million which resulted from the sale or disposition of an aircraft, a
marine vessel, marine containers, trailers, and railcars with an aggregate net
book value of $3.2 million, for proceeds of $10.2 million. Included in the 2001
net gain on disposition of assets is the unused portion of aircraft engine
reserves of $0.8 million.
(e) Equity in Net Income of Unconsolidated Special-Purpose Entities (USPEs)
Equity in net income of USPEs represents the Fund's share of the net income
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 . . . . . . . . . . . . . . $ 460 $ 370
Marine vessel. . . . . . . . . . . . 3 231
---------- ---------
Equity in net income of USPEs $ 463 $ 601
========== =========
The following USPE discussion by equipment type is based on the Fund's
proportional share of revenues, other income, gain on equipment dispositions,
depreciation expense, direct expenses, and administrative expenses in the USPEs:
Aircraft: As of December 31, 2002 and 2001, the Fund owned interests in two
trusts that each owns a commercial aircraft. During the year ended December 31,
2002, lease revenues of $1.3 million were offset by depreciation expense, direct
expenses, and administrative expenses of $0.8 million. During the same period
of 2001, lease revenues of $1.5 million and other income of $0.8 million were
offset by depreciation expense, direct expenses, and administrative expenses of
$1.9 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 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 2002.
The decrease in expenses of $1.1 million was due to lower depreciation expense
of $0.8 million resulting from one commercial aircraft in a trust becoming fully
depreciated during 2001, and a $0.2 million decrease on another commercial
aircraft resulting from 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 Fund no longer owned an
interest in an entity that owned a marine vessel. During the year ended
December 31, 2001, lease revenues of $0.4 million and the gain of $0.3 million
from the sale of a marine vessel entity in which the Fund owned an interest were
offset by depreciation expense, direct expenses, and administrative expenses of
$0.4 million.
(f) Net Income (Loss)
As a result of the foregoing, the Fund had a net loss of $0.8 million for the
year ended December 31, 2002, compared to net income of $8.6 million during the
same period of 2001. The Fund'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 Fund's performance in the year ended December
31, 2002 is not necessarily indicative of future periods. In the year ended
December 31, 2002, the Fund distributed $5.0 million to Class A members, or
$1.01 per weighted-average Class A unit.
(2) Comparison of the Fund's Operating Results for the Years Ended December
31, 2001 and 2000
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
decreased during the year ended December 31, 2001, when 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 $ 5,124 $ 4,095
Aircraft. . . . . 3,946 4,022
Railcars. . . . . 2,686 3,043
Marine vessels. . 1,835 3,914
Trailers. . . . . 614 2,587
Marine containers: Marine container lease revenues were $5.2 million and
$0.1 million, respectively, for the year ended December 31, 2001, compared to
$4.1 million and $18,000, respectively, during 2000. Marine container
contribution increased in 2001, compared to 2000 due to the purchase of
additional marine containers in 2000 and 2001.
Aircraft: Aircraft lease revenues and direct expenses were $4.0 million and
$25,000, respectively, for 2001, compared to $4.1 million and $35,000,
respectively, during 2000. Aircraft lease revenues decreased $0.1 million
during 2001 due to the disposition of one of the Fund's aircraft during 2001.
Railcars: Railcar lease revenues and direct expenses were $3.4 million and
$0.7 million, respectively, for 2001, compared to $3.7 million and $0.6 million,
respectively, during 2000. Lease revenues decreased $0.3 million during 2001
compared to 2000 primarily due to lower lease revenues on railcars whose lease
expired during 2001 that were re-leased at a lower lease rate.
Marine vessels: Marine vessel lease revenues and direct expenses were $5.5
million and $3.7 million, respectively, for 2001, compared to $7.6 million and
$3.7 million, respectively, during 2000.
Lease revenues decreased $2.1 million in 2001 compared to 2000. Lease revenues
decreased $3.7 million during 2001 compared to 2000 due to the sale of three
marine vessels during 2001 and 2000. The decrease caused by the sales was
offset, in part, by an increase of $1.6 million in lease revenues on the
remaining marine vessel due to a higher lease rate earned on this marine vessel
in 2001 compared to 2000. During 2001, the remaining marine vessel changed from
time charter to voyage charter. While on voyage charter, the owner earns a
higher lease rate; however, certain operating costs are now the responsibility
of the owner.
Direct expenses decreased $18,000 in 2001 compared to 2000. A decrease of $1.2
million in direct expenses was caused by the sale of three marine vessels during
2001 and 2000. This decrease in direct expenses was offset by an increase of
$47,000 in direct expenses due to higher repairs and maintenance and an increase
of $1.2 million due to higher operating expenses caused by the voyage charter
for the remaining marine vessel when compared to 2000.
Trailers: Trailer lease revenues and direct expenses were $1.1 million and
$0.5 million, respectively, for 2001, compared to $3.5 million and $0.9 million,
respectively, during 2000. Lease revenue decreased $2.2 million in 2001
compared to 2000 due to the sale of 39% of the Fund's trailers during 2000. The
trailers that were sold were newer and earned a higher lease rate than the
trailers that were retained. In addition, lease revenue decreased $0.2 million
due to lower utilization on the remaining trailer fleet. Expenses decreased in
2001 compared to 2000 due to the sale of the Fund's trailers during 2000.
(b) Interest and Other Income
Interest and other income decreased $0.3 million during 2001 compared to 2000.
A decrease of $0.7 million was due to an insurance claim for one of the Fund's
owned marine vessels that was recorded as other income during 2000. There were
no similar claims in 2001. This decrease was partially offset by an increase in
interest income of $0.3 million caused by higher average cash balances in 2001
compared to 2000.
(c) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $14.7 million for 2001 decreased from $17.7 million
for 2000. Significant variances are explained as follows:
(i) A $3.3 million decrease in depreciation and amortization expenses
from 2000 levels resulted from a $3.5 million decrease due to the use of the
double-declining balance depreciation method which results in greater
depreciation the first years an asset is owned and a decrease of $3.0 million
resulting from the sale of equipment. These decreases were partially offset by
an increase of $3.2 million in depreciation expense from the purchase of
equipment during 2000 and 2001;
(ii) A $0.5 million decrease in general and administrative expenses
during 2001 compared to 2000 was due to lower costs of $0.5 million resulting
from the sale of certain of the Fund's trailers and a $0.1 million decrease
resulting from the sale of owned marine vessels during 2001 and 2000. These
decreases were partially offset by an increase of $0.1 million resulting from an
increase in professional services during 2001 compared to 2000;
(iii) A $0.2 million decrease in interest and amortization expense was
due to lower average borrowings outstanding during 2001 compared to 2000; and
(iv) A $1.0 million increase in the provision for bad debts was due to
the Manager's evaluation of the collectability of receivables due from certain
lessees.
(d) Gain on Disposition of Owned Equipment
The gain on disposition of equipment for 2001 totaled $7.8 million which
resulted from the sale or disposition of an aircraft, a marine vessel, marine
containers, trailers, and railcars with an aggregate net book value of $3.2
million, for proceeds of $10.2 million. Included in the 2001 gain on
disposition of assets is the unused portion of aircraft engine reserves of $0.8
million. The gain on disposition of equipment for the year ended December 31,
2000 totaled $4.0 million which resulted from the sale of marine vessels,
trailers, and railcars with an aggregate net book value of $13.3 million, for
proceeds of $16.7 million. Included in the 2000 net gain on disposition of
assets is the unused portion of marine vessel dry-docking reserves of $0.5
million.
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Equity in net income (loss) of USPEs represents the Fund'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 are single purpose and
have no debt or 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
---------------------
Aircraft. . . . . . . . . . . . . . . . . . $ 370 $ (95)
Marine vessel . . . . . . . . . . . . . . . 231 (255)
Mobile offshore drilling unit . . . . . . . -- 174
---------- ----------
Equity in Net Income (Loss) of USPEs $ 601 $ (176)
========== ==========
The following USPE discussion by equipment type is based on the Fund's
proportional share of revenues, other income, gain on equipment dispositions,
depreciation expense, direct expenses, and administrative expenses in the USPEs:
Aircraft: As of December 31, 2001 and 2000, the Fund owned interests in two
trusts that each own a commercial aircraft. During 2001, aircraft lease
revenues of $1.5 million and other income of $0.8 million were offset by
depreciation expense, direct expenses, and administrative expenses of $1.9
million. During 2000, aircraft lease revenues were $2.1 million offset by
depreciation expense, direct expenses, and administrative expenses of $2.2
million.
Lease revenues decreased $0.6 million due to the reduction in the lease rate of
both MD-82s in the trusts as part of a new lease agreement for these commercial
aircraft. Other income increased $0.8 million during 2001 due to the
recognition of an engine reserve liability as income upon termination of the
previous lease agreement. A similar event did not occur during 2000.
The decrease in depreciation expense, direct expenses, and administrative
expenses of $0.3 million was due to 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, 2001, the Fund had no interest in any
entities that owned marine vessels. As of December 31, 2000, the Fund had an
interest in an entity that owned a marine vessel. During 2001, lease revenues
of $0.4 million and the gain of $0.3 million from the sale this entity in which
the Fund owned an interest were offset by depreciation expense, direct expenses,
and administrative expenses of $0.4 million. During 2000, lease revenues of
$0.6 million were offset by depreciation expense, direct expenses, and
administrative expenses of $0.9 million.
Lease revenues, depreciation expense, direct expenses, and administrative
expenses deceased during 2001 compared to 2000 due to the sale of the Fund's
interest in an entity owning a marine vessel.
Mobile offshore drilling unit: The Fund's interest in an entity owning a
mobile offshore drilling unit was sold during the fourth quarter of 1999.
During 2000, additional sale proceeds of $0.2 million were offset by
administrative expenses of $8,000.
(f) Net Income
As a result of the foregoing, the Fund had net income of $8.6 million for the
year ended December 31, 2001, compared to net income of $4.8 million during
2000. The Fund'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 Fund's performance in the year ended December 31, 2001
is not necessarily indicative of future periods. In the year ended December 31,
2001, the Fund distributed $5.5 million to Class A members, or $1.11 per
weighted-average Class A unit.
(G) Geographic Information
Certain of the Fund's equipment operates in international markets. Although
these operations expose the Fund to certain currency, political, credit and
economic risks, the Manager 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 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 Fund 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 Manager strives to minimize this
risk with market analysis prior to committing equipment to a particular
geographic area. Refer to Note 7 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 by geographic region are impacted by the time
period the assets are owned and the useful life ascribed to the assets for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years due to
the use of the double-declining balance method of depreciation. The
relationships of geographic revenues, net income, and net book value of
equipment are expected to change significantly in the future, as assets come off
lease and decisions are made to either redeploy the assets in the most
advantageous geographic location or sell the assets.
The Fund's owned and partially owned equipment on lease to US-domiciled lessees
consists of trailers, railcars, and interests in entities that own aircraft.
During 2002, US lease revenues accounted for 23% of the total lease revenues
from wholly and jointly owned equipment. This region reported a net income of
$0.3 million.
The Fund's owned equipment on lease to South American-domiciled lessees consists
of three aircraft. During 2002, South American lease revenues accounted for 14%
of the total lease revenues from wholly and jointly owned equipment, while this
region reported a net income of $0.4 million.
The Fund's equipment on lease to Canadian-domiciled lessees consists of
railcars. Lease revenues in Canada accounted for 6% of total lease revenues
from wholly and jointly-owned equipment, while this region reported a net income
of $0.2 million.
The Fund'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 58%
of the total lease revenues of wholly and jointly owned equipment. This region
reported a net income of $0.5 million.
(H) Inflation
Inflation had no significant impact on the Fund'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 Fund'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 Fund's actual results could differ materially
from those discussed here.
(J) Outlook for the Future
The Fund'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 Fund to realize acceptable lease rates on its equipment in
the different equipment markets is contingent on many factors, such as specific
market conditions and economic activity, technological obsolescence, and
government or other regulations. The unpredictability of these factors makes it
difficult for the Manager to clearly define trends or influences that may impact
the performance of the Fund's equipment. The Manager continually monitors both
the equipment markets and the performance of the Fund's equipment in these
markets. The Manager may make an evaluation to reduce the Fund's exposure to
those equipment markets in which it determines that it cannot operate equipment
and achieve acceptable rates of return.
In 2002, the Manager committed the Fund to purchase railcars totaling $19.8
million. These purchases are expected to be completed in 2003.
Factors that may affect the Fund'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 2005, a
significant number of the Fund's marine containers currently on a fixed rate
lease will be switching to a lease based on utilization. The Manager
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 Fund. 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. Freight rates earned by the Fund's marine vessel
began to decrease during the latter half of 2001 and continued through 2002. In
the fourth quarter of 2002 and into 2003, freight rates for the Fund's marine
vessels, which primarily carry petroleum products, started to increase due to an
increase in oil prices caused by political instability in the Middle East;
(iv) Utilization of intermodal trailers owned by the Fund decreased 12% in
2002 compared to 2001. This decline was similar to the decline in industry-wide
utilization. As the Fund's trailers are smaller than many shippers prefer, the
Manager expects declines in utilization over the next few years. Additionally,
one of the major shippers that leased the Fund's trailers has entered
bankruptcy. While the Fund 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; and
(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. As a result of this, upon lease expiration of the
Fund's owned aircraft, the Fund re-leased this aircraft at a lower rate that
will result in a decrease in revenues during 2003. The Manager 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 Fund's owned
and partially owned aircraft. Although no impairments were required during 2002
to these aircraft, the Manager does not expect these aircraft to return to their
September 11, 2001 values.
During 2001, the lessee of three Stage II Boeing 737-200 commercial aircraft
notified the Manager 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 Fund has a security deposit from this lessee that
could be used to pay a portion of the amount due. During October 2001, the
Manager sent a notification of default to the lessee. The lease, which expired
in October 2002, had certain return condition requirements for the aircraft.
The Manager recorded an allowance for bad debts for the amount due less the
security deposit.
During October 2002, the Manager reached an agreement with the lessee of this
aircraft for the past due lease payments and agreed to re-lease two of these
aircraft to this lessee until March 2003 at a lower lease rate. In order to
give the lessee an incentive to make timely payments in accordance with the
agreement, the Manager 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 $3.6 million. Due to the uncertainty of ultimate
collection, the Manager 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 Fund during March was
not received. The Manager has not yet placed the lessee into default, however,
is currently reviewing the options available under the agreement.
The remaining aircraft that was leased to this lessee is currently off-lease.
The Manager expects that when the two aircraft on lease expires in March 2003
and due to the age of these aircraft and the current economic conditions, these
aircraft may be off-lease for a significant period of time.
(vi) The Manager 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 Fund's equipment
portfolio caused by the events of September 11, 2001 and other economic factors.
The Manager has also experienced an increase in the deductible required to
obtain coverage. This may have a negative impact on the Fund in the event of an
insurance claim.
Several other factors may affect the Fund's operating performance in 2003 and
beyond, including changes in the markets for the Fund's equipment and changes in
the regulatory environment in which that equipment operates.
(1) Repricing and Reinvestment Risk
Certain of the Fund's aircraft, marine vessel, railcars, marine containers, and
trailers will be remarketed in 2003 as existing leases expire, exposing the Fund
to repricing risk/opportunity. Additionally, the Manager may elect to sell
certain under-performing equipment or equipment whose continued operation may
become prohibitively expensive. In either case, the Manager intends to re-lease
or sell equipment at prevailing market rates; however, the Manager cannot
predict these future rates with any certainty at this time, and cannot
accurately assess the effect of such activity on future Fund performance.
(2) Impact of Government Regulations on Future Operations
The Manager operates the Fund'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 Fund'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 Fund of meeting regulatory compliance for the same equipment operated
between countries.
Under US Federal Aviation Regulations, after December 31, 1999, no person may
operate an aircraft to or from any airport in the contiguous United States
unless that aircraft has been shown to comply with Stage III noise levels. The
Fund has three Stage II aircraft that do not meet Stage III requirements. Two
Stage II aircraft are leased in a country that does not have these noise
restrictions. The Fund's remaining Stage II aircraft is currently off-lease and
stored in a country that does not require this regulation
Furthermore, 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 a tank railcar for service. The average cost of this
inspection is $1,800 for non-jacketed tank railcars and $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
Fund currently owns 267 jacketed tank railcars. As of December 31, 2002, 28
jacketed tank railcars will need to be re-qualified during 2003 or 2004.
During the fourth quarter of 2002, the Fund reduced the net book value of 80
owned tank railcars in its railcar fleet to their fair value of $2,000 per
railcar, and recorded a $0.7 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 US and
internationally, cannot be predicted with accuracy, and preclude the Manager
from determining the impact of such changes on Fund operations, purchases, or
sale of equipment.
(K) Distribution Levels and Additional Capital Resources
The Fund's initial contributed capital was composed of the proceeds from its
initial offering of $100.0 million, supplemented by permanent debt in the amount
of $25.0 million. The Manager 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. The Fund intends to rely on operating cash flow to meet
its operating obligations, make cash distributions to members, make debt
payments, and increase the Fund's equipment portfolio with any remaining surplus
cash available.
The Manager will evaluate the level of distributions the Fund can sustain over
extended periods of time and, together with other considerations, may adjust the
level of distributions accordingly. In the long term, the difficulty in
predicting market conditions precludes the Manager from accurately determining
the impact of changing market conditions on liquidity or distribution levels.
The Manager has announced that the Fund will not make a monthly or quarterly
cash distribution to its members related to the first quarter 2003 operations.
The Fund's permanent debt obligation began to mature in December 2000. The Fund
has scheduled debt payments of $3.0 million on December 31, 2003 and 2004 and
$5.0 million on December 31, 2005 and 2006. The Manager believes that
sufficient cash flow will be available in the future for repayment of debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Fund's primary market risk exposure is that of currency risk. During 2002,
77% of the Fund's total lease revenues from wholly-and jointly-owned equipment
came from non-United States domiciled lessees. Most of the 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 payment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
The financial statements for the Fund are listed on 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 Manager announced that the Fund had engaged Deloitte &
Touche LLP as the Fund'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 procedure.
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 Fund has no directors, officers, or employees. The Fund has 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 Manager is generally entitled to a 1% interest in profits and losses and a
15% interest in the Fund's cash distributions, subject to certain allocation of
income provisions. After the investors receive cash equal to their original
capital contribution, the Manager's interest in the distributions of the Fund
will increase to 25%. As of December 31, 2002, no investor was known by the
Manager to beneficially own more than 5% of the units of the Fund.
(B) Security Ownership of Management
Neither the Manager and its affiliates nor any executive officer or director of
the Manager and its affiliates owned any units of the Fund as of December 31,
2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
Transactions with Management and Others
During 2002, the Fund paid or accrued the following fees to FSI or its
affiliates: management fees - $0.9 million; and administrative and data
processing services performed on behalf of the Fund - $0.3 million.
During 2002, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Fund's proportional share of ownership): management
fees - $0.1 million; and administrative and data processing services - $12,000.
The balance due to affiliates as of December 31, 2002, included $0.2 million due
to FSI and its affiliates for management fees.
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 Fund's principal Executive Officer and Chief Financial Officer have
concluded that the Fund's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Fund
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 Fund'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
MD-82 Trust S/N 49183.
(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
On December 20, 2002, the Fund filed Form 8-K to disclose that the Manager of
the Fund entered into binding commitments totaling approximately $19.8 million
to purchase pressure tank and sulfur railroad cars at fair value from Acquisub
LLC, a related party to the Manager of the Fund.
(D) Exhibits
4. Operating Agreement of Fund, incorporated by reference to the Fund's
Registration Statement on Form S-1 (Reg. No. 33-55796) which became effective
with the Securities and Exchange Commission on May 25, 1993.
10.1 Management Agreement between Fund and PLM Investment Management, Inc.,
incorporated by reference to the Fund'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 $25.0 Million Note Agreement, dated as of December 30, 1996,
incorporated by reference to the Fund's 1996 Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 14, 1997.
10.3 Warehousing Credit Agreement, dated as of April 13, 2001, incorporated
by reference to the Fund's Form 10-Q dated March 31, 2001 filed with the
Securities and Exchange Commission on May 9, 2001.
10.4 First Amendment to Warehousing Credit Agreement, dated as of December
21, 2001, incorporated by reference to the Fund's 2001 Annual Report on Form
10-K 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 Fund's Form 10-Q dated March 31, 2002
filed with the Securities and Exchange Commission on May 14, 2002.
10.6 Third amendment to the Warehouse Credit Agreement, dated July 11, 2002,
incorporated by reference to the Fund'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 Fund'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 Fund's Form 10-Q dated
September 30, 2002 filed with the Securities and Exchange Commission on November
14, 2002.
10.9 Escrow agreement dated December 19, 2002 between the Fund and Trenam
Kemker for $3.6 million, incorporated by reference to the Fund's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2002.
10.10 Escrow agreement dated December 19, 2002 between the Fund and Trenam
Kemker for $5.0 million, incorporated by reference to the Fund's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2002.
10.11 Escrow agreement dated December 19, 2002 between the Fund and Trenam
Kemker for $4.3 million, incorporated by reference to the Fund's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2002.
10.12 Escrow agreement dated December 19, 2002 between the Fund and Trenam
Kemker for $6.3 million, incorporated by reference to the Fund's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2002.
10.13 Escrow agreement dated December 19, 2002 between the Fund and Trenam
Kemker for $0.5 million, incorporated by reference to the Fund's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2002.
Financial Statements required under Regulation S-X Rule 3-09:
99.1 MD-82 Trust S/N 49183.
CONTROL CERTIFICATION
- ----------------------
I, James A. Coyne, certify that:
1. I have reviewed this annual report on Form 10-K of Professional Lease
Management Income Fund I, L.L.C.
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 --, 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 Professional Lease
Management Income Fund I, L.L.C.
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 --, 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 Fund has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
The Fund has no directors or officers. The Manager has signed on behalf of the
Fund by duly authorized officers.
PROFESSIONAL LEASE MANAGEMENT INCOME
Date: March --, 2003 FUND I, L.L.C.
By: PLM Financial Services, Inc.
Manager
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 Manager
of Professional Lease Management Income Fund I, L.L.C. (the Fund), that the
Annual Report of the Fund 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 Fund at the end of such
period and the results of operations of the Fund 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 Fund's Manager on the
dates indicated.
Name Capacity Date
- ---- -------- ----
/s/ Gary D. Engle
- --------------------
Gary D. Engle Director - FSI March --, 2003
/s/ James A. Coyne
- ---------------------
James A. Coyne Director - FSI March --, 2003
/s/ Richard K Brock
- ----------------------
Richard K Brock Director - FSI March --, 2003
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I
(A LIMITED LIABILITY COMPANY)
INDEX TO FINANCIAL STATEMENTS
(Item 15(a))
Page
----
Independent auditors' reports 32-33
Balance sheets as of December 31, 2002 and 2001 34
Statements of operations for the years ended
December 31, 2002, 2001, and 2000 35
Statement of changes in members' equity for the years ended
December 31, 2002, 2001, and 2000 36
Statements of cash flows for the years ended
December 31, 2002, 2001, and 2000 37
Notes to financial statements 38-51
Independent auditors' report on financial statement schedule 52
Schedule II valuation and qualifying accounts 53
INDEPENDENT AUDITORS' REPORT
The Members
Professional Lease Management Income Fund I, L.L.C.:
We have audited the accompanying balance sheets of Professional Lease Management
Income Fund I, L.L.C. (the "Fund"), as of December 31, 2002 and 2001, and the
related statements of operations, changes in members' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Fund'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 Fund 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 Members
Professional Lease Management Income Fund I, L.L.C.:
We have audited the accompanying statements of operations, changes in members'
equity and cash flows of Professional Lease Management Income Fund I, L.L.C., a
Delaware Limited Liability Company (the Fund), for the year ended December 31,
2000. These financial statements are the responsibility of the Fund'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 Professional
Lease Management Income Fund I, L.L.C. 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
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEETS
DECEMBER 31,
(in thousands of dollars, except unit amounts)
2002 2001
--------- ---------
ASSETS
Equipment held for operating leases. . . . . . . . . . . . . . . . . . $ 89,472 $ 89,833
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . (55,619) (48,425)
--------- ---------
Net equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,853 41,408
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . 560 21,837
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . 568 553
Cash held in escrow accounts . . . . . . . . . . . . . . . . . . . . . 19,792 --
Accounts and note receivable, less of allowance for doubtful accounts
of $3,532 in 2002 and $1,048 in 2001 . . . . . . . . . . . . . . . . 2,342 2,513
Investments in unconsolidated special-purpose entities . . . . . . . . 2,044 2,754
Debt placement fees, less accumulated amortization
of $105 in 2002 and $87 in 2001. . . . . . . . . . . . . . . . . . 71 89
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . 443 102
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 59,673 $ 69,256
========= =========
LIABILITIES AND MEMBER'S EQUITY
Liabilities
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . $ 622 $ 625
Due to affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . 191 264
Lessee deposits and reserves for repairs . . . . . . . . . . . . . . . 3,917 3,739
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 19,000
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 20,730 23,628
--------- ---------
Commitments and contingencies
Members' equity
Class A members (4,971,311 units at December 31, 2002 and 2001). . . . 38,943 45,628
Class B member . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
--------- ---------
Total members' equity. . . . . . . . . . . . . . . . . . . . . . . 38,943 45,628
--------- ---------
Total liabilities and members' equity . . . . . . . . . . . . . . $ 59,673 $ 69,256
========= =========
See accompanying notes to financial statements.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of dollars, except weighted-average unit amounts)
2002 2001 2000
-------- ------- --------
REVENUES
Lease revenue. . . . . . . . . . . . . . . . . . . $18,136 $19,198 $22,949
Interest and other income. . . . . . . . . . . . . 451 808 1,083
Gain on disposition of equipment . . . . . . . . . 171 7,812 3,956
Loss on disposition of equipment . . . . . . . . . (12) -- --
-------- ------- --------
Total revenues . . . . . . . . . . . . . . . . . 18,746 27,818 27,988
-------- ------- --------
EXPENSES
Depreciation . . . . . . . . . . . . . . . . . . . 6,646 9,536 12,815
Repairs and maintenance. . . . . . . . . . . . . . 1,856 1,779 2,517
Equipment operating expenses . . . . . . . . . . . 4,338 2,855 2,515
Insurance expense. . . . . . . . . . . . . . . . . 401 468 294
Management fees to affiliate . . . . . . . . . . . 851 1,277 1,232
Interest expense . . . . . . . . . . . . . . . . . 1,413 1,631 1,851
General and administrative expenses to affiliates. 256 546 853
Other general and administrative expenses. . . . . 1,328 741 919
Impairment loss on equipment . . . . . . . . . . . 719 -- --
Provision for (recovery of) bad debt expense . . . 2,181 1,001 (5)
-------- ------- --------
Total expenses . . . . . . . . . . . . . . . . . 19,989 19,834 22,991
-------- ------- --------
Equity in net income (loss) of unconsolidated
special-purpose entities . . . . . . . . . . . . 463 601 (176)
-------- ------- --------
Net income (loss). . . . . . . . . . . . . . . . . $ (780) $ 8,585 $ 4,821
======== ======= ========
MEMBERS' SHARE OF NET INCOME (LOSS)
Class A members. . . . . . . . . . . . . . . . . . $(1,657) $ 7,488 $ 3,066
Class B member . . . . . . . . . . . . . . . . . . 877 1,097 1,755
-------- ------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . $ (780) $ 8,585 $ 4,821
======== ======= ========
Net income (loss) per weighted-average
Class A unit . . . . . . . . . . . . . . . . . . $ (0.33) $ 1.51 $ 0.62
======== ======= ========
See accompanying notes to financial statements.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(in thousands of dollars)
Class A Class B Total
-------------------------------
Members' equity as of December 31, 1999. $ 50,598 $ -- $ 50,598
Net income . . . . . . . . . . . . . . . . 3,066 1,755 4,821
Purchase of Class A units. . . . . . . . . (48) -- (48)
Cash distributions . . . . . . . . . . . . (9,946) (1,755) (11,701)
--------- --------- ---------
Members' equity as of December 31, 2000. . 43,670 -- 43,670
Net income . . . . . . . . . . . . . . . . 7,488 1,097 8,585
Cash distributions . . . . . . . . . . . . (5,530) (1,097) (6,627)
--------- --------- ---------
Members' equity as of December 31, 2001. . 45,628 -- 45,628
Net income (loss). . . . . . . . . . . . . (1,657) 877 (780)
Cash distributions . . . . . . . . . . . . (5,028) (877) (5,905)
--------- --------- ---------
Members' equity as of December 31, 2002. $ 38,943 $ -- $ 38,943
========= ========= =========
See accompanying notes to financial statements.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of dollars)
OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . 2002 2001 2000
--------- -------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ (780) $ 8,585 $ 4,821
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . 6,646 9,536 12,815
Amortization of debt placement fees . . . . . . . . . . . . 18 18 18
Provision for (recovery of) bad debt expense. . . . . . . . 2,181 1,001 (5)
Impairment loss on equipment. . . . . . . . . . . . . . . . 719 -- --
Net gain on disposition of equipment. . . . . . . . . . . . (159) (7,812) (3,956)
Equity in net (income) loss of unconsolidated special
purpose entities. . . . . . . . . . . . . . . . . . . . (463) (601) 176
Changes in operating assets and liabilities:
Restricted cash . . . . . . . . . . . . . . . . . . . . . (30) 335 (360)
Accounts and note receivable. . . . . . . . . . . . . . . (2,010) (1,230) (273)
Prepaid expenses and other assets . . . . . . . . . . . . (341) 8 (2)
Accounts payable and accrued expenses . . . . . . . . . . (3) 45 (25)
Due to affiliates . . . . . . . . . . . . . . . . . . . . (60) (666) 261
Lessee deposits and reserves for repairs. . . . . . . . . 178 25 1,207
--------- -------- ---------
Net cash provided by operating activities . . . . . 5,896 9,244 14,677
--------- -------- ---------
INVESTING ACTIVITIES
Payments for capitalized repairs and purchase of equipment. . (11) (2,263) (19,484)
Increase in cash held in escrow accounts. . . . . . . . . . . (19,792) -- --
Liquidation distributions from unconsolidated special-
purpose entities. . . . . . . . . . . . . . . . . . . . -- 931 182
Distributions from unconsolidated special-purpose entities. . 1,160 2,084 2,204
Proceeds from disposition of equipment. . . . . . . . . . . . 360 10,106 16,864
--------- -------- ---------
Net cash (used in) provided by investing activities. (18,283) 10,858 (234)
--------- -------- ---------
FINANCING ACTIVITIES
Payments on note payable. . . . . . . . . . . . . . . . . . . (3,000) (3,000) (3,000)
Decrease (increase) in restricted cash. . . . . . . . . . . . 15 (75) --
Cash distributions to Class A members . . . . . . . . . . . . (5,028) (5,384) (9,946)
Cash distributions to Class B member. . . . . . . . . . . . . (877) (1,097) (1,755)
Purchase of Class A units . . . . . . . . . . . . . . . . . . -- -- (48)
--------- -------- ---------
Net cash used in financing activities . . . . . . . . . (8,890) (9,556) (14,749)
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents. . . . . (21,277) 10,546 (306)
Cash and cash equivalents at beginning of year. . . . . . . . 21,837 11,291 11,597
--------- -------- ---------
Cash and cash equivalents at end of year. . . . . . . . . . . $ 560 $21,837 $ 11,291
========= ======== =========
SUPPLEMENTAL INFORMATION
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 1,391 $ 1,617 $ 1,833
========= ======== =========
See accompanying notes to financial statements.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
-----------------------
Organization
------------
Professional Lease Management Income Fund I, L.L.C., a Delaware Limited
Liability Company (the Fund), was formed on August 22, 1994, 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
Manager of the Fund. FSI is a wholly-owned subsidiary of PLM International,
Inc. (PLM International or PLMI).
On May 13, 1996, the Fund ceased its offering for Class A Units. As of December
31, 2002, there were 4,971,311 Units outstanding.
The Fund will terminate on December 31, 2010, unless terminated earlier upon
sale of all equipment or by certain other events. The Fund may not reinvest
cash flow generated from operations after January 1, 2003 into additional
equipment. Excess cash, if any, less reasonable reserves, will be distributed
to the Members.
The Manager (Class B Member) controls and manages the affairs of the Fund. The
Manager paid out of its own corporate funds (as a capital contribution to the
Fund) all organization and syndication expenses incurred in connection with the
offering; therefore, 100% of the net cash proceeds received by the Fund from the
sale of Class A Units were used to purchase equipment and establish any required
cash reserves. For its contribution, the Manager is generally entitled to a 1%
interest in profits and losses and 15% interest in the Fund's cash distributions
subject to certain special allocation provisions (see Net Income (Loss) and
Distributions Per Unit, below). After the investors receive cash distributions
equal to their original capital contributions, the Manager's interest in the
cash distributions of the Fund will increase to 25%.
The operating agreement includes a redemption provision. Upon the
conclusion of the 30-month period immediately following the termination of the
offering, which was in November 1998, the Fund may, at the Manager's sole
discretion, redeem up to 2% of the outstanding units each year. The purchase
price paid by the Fund for outstanding Class A Units upon redemption will be
equal to 105% of the amount Class A Members paid for the Class A Units, less the
amount of cash distributions Class A Members have received relating to such
Class A Units. The price may not bear any relationship to the fair value of a
Class A Unit. During 2000, the Fund purchased 4,010 units for $48,000. No
units were purchased during 2002 or 2001. The Manager does not anticipate
additional units being purchased under this plan in the future.
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 Fund 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 Fund 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.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
-----------------------
Accounting for Leases
- -----------------------
The Fund'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 most other types of equipment. Certain aircraft are
depreciated under the double-declining balance method over the lease term which
approximate their economic life. The depreciation method changes to straight
line when the annual depreciation expense using the straight-line method exceeds
that calculated by the double-declining balance method. 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. Debt placement fees 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
operations (see Note 8).
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 Manager
reviewed the carrying value of the Fund's equipment portfolio at least quarterly
and whenever circumstances indicated that the carrying values 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 replaced SFAS No. 121. In accordance with SFAS No. 144, the Manager
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
Fund 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 Fund's owned and partially owned
equipment is based on the opinion of the Fund'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.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
-----------------------
Transportation Equipment (continued)
- -------------------------
During the fourth quarter of 2002, the Fund reduced the net book value of 80
owned tank railcars in its railcar fleet to their fair value of $2,000 per
railcar, and recorded a $0.7 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 Fund 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 Fund's interests in USPEs are managed by IMI. The Fund's equity interest in
the net income (loss) of USPEs is reflected net of management fees paid or
payable to IMI.
Repairs and Maintenance
- -------------------------
Repairs and maintenance costs related to marine vessels, railcars, and trailers
are usually the obligation of the Fund 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 Fund has the obligation to fund and accrue the
difference. In certain instances, if the aircraft is sold and there is a
balance in the reserve account for repairs to that aircraft, the balance in the
reserve account is reclassified 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 reserves for repairs.
Net Income (Loss) and Distributions per Unit
- --------------------------------------------------
The net profits and losses of the Fund are generally allocated 1% to the Class B
Member and 99% to the Class A Members. The Class B Member or Manager will be
specially allocated (i) 100% of the Fund's organizational and offering cost
amortization expenses and (ii) income equal to the excess of cash distribution
over the Manager's 1% share of net profits. The effect on the Class A Members
of this special income allocation will be to increase the net loss or decrease
the net profits allocable to the Class A Members by an equal amount. During
2002, the Manager received a special allocation of income of $0.9 million ($1.0
million and $1.7 million in 2001 and 2000, respectively) in excess of its
prorata ownership share. Cash distributions of the Fund are generally allocated
85% to the Class A Members and 15% to the Manager and may include amounts in
excess of net income. After the investors receive cash distributions equal to
their original capital contributions, the Manager's interest in the cash
distributions of the Fund will increase to 25%. The Class A Members' net income
(loss) is allocated among the Class A Members based on the number of Class A
units owned by each member and on the number of days of the year each member is
in the Fund.
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.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
-----------------------
Net Income (Loss) and Distributions per Unit (continued)
- --------------------------------------------------
For the years ended December 31, 2002, 2001 and 2000, cash distributions totaled
$5.9 million, $6.6 million, and $11.7 million, respectively, or $1.01, $1.11 and
$2.00 per weighted-average Class A unit, respectively.
Cash distributions to Class A Unitholders in excess of net income are considered
a return of capital. Cash distributions to Class A Unitholders of $5.0 million
and $6.9 million in 2002 and 2000, respectively, were deemed to be a return of
capital. None of the cash distributions paid during 2001 were deemed to be a
return of capital.
Cash distributions related to the fourth quarter of 2002 of $0.8 million, 2001
of $0.9 million, and 2000 of $1.2 million, were declared and paid during the
first quarter of 2003, 2002, and 2001, respectively.
The Manager has announced that the Fund will not make a monthly or quarterly
cash distribution to its members related to the first quarter 2003 operations.
Net Income (Loss) Per Weighted-Average Class A Unit
- ----------------------------------------------------------
Net income (loss) per weighted-average Class A unit was computed by dividing net
income (loss) attributable to Class A Members by the weighted-average number of
Class A units deemed outstanding during the period. The weighted-average number
of Class A units deemed outstanding during the years ended December 31, 2002 and
2001 were 4,971,311 and the year ended December 31, 2000 was 4,971,968.
Cash and Cash Equivalents
- ----------------------------
The Fund 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.
Restricted Cash
- ----------------
As of December 31, 2002, restricted cash consists of bank accounts and
short-term investments that are primarily subject to withdrawal restrictions per
the loan agreements. At December 31, 2002, the Fund has a security deposit from
a marine container lessee of $0.5 million and a security deposit of $0.1 million
with the warehouse facility lender (see Note 8) that are reported as restricted
cash.
Comprehensive Income
- ---------------------
The Fund's comprehensive income is equal to net income for the years ended
December 31, 2002, 2001 and 2000.
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
Fund implemented SFAS No. 142 on January 1, 2002. SFAS No. 142 had no impact on
the Fund'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.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation (continued)
-----------------------
New Accounting Standards (continued)
- --------------------------
145 are effective for fiscal years beginning after May 15, 2002. As permitted
by the pronouncement, the Fund has elected early adoption of SFAS No. 145 as of
January 1, 2002. SFAS No. 145 had no impact on the Fund'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 Fund to evaluate all existing arrangements to identify
situations where the Fund 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 Fund to consolidate the
variable interest entities' financial statements with its own. The Fund is
required to perform this assessment by September 30, 2003 and consolidate any
variable interest entities for which the Fund will absorb a majority of the
entities' expected losses or receive a majority of the expected residual gains.
The Fund 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 Manager and Affiliates
--------------------------------------------
An officer of FSI contributed the $100 of the Fund'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 attributable to equipment which is subject to
full payout net leases, (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 equipment for which IMI provides both management
and additional services. The Fund management fee in 2002, 2001 and 2000 was
$0.9 million, $1.3 million and $1.2 million, respectively. The Fund
reimbursed FSI or its affiliates $0.3 million,
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
2. Transactions with Manager and Affiliates (continued)
--------------------------------------------
$0.5 million, and $0.9 million for data processing expenses and other
administrative services performed on behalf of the Fund during 2002, 2001, and
2000.
The Fund's proportional share of USPE management fees to affiliate were $0.1
million during 2002, 2001, and 2000, and the Fund's proportional share of
administrative and data processing expenses to affiliate were $12,000, $0.1
million, and $34,000 during 2002, 2001, and 2000, respectively. Both of these
affiliate expenses reduced the Fund's proportional share of the equity interest
in the income in USPEs.
During the liquidation phase of the Fund, Transportation Equipment Corporation
(TEC) will 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 Fund, or
(ii) 50% of the "Competitive Equipment Sale Commission," as defined in the
agreement, if certain conditions are met. TEC is a wholly-owned subsidiary of
the Manager. In certain circumstances, the Manager 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 which 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 fee would cause the combination of the equipment management fee
paid to IMI and the re-lease fees with respect to such transactions to exceed 7%
of gross lease revenues.
The Fund had an interest in certain equipment in conjunction with affiliated
programs during 2002, 2001, and 2000 (see Note 5).
The balance due to affiliates as of December 31, 2002, included $0.2 million
($0.3 million at December 31, 2001) due to FSI and its affiliates for management
fees.
3. Cash Held in Escrow Accounts
--------------------------------
In December 2002, the Manager entered into five escrow agreements on behalf of
the Fund. The Manager placed $19.8 million with the escrow agent, an
unaffiliated third party, during 2002. These funds will be used to pay for
equipment in 2003 for which the Manager had entered into a legally binding
commitment to purchase in 2002 (see Notes 4, 12 and 13).
4. 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 . . . . . . . . . $ 31,121 $ 31,405
Railcars. . . . . . . . . . . . . . 19,463 19,495
Marine vessel . . . . . . . . . . . 17,000 17,000
Aircraft. . . . . . . . . . . . . . 15,358 15,358
Trailers. . . . . . . . . . . . . . 6,530 6,575
--------- ---------
89,472 89,833
Less accumulated depreciation . . . (55,619) (48,425)
--------- ---------
Net equipment . . . . . . . . . . $ 33,853 $ 41,408
========= =========
Revenues are earned under operating leases. A portion of the Fund's marine
containers are leased to operators of utilization-type leasing pools that
include equipment owned by unaffiliated parties. In such instances, revenues
earned by the Fund consist of a specified percentage of the total revenues
generated by leasing the pooled equipment to sublessees after deducting certain
direct operating expenses of the pooled equipment. The Fund's marine vessel is
operating on short-term leases which
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
4. Equipment (continued)
---------
usually have a duration of less than one year. 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 the remaining equipment are based
on fixed rates.
Equipment held for operating leases is stated at cost less any reductions to the
carrying value as required by SFAS No. 144. During the fourth quarter of 2002,
the Fund recorded a write-down of certain owned tank railcars representing
impairment to the carrying value. The Fund reduced the net book value of 80
owned tank railcars in its railcar fleet to their fair value of $2,000 per
railcar, and recorded a $0.7 million impairment loss. The impairment was caused
by a general recall due to a manufacturing defect allowing extensive corrosion
of the railcars' internal lining. Repairing the railcars was determined to be
cost prohibitive. The fair value of railcars with this defect was determined by
using industry expertise. These railcars were off lease. No reductions were
required to the carrying value of wholly owned equipment during 2001 or 2000.
As of December 31, 2002, all owned equipment in the Fund's portfolio was on
lease except for one commercial aircraft and 172 railcars with a net book value
of $0.9 million. As of December 31, 2001, all owned equipment in the Fund's
portfolio was on lease except for 62 railcars with a net book value of $0.5
million.
No equipment was purchased during the year ended December 31, 2002; however, the
Manager, on behalf of the Fund, entered into commitments to purchase railcars
totaling $19.8 million. The funds to purchase this equipment have been placed
with an unaffiliated escrow agent. The equipment is expected to be delivered
and paid for in 2003. The Fund made capital improvements in 2002 totaling
$11,000. During the year ended December 31, 2001, the Fund purchased marine
containers for $2.3 million.
During the year ended December 31, 2002, the Fund disposed of marine containers,
railcars and trailers with a net book value of $0.2 million for proceeds of $0.4
million. During the year ended December 31, 2001, the Fund disposed of a marine
vessel, an aircraft, marine containers, trailers, and railcars with an aggregate
net book value of $3.2 million, for proceeds of $10.2 million. Included in the
2001 gain on disposition of assets is the unused portion of aircraft engine
reserves of $0.8 million.
All owned equipment on lease is being accounted for as operating leases. Future
minimum rent under noncancelable operating leases as of December 31, 2002 for
the owned equipment during each of the next five years are approximately $5.8
million in 2003; $4.0 million in 2004; $1.6 million in 2005; $0.6 million in
2006; $0.5 million in 2007; and $2.9 million thereafter. Per diem and
short-term rentals consisting of utilization rate lease payments included in
revenues amounted to approximately $11.7 million, $10.2 million and $6.2 million
in 2002, 2001, and 2000, respectively.
5. Investments in Unconsolidated Special Purpose Entities
-----------------------------------------------------------
The Fund 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 Fund's contribution towards the cost of the
equipment in the USPEs. The Fund'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 and acquisition and lease negotiation fees varying among the owners
of the USPEs.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
5. Investments in Unconsolidated Special Purpose Entities (continued)
-----------------------------------------------------------
The tables below set forth 100% of the assets, liabilities, and equity of the
entities in which the Fund has an interest and the Fund's proportional share of
equity in each entity as of December 31, 2002 and 2001 (in thousands of
dollars):
TWA TWA
S/N 49183 MD-82
As of December 31, 2002 Trust1 Trust2 Total
- ----------------------------------------------------------------------
Assets
Equipment less accumulated depreciation $ -- $ 4,192
----------- -------
Total assets. . . . . . . . . . . . . $ -- $ 4,192
=========== =======
Liabilities
Due to affiliates . . . . . . . . . . . $ 6 $ 6
----------- -------
Total liabilities . . . . . . . . . . 6 6
----------- -------
Equity. . . . . . . . . . . . . . . . . . (6) 4,186
----------- -------
Total liabilities and equity. . . . . $ -- $ 4,192
=========== =======
Fund's share of equity. . . . . . . . . . $ -- $ 2,044 $2,044
=========== ======= ======
TWA TWA
S/N 49183 MD-82
As of December 31, 2001 Trust1 Trust2 Total
- ----------------------------------------------------------------------
Assets
Equipment less accumulated depreciation $ -- $ 5,590
----------- -------
Total assets. . . . . . . . . . . . . $ -- $ 5,590
=========== =======
Liabilities
Accounts payable. . . . . . . . . . . . $ 7 $ 7
Due to affiliates . . . . . . . . . . . 5 16
----------- -------
Total liabilities . . . . . . . . . . 12 23
----------- -------
Equity. . . . . . . . . . . . . . . . . . (12) 5,567
----------- -------
Total liabilities and equity. . . . . $ -- $ 5,590
=========== =======
Fund's share of equity. . . . . . . . . . $ -- $ 2,754 $2,754
=========== ======= ======
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 Fund has an interest, and the Fund'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
For the year ended. . . . . . . . S/N 49183 MD-82
December 31, 2002 . . . . Trust1 Trust2 Other Total
- --------------------------------------------------------------------------
Revenues. . . . . . . . . . . . $ 1,260 $ 1,260 $ --
Less: Direct expenses . . . . . (1) -- (7)
Indirect expenses . . 78 1,478 1
----------- -------- -------
Net income (loss) . . . . . . $ 1,183 $ (218) $ 6
=========== ======== =======
Fund's share of net income (loss) $ 553 $ (93) $ 3 $ 463
=========== ======== ======= ======
1 The Fund owns a 50% interest of the TWA S/N 49183 Trust that owns an MD-82
stage III commercial aircraft.
2 The Fund owns a 50% interest in the TWA MD-82 Trust that owns an MD-82
stage III commercial aircraft.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
5. Investments in Unconsolidated Special Purpose Entities (continued)
-----------------------------------------------------------
TWA TWA
For the year ended. . . . . . . . . S/N 49183 MD-82 Spear
December 31, 2001 . . . . . Trust1 Trust2 Partnership3 Total
Revenues. . . . . . . . . . . . . $ 1,477 $ 3,126 $ 710
- --------------------------------------------------------------------------------
Gain on disposition of equipment. -- -- 458
Less: Direct expenses . . . . . . 26 22 578
Indirect expenses . . . 1,888 2,077 280
----------- ------- -------------
Net income (loss) . . . . . . . $ (437) $ 1,027 $ 310
=========== ======= =============
Fund's share of net income (loss) . $ (191) $ 561 $ 231 $ 601
=========== ======= ============= ======
TWA TWA
For the year ended. . . . . . . . S/N 49183 MD-82 Spear
December 31, 2000 . . . . Trust1 Trust2 Partnership3
- -----------------------------------------------------------------------
Revenues. . . . . . . . . . . . $ 2,402 $ 1,847 $ 1,255
Less: Direct expenses . . . . . 23 26 1,273
Indirect expenses . . 1,913 2,607 493
---------- -------- --------------
Net income (loss) . . . . . . $ 466 $ (786) $ (511)
========== ======== ==============
Fund's share of net income (loss) $ 260 $ (361) $ (255)
========== ======== ==============
For the year ended. . . . . . . . . . Canadian Canadian Hyde
December 31, 2000 (continued) Trust #2 4 Trust #3 5 Partnership6 Total
- -------------------------------------------------------------------------------------
Revenues. . . . . . . . . . . . . . $ 31 $ 14 $ --
Gain on disposition of equipment. . -- -- 300
Less: Direct expenses . . . . . . . -- -- --
Indirect expenses . . . . -- -- 13
----------- ----------- -------------
Net income (loss) . . . . . . . . $ 31 $ 14 $ 287
=========== =========== =============
Fund's share of net income (loss) . . $ 3 $ 3 $ 174 $ (176)
=========== =========== ============= =======
As of December 31, 2002 and 2001, all jointly-owned equipment in the Fund's USPE
portfolio was on lease.
During 2001, the Manager sold a container marine vessel of which the Fund had a
50% interest. The Fund's interest in this entity was sold for proceeds of $0.9
million for its net investment of $0.8 million. Included in the gain on sale of
this entity was the unused portion of marine vessel dry-docking liability of
$0.2 million.
All jointly owned equipment on lease is being accounted for as operating leases.
The Fund's proportionate share of future minimum rent under noncancelable
operating leases as of December 31, 2002 for the jointly owned equipment during
each of the next five years are approximately $1.3 million in 2003; $1.3 million
in 2004; $1.3 million in 2005; $1.3 million in 2006; $1.3 million in 2007; and
$1.0 million thereafter.
6. Operating Segments
-------------------
The Fund operates or operated in five primary operating segments: marine
container leasing, aircraft leasing, railcar leasing, marine vessel leasing, and
trailer leasing. Each equipment leasing segment engages in short-term to
mid-term operating leases to a variety of customers.
1 The Fund owns a 50% interest of the TWA S/N 49183 Trust that owns an MD-82
stage III commercial aircraft.
2 The Fund owns a 50% interest in the TWA MD-82 Trust that owns an MD-82
stage III commercial aircraft.
3 The Fund owned a 50% interest in the Spear Partnership that owned a
container feeder vessel.
4 The Fund owned a 50% interest in the Canadian Air Trust #2 that owned two
Boeing 737-200 commercial aircraft.
5 The Fund owned a 25% interest in the Canadian Air Trust #3 that owned four
Boeing 737-200 commercial aircraft.
6 The Fund owned a 61% interest in the Hyde Partnership that owned a mobile
offshore drilling unit.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
6. Operating Segments (continued)
-------------------
The Manager evaluates the performance of each segment based on profit or loss
from operations before interest expense and certain general and administrative
and operations support expenses. The segments are managed separately due to
different business strategies for each operation. The accounting policies of
the Fund'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
Container Aircraft Railcar Vessel Trailer
For the Year Ended December 31, 2002 Leasing Leasing Leasing Leasing Leasing Other 1 Total
- ---------------------------------------------------------------------------------------------------------------------
REVENUES
Lease revenue. . . . . . . . . . . . . . $ 5,022 $ 2,645 $ 2,999 $ 6,258 $ 1,212 $ -- $18,136
Interest and other income. . . . . . . . -- 33 21 7 -- 390 451
Gain (loss) on disposition of equipment. 162 -- (12) -- 9 -- 159
---------- --------- --------- --------- --------- --------- --------
Total revenues. . . . . . . . . . . . 5,184 2,678 3,008 6,265 1,221 390 18,746
---------- --------- --------- --------- --------- --------- --------
EXPENSES
Operations support . . . . . . . . . . . 54 27 715 5,120 616 63 6,595
Depreciation . . . . . . . . . . . . . . 3,683 -- 1,116 1,480 367 -- 6,646
Interest expense . . . . . . . . . . . . -- -- -- -- -- 1,413 1,413
Management fees to affiliate . . . . . . 251 26 199 313 62 -- 851
General and administrative expenses. . . -- 56 183 52 203 1,090 1,584
Impairment loss. . . . . . . . . . . . . -- -- 719 -- -- -- 719
Provision for bad debts. . . . . . . . . -- 2,136 22 -- 23 -- 2,181
---------- --------- --------- --------- --------- --------- --------
Total expenses. . . . . . . . . . . . 3,988 2,245 2,954 6,965 1,271 2,566 19,989
---------- --------- --------- --------- --------- --------- --------
Equity in net income of USPEs. . . . . . . -- 460 -- 3 -- -- 463
---------- --------- --------- --------- --------- --------- --------
Net income (loss). . . . . . . . . . . . . $ 1,196 $ 893 $ 54 $ (697) $ (50) $ (2,176) $ (780)
========== ========= ========= ========= ========= ========= ========
Total assets as of Dcember 31, 2002. . . . $ 19,997 $ 2,305 $ 26,380 $ 7,959 $ 1,898 $ 1,134 $59,673
========== ========= ========= ========= ========= ========= ========
1 Includes certain assets not identifiable to a specific segment such as
cash, certain restricted cash, debt placement fees, and prepaid expenses. Also
includes interest income and costs not identifiable to a particular segment,
such as interest expense, general and administrative, and operations support
expenses.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
6. Operating Segments (continued)
-------------------
Marine Marine
Container Aircraft Railcar Vessel Trailer
For the Year Ended December 31, 2001 Leasing Leasing Leasing Leasing Leasing Other 1 Total
- ------------------------------------------------------------------------------------------------------------------
REVENUES
Lease revenue. . . . . . . . . . . . . $ 5,196 $ 3,971 $ 3,357 $ 5,548 $ 1,126 $ -- $19,198
Interest and other income. . . . . . . -- 33 8 56 -- 711 808
Gain on disposition of equipment . . . 7 6,820 8 963 14 -- 7,812
---------- --------- --------- -------- --------- --------- -------
Total revenues. . . . . . . . . . . 5,203 10,824 3,373 6,567 1,140 711 27,818
---------- --------- --------- -------- --------- --------- -------
EXPENSES
Operations support . . . . . . . . . . 72 25 671 3,713 512 109 5,102
Depreciation . . . . . . . . . . . . . 4,529 1,543 1,288 1,776 400 -- 9,536
Interest expense . . . . . . . . . . . -- -- -- -- -- 1,631 1,631
Management fees to affiliate . . . . . 260 466 224 270 57 -- 1,277
General and administrative expenses. . 1 24 87 58 190 927 1,287
Provision for (recovery of) bad debts. -- 894 (27) 154 (20) -- 1,001
---------- --------- --------- -------- --------- --------- -------
Total expenses. . . . . . . . . . . 4,862 2,952 2,243 5,971 1,139 2,667 19,834
---------- --------- --------- -------- --------- --------- -------
Equity in net income of USPEs. . . . . . -- 370 -- 231 -- -- 601
---------- --------- --------- -------- --------- --------- -------
Net income (loss). . . . . . . . . . . . $ 341 $ 8,242 $ 1,130 $ 827 $ 1 $ (1,956) $ 8,585
========== ========= ========= ======== ========= ========= =======
Total assets as of Dcember 31, 2001. . . $ 23,829 $ 3,280 $ 8,494 $ 9,271 $ 2,354 $ 22,028 $69,256
========== ========= ========= ======== ========= ========= =======
1 Includes certain assets not identifiable to a specific segment such as
cash, certain restricted cash, debt placement fees, and prepaid expenses. Also
includes interest income and costs not identifiable to a particular segment,
such as interest expense, general and administrative, and operations support
expenses.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
6. Operating Segments (continued)
-------------------
Marine Marine
Container Aircraft Railcar Vessel Trailer
For the Year Ended December 31, 2000 Leasing Leasing Leasing Leasing Leasing Other 1 Total
- -------------------------------------------------------------------------------------------------------------------
REVENUES
Lease revenue. . . . . . . . . . . . . $ 4,113 $ 4,057 $ 3,652 $ 7,645 $ 3,482 $ -- $22,949
Interest and other income. . . . . . . -- 2 6 657 -- 418 1,083
Gain on disposition of equipment . . . -- -- 84 1,798 2,074 -- 3,956
---------- ---------- -------- --------- --------- --------- --------
Total revenues. . . . . . . . . . . 4,113 4,059 3,742 10,100 5,556 418 27,988
---------- ---------- -------- --------- --------- --------- --------
EXPENSES
Operations support . . . . . . . . . . 18 35 609 3,731 895 38 5,326
Depreciation . . . . . . . . . . . . . 3,428 2,314 1,499 4,347 1,227 -- 12,815
Interest expense . . . . . . . . . . . -- -- -- -- -- 1,851 1,851
Management fees to affiliate . . . . . 206 203 241 384 198 -- 1,232
General and administrative expenses. . -- 12 97 81 718 864 1,772
Provision for (recovery of) bad debts. -- -- 1 -- (6) -- (5)
---------- ---------- -------- --------- --------- --------- --------
Total expenses. . . . . . . . . . . 3,652 2,564 2,447 8,543 3,032 2,753 22,991
---------- ---------- -------- --------- --------- --------- --------
Equity in net income (loss) of USPEs . . -- (95) -- (255) -- 174 (176)
---------- ---------- -------- --------- --------- --------- --------
Net income (loss). . . . . . . . . . . . $ 461 $ 1,400 $ 1,295 $ 1,302 $ 2,524 $ (2,161) $ 4,821
========== ========== ======== ========= ========= ========= ========
7. Geographic Information
-----------------------
The Fund owns certain equipment that is leased and operated internationally. A
limited number of the Fund'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 Fund leases aircraft, railcars and trailers to lessees domiciled in three
geographic regions: United States, South America, and Canada. The marine
vessels, mobile offshore drilling unit and marine containers were leased to
multiple lessees in different regions who operated the equipment worldwide.
The following table sets forth lease revenue information by region for the 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 . . $ 3,117 $ 3,168 $ 5,081 $ 1,260 $ 1,505 $ 2,124
South America . . 2,645 3,972 4,057 -- -- --
Canada. . . . . . 1,094 1,314 2,053 -- -- --
Rest of the world 11,280 10,744 11,758 -- 354 625
------- ------- ------- ------- ------- -------
Lease revenues $18,136 $19,198 $22,949 $ 1,260 $ 1,859 $ 2,749
====== ======== ======= ======= ======= =======
1 Includes interest income and costs not identifiable to a particular
segment, such as, interest expense, 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.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
7. Geographic Information (continued)
-----------------------
The following table sets forth income (loss) information by region for owned
equipment and investments in USPEs for the years ended December 31, are as
follows (in thousands of dollars):
Owned Equipment Investments in USPEs
--------------- --------------------
Region 2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------------
United States . . . . . . $ (203) $ 714 $ 2,949 $ 460 $ 370 $ (101)
South America . . . . . . 432 7,873 1,496 -- -- --
Canada. . . . . . . . . . 208 415 867 -- -- 6
Rest of the world . . . . 496 937 2,018 3 231 (81)
--------- ------- ------- ------ ------ --------
Regional income (loss) 933 9,939 7,330 463 601 (176)
Administrative and other. (2,176) (1,955) (2,333) -- -- --
--------- ------- ------- ------ ------ --------
Net income (loss) . . . $ (1,243) $ 7,984 $ 4,997 $ 463 $ 601 $ (176)
========= ======= ======= ====== ====== ========
The net book value of owned assets and the net investment in the unconsolidated
special-purpose entities at December 31, are as follows (in thousands of
dollars):
Owned Equipment Investments in USPEs
-------------- --------------------
Region 2002 2001 2002 2001
- ---------------------------------------------------------
United States . . $ 4,667 $ 6,264 $ 2,044 $ 2,754
Canada. . . . . . 3,473 4,092 -- --
Rest of the world 25,713 31,052 -- --
-------- ------- ------- --------
Net book value $ 33,853 $41,408 $ 2,044 $ 2,754
======== ======= ======= ========
8. Debt
----
In December 1996, the Fund entered into an agreement to issue a $25.0 million
long-term note to an institutional investor. The loan was funded in March 1997.
The note bears interest at a fixed rate of 7.33% per annum and has a maturity in
2006. Interest on the note is payable semi-annually. The remaining note
balance of $16.0 million will be repaid in two principal payments of $3.0
million on December 31, 2003 and 2004 and two principal payments of $5.0 million
on December 31, 2005 and 2006. The Fund has made all the regularly scheduled
principal payments and semiannual interest payments to the lender of the note
when due. The Fund's wholly and jointly owned equipment is used as collateral
to the note.
The Manager estimates, based on recent transactions, that the fair value of the
$16.0 million fixed-rate note is $17.0 million.
The Fund is a participant in a $10.0 million warehouse facility. The warehouse
facility is shared by the Fund, PLM Equipment Growth Fund V, PLM Equipment
Growth Fund VI, PLM Equipment Growth & Income Fund VII 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 Fund 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 Fund are guaranteed by PLMI. The Fund is not liable for the advances made
to other borrowers.
As of December 31, 2002, the Fund had no borrowings outstanding under this
facility and there were no other borrowings outstanding under this facility by
any other eligible borrower.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
9. Concentrations of Credit Risk
--------------------------------
For the years ended December 31, 2002, 2001 and 2000, the Fund's customers that
accounted for 10% or more of the total revenues for the owned equipment and
jointly owned equipment were Capital Leasing (18% in 2002) and Varig South
America ("Varig") (13%, 12% and 13%, respectively). In addition, during 2001,
AON Limited IBA purchased a Boeing 737-200A stage II commercial aircraft and the
gain from the disposal accounted for 20% of total revenues from wholly and
jointly owned equipment.
During 2001, Varig notified the Manager of its intention to return the three
aircraft under lease and stopped making lease payments. The Fund has a security
deposit from Varig that could be used to pay a portion of the amount due.
During October 2001, the Manager sent a notification of default to Varig. The
lease, which expired in October 2002, had certain return condition requirements
for the aircraft. The Manager recorded an allowance for bad debts for the
amount due less the security deposit. During October 2002, the Manager reached
an agreement with Varig for the past due lease payments and agreed to re-lease
two of these aircraft to them until March 2003 at a lower lease rate. In order
to give Varig an incentive to make timely payments in accordance with the
agreement, the Manager gave a discount on the total amount due. If Varig fails
to comply with the payment schedule in the agreement, the discount provision
will be waived and the full amount again becomes payable. Varig 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 $3.6 million.
Due to the uncertainty of ultimate collection, the Manager will continue to
fully reserve the unpaid outstanding balance less the security deposit from this
lessee. As of December 31, 2002, Varig was current with all payments due under
the agreement.
As of December 31, 2002 and 2001, the Manager believed the Fund had no other
significant concentrations of credit risk that could have a material adverse
effect on the Fund.
10. Income Taxes
-------------
The Fund is not subject to income taxes, as any income or loss is included in
the tax returns of the individual members. Accordingly, no provision for income
taxes has been made in the financial statements of the Fund.
As of December 31, 2002, the federal income tax basis was higher than the
financial statement carrying values of certain assets and liabilities by
approximately $19.4 million, primarily due to differences in depreciation
methods, equipment reserves, provisions for bad debts, lessees' prepaid
deposits, and the tax treatment of syndication costs.
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. . . . . . . . . . $4,852 $4,876 $ 4,497 $ 4,521 $18,746
Net income (loss) . . . . . . . . 81 (128) (593) (140) (780)
Per weighted-average Class A unit:
Net loss. . . . . . . . . . . . . . $(0.03) $(0.07) $ (0.16) $ (0.07) $ (0.33)
The following is a list of the major events that affected the Fund's performance
during 2002:
(i) In the second quarter of 2002, administrative and professional
costs increased $0.2 million;
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
11. Quarterly Results of Operations (unaudited) (continued)
----------------------------------
(ii) In the third quarter of 2002, lease revenues decreased $0.4
million due to a lower lease rate earned on the Fund's marine vessel; and
(iii) In the fourth quarter of 2002, an increase in the impairment
loss of $0.7 million was offset by a decrease in indirect expenses of $0.7
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 . . . . . . . . . $5,708 $4,718 $ 5,352 $ 12,040 $27,818
Net income . . . . . . . . . . . 553 1,246 604 6,182 8,585
Per weighted-average Class A unit:
Net income . . . . . . . . . . . . $ 0.02 $ 0.21 $ 0.08 $ 1.20 $ 1.51
The following is a list of the major events that affected the Fund's performance
during 2001:
(i) In the second quarter of 2001, the Fund recognized a USPE
engine reserve liability of $0.8 million as income; and
(ii) In the fourth quarter of 2001, the Fund sold an aircraft, a
marine container, and trailers for a total gain of $6.8 million.
12. Commitments and Contingencies
-------------------------------
Commitment to Purchase Railcars
- ----------------------------------
As of December 31, 2002, the Manager has committed the Fund to purchase a total
of $19.8 million in railcar equipment. The funds to purchase these railcars
were placed with an unaffiliated escrow agent and are reported as cash held in
escrow accounts on the accompanying 2002 balance sheet. The Manager believes
these purchases will be completed in 2003.
Warehouse Credit Facility and Notes Payable
- ------------------------------------------------
See Note 8 for discussion of the Fund's debt facilities.
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 $19,792 $19,792 $ -- $ -- $ --
Notes payable 16,000 3,000 8,000 5,000 --
Line of credit -- -- -- -- --
------- ------- -------- ------ ------
$35,792 $22,792 $ 8,000 $5,000 $ --
======= ======= ======== ====== ======
13. Subsequent Event
-----------------
From January 1, 2003 through March 25, 2003, the Fund paid $12.1 million for
railcars that it had committed to purchase in 2002. The funds to purchase this
equipment were classified as cash held in escrow accounts on the accompanying
2002 balance sheet.
- ------
INDEPENDENT AUDITORS' REPORT
The Members
Professional Lease Management Income Fund I, L.L.C.:
We have audited the financial statements of Professional Lease Management Income
Fund I, L.L.C., a Delaware Limited Liability Company (the "Fund"), 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 Professional Lease Management Income Fund I,
L.L.C., listed in Item 15(B). These financial statement schedules are the
responsibility of the Fund'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
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(in thousands of dollars)
- - Balance at Additions Balance at
Beginning of Charged to Increases End of
Year Expense (Deductions) Year
- ----------------------------------------------------------------------------------------
Year Ended December 31, 2002
Allowance for doubtful accounts . $ 1,048 $ 2,181 $ 303 $ 3,532
Marine vessel dry-docking reserve 240 288 (2) 526
Aircraft engine reserve . . . . . 2,200 -- -- 2,200
Year Ended December 31, 2001
Allowance for doubtful accounts . $ 48 $ 1,001 $ (1) $ 1,048
Marine vessel dry-docking reserve 428 245 (433) 240
Aircraft engine reserve . . . . . 2,550 -- (350) 2,200
Year Ended December 31, 2000
Allowance for doubtful accounts . $ 65 $ (5) $ (12) $ 48
Marine vessel dry-docking reserve 672 518 (762) 428
Aircraft engine reserve . . . . . 1,950 -- 600 2,550
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
INDEX OF EXHIBITS
Exhibit Page
- ------- ----
4.. . . Operating Agreement of Fund. *
10.1 Management Agreement between Fund and PLM Investment *
Management, Inc.
10.2 25.0 Million Note Agreement, dated as of December 30, 1996. *
10.3 Warehouse 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 as of
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. *
10.9 Escrow agreement dated December 19, 2002 between the Fund and
Trenam Kemker for $3.6 million. *
10.10 Escrow agreement dated December 19, 2002 between the Fund and
Trenam Kemker for $5.0 million. *
10.11 Escrow agreement dated December 19, 2002 between the Fund and
Trenam Kemker for $4.3 million. *
10.12 Escrow agreement dated December 19, 2002 between the Fund and
Trenam Kemker for $6.3 million. *
10.13 Escrow agreement dated December 19, 2002 between the Fund and
Trenam Kemker for $0.5 million. *
Financial Statements required under Regulation S-X Rule 3-09:
99.1 MD-82 Trust S/N 49183 56-65
* Incorporated by reference. See page 26-27 of this report.