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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 33-32258
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PLM EQUIPMENT GROWTH FUND V
(Exact name of registrant as specified in its charter)
California 94-3104548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Market, Steuart Street Tower
Suite 800, San Francisco, CA 94105-1301
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (415) 974-1399
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Aggregate Market Value of Voting Stock: N/A
An index of exhibits filed with this Form 10-K is located at page 44.
Total number of pages in this report: 47.
PART I
ITEM 1. BUSINESS
(A) Background
In November 1989, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly-owned subsidiary of PLM International, Inc. (PLM International), filed a
Registration Statement on Form S-1 with the Securities and Exchange Commission
with respect to a proposed offering of 10,000,000 Depositary Units (including
2,500,000 option units) (the Units) in PLM Equipment Growth Fund V, a California
limited partnership (the "Partnership", the "Registrant" or "EGF V"). The
Registration Statement also proposed offering an additional 1,250,000 Class B
units through a reinvestment plan. The General Partner has determined that it
will not adopt this reinvestment plan for the Partnership. The Partnership's
offering became effective on April 11, 1990. FSI, as General Partner, owns a 5%
interest in the Partnership. The Partnership engages in the business of owning
and leasing transportation equipment to various commodity shippers and
transportation companies.
The Partnership was formed to engage in the business of owning and managing
a diversified pool of used and new transportation-related equipment and certain
other items of equipment. The Partnership's primary objectives are:
(i) to acquire a diversified portfolio of low obsolescence equipment with
long lives and high residual values with the net proceeds of the initial
partnership offering, supplemented by debt financing if deemed appropriate by
the General Partner. The General Partner intends to acquire the equipment at
what it 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;
(ii)to generate sufficient net operating cash flow from lease operations to
meet liquidity requirements and to generate cash distributions to the Limited
Partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(iii) to selectively sell and purchase other equipment to add to the
Partnership's initial equipment portfolio. The General Partner intends to sell
equipment when it believes that, due to market conditions, market prices for
equipment exceed inherent equipment values or expected future benefits from
continual ownership of a particular asset will not equal or exceed other
equipment investment opportunities. Proceeds from these sales, together with
excess net operating cash flow from operations that remains after cash
distributions have been made to the partners, will be used to acquire additional
equipment throughout the six year reinvestment phase of the Partnership;
(iv)to preserve and protect the value of the portfolio through quality
management, maintaining diversity and constantly monitoring equipment markets.
The offering of the Units of the Partnership closed on December 23, 1991.
As of December 31, 1996, there were 9,169,019 Units outstanding. The General
Partner contributed $100 for its 5% general partner interest in the Partnership.
Beginning in the Partnership's seventh year of operations, which commences
January 1, 1999, the General Partner will stop reinvesting cash flow and surplus
funds, all of which, if any, less reasonable reserves, will be distributed to
the partners. In the ninth year of operations of the Partnership, the General
Partner will begin to liquidate the assets of the Partnership in an orderly
fashion, unless the Partnership is terminated earlier upon sale of all of the
Partnership's equipment or by certain other events. It is anticipated that the
liquidation will be completed by the end of the tenth year of operations of the
Partnership.
Table 1, below, lists the equipment and the cost of the equipment in the
Partnership portfolio as of December 31, 1996 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
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Owned equipment held for operating leases:
1 Product tanker KK Uwajima Zosen $ 17,254
1 Product tanker Kaldnes M/V 16,276
1 Panamax bulk carrier China S.B. Corp. 18,729
5 737-200 Stage II commercial aircraft Boeing 26,405
2 Metro III commuter aircraft Fairchild 1,515
2 DHC-8-102 commuter aircraft DeHavilland 7,629
1 DHC-8-300 commuter aircraft DeHavilland 5,748
1 DC-9-32 commercial aircraft McDonnell Douglas 10,056
1 Stage III aircraft engine RB-211-535E4 Rolls Royce 5,852
752 Refrigerated marine containers Various 13,208
3,236 Various marine containers Various 11,243
126 Covered hopper cars Various 2,972
106 Anhydrous ammonia tank cars GATX 2,483
44 Mill gondola cars Bethlehem Steel 1,248
85 Sulphur tank cars ACF/RTC 2,786
73 Tank cars Various 1,917
183 Refrigerated trailers Various 5,529
154 Dry trailers Various 1,878
149 Piggyback refrigerated trailers Oshkosh 2,276
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Total equipment held for operating leases $ 155,004
===========
Investment in equipment owned by unconsolidated special purpose entities:
0.5 Bulk carrier Nipponkai and Toyama $ 9,705
0.5 Product tanker Kaldnes M/V 8,249
0.17 Two Trusts comprised of:
Three 737-200 Stage II commercial aircraft Boeing 4,706
Two aircraft engines Pratt Whitney 195
Portfolio of aircraft rotables Various 325
0.25 Equipment on direct finance lease:
Two DC-9 commercial aircraft McDonnell Douglas 3,004
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Total investments $ 26,184
===========
Owned equipment on direct finance lease:
1 Stage III hushkit installed on B727-200 $ 2,525
===========
Includes proceeds from capital contributions, undistributed cash flow from
operations, and partnership borrowings invested in equipment. Includes
costs capitalzied subsequent to the date of acquisition, and equipment
acquisition fees paid to PLM Transportation Equipment Corporation (TEC), a
wholly-owned subsidiary of FSI, or PLM Worldwide Management Services (WMS),
a wholly-owned subsidiary of PLM International. All equipment was used
equipment at the time of purchase, except 125 dry van trailers and 150
piggyback refrigerated trailers.
Jointly owned: EGF V and an affiliated partnership.
Jointly owned: EGF V (17%) and three affiliated partnerships.
Jointly owned: EGF V (25%) and two affiliated partnerships.
The equipment is generally leased under operating leases with terms of one
to six years. Some of the Partnership's marine containers are leased to
operators of utilization-type leasing pools with equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment.
At December 31, 1996, approximately 69% of the Partnership's trailer
equipment operated in rental yards owned and maintained by PLM Rental, Inc., the
short-term trailer rental subsidiary of PLM International. Revenues collected
under short-term rental agreements with the rental yards' customers are credited
to the owners of the related equipment as received. Direct expenses associated
with the equipment are charged directly to the Partnership. An allocation of
other direct expenses of the rental yard operations are billed to the
Partnership monthly.
The lessees of the equipment include, but are not limited to: America West
Airlines, Inc., Chevron USA, Mobil Oil Corporation, Chembulk Trading, Inc.,
Halla Merchant Marine Company, Ltd., Scanports Shipping Ltd., E.I.
Dupont,.Transamerica Leasing, Marfort Shipping, Inc., and Continental Airlines,
Inc.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the equipment. IMI has agreed to perform all services necessary to
manage the transportation equipment on behalf of the Partnership and to perform
or contract for the performance of all obligations of the lessor under the
Partnership's leases. In consideration for its services and pursuant to the
Partnership Agreement, IMI is entitled to a monthly management fee (see
Financial Statements notes 1 and 3).
(C) Competition
(1) Operating Leases vs. Full Payout Leases
Generally, the equipment owned or invested in by the Partnership is leased out
on an operating lease basis wherein the rents owed during the initial
noncancelable term of the lease are insufficient to recover the Partnership's
purchase price of the equipment. The short to mid-term nature of operating
leases generally commands a higher rental rate than the longer term, full payout
leases and offers lessees relative flexibility in their equipment commitment. In
addition, the rental obligation under an operating lease need not be capitalized
on the lessee's balance sheet.
The Partnership encounters considerable competition from lessors utilizing
full payout leases on new equipment, i.e., leases which have terms equal to the
expected economic life of the equipment. Full payout leases are written for
longer terms and for lower monthly rates than the Partnership offers. While some
lessees prefer the flexibility offered by a shorter term operating lease, other
lessees prefer the rate advantages possible with a full payout lease.
Competitors of the Partnership may write full payout leases at considerably
lower rates, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, and as a result, the Partnership may be at a
competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership also competes with equipment manufacturers who offer operating
leases and full payout leases. Manufacturers may provide ancillary services
which the Partnership cannot offer, such as specialized maintenance service
(including possible substitution of equipment), training, warranty services, and
trade-in privileges.
The Partnership competes with many equipment lessors including ACF
Industries, Inc. (Shippers Car Line Division), General Electric Railcar Services
Corporation, Greenbrier Leasing Company, General Electric Capital Aviation
Services Corporation, and other limited partnerships which lease the same types
of equipment.
(D) Demand
The Partnership invests in transportation-related capital equipment and in
"relocatable environments." "Relocatable environments" refers to capital
equipment constructed to be self-contained in function but transportable,
examples of which include mobile offshore drilling units, storage units, and
relocatable buildings. A general distinction can be drawn between equipment used
for the transport of either materials and commodities or people. With the
exception of aircraft leased to passenger air carriers, the Partnership's
equipment is used primarily for the transport of materials and commodities.
The following describe the markets for the Partnership's equipment:
(1) Commercial Aircraft
The market for commercial aircraft continued to improve in 1996 representing two
consecutive years of growth and profits in the airline industry. The $5.7
billion in net profits recorded by the world's top 100 airlines in 1995 grew to
over $6 billion in 1996. The profits are a result of the continued management
emphasis on costs. The demand for ever-lower unit costs by airline management
has caused a significant reduction of surplus used Stage II and Stage III
commercial aircraft. The result is a return to supply/demand equilibrium. On the
demand side, passenger traffic is improving, cargo movement is up, and load
factors are generally higher across the major markets.
These changes are reflected in the performance of the world's 62 major airlines
that operate 60% of the world airline fleet but handle 78% of world passenger
traffic. Focusing on the supply/demand for Partnership-type narrowbody
commercial aircraft, there were 213 used narrowbody aircraft available at year
end 1995. In the first 10 months of 1996, this supply was reduced to 119
narrowbody aircraft available for sale or lease. Forecasts for 1997 see a
continuing supply/demand equilibrium due to air travel growth and balanced
aircraft supply.
The Partnership's narrowbody fleet is primarily late-model (post 1974) Boeing
737-200 Advanced aircraft. There are a total of 939 Boeing 737-200 aircraft in
service, with 219 built prior to 1974. Independent forecasts estimate that 250
total 737-200s will be retired, leaving approximately 700 aircraft in service
after 2003. The forecasts regarding hushkits estimate that half of the 700
Boeing 737-200's, will be hushed to meet Stage III noise levels. The
Partnership's aircraft are all prospects for Stage III hushkits due to their
age, hours, cycles, engine configurations, and operating weights.
Independent projections for the Boeing 727-200 aircraft indicate there are 1,050
in service, with 299 built prior to 1974. The Partnership's aircraft are all
1974 or earlier model 727-100/200s and are expected to be retired prior to 2003.
The current strategy is to optimize their remaining value based on the present
value of lease cash flows and projected residuals.
The Partnership's Douglas DC-9-32s are late model aircraft. There are 663
DC-9-30/40/50 series aircraft in-service, 437 built prior to 1974. Independent
forecasts estimate that 300 older DC-9 aircraft will be retired by the year
2003. The remaining fleet will total approximately 350 aircraft and most of
these aircraft will be hushed to Stage III. The aircraft will remain in active
airline service. The lessees are likely to be secondary airlines operating in
markets outside the United States.
(2) Commuter/Regional Aircraft
Independent forecasts show the regional aircraft market is growing at a rate of
5.5% per year through 2013. This is slightly higher than the comparable growth
rate in commercial aircraft of 4.7% over the same period. Currently there are
4,390 regional aircraft in service in the 15 to 70 seat class. Independent
forecasts show this will grow to over 5,000 aircraft during the next 17 years.
The highest growth markets are the 30 to 50 seat turboprops. The emphasis on the
larger aircraft in the future is a result of growing passenger numbers, airport
congestion and the extension of regional airline route networks requiring longer
range aircraft. These events will continue the current trend of the major
airlines to hand down the operations of their marginal shorthaul routes to
affiliated regional carriers.
The Partnership leases regional aircraft that are in the 19 seat, 36 seat and 50
seat categories. The 19 seat aircraft are in North America and New Zealand. We
expect to sell all 19 seat class aircraft in 1997. The Partnership's 30 to 50
seat regional aircraft are in North America, which is the highest growth market
for this class. The 30 seat market is growing at the expense of the smaller 19
seat aircraft. The 50 seat market is growing as a result of the major airlines
taking +100 seat jets off "thin" routes which are more economically served by
the large turboprop powered aircraft.
(3) Aircraft Engines
The demand for spare engines has increased as a result of the air travel
industry's expansion over the last two years. The most significant area of
increase is in the Pratt & Whitney Stage II JT8D engine which powers many of the
Partnership's Stage II commercial aircraft. Today there are over 3000 Stage II
commercial jets in service. In December 1993 there were 288 Stage II narrowbody
aircraft available for sale or lease. As of October 1996, the number of
available Stage II narrowbody's was only 107 aircraft. The increase in the Stage
II fleet has placed over 450 engines back into service. This level of demand has
placed a premium on spare JT8D engines and resulted in a good leasing market for
available engines. The Partnership's spare engines will all be re-leased or sold
over the next two years during this market cycle.
The demand for spare Stage III engines has also risen due to the growth in Stage
III aircraft. The Partnership leases one Stage III spare engine manufactured by
Rolls Royce (RR). This engine is an RB211-535E4 and powers the Boeing 757 series
aircraft. Today, there are 257 B757's operating the RB211 engine with 52
different airlines. The engine fleet is approximately 600 engines operating over
3000 hours per year. Approximately every three years each engine on wing
requires removal for overhaul. This results in the need for a spare engine to
allow the aircraft to operate during this interim period. The Partnership's
engine will be available for sale or lease during 1997.
(4) Aircraft Rotables
Aircraft rotables are replacement spare parts held by an airline in inventory.
These parts are components that are removable from an aircraft or engine,
undergo overhaul, and are recertified and refit to the aircraft in an "as new"
condition. Components or rotables, carry specific identification numbers
allowing each part to be individually tracked. The types of rotables owned and
leased by the Partnership include landing gear, certain engine components,
avionics, auxiliary power units (APU's), replacement doors, control surfaces,
pumps, valves and other comparable equipment. Generally a rotable has a useful
life that is either measured in terms of time in service or number of cycles
(takeoffs and landings). While there are no specific guidelines that apply to
the time or cycles between overhauls for rotable equipment, there is no
limitation on the number of times a rotable may be overhauled and recertified.
The component will be overhauled until the cost of such overhaul becomes
uneconomic relative to the units' replacement cost.
The Partnership's rotable parts will be available for sale or lease in 1997.
Rotables generally reflect the market conditions of the aircraft they support.
The Partnership's rotables support primarily Boeing 737-300/400/500 and the
Boeing 737-200 Advanced aircraft. Independent forecasts for 1997 indicate a
supply-demand equilibrium for these aircraft types.
(5) Marine Containers
At the end of 1995, the consensus of industry sources was that 1996 would see
both higher container utilization and strengthening per diem lease rates. Such
was not the case as there was no appreciable cyclical improvement in the
container market following the traditional winter slow down. Industry
utilization continues to be under pressure with per diem rates being impacted as
well.
A substantial portion of the Partnership's containers are on long-term
utilization leases which were entered into with Trans Ocean Leasing as lessee.
The industry has seen a major consolidation as Transamerica Leasing late in the
fourth quarter of 1996, acquired Trans Ocean Leasing. Transamerica Leasing is
the second largest container leasing company in the world. Transamerica Leasing
is the substitute lessee for Trans Ocean Leasing. Long term, such industry
consolidation should bring more rationalization to the market and result in
higher utilization and per diem rates.
(6) Railcars
Pressurized Tank Cars
These cars are used primarily in the petro-chemical and fertilizer industries.
They transport liquefied petroleum gas ("LPG") and anhydrous ammonia. The
utilization rate on the Partnership's fleet of pressurized tank cars was over
98% during 1996. Independent forecasts show the demand for natural gas to grow
during 1997 to 1999, as the developing world, former Communist countries and the
industrialized world all increase their demand for energy. The fertilizer
industry was undergoing a rapid restructuring toward the end of 1996 after a
string of major mergers, which began in 1995. These mergers reduce the number of
companies that use pressurized tank cars for fertilizer service. Whether or not
the economies of the mergers allow the total fleet size to be reduced remains to
be seen.
Non-Pressurized Tank Cars
General purpose or non-pressurized tank cars are used to transport a wide
variety of bulk liquid commodities such as petroleum fuels, lubricating oils,
vegetable oils, molten sulphur, corn syrup, asphalt, and specialty chemicals.
Demand for general purpose tank cars in the Partnership's fleet has remained
healthy over the last two years with utilization remaining above 98%. The demand
for petroleum is anticipated to grow during 1997 to 1999, as the developing
world, former communist countries and the industrialized world all increase
their demand for energy. Chemical carloadings for the first 40 weeks of 1996 are
up one tenth of one percent (0.1%) as compared to the same period in 1995.
Covered Hopper Cars
Through October 5, 1996, grain car loadings were down 13% compared to the same
period for 1995. Even with the greatly reduced loadings, the on-lease rate
during 1996 for the Partnership grain cars remained at 100%. Industry-wide, the
covered hopper is one car type that has increased in number over the last ten
years, going from a total of 299,172 cars in 1985 to 325,882 cars in 1995. It is
possible that another poor crop year, combined with more available cars, could
place downward pressure on grain car rental rates during 1997.
Mill Gondola Cars
The Partnership's net per diem rental income remained high during 1996, as the
demand for mill gondolas remained strong. Quoting from the December, 1996 issue
of Railway Age magazine: "Significant building programs have lessened shortages
somewhat, as have changes in rules on railroad cars and car assignments.
However, gondolas are still in short supply in many places..." The November,
1996 WEFA Group report indicates that they anticipate scrap metal demands to
grow as electric furnace process gain share. Also, they anticipate demand for
steel mill products to expand by 2.5 - 3%, on average, from 1997 to 2000.
(7) Marine Vessels
The Partnership owns or has investments in small to medium-sized dry bulk
vessels and product tankers, which are traded in worldwide markets, carrying
commodity cargoes.
The freight rates in the dry bulk shipping market are dependent on the
balance of supply and demand for shipping commodities and trading patterns for
such dry bulk commodities. In 1995, dry bulk shipping demand was robust (growing
at 5%t over 1994) and there was a significant infusion of new vessel tonnage
especially late in the year, causing some decline in freight rates after a peak
in mid-year. The slide in freight rates continued in the first half of 1996, as
new tonnage was delivered and shipping demand slipped from the high growth rates
of 1995. In the third quarter of 1996, there was a significant acceleration in
the drop of freight rates, primarily caused by the lack of significant grain
shipment volumes and the infusion of new tonnage. The low freight rates induced
many ship owners to scrap older tonnage and to defer or cancel new building
orders. In the fourth quarter, a strong grain harvest worldwide gave the market
new strength and freight rates recovered to the levels experienced in early
1996, but not to 1995 levels. Overall 1996 was a soft year for shipping with dry
bulk demand growing only 1.8% and the dry bulk fleet growing 3% in tonnage. The
outlook for 1997 shows an expected improvement in demand with growth at 2.4%,
but a high orderbook remains. 1997 is expected to be a soft year with relatively
low freight rates; however, prospects may be strengthened by continued scrapping
of older vessels in the face of soft rates and deferment or canceling of orders.
Demand for commodity shipping closely tracks worldwide economic growth;
however, economic development may alter demand patterns from time to time. The
general partner operates its funds' vessels in spot charters, period charters
and pooled vessel operations. This operating approach provides the flexibility
to adapt to changing demand patterns.
Independent forecasts show the longer term outlook (past 1997) should bring
improvement in freight rates earned by vessels; however, this is dependent on
the supply/demand balance and stability in growth levels. The newbuilding
orderbook currently is slightly lower than at the end of 1995 in tonnage.
Shipyard capacity is booked through late 1998; however, it remains to be seen
how many of these orders will actually be fulfilled. Historically, demand has
averaged approximately 3 percent annual growth, fluctuating between flat growth
and 6 percent annually. With predictable long term demand growth, the long term
outlook depends on the supply side, which is affected by interest rates,
governmental shipbuilding subsidy programs, and prospects for reasonable capital
returns in shipping.
(8) Trailers
Intermodal Trailers
The robust intermodal trailer market that began 4 years ago began to soften in
1995 and reduced demand continued in 1996. Intermodal trailer loadings were flat
in 1996 versus 1995's depressed levels. This lack of growth has been the result
of many factors ranging from truckload firms aggressively recapturing market
share from the railroads through aggressive pricing, to the continuing
consolidation activities and asset efficiency improvements of the major U.S.
railroads.
All of these factors helped make 1996 a year of equalizing equipment supply
as railroads and lessors were pressured to retire older and less efficient
trailers. The two largest suppliers of railroad trailers reduced the available
fleet in 1996 by over 15%. Overall utilization for intermodal trailers,
including the Partnership's fleet , was lower in 1996 than in previous years.
Over-the-Road Dry Trailers
The over-the-road dry trailer market was weak in 1996 with utilization down 15%.
The trailer industry experienced a record year in 1994 for new production and
1995 production levels were similar to 1994. However, in 1996 , the truck
freight recession, along with an over building situation, contributed to 1996's
poor performance. 1996 had too little freight and too much equipment.
Over-the-Road Refrigerated Trailers
The Partnership experienced fairly strong demand levels in 1996 for its
refrigerated trailers. With over 37% of the fleet in over the road refrigerated
trailers, the Partnership, PLM and affiliated partnerships combined, is the
largest supplier of short-term rental refrigerated trailers in the U.S..
(E) Government Regulations
The use, maintenance, and ownership of equipment is regulated by federal, state,
local, and/or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations which may
require the removal from service or extensive modification of such equipment to
meet these regulations at considerable cost to the Partnership. Such regulations
include (but are not limited to):
(1) the U.S. Oil Pollution Act of 1990 (which established liability for
operators and owners of vessels, mobile offshore drilling units, etc. that
create environmental pollution);
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990
(which limits or eliminates the operation of commercial aircraft in the
U.S. that do not meet certain noise, aging, and cor- rosion criteria);
(3) the Montreal Protocol on Substances that Deplete the Ozone Layer and
the U.S. Clean Air Act Amendments of 1990 (which call for the control and
eventual replacement of substances that have been found to cause or
contribute significantly to harmful effects on the stratospheric ozone
layer and which are used extensively as refrigerants in refrigerated
marine cargo containers, over-the-road trailers, etc.);
(4) the U.S. Department of Transportation's Hazardous Materials Regulations
(which regulate the classification of and packaging requirements for
hazardous materials and which apply particularly to the Partnership's tank
cars).
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased for leasing purposes. At December 31, 1996, the Partnership
owned a portfolio of transportation equipment and investments in equipment owned
by special purpose entities as described in Part I, Table 1. The Partnership
acquired equipment with the proceeds of the Partnership offering through
approximately the first quarter of 1992.
The Partnership maintains its principal office at One Market, Steuart
Street Tower, Suite 800, San Francisco, California 94105-1301. All office
facilities are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
PLM International (PLMI) along with FSI, IMI, TEC and PLM Securities Corp (PLM
Securities), and collectively with PLMI, FSI, IMI, TEC and PLM Securities, (the
"PLM Entities"), were named as defendants in a class action lawsuit filed in the
Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251. The PLM
Entities received service of the complaint on February 10, 1997, and pursuant to
an extension of time granted by plaintiffs' attorneys, have sixty days to
respond to the complaint. PLM International is currently reviewing the substance
of the allegations with its counsel, and believes the allegations to be
completely without merit and intends to defend this matter vigorously.
The plaintiffs, who filed the complaint on their own and on behalf of all
class members similarly situated, are six individuals who allegedly invested in
certain California limited partnerships sponsored by PLM Securities, for which
FSI acts as the general partner, including the Partnership, PLM Equipment Growth
Fund IV, PLM Equipment Growth Fund VI, and PLM Equipment Growth and Income Fund
VII (the "PLM Growth Funds"). The complaint purports eight causes of action
against all defendants as follows: fraud and deceit, suppression, negligent
misrepresentation and suppression, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, unjust enrichment, conversion, and
conspiracy. Additionally, plaintiffs allege a cause of action for breach of
third party beneficiary contracts against and in violation of the National
Association of Securities Dealers (NASD) rules of fair practice by PLM
Securities alone.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, general
partner, and control persons. Based on these duties, plaintiffs assert liability
against the PLM Entities for improper sales and marketing practices,
mismanagement of the PLM Growth Funds, and concealing such mismanagement from
investors in the PLM Growth Funds. Plaintiffs seek unspecified compensatory and
recissory damages, as well as punitive damages, and have offered to tender their
limited partnership units back to the defendants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS
Pursuant to the terms of the Partnership Agreement, the General Partner is
generally entitled to a 5% interest in the profits and losses and distributions
of the Partnership. The General Partner is the sole holder of such interests.
Gross income in each year of the Partnership is specially allocated to the
General Partner to the extent, if any, necessary to cause the capital account
balance of the General Partner to be zero as of the close of such year. The
remaining interests in the profits and losses and distributions of the
Partnership are owned, as of December 31, 1996, by the approximately 10,000
holders of Units in the Partnership.
There are several secondary exchanges which will facilitate sales and
purchases of limited partnership units. Secondary markets are characterized as
having few buyers for limited partnership interests and, therefore, generally
are viewed as inefficient vehicles for the sale of partnership units. There is
presently no public market for the Units and none is likely to develop. To
prevent the Units from being considered "publicly traded" and, thereby, to avoid
taxation of the Partnership as an association treated as a corporation under the
Internal Revenue Code, the Units will not be transferred without the consent of
the General Partner, which may be withheld in its absolute discretion. The
General Partner intends to monitor transfers of Units in an effort to ensure
that they do not exceed the number permitted by certain safe harbors promulgated
by the Internal Revenue Service. A transfer may be prohibited if the intended
transferee is not a U.S. Citizen or if the transfer would cause any portion of
the Units to be treated as "plan assets". The Partnership may also be obligated
to redeem a certain number of Units each year beginning January 1, 1994. At
December 31, 1996, the Partnership agreed to purchase approximately 120,000
Units for an aggregate price of approximately $1,171,000. The General Partner
anticipates that these Units will be repurchased in the first and second
quarters of 1997.
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the years ended December 31, 1996, 1995, 1994,
1993, and 1992, (In thousands of dollars except
per unit amounts)
1996 1995 1994 1993 1992
--------------------------------------------------------------------------
Operating results:
Total revenues $ 44,322 $ 39,142 $ 44,291 $ 38,476 $ 38,497
Net gain (loss) on disposition
of equipment 14,199 3,835 4,920 (584 ) (273 )
Loss on revaluation of
equipment -- -- -- (4,125 ) --
Equity in net loss of unconsolidated
special purpose entities (116 ) -- -- -- --
Net income (loss) 12,441 2,045 3,193 (8,443 ) (4,119 )
At year-end:
Total assets $ 98,419 $ 102,109 $ 120,114 $ 135,582 $ 162,111
Total liabilities 46,123 44,092 44,221 43,462 42,117
Notes payable 40,463 38,000 38,000 38,000 38,000
Cash distributions $ 18,083 $ 19,342 $ 19,420 $ 19,430 $ 19,180
Cash distributions which represent
a return of capital $ 5,642 $ 17,297 $ 16,227 $ 18,460 $ 18,228
Per weighted average of Limited
Partnership Depositary Unit:
Net income (loss) $ 1.26 $ 0.12 $ 0.24 $ (1.02 ) $ (0.55 )
Cash distributions $ 1.87 $ 2.00 $ 2.00 $ 2.00 $ 200
Cash distributions which represent
a return of capital $ 0.61 $ 1.89 $ 1.76 $ 2.00 $ 2.00
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management's Discussion and Analysis of Financial Condition and Results of
Operations relates to the Financial Statements of the Partnership. The following
discussion and analysis of operations focuses on the performance of the
Partnership's equipment in various sectors of the transportation industry, and
its effect on the Partnership's overall financial condition.
Results of Operations - Factors Affecting Performance
(A) Re-leasing and Repricing Activity
The exposure of the Partnership's equipment portfolio to repricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and the
equipment must be remarketed. Major factors influencing the current market rate
for transportation equipment include supply and demand for similar or comparable
types or kinds of transport capacity, desirability of the equipment in the lease
market, market conditions for the particular industry segment in which the
equipment is to be leased, various regulations concerning the use of the
equipment, and others. Equipment that is idle or out of service between the
expiration of one lease and the assumption of a subsequent lease can result in a
reduction of contribution to the Partnership. The Partnership experienced
re-leasing or repricing activity in 1996 primarily in its trailer, marine vessel
and marine container portfolios.
(1) Trailers: The majority of the Partnership's trailer portfolio operates
in short-term rental facilities or short-line railroad systems. The relatively
short duration of most leases in these operations exposes the trailers to
considerable re-leasing activity. Contributions from the Partnership's trailers
increased during 1996 due to the expiration of various term leases and the
transfer of these trailers to the PLM short-term rental facilities which started
earning a higher lease;
(2) Marine Vessels: Certain of the Partnership's marine vessels transferred
to the voyage charter market from the time charter market during 1996. Voyage
charters are usually short in duration and reflect the short-term demand and
pricing trends in the vessel market. The Partnership experienced an increase in
marine vessel contribution due to higher average rates for these short-term
charters in 1996;
(3) Marine Containers: All of the Partnership's marine containers are
leased to operators of utilization-type leasing pools and, as such, are highly
exposed to repricing activity. The decline in marine containers contributions
was due to soft market conditions that caused a decline in repricing activity.
(4) While market conditions and other factors may have had some impact on
lease rates in markets in which the Partnership owns the remainder of its
equipment portfolio, the majority of this equipment was unaffected.
(B) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment, unless accompanied by an immediate
replacement of additional equipment earning similar rates (see below in
"Reinvestment Risk"), represents a reduction in the size of the equipment
portfolio, and may result in a reduction of contribution to the Partnership.
Lessees not performing under the terms of their leases, either by not paying
rent, not maintaining or operating the equipment in accordance with the
conditions of the leases, or other possible departures from the leases can
result not only in reductions in contribution, but also may require the
Partnership to assume additional costs to protect its interests under the
leases, such as repossession, legal fees, etc.
(1) Liquidations: During the year, the Partnership received proceeds of
approximately $30.0 million from the sale of a mobile offshore drilling unit
(rig), 926 marine containers, 2 aircraft engines, 1 commuter aircraft, 1
trailer, and 4 railcars. The sales proceeds represented approximately 81% of the
original cost of the assets. By year end, the Partnership had reinvested
approximately all of the $30.0 million received.
(2) Nonperforming Lessees: At December 31, 1996, the lessee of the
Partnership's hushkit and a small number of other lessees were delinquent in
making their lease payments. The Partnership established reserves against these
receivables and the General Partner is in the process of taking the necessary
steps to repossess the huskit and certain other collateral from the lessee.
(C) Reinvestment Risk
Reinvestment risk occurs when 1) the Partnership cannot generate sufficient
surplus cash after fulfillment of operating obligations and distributions to
reinvest in additional equipment during the reinvestment phase of Partnership
operations; 2) equipment is sold or liquidated for less than threshold amounts;
3) proceeds from sales, losses, or surplus cash available for reinvestment
cannot be reinvested at threshold lease rates; or 4) proceeds from sales or
surplus cash available for reinvestment cannot be deployed in a timely manner.
During the first six years of operations, the Partnership intends to
increase its equipment portfolio by investing surplus cash available in
additional equipment after fulfilling operating requirements and payments of
distributions to the partners. Subsequent to the end of the reinvestment period,
the Partnership will continue to operate for another two years and then begin an
orderly liquidation over an anticipated two-year period. The operating lease
income generated, together with the proceeds from sales of this equipment, are
intended to enhance financial returns to the partners.
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 the exercise of purchase options written into certain lease
agreements. Equipment sales generally result from evaluations by the General
Partner that continued ownership of certain equipment is either inadequate to
meet Partnership performance goals, or that market conditions, market values,
and other considerations indicate it is the appropriate time to sell certain
equipment.
During 1996, the Partnership purchased four 737-200 Boeing stage II
commercial aircraft for $21.9 million, $5.7 million was used to purchase a
DHC-8-300 commuter aircraft, and $3.0 million was used to purchase a partial
interest in an entity which owns two DC-9 commercial aircraft on a direct
finance lease. The deployment of the majority of funds occurred in a timely
manner; consequently, Partnership performance was largely unaffected by any lack
of reinvestment of available funds.
(D) Equipment Valuation
In March 1995, the Financial Accounting Standards Board (FASB) issued statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" (SFAS 121). This standard is effective for years
beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995,
the effect of which was not material as the method previously employed by the
Partnership was consistent with SFAS 121. In accordance with SFAS 121, the
General Partner reviews the carrying value of the Partnership's equipment
portfolio at least annually in relation to expected future market conditions for
the purpose of assessing the recoverability of the recorded amounts. If the
projected future lease revenue plus residual values are less than the carrying
value of the equipment, a loss on revaluation is recorded. There were no
reductions required to the carrying value of equipment during 1996.
As of December 31, 1996, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including equipment owned by
unconsolidated special purpose entities (USPE's), to be approximately $124.6
million.
Financial Condition - Capital Resources, Liquidity, and Unit Redemption Plan
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering, borrowings from the Committed
Bridge Facility of $2.5 million, and permanent debt financing of $38 million. No
further capital contributions from original partners are permitted under the
terms of the Partnership's Limited Partnership Agreement, while the
Partnership's total outstanding debt, currently $40.5 million, can only be
increased by a maximum of $4.5 million subject to specific covenants in existing
debt agreements. The Partnership relies on operating cash flow to meet its
operating obligations, make cash distributions to Limited Partners, and increase
the Partnership's equipment portfolio with any remaining available surplus cash.
For the year ended December 31, 1996, the Partnership generated sufficient
operating cash to meet its operating obligations and pay distributions, but used
undistributed available cash from prior periods of approximately $2.0 million to
maintain the current level of distributions (total 1996 of approximately $18.1
million) to the partners
On September 26, 1996, the existing senior loan agreement was amended and
restated to reduce the interest rate, to grant increased flexibility in
allowable collateral, to pledge additional equipment to the lenders and to amend
the loan repayment schedule from 16 consecutive equal quarterly installments to
20 consecutive quarterly installments with lower principle payments for the
first four payments. The Partnership incurred a loan amendment fee of $133,000
to the lender in connection with the restatement of this loan. Pursuant to the
terms of the loan agreement the Partnership must comply with certain financial
covenants and maintain certain financial ratios. The General Partner believes
that the book value of the note payable approximates fair value due to its
variable interest rate.
Pursuant to the terms of the Limited Partnership agreement, beginning
January 1, 1994, the Partnership can become obligated under certain conditions
to redeem up to 2% of the outstanding Depositary Units each year. The purchase
price to be offered for such outstanding units will be equal to 110% of the
unrecovered principal attributed to the units - where unrecovered principal is
defined as the excess of the capital contribution attributable to a unit over
the distributions from any source paid with respect to that Unit. At December
31, 1996, the Partnership agreed to purchase approximately 120,000 Units for an
aggregate price of approximately $1,171,000. The General Partner anticipates
that these Units will be repurchased in the first and second quarters of 1997.
The General Partner has entered into a joint $50 million credit facility
(the "Committed Bridge Facility") on behalf of the Partnership, PLM Equipment
Growth Fund IV, PLM Equipment Growth Fund VI, PLM Equipment Growth & Income Fund
VII and Professional Lease Management Income Fund I ("Fund I"), all affiliated
investment programs, TEC Acquisub, Inc. ("TECAI"), an indirect wholly-owned
subsidiary of the General Partner, and American Finance Group, Inc. (AFG), a
subsidiary of PLM International Inc., which may be used to provide interim
financing of up to (i) 70% of the aggregate book value or 50% of the aggregate
net fair market value of eligible equipment owned by the Partnership , plus (ii)
50% of unrestricted cash held by the borrower. The Committed Bridge Facility
became available on December 20, 1993, and was amended and restated on October
31, 1996, to expire on October 31, 1997 and increased the available borrowings
for AFG to $50 million. The Partnership, TECAI, Fund I and the other
partnerships collectively may borrow up to $35 million of the Committed Bridge
Facility. The Committed Bridge Facility also provides for a $5 million Letter of
Credit Facility for the eligible borrowers. Outstanding borrowings by Fund I,
TECAI, AFG or PLM Equipment Growth Funds IV through VII reduce the amount
available to each other under the Committed Bridge Facility. Individual
borrowings may be outstanding for no more than 179 days, with all advances due
no later than October 31, 1997. The Committed Bridge Facility prohibits the
Partnership from incurring any additional indebtedness. Interest accrues at
either the prime rate or adjusted LIBOR plus 2.5% at the borrowers option and is
set at the time of an advance of funds. Borrowings by the Partnership are
guaranteed by the General Partner. As of December 31, 1996, the Partnership had
borrowings of $2.5 million, PLM Equipment Growth Fund VI had $1.3 million, PLM
Equipment Growth and Income Fund VII had $2.0 million, AFG had $26.9 million,
and TECAI had $4.1 million in outstanding borrowings. Neither PLM Equipment
Growth Fund IV nor Fund I had any outstanding borrowings.
The General Partner has not planned any expenditures, nor is it aware of
any contingencies that would cause it to require any additional capital to that
mentioned above.
Results of Operations - Year to Year Detailed Comparison
Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1996 and 1995
(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, 1996, when compared to the same
period of 1995. The following table presents lease revenues less direct expenses
by owned equipment type (in thousands):
For the years ended
December 31,
1996 1995
----------------------------
Aircraft and aircraft engines $ 6,348 $ 4,727
Marine vessels 4,910 3,542
Trailers 1,567 1,436
Rail equipment 1,532 1,797
Marine containers 2,790 3,939
Mobile offshore drilling unit 1,062 2,553
Aircraft: Aircraft lease revenues and direct expenses were $6.5 million and $0.1
million, respectively, for the year ended December 31, 1996, compared to $4.7
million and $35,000, respectively during the same period of 1995. The increase
in aircraft contribution was due to the purchase of five aircraft during the
later half of the second quarter 1995. This equipment was on lease for the
entire year of 1996, compared to being on lease for only seven months of 1995.
In addition, lease revenues from owned equipment in 1996 reflects a transfer of
2 aircraft from USPE's to comply with the credit agreement (See Note 2). The
increase in aircraft contribution was offset, in part, by the sale of two
aircraft engines during the third quarter of 1996;
Marine vessels: Marine vessel lease revenues and direct expenses were $14.0
million and $9.1 million, respectively, for the year ended December 31, 1996,
compared to $13.5 and $10.0 million, respectively during the same period of
1995. The increase in marine vessel contribution was due primarily to two marine
vessels which were operating under a voyage charter during the first six months
of 1996, transferring to a time charter during the third quarter of 1996
compared to operating under a time charter during all of 1995. Marine vessels
typically earn a higher lease rate while under a voyage charter when compared to
a time charter. Marine vessel direct expenses remained relatively constant for
both periods except dry docking expenses which decreased significantly during
1996 due to an increase in the number of months between required dry docking;
Trailers: Trailer lease revenues and direct expenses were $2.0 million and $0.5
million, respectively, for the year ended December 31, 1996, compared to $1.5
and $0.1 million, respectively during the same period of 1995. The trailer fleet
remained virtually constant for both periods, however, over the past twelve
months the number of trailers in the PLM affiliated short-term rental yards has
increased due to expiration of term leases. These trailers are now earning a
higher utilization rate while in the rental yards compared to the fixed term
leases. Due to the increase of trailers in the PLM affiliated short-term rental
yards, repairs to maintain these trailers in running condition has also
increased;
Rail equipment: Rail equipment lease revenues and direct expenses were $2.4
million and $0.9 million, respectively, for the year ended December 31, 1996,
compared to $2.5 million and $0.7 million, respectively during the same period
of 1995. The decrease in railcar contribution is due to the sale of 98 railcars
in May of 1995.
Marine containers: Marine container lease revenues and direct expenses were $2.8
million and $25,000, respectively, for the year ended December 31, 1996,
compared to $4.1 million and $123,000, respectively during the same period of
1995. The number of marine containers owned by the Partnership has been
declining over the past twelve months due to sales and dispositions. The result
of this declining fleet has resulted in a decrease in marine container net
contribution. In addition, the container fleet is experiencing a decline in the
utilization rate during 1996 compared to 1995.
Mobile offshore drilling unit: Rig lease revenues and direct expenses were $1.1
million and $3,000, respectively, for the year ended December 31, 1996, compared
to $2.6 million and $3,000, respectively during the same quarter of 1995. The
decrease in the rig contribution was due to the sale of this equipment during
the later part of the second quarter of 1996;
(B) Indirect expenses related to owned equipment operations
Total indirect expenses of $21.1 million for the year ended December 31, 1996,
increased from $20.8 million for the same period in 1995. The significant
variances are explained below:
(1) The $0.3 million decrease in interest expense was due to a lower interest
rate charged to the Partnership on the existing senior loan during 1996;
(2) Depreciation and amortization expenses decreased $0.3 million from 1995
levels reflecting the double declining balance method of depreciation and the
sale of certain assets during 1996 and 1995. The decrease was offset, in part,
by the purchase of two commercial aircraft during 1996 ;
(3) Administrative expenses increased $0.6 million due primarily to the
additional costs to transfer the off-lease trailers to the PLM affiliated rental
yards and the additional allocation of rental yard costs incurred due to the
increased number of trailers in the rental yards. The Partnership also incurred
higher professional services during 1996 when compared to the same period of
1995. Also, during 1995, the Partnership received a $0.1 million refund of
services not performed, a similar refund was not received during 1996;
(4) A $0.3 million increase in bad debt expenses due to an increase in
uncollectable amounts due from certain lessees;
(C) Net gain on disposition of owned equipment
Net gain on disposition of equipment for the year ended December 31, 1996
totaled $14.2 million which resulted from the sale of a rig with a net book
value of $10.7 million for proceeds of $21.3 million, 2 aircraft engines, 1
commuter aircraft, 926 marine containers, 1 trailer and 4 railcars with an
aggregate net book value of $5.1 million for proceeds of $8.7 million. Net gain
on disposition of equipment during the twelve months ended December 31, 1995,
was realized on the disposal of 1,519 marine containers, 2 marine vessels, 1
aircraft, and 98 railcars with an aggregate net book value of $15.8 million for
proceeds of $18.3 million. Included in the gain on sale of one of the marine
vessels, is the unused portion of dry docking reserves and commissions in the
net amount of $1.3 million.
(D) Interest and other income
Interest and other income increased $0.4 million during the year ended December
31, 1996 due primarily to a business interruption claim of $0.3 million which
was received during 1996 and interest earned from the finance lease which was
not in place during 1995. This increase was offset by a decrease in interest
income earned on cash investments during 1996 due to lower cash available for
investment.
(E) Equity in net income (loss) of unconsolidated special purpose entities
represents net income generated from the operation of jointly-owned assets
accounted for under the equity method (see Note 2 to the financial statements).
For the year ended
December 31,
1996 1995
----------------------------
Aircraft, aircraft rotable, and aircraft engines $ (265 ) $ (87 )
Marine vessels 149 135
Aircraft, aircraft rotable, and aircraft engines: As of December 31 1996, the
Partnership has an interest in two trusts which own 3 commercial aircraft, 2
aircraft engines and a portfolio of aircraft rotables. The Partnership also had
purchased an interest in an additional trust during 1996 which was transferred
into equipment held for operating lease during the later part of the third
quarter of 1996 (see Note 2 and 4 to the financial statements). Revenues earned
by these trusts during the year ended December 31, 1996 of $3.3 million were
offset by depreciation and amortization expense, management fees and
administrative costs of $3.5 million. As of December 31 1995, the Partnership
has an interest in three trusts which own 4 commercial aircraft, 2 aircraft
engines and a portfolio of aircraft rotables which was purchased at the end of
the last two quarters of 1995. Revenues earned by these trusts during the same
period of 1995 of $0.7 million were offset by depreciation and amortization
expense, and management fees of $0.8 million.
Marine vessels: As of December 31, 1996, the Partnership owns a 50%-interest in
two entities which own marine vessels. The revenues generated by this equipment
decreased $0.9 million when compared to the same period of 1995 due to one of
the marine vessels transferring to a time charter during 1996 from a voyage
charter during the same period of 1995. The $0.6 million decrease in 1996 marine
operating expenses when compare to the same period of 1995 was also due to the
one marine vessel which was transferred to a time charter during 1996 from a
voyage charter during the same period of 1995. Depreciation expense decreased
$0.2 million due to the double-declining balance method of depreciation.
(F) Net Income
As a result of the foregoing, the Partnership's net income of $12.4 million for
the year ended December 30, 1996, increased from net income of $2.0 million
during the same period in 1995. The Partnership's ability to operate and
liquidate assets, secure leases, and re-lease those assets whose leases expire
during the duration of the Partnership is subject to many factors and the
Partnership's performance in the twelve months ended December 31. 1996 is not
necessarily indicative of future periods. In the twelve months ended December
31, 1996, the Partnership distributed $17.2 million to the Limited Partners, or
$1.87 per weighted average Depositary Unit.
Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1995 and 1994
- - -----------------------------------------------------------------------
(A) Revenues
Total revenues for the years ended December 31, 1995 and 1994, were $39.1
million and $44.3 million, respectively. This decrease in 1995 revenues was
primarily attributable to lower lease revenues and a lower gain recorded on the
sale of equipment, offset partially by increased interest and other income. The
Partnership's ability to acquire, operate, or liquidate assets, secure leases,
and re-lease those assets whose leases expire during the duration of the
Partnership is subject to many factors, therefore, the Partnership's performance
in 1995 or 1994 in this regard is not necessarily indicative of future periods.
(1) The Partnership's lease revenue decreased to $34.3 million in the year
ended December 31, 1995, from $38.8 million during the same period in 1994.
The following table presents lease revenues earned by equipment type (in
thousands):
For the year ended December
31,
1995 1994
-------------------------------
Marine vessels $ 18,194 $ 21,501
Mobile offshore drilling units 2,556 5,167
Marine containers 4,061 4,646
Aircraft 5,471 3,265
Rail equipment 2,475 2,945
Trailers 1,541 1,233
==============================
$ 34,298 $ 38,757
==============================
Significant revenue component changes resulted primarily from:
(a) An increase of $2.2 million in aircraft revenues due primarily to the
acquisition and lease of five commuter aircraft and an interest in three trusts
containing commercial aircraft during 1995;
(b) An increase of $0.3 million in trailer revenues due primarily to the
acquisition and lease of 150 trailers during the first quarter of 1995;
(c) The net decline of $3.3 million in marine vessel revenues is due to a
number of factors:
(c-1) Revenues declined $2.1 million during the year ended December 31,
1995, due to the sale of two marine vessels during the first and second quarters
of 1995 which were on lease during 1994;
(c-2) Revenues declined $2.5 million due to one marine vessel which was
on voyage charter (see below) for all of 1994, switching to a time charter
arrangement during most of the first two quarters of 1995 before switching back
to voyage charter. This marine vessel was also off-hire for 41 days for
drydocking during the later part of 1995;
(c-3) These declines were partially offset by an increase of $1.3
million in revenues earned by three marine vessels which are currently operating
under time charter and voyage charter. Although two of these marine vessels went
into drydocking for an aggregate of 50 days during 1995, increases in the time
charter rates earned during the last two quarters of 1995 plus profit sharing
from the time charter, gave these marine vessels the increased earnings when
compared to 1994;
Voyage charters are short-term leases lasting the duration of specific
voyages, typically 30 to 45 days. Voyage charters have higher revenues
associated with them since the owner pays for costs, such as bunkers and port
costs, normally borne by the lessees under time or bareboat charters. To
position the Partnership's marine vessel fleet for a potential upturn in the
marine vessel market, the Partnership has entered some of its marine vessels
into voyage charters and plans to enter into longer-term contracts as the market
improves;
(d) Declines of $2.6 million in revenues earned by the mobile offshore
drilling unit (rig) were primarily due to the sale of a rig during the later
part of December 1994, which was on lease during 1994 and to a lower re-lease
rate earned on the remaining rig;
(e) Declines of $0.6 million in marine container revenues due primarily to
the disposal of 1,519 marine containers in service between the 1995 and 1994
periods offset, in part, by higher utilization and rents earned during 1995;
(f) Declines of $0.4 million in rail equipment revenues was due primarily
to the sale of 98 railcars during 1995 which were on lease during 1994.
(2) Interest and other income increased $0.4 million when compared to 1994
due primarily to higher cash balances available for investment and an increase
in the interest rate earned on cash equivalents.
(3) Net gain on disposition of equipment during the year ended December 31,
1995, was realized on the disposal of 1,519 marine containers, 2 marine vessels,
1 commuter aircraft, and 98 railcars with an aggregate net book value of $15.8
million for proceeds of $18.3 million. Included in the gain on sale of one of
the marine vessels is the unused portion of drydocking reserves and commissions
in the net amount of $1.3 million. During the year ended December 31, 1994, the
Partnership disposed of 1 mobile offshore drilling unit with a net book value of
$7.9 for proceeds of $12.6 million, and 1,086 marine containers and 26 railcars
with an aggregate net book value of $2.0 million for aggregate proceeds of $2.2
million.
(B) Expenses
Total expenses of $37.1 million for the year ended December 31, 1995, decreased
from $41.1 million for the same period in 1994. The decrease in 1995 expenses
was attributable to lower depreciation expense, management fees to affiliate,
and equipment operating expenses, partially offset by increases in repairs and
maintenance, interest expense, insurance expense, and administrative expenses.
(1) Direct operating expenses (defined as repairs and maintenance,
insurance expenses, and equipment operating expenses) decreased to $13.8 million
in the year ending December 31, 1995, from $15.6 million in the same period in
1994. This change resulted from:
(a) A decrease of $2.4 million in marine equipment operating costs is due
primarily to two of the Partnership's marine vessels switching from short-term
voyage charters, in which the Partnership pays all marine vessel operating
costs, such as crew costs and stores, as well as certain additional costs, such
as bunkers and port costs, to a longer-term time charter. When the marine vessel
is operating under a time charter, a portion of the above expenses are paid by
the charterer and not the Partnership. During the same period in 1994, two
marine vessels operated on a short-term voyage charter and the lessee of the
remaining marine vessels paid for the majority of the above mentioned costs
compared to one marine vessel on voyage charter in 1995;
(b) An increase of $0.3 million in repairs and maintenance costs from 1994
levels was due primarily to additional repairs charged to two of the
Partnership's marine vessels during their drydocking in the fourth quarter 1995
which were not anticipated and additional upgrades required to another marine
vessel during 1995. The increase to marine vessel repairs and maintenance was
offset, in part, by a reduction to repairs and maintenance caused by the sale of
two marine vessels during 1995;
(c) An increase of $0.3 million in insurance expense during the year ended
December 31, 1995, when compared to the same period in 1994, is due to overall
escalating insurance premiums charged to the marine vessels. Also, during 1994,
the Partnership received a refund of $131,000 from an insurance company due to
lower loss of hire claims; a similar refund was not received in 1995;
(2) Indirect operating expenses (defined as depreciation and amortization
expense, management fees, interest expense, and general and administrative
expenses) decreased to $23.3 million in the year ended December 31, 1995 from
$25.5 million in the year ended December 31, 1994. This change resulted
primarily from:
(a) A decrease in depreciation and amortization expense of $2.9 million
from 1994 levels reflecting the Partnership's double-declining depreciation
method and the sale of a rig during December of 1994 and two marine vessels and
other equipment during 1995. The decrease was offset in part by the purchase of
six additional aircraft and a partial beneficial interest in two trusts owning
aircraft during 1995;
(b) An increase of $0.8 million in interest expenses due to a rise in the
base rate of interest charged on the Partnership's debt;
(c) A decrease of $0.3 million in management fees due to a decrease in
lease revenues;
(d) An increase of $0.2 million in administrative expenses due to higher
bank charges to the Partnership, an increase in professional services needed,
and a loan fee charged the Partnership.
(C) Net Income
The Partnership's net income of $2.0 million in the year ended December 31,
1995, decreased from a net income of $3.2 million in the year ended December 31,
1994. The Partnership's ability to acquire, operate, or liquidate assets, secure
leases, and re-lease those assets whose leases expire during the duration of the
Partnership, is subject to many factors and the Partnership's performance in the
year ended December 31, 1995, is not necessarily indicative of future periods.
In the year ended December 31, 1995, the Partnership distributed $18.4 million
to the Limited Partners, or $2.00 per weighted average Depositary Unit.
Geographic Information
The Partnership operates its equipment in international markets. Although these
operations expose the Partnership to certain currency, political, credit and
economic risks, the Manager believes these risks are minimal or has implemented
strategies to control the risks as follows: Currency risks are at a minimum
because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
generally through the avoidance of operations in countries that do not have a
stable judicial system and established commercial business laws. Credit support
strategies for lessees range from letters of credit supported by U.S. banks to
cash deposits. Although these credit support mechanisms generally allow the
Partnership to maintain its lease yield, there are risks associated with
slow-to-respond judicial systems when legal remedies are required to secure
payment or repossess equipment. Economic risks are inherent in all international
markets and the Manager strives to minimize this risk with market analysis prior
to committing equipment to a particular geographic area. Refer to the Financial
Statements, Note 4 for information on the revenues, income, and assets in
various geographic regions.
Revenues and net operating income by geographic region are impacted by the
time period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges which are greatest in the early years due to
the use of 200% declining balance method of depreciation. The relationships of
geographic revenues, net income (loss) and net book value are expected to
significantly change in the future as assets come off lease and decisions are
made to redeploy the assets in the most advantageous geographic location or sell
the assets.
The Partnership's equipment on lease to U.S. domiciled lessees consists of
trailers, railcars and aircraft. During 1996, U.S. lease revenues accounted for
22% of the total lease revenues while net income accounted for 12% of the net
income for the Partnership. The primary reason for this relationship is that
there was a large gain realized from the sale of an asset in another geographic
region and the Partnership depreciates its rail equipment over a fifteen year
period versus twelve years for other equipment types owned and leased in other
geographic regions.
The Partnership's owned equipment and investments in equipment owned by
USPE's on lease to Canadian domiciled lessees consists of aircraft and railcars.
During 1996, Canadian lease revenues accounted for 9% of the total lease
revenues and recorded a net loss of $1.3 million when compared to the net income
for the Partnership of $12.4 million. The primary reason for this relationship
is that there was a large gain realized from the sale of an asset in another
geographic region.
The Partnership's owned aircraft on lease to a South American domiciled
lessee during 1996, accounted for 2% of the total lease revenues and recorded a
net loss of $1.4 million when compared to the net income for the Partnership of
$12.4 million. The primary reason for this relationship is that there was a
large gain realized from the sale of an asset in another geographic region.
The Partnership owned a rig which was on lease to a lessee domiciled in
Asia. Lease revenues in this region accounted for 3% of the total lease revenues
while net income accounted for 86% of the net income for the Partnership. The
primary reason for this relationship is that during 1996, the Partnership sold
this rig for a gain which accounted for 85% of total net income for the
Partnership. At December 31, 1996. the Partnership did not have any remaining
assets in the region surrounding Asia.
The Partnership's owned equipment and investments in equipment owned by
USPE's on lease to lessees in Europe consisted of aircraft which accounted for
6% of lease revenues while net income accounted for 30% of the net income for
the Partnership. The primary reason for this relationship is that the
Partnership sold some of the aircraft equipment and realized a gain on the sales
The Partnership's owned equipment and investments in USPE's on lease to
lessees in the rest of the world consists of marine vessels and marine
containers. During 1996, lease revenues for these lessees accounted for 58% of
the total lease revenues and recorded a net income of 21% when compared to the
net income for the Partnership. The primary reason for this relationship is that
there was a large gain realized from the sale of an asset in another geographic
region.
Inflation
There was no significant impact on the Partnership's operations as a result of
inflation during 1996, 1995 or 1994.
Forward Looking Information
Except for historical information contained herein, the discussion in this Form
10-K contains forward-looking statements that involve risks and uncertainties,
such as statements of the Partnership's plans, objectives, expectations and
intentions. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.
Outlook for the Future
Several factors may affect the Partnership's operating performance in 1997 and
beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
The Partnership's operation of a diversified equipment portfolio in a broad
base of markets is intended to reduce its exposure to volatility in individual
equipment sectors. In 1996, market conditions, supply and demand equilibrium,
and other factors varied in several markets. In the container and refrigerated
over-the-road trailer markets, oversupply conditions, industry consolidations,
and other factors resulted in falling rates and lower returns. In the dry
over-the-road trailer markets, strong demand and a backlog of new equipment
deliveries produced high utilization and returns. The marine vessel, rail, and
mobile offshore drilling unit markets could be generally categorized by
increasing rates as the demand for equipment is increasing faster than new
additions net of retirements. Finally, demand for narrowbody stage II aircraft,
such as those owned by the Partnership, has increased as expected savings from
newer narrowbody aircraft have not materialized and deliveries of the newer
aircraft have slowed down. These different markets have had individual effects
on the performance of Partnership equipment - in some cases resulting in
declining performance, and in others, in improved performance.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent on many factors, such
as specific market conditions and economic activity, technological obsolescence,
governmental or other regulations, and others. The unpredictability of some of
these factors, or of their occurrence, makes it difficult for the General
Partner to clearly define trends or influences that may impact the performance
of the Partnership's equipment. The General Partner continuously monitors both
the equipment markets and the performance of the Partnership's equipment in
these markets. The General Partner may make an evaluation to reduce the
Partnership's exposure to equipment markets in which it determines that it
cannot operate equipment and achieve acceptable rates of return. Alternatively,
the General Partner may make a determination to enter equipment markets in which
it perceives opportunities to profit from supply-demand instabilities or other
market imperfections.
The Partnership intends to use excess cash flow, if any, after payment of
expenses, loan principal, and cash distributions to acquire additional equipment
during the first seven years of Partnership operations. The General Partner
believes these acquisitions may cause the Partnership to generate additional
earnings and cash flow for the Partnership.
(A) Repricing and Reinvestment Risk
Certain portions of the Partnership's marine container, marine vessel, and
trailer portfolios will be remarketed in 1997 as existing leases expire,
exposing the Partnership to considerable repricing risk/opportunity.
Additionally, the General Partner may select to sell certain underperforming
equipment, or equipment whose continued operation may become prohibitively
expensive, and thus faces reinvestment risk. In either case, the General Partner
intends to re-lease or sell equipment at prevailing market rates; however, the
General Partner cannot predict these future rates with any certainty at this
time and cannot accurately assess the effect of such activity on future
Partnership performance.
(B) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the General Partner has
observed rising insurance costs to operate certain vessels into U.S. ports
resulting from implementation of the U.S. Oil Pollution Act of 1990. Ongoing
changes in the regulatory environment, both in the U.S. and internationally,
cannot be predicted with any accuracy, and preclude the General Partner from
determining the impact of such changes on Partnership operations, purchases, or
sale of equipment.
(C) Distributions
Pursuant to the Limited Partnership Agreement, the Partnership will cease to
reinvest in additional equipment beginning in its seventh year of operations
which commences on January 1, 1998. The General Partner intends to continue its
strategy of selectively redeploying equipment to achieve competitive returns. By
the end of the reinvestment period, the General Partner intends to have
assembled an equipment portfolio capable of achieving a level of operating cash
flow for the remaining life of the Partnership sufficient to meet its
obligations and sustain a predictable level of distributions to the partners.
The General Partner believes the current level of distributions to the
partners can be maintained throughout 1997 using cash from operations,
undistributed available cash from prior periods, and proceeds from sales or
dispositions of equipment if necessary. Subsequent to this period, the General
Partner will evaluate the level of distributions the Partnership 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 and the availability of suitable equipment
acquisitions preclude the General Partner from accurately determining the impact
of its redeployment strategy on liquidity or future distribution levels.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed on the Index to
Financial Statements included in Item 14(a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(this space intentionally left blank)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
As of the date of this Annual Report, the directors and executive officers of
PLM International (and key executive officers of its subsidiaries) are as
follows:
Name Age Position
-------------------------------------- ------------------ -------------------------------------------------------
J. Alec Merriam 61 Director, Chairman of the Board, PLM International,
Inc.; Director, PLM Financial Services, Inc.
Douglas P. Goodrich 50 Director and Senior Vice President, PLM
International; Director and President, PLM Financial
Services, Inc.; Senior Vice President, PLM
Transportation Equipment Corporation; President, PLM
Railcar Management Services, Inc.
Walter E. Hoadley 80 Director, PLM International, Inc.
Robert L. Pagel 60 Director, Chairman of the Executive Committee, PLM
International, Inc.; Director, PLM Financial
Services, Inc.
Harold R. Somerset 62 Director, PLM International, Inc.
Robert N. Tidball 58 Director, President and Chief Executive Officer, PLM
International, Inc.
J. Michael Allgood 48 Vice President and Chief Financial Officer, PLM
International, Inc. and PLM Financial Services, Inc.
Stephen M. Bess 50 President, PLM Investment Management, Inc.;
President, PLM Securities Corp.; Vice President, PLM
Financial Services, Inc.
David J. Davis 40 Vice President and Corporate Controller, PLM
International and PLM Financial Services, Inc.
Frank Diodati 42 President, PLM Railcar Management Services Canada
Limited.
Steven O. Layne 42 Vice President, PLM Transportation Equipment
Corporation; Vice President and Director, PLM
Worldwide Management Services, Ltd.
Stephen Peary 48 Senior Vice President, General Counsel and Secretary,
PLM International, Inc.; Vice President, General
Counsel and Secretary, PLM Financial Services, Inc.,
PLM Investment Management, Inc., PLM Transportation
Equipment Corporation; Vice President, PLM
Securities, Corp.
Thomas L. Wilmore 54 Vice President, PLM Transportation Equipment
Corporation; Vice President, PLM Railcar Management
Services, Inc.
J. Alec Merriam was appointed Chairman of the Board of Directors of PLM
International in September 1990, having served as a director since February
1988. In October 1988, he became a member of the Executive Committee of the
Board of Directors of PLM International. From 1972 to 1988, Mr. Merriam was
Executive Vice President and Chief Financial Officer of Crowley Maritime
Corporation, a San Francisco area-based company engaged in maritime shipping and
transportation services. Previously, he was Chairman of the Board and Treasurer
of LOA Corporation of Omaha, Nebraska and served in various financial positions
with Northern Natural Gas Company, also of Omaha.
Douglas P. Goodrich was elected to the Board of Directors in July 1996, and
appointed Director and President of PLM Financial Services in June 1996, and
appointed Senior Vice President of PLM International in March 1994. Mr. Goodrich
has also served as Senior Vice President of PLM Transportation Equipment
Corporation since July 1989, and as President of PLM Railcar Management
Services, Inc. since September 1992 having been a Senior Vice President since
June 1987. Mr. Goodrich was an Executive Vice President of G.I.C. Financial
Services Corporation, a subsidiary of Guardian Industries Corp. of Chicago,
Illinois from December 1980 to September 1985.
Dr. Hoadley joined PLM International's Board of Directors and its Executive
Committee in September, 1989. He served as a Director of PLM, Inc. from November
1982 to June 1984 and PLM Companies, Inc. from October 1985 to February 1988.
Dr. Hoadley has been a Senior Research Fellow at the Hoover Institute since
1981. He was Executive Vice President and Chief Economist for the Bank of
America from 1968 to 1981, and Chairman of the Federal Reserve Bank of
Philadelphia from 1962 to 1966. Dr. Hoadley served as a Director of Transcisco
Industries, Inc. from 1988 through August of 1995.
Robert L. Pagel was appointed Chairman of the Executive Committee of the
Board of Directors of PLM International in September 1990, having served as a
director since February 1988. In October 1988, he became a member of the
Executive Committee of the Board of Directors of PLM International. From June
1990 to April 1991, Mr. Pagel was President and Co-Chief Executive Officer of
The Diana Corporation, a holding company traded on the New York Stock Exchange.
He is the former President and Chief Executive Officer of FanFair Corporation
which specializes in sports fans' gift shops. He previously served as President
and Chief Executive Officer of Super Sky International, Inc., a publicly traded
company, located in Mequon, Wisconsin, engaged in the manufacture of skylight
systems. He was formerly Chairman and Chief Executive Officer of Blunt, Ellis &
Loewi, Inc., a Milwaukee-based investment firm. Mr. Pagel retired from Blunt,
Ellis & Loewi in 1985 after a career spanning 20 years in all phases of the
brokerage and financial industries. Mr. Pagel has also served on the Board of
Governors of the Midwest Stock Exchange.
Harold R. Somerset was elected to the Board of Directors of PLM
International in July 1994. From February 1988 to December 1993, Mr. Somerset
was President and Chief Executive Officer of California & Hawaiian Sugar
Corporation (C&H), a recently-acquired subsidiary of Alexander & Baldwin, Inc.
Mr. Somerset joined C&H in 1984 as Executive Vice President and Chief Operating
Officer, having served on its Board of Directors since 1978, a position in which
he continues to serve. Between 1972 and 1984, Mr. Somerset served in various
capacities with Alexander & Baldwin, Inc., a publicly-held land and agriculture
company headquartered in Honolulu, Hawaii, including Executive Vice President -
Agricultures, Vice President, General Counsel and Secretary. In addition to a
law degree from Harvard Law School, Mr. Somerset also holds degrees in civil
engineering from the Rensselaer Polytechnic Institute and in marine engineering
from the U.S. Naval Academy. Mr. Somerset also serves on the Boards of Directors
for various other companies and organizations, including Longs Drug Stores,
Inc., a publicly-held company.
Robert N. Tidball was appointed President and Chief Executive Officer of
PLM International in March 1989. At the time of his appointment, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989 and a member of the Executive Committee of the
Board of Directors of PLM International in September 1990. Mr. Tidball was
elected President of PLM Railcar Management Services, Inc. in January 1986. Mr.
Tidball was Executive Vice President of Hunter Keith, Inc., a Minneapolis-based
investment banking firm, from March 1984 to January 1986. Prior to Hunter Keith,
Inc., he was Vice President, a General Manager and a Director of North American
Car Corporation, and a Director of the American Railcar Institute and the
Railway Supply Association.
J. Michael Allgood was appointed Vice President and Chief Financial Officer
of PLM International in October 1992. Between July 1991 and October 1992, Mr.
Allgood was a consultant to various private and public sector companies and
institutions specializing in financial operational systems development. In
October 1987, Mr. Allgood co-founded Electra Aviation Limited and its holding
company, Aviation Holdings Plc of London where he served as Chief Financial
Officer until July 1991. Between June 1981 and October 1987, Mr. Allgood served
as a First Vice President with American Express Bank, Ltd. In February 1978, Mr.
Allgood founded and until June 1981, served as a director of Trade Projects
International/Philadelphia Overseas Finance Company, a joint venture with
Philadelphia National Bank. From March 1975 to February 1978, Mr. Allgood served
in various capacities with Citibank, N.A.
Stephen M. Bess was appointed President of PLM Securities, Corp. in June
1996 and President of PLM Investment Management, Inc. in August 1989, having
served as Senior Vice President of PLM Investment Management, Inc. beginning in
February 1984 and as Corporate Controller of PLM Financial Services, Inc.
beginning in October 1983. Mr. Bess served as Corporate Controller of PLM, Inc.,
beginning in December 1982. Mr. Bess was Vice President-Controller of Trans
Ocean Leasing Corporation, a container leasing company, from November 1978 to
November 1982, and Group Finance Manager with the Field Operations Group of
Memorex Corp., a manufacturer of computer peripheral equipment, from October
1975 to November 1978.
David J. Davis was appointed Vice President and Controller of PLM
International in January 1994. From March 1993 through January 1994, Mr. Davis
was engaged as a consultant for various firms, including PLM. Prior to that Mr.
Davis was Chief Financial Officer of LB Credit Corporation in San Francisco from
July 1991 to March 1993. From April 1989 to May 1991, Mr. Davis was Vice
President and Controller for ITEL Containers International Corporation which was
located in San Francisco. Between May 1978 and April 1989, Mr. Davis held
various positions with Transamerica Leasing Inc., in New York, including that of
Assistant Controller for their rail leasing division.
Frank Diodati was appointed President of PLM Railcar Management Services
Canada Limited in 1986. Previously, Mr. Diodati was Manager of Marketing and
Sales for G.E. Railcar Services Canada Limited.
Steven O. Layne was appointed Vice President, PLM Transportation Equipment
Corporation's Air Group in November 1992, and was appointed Vice President and
Director of PLM Worldwide Management Services, Ltd. in September 1995. Mr. Layne
was PLM Transportation Equipment Corporation's Vice President, Commuter and
Corporate Aircraft beginning in July 1990. Prior to joining PLM, Mr. Layne was
the Director, Commercial Marketing for Bromon Aircraft Corporation, a joint
venture of General Electric Corporation and the Government Development Bank of
Puerto Rico. Mr. Layne is a Major in the United States Air Force Reserves and
senior pilot with 13 years of accumulated service.
Stephen Peary became Vice President, Secretary, and General Counsel of PLM
International in February 1988 and Senior Vice President in March 1994. Mr.
Peary was Assistant General Counsel of PLM Financial Services, Inc. from August
1987 through January 1988. Previously, Mr. Peary was engaged in the private
practice of law in San Francisco. Mr. Peary is a graduate of the University of
Illinois, Georgetown University Law Center, and Boston University (Masters of
Taxation Program).
Thomas L. Wilmore was appointed Vice President - Rail, PLM Transportation
Equipment Corporation, in March 1994 and has served as Vice President, Marketing
for PLM Railcar Management Services, Inc. since May 1988. Prior to joining PLM,
Mr. Wilmore was Assistant Vice President Regional Manager for MNC Leasing Corp.
in Towson, Maryland from February 1987 to April 1988. From July 1985 to February
1987, he was President and Co-Owner of Guardian Industries Corp., Chicago,
Illinois, and between December 1980 and July 1985, Mr. Wilmore was an Executive
Vice President for its subsidiary, G.I.C. Financial Services Corporation. Mr.
Wilmore also served as Vice President of Sales for Gould Financial Services
located in Rolling Meadows, Illinois from June 1978 to December 1980.
The directors of the General Partner are elected for a one-year term or
until their successors are elected and qualified. There are no family
relationships between any director or any executive officer of the General
Partner.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership
has no pension, profit sharing, retirement, or similar benefit plan in effect as
of December 31, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to 5% interest in the profits
and losses and distributions of the Partnership. At December 31, 1996,
no investor was known by the General Partner to beneficially own more
than 5% of the Units of the Partnership.
(b) Security Ownership of Management
Neither the General Partner and its affiliates nor any officer or
director of the General Partner and its affiliates own any Units of the
Partnership as of December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
During 1996, the Partnership paid or accrued the following fees to FSI
or its affiliates: management fees - $1,458,000; equipment acquisition
fees - $936,000 and lease negotiation fees - $214,000. The Partnership
reimbursed FSI or its affiliates $838,000 for administrative and data
processing services performed on behalf of the Partnership. The
Partnership paid Transportation Equipment Indemnity Company Ltd. (TEI),
a wholly-owned, Bermuda-based subsidiary of PLM International $768,000
for insurance coverages during 1996, which amounts were paid
substantially to third party reinsurance underwriters or placed in risk
pools managed by TEI on behalf of affiliated partnerships and PLM
International which provide threshold coverages on marine vessel loss
of hire and hull and machinery damage. All pooling arrangement funds
are either paid out to cover applicable losses or refunded pro rata by
TEI.
During 1996, the USPE's paid or accrued the following fees to FSI
or its affiliates (based on the Partnership's proportional share of
ownership): management fees - $304,000; administrative and data
processing services - $73,000; equipment acquisition fees - $382,000
and lease negotiation fees - $85,000. The USPE's also paid TEI $231,000
for insurance coverages during 1996
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions With Promoters
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report.
(b) Reports on Form 8-K
None.
(c) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated by
reference to the Partnership's Registration Statement on Form
S-1 (Reg. No. 33-32258) which became effective with the
Securities and Exchange Commission on April 11, 1990.
10.1 Management Agreement between Partnership and PLM Investment
Management, Inc. Incorporated by reference to the
Partnership's Registration Statement on Form S-1 (Reg. No.
33-32258) which became effective with the Securities and
Exchange Commission on April 11, 1990.
10.2 Loan Agreement, amended and restated as of September 26, 1996
regarding Senior Notes due November 8, 1999. Incorporated by
reference to the Partnership's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 30,
1992.
10.4 Second Amended and restated Warehousing Credit Agreement,
dated as of May 31, 1996 with First Union National Bank of
North Carolina.
10.5 Amendment No. 1 to Second Amended and restated Warehousing
Credit Agreement, dated as of November 5, 1996 with First
Union National Bank of North Carolina.
24. Powers of Attorney.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has
signed on behalf of the Partnership by duly authorized officers.
Dated: March 11, 1997 PLM EQUIPMENT GROWTH FUND V
PARTNERSHIP
By: PLM Financial Services, Inc.
General Partner
By: /s/ Douglas P. Goodrich
------------------------
Douglas P. Goodrich
President and Director
By: /s/ David J. Davis
------------------------
David J. Davis
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
*_______________________
J. Alec Merriam Director - FSI March 11, 1997
*_______________________
Robert L. Pagel Director - FSI March 11, 1997
* Stephen Peary, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to powers of attorney duly executed by
such persons and filed with the Securities and Exchange Commission.
/s/ Stephen Peary
- - ----------------------
Stephen Peary
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Report of Independent Auditors 29
Balance sheets as of December 31, 1996 and 1995 30
Statements of income for the years ended
December 31, 1996, 1995, and 1994 31
Statements of changes in partners' capital for the
years ended December 31, 1996, 1995, and 1994 32
Statements of cash flows for the years ended
December 31, 1996, 1995, and 1994 33
Notes to financial statements 34 - 43
All other financial statement schedules have been omitted as the required
information is not pertinent to the Registrant or is not material, or because
the information required is included in the financial statements and notes
thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners
PLM Equipment Growth Fund V:
We have audited the accompanying financial statements of PLM Equipment Growth
Fund V as listed in the accompanying index. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth Fund V as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
- - --------------------------------
SAN FRANCISCO, CALIFORNIA
February 28, 1997
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
BALANCE SHEETS
December 31,
(Dollars in thousands)
ASSETS
1996 1995
-----------------------------------
Equipment held for operating leases, at cost $ 155,004 $ 159,314
Less accumulated depreciation (81,541 ) (85,564 )
---------------------------------
Net equipment 73,463 73,750
Cash and cash equivalents 4,662 5,583
Restricted cash 553 223
Investments in unconsolidated special purpose entities 12,673 16,158
Accounts receivable, net of allowance for doubtful accounts of
$236 in 1996 and $54 in 1995 3,481 2,731
Net investment in direct finance lease 2,282 2,637
Notes receivable 27 322
Lease negotiation fees to affiliate, net of accumulated
amortization of $184 in 1996 and $805 in 1995 319 143
Debt issuance and loan costs, net of accumulated amortization
of $255 in 1996 and $199 in 1995 268 187
Debt placement fees to affiliate, net of accumulated
amortization of $245 in 1996 and $198 in 1995 134 182
Prepaid expenses and other assets 557 193
---------------------------------
Total assets $ 98,419 $ 102,109
=================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Due to affiliates $ 699 $ 1,116
Accounts payable and accrued expenses 1,060 1,360
Lessee deposits and reserve for repairs 3,901 3,616
Short term note payable 2,463 --
Note payable 38,000 38,000
---------------------------------
Total liabilities 46,123 44,092
Partners' capital:
Limited Partners (9,169,019 Depositary Units in 1996
and 9,175,944 Depositary Units in 1995) 52,296 58,017
General Partner -- --
---------------------------------
Total partners' capital 52,296 58,017
---------------------------------
Total liabilities and partners' capital $ 98,419 $ 102,109
=================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
STATEMENTS OF INCOME
For the years ended December 31,
(In thousands of dollars, except per unit amounts)
1996 1995 1994
------------------------------------------
Revenues:
Lease revenue $ 28,763 $ 34,298 $ 38,757
Interest and other income 1,360 1,009 614
Net gain on disposition of equipment 14,199 3,835 4,920
-----------------------------------------
Total revenues 44,322 39,142 44,291
Expenses:
Depreciation and amortization 14,941 17,321 20,266
Management fees to affiliate 1,458 1,767 2,097
Repairs and maintenance 2,843 4,004 3,657
Interest expense 2,789 3,048 2,235
Equipment operating expenses 6,016 7,736 10,089
Insurance expense to affiliate 768 1,015 841
Other insurance expense 985 1,080 996
General and administrative expenses to affiliates 838 612 436
Other general and administrative expenses 903 514 481
Provision for bad debts 224 -- --
-----------------------------------------
Total expenses 31,765 37,097 41,098
-----------------------------------------
Equity in net loss of unconsolidated special purpose entities (116 ) -- --
-----------------------------------------
Net income $ 12,441 $ 2,045 $ 3,193
=========================================
Partners' share of net income:
Limited Partners $ 11,524 $ 1,077 $ 2,222
General Partner 917 968 971
=========================================
Total $ 12,441 $ 2,045 $ 3,193
=========================================
Net income per weighted average Depositary Unit (9,181,074 Units
at December 31, 1996, 9,175,460 Units at
December 31, 1995; 9,219,932 Units at December 31, 1994) $ 1.26 $ 0.12 $ 0.24
=========================================
Cash distributions $ 18,083 $ 19,342 $ 19,420
=========================================
Cash distribution per Depositary Unit $ 1.87 $ 2.00 $ 2.00
=========================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the years ended December 31, 1996, 1995, and 1994
(In thousands)
Limited General
Partners Partner Total
--------------------------------------------------
Partners' capital at December 31, 1993 $ 92,120 $ -- $ 92,120
Net income 2,222 971 3,193
Cash distributions (18,449 ) (971 ) (19,420 )
------------------------------------------------
Partners' capital at December 31, 1994 75,893 -- 75,893
Net income 1,077 968 2,045
Repurchase of Depositary Units (579 ) -- (579 )
Cash distributions (18,374 ) (968 ) (19,342 )
------------------------------------------------
Partners' capital at December 31, 1995 58,017 -- 58,017
Net income 11,524 917 12,441
Repurchase of Depositary Units (79 ) -- (79 )
Cash distributions (17,166 ) (917 ) (18,083 )
------------------------------------------------
Partners' capital at December 31, 1996 $ 52,296 $ -- $ 52,296
================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31,
(In thousands)
1996 1995 1994
---------------------------------------------
Operating activities:
Net income $ 12,441 $ 2,045 $ 3,193
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 14,941 17,321 20,266
Net gain on disposition of equipment (14,199 ) (3,835 ) (4,920 )
Equity in net loss of unconsolidated special purpose entities 116 -- --
Changes in operating assets and liabilities, net:
(Increase) decrease in accounts receivable, net (750 ) 1,532 (1,010 )
Collections on notes receivable 295 441 396
Increase in prepaid expenses and other assets (364 ) (152 ) (24 )
(Decrease) increase in due to affiliates (414 ) 785 296
(Decrease) increase in accounts payable and accrued
expenses (294 ) 7 368
Increase in lessee deposits and reserve for repairs 285 620 74
Increase in restricted cash (330 ) (36 ) --
--------------------------------------------
Net cash provided by operating activities 11,727 18,728 18,639
--------------------------------------------
Investing activities:
Proceeds from disposition of equipment 29,992 18,375 14,827
Payments for purchase of equipment (21,378 ) (27,128 ) (654 )
Investment in direct finance lease, net (2,639 ) --
Principal payments received on direct finance lease 327 -- --
Investment in and equipment purchased and placed in
unconsolidated special purpose entities (8,952 ) -- --
Distributions from unconsolidated special purpose entities 4,348 -- --
Payments of acquisition fees to affiliate (936 ) (1,198 ) --
Payments of lease negotiation fees to affiliate (214 ) (266 ) --
--------------------------------------------
Net cash provided by (used in) investing activities 3,187 (12,856 ) 14,173
--------------------------------------------
Financing activities:
Proceeds from short-term note payable 8,073 -- --
Payments of short-term note payable (5,610 ) -- --
Cash distributions paid to an affiliate (917 ) (968 ) (971 )
Cash distributions paid to the limited partners (17,166 ) (18,374 ) (18,449 )
Payment for loan costs (136 )
Repurchase of Depositary Units (79 ) (579 ) --
--------------------------------------------
Net cash used in financing activities (15,835 ) (19,921 ) (19,420 )
--------------------------------------------
Net (decrease) increase in cash and cash
equivalents (921 ) (14,049 ) 13,392
Cash and cash equivalents at beginning of year (See Note 2) 5,583 20,200 6,808
--------------------------------------------
Cash and cash equivalents at end of year $ 4,662 $ 6,151 $ 20,200
============================================
Supplemental information:
Non-cash transfer of equipment at net book value from
unconsolidated special purpose entities $ 7,901 -- $ --
============================================
Interest paid $ 2,815 $ 2,970 1,808
============================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation
Organization
PLM Equipment Growth Fund V, a California limited partnership (the
Partnership), was formed on November 14, 1989. The Partnership offering
became effective April 11, 1990. The Partnership commenced significant
operations in May 1990. PLM Financial Services, Inc. (FSI) is the General
Partner. FSI is a wholly-owned subsidiary of PLM International, Inc. (PLM
International). The Partnership engages in the business of owning and
leasing primarily used transportation equipment.
The Partnership will terminate on December 31, 2010, unless terminated
earlier upon sale of all equipment or by certain other events. Beginning in
the Partnership's seventh year of operations, which commences on January 1,
1999, the General Partner will stop reinvesting excess cash if any, which,
less reasonable reserves, will be distributed to the Partners. Beginning in
the Partnership's ninth year of operations, the General Partner intends to
begin an orderly liquidation of the Partnership's assets. The General
Partner anticipates that the liquidation of the assets will be completed by
the end of the Partnership's tenth year of operations.
FSI manages the affairs of the Partnership. The net income (loss) and
distributions of the Partnership are generally allocated 95% to the Limited
Partners and 5% to the General Partner (see Net Income (Loss) and
Distributions per Depositary Unit, below). The General Partner is entitled
to a subordinated incentive fee equal to 5% of Cash Available for
Distribution and of Net Disposition Proceeds (as defined in the Partnership
Agreement) which are distributed by the Partnership after the Limited
Partners have received a certain minimum rate of return.
The General Partner has determined that it will not adopt a
reinvestment plan for the Partnership. Based on this decision, beginning
January 1, 1994, the Partnership may be obligated to redeem up to 2% of the
outstanding units each year, subject to the General Partner's good faith
determination that such redemption's should not (i) cause the Partnership
to be taxed as a corporation under Section 7704 of the IRS Code or (ii)
impair the capital or operations of the Partnership. The purchase price to
be offered by the Partnership for the outstanding units will be equal to
110% of the unrecovered principal attributable to the units. The
unrecovered principal for any unit will be equal to the excess of (i) the
capital contribution attributable to the unit over (ii) the distributions
from any source paid with respect to the units. For the years ended
December 31, 1996 and 1995, the Partnership had repurchased 6,925 and
43,988 Depositary Units, for $79,000 and $579,000, respectively.
At December 31, 1996, the Partnership agreed to repurchase
approximately 120,000 Units for an aggregate price of approximately
$1,171,000. The General Partner anticipates that these Units will be
repurchased in the first and second quarters of 1997.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operations
The equipment of the Partnership is managed, under a continuing management
agreement, by PLM Investment Management, Inc. (IMI), a wholly-owned
subsidiary of FSI. IMI receives a monthly management fee from the
Partnership for managing the equipment (see Note 3). FSI, in conjunction
with its subsidiaries, syndicates investor programs, sells transportation
equipment to investor programs and third parties, manages pools of
transportation equipment under agreements with the investor programs, and
is a General Partner of other Limited Partnerships.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
Accounting for Leases
The Partnership's leasing operations generally consist of operating leases.
Under the operating lease method of accounting, the leased asset is
recorded at cost and depreciated over its estimated useful life. Rental
payments are recorded as revenue over the lease term. Lease origination
costs are capitalized and amortized over the term of the lease.
Periodically, the Partnership leases equipment with lease terms that
qualify for direct finance lease classification as required by Statement of
Financial Accounting Standards No. 13 (SFAS 13).
Depreciation and Amortization
Depreciation of transportation equipment, held for operating leases, is
computed on the 200% declining balance method, taking a full month's
depreciation in the month of acquisition, based upon estimated useful lives
of 15 years for railcars and 12 years for all other types of equipment. The
depreciation method changes to straight line when annual depreciation
expense using the straight line method exceeds that calculated by the 200%
declining balance method. Acquisition fees and certain acquisition costs
have been capitalized as part of the cost of the equipment. Lease
negotiation fees are amortized over the initial equipment lease term. Debt
issuance costs are amortized over the term of the loan for which they were
paid. Major expenditures which are expected to extend the useful lives or
reduce operating expenses for equipment are capitalized.
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" (SFAS 121). This standard is
effective for years beginning after December 15, 1995. The Partnership
adopted SFAS 121 during 1995, the effect of which was not material as the
method previously employed by the Partnership was consistent with SFAS 121.
In accordance with SFAS 121, the General Partner reviews the carrying value
of the Partnership's equipment at least annually in relation to expected
future market conditions for the purpose of assessing recoverability of the
recorded amounts. If projected future lease revenue plus residual values
are less than the carrying value of the equipment, a loss on revaluation is
recorded. There were no reductions to the carrying value of equipment
required during 1996.
Investments in Unconsolidated Special Purpose Entities
The Partnership has interests in unconsolidated special purpose entities
which own transportation equipment. These interests are accounted for using
the equity method.
The Partnership's investment in unconsolidated special purpose entities
includes acquisition and lease negotiation fees paid by the Partnership to
PLM Transportation Equipment Corporation (TEC). The Partnership's equity
interest in net income of unconsolidated special purpose entities (USPE) is
reflected net of management fees paid or payable to IMI and the
amortization of acquisition and lease negotiation fees paid to TEC.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are not
covered by the lessee they are charged against operations as incurred.
Estimated costs associated with marine vessel drydockings are accrued and
charged to income ratably over the period prior to such drydocking. The
reserve accounts are included in the balance sheet as lessee deposits and
reserve for repairs.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
Net Income (Loss) and Distributions per Depositary Unit
The net income (loss) and distributions of the Partnership are generally
allocated 95% to the Limited Partners and 5% to the General Partner. Gross
income in each year is specially allocated to the General Partner to the
extent, if any, necessary to cause the capital account balance of the
General Partner to be zero as of the close of such year. The Limited
Partners' net income (loss) and distributions are allocated among the
Limited Partners based on the number of Depositary Units owned by each
Limited Partner and on the number of days of the year each Limited Partner
is in the Partnership.
Cash distributions are recorded when paid. Cash distributions to
investors in excess of net income are considered to represent a return of
capital. Cash distributions to the Limited Partners of $5,642,000,
$17,297,000 and $16,227,000 in 1996, 1995, and 1994, respectively, were
deemed to be a return of capital.
Cash distributions of $2,785,000, $3,493,000, and $3,511,000 related to
the fourth quarter of 1996, 1995 and 1994, respectively, were paid or are
payable during January and February 1997, 1996, or 1995, depending on
whether the individual Unitholder elected to receive a monthly or quarterly
distribution check.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three
months or less as cash equivalents. The carrying amount of cash equivalents
approximates fair market value due to the short-term nature of the
investments. Lessee security deposits held by the Partnership are
considered restricted cash.
2. Investments in Unconsolidated Special Purpose Entities (USPE)
During the second half of 1995, the Partnership began to increase the level
of its participation in the ownership of large-ticket transportation assets
to be owned and operated jointly with affiliated programs.
This trend continued during 1996.
Prior to 1996, the Partnership accounted for operating activities
associated with joint ownership of transportation equipment as undivided
interests, including its proportionate share of each asset with similar
wholly-owned assets in its financial statements. Under generally accepted
accounting principles, the effects of such activities, if material, should
be reported using the equity method of accounting. Therefore, effective
January 1, 1996, the Partnership adopted the equity method to account for
its investment in such jointly-held assets.
The principle differences between the previous accounting method and
the equity method relate to the presentation of activities relating to
these assets in the statement of operations. Whereas, under the equity
method of accounting the Partnership's proportionate share is presented as
a single net amount, equity in net income (loss) of USPE's, under the
previous method, the Partnership's statement of operations reflected its
proportionate share of each individual item of revenue and expense.
Accordingly, the effect of adopting the equity method of accounting has no
cumulative effect on previously reported partner's capital or on the
Partnership's net income (loss) for the period of adoption. Because the
effects on previously issued financial statements of applying the equity
method of accounting to investments in jointly-owned assets are not
considered to be material to such financial statements taken as a whole,
previously issued financial statements have not been restated. However,
certain items have been reclassified in the previously issued balance sheet
to conform to the current period presentation. The beginning cash and cash
equivalent for 1996 is different from the ending cash and cash equivalent
for 1995 on the statement of cash flows due to
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
2. Investments in Unconsolidated Special Purpose Entities (continued)
this reclassification.
During 1996, the Partnership purchased an interest in a trust owning
five commercial aircraft for $5.6 million and an interest in an entity
owning two commercial aircraft on a direct finance lease for $2.9 million
and incurred acquisition and lease negotiation fees of $0.3 million to PLM
Worldwide Management Services (WMS), an affiliate of the General Partner.
The following summarizes the financial information for the special
purpose entities and the Partnership's interest therein as of and for the
year ended December 31, 1996 (in thousands):
Net
Total Interest of
USPE Partnership
------------------------------
Net Investments $ 48,660 $ 12,673
Revenues 30,337 7,054
Net loss (1,692 ) (116 )
The net investments in USPE's include the following jointly-owned
equipment (and related assets and liabilities) at December 31 1996 and
1995, (in thousands):
1996 1995
--------------------------------
50% interest in an entity owning a bulk carrier $ 3,196 $ 3,778
50% interest in an entity owning a product tanker 2,144 2,841
25% interest in two commercial aircraft on direct finance lease 2,768 --
17% interest in two trusts owning three commercial aircraft, two
aircraft engines, and a portfolio of aircraft rotables 4,565 5,334
14% interest in a Trust that owns seven commercial aircraft (see below
note) -- 4,205
----------------------------
Net investments $ 12,673 $ 16,158
============================
The Partnership had beneficial interests in two USPE's that own
multiple aircraft (the "Trusts"). These Trusts contained certain
provisions, under certain circumstances, for allowing the removal of
specific aircraft to the beneficial owners. A renegotiation of the
Partnership's senior loan agreement during the third quarter of 1996 (see
note 6), required the Partnership to remove from the Trusts the aircraft
designated to the Partnership for loan collateral purposes. As of December
31, 1996, the two Boeing 737 aircraft, one of which was purchased during
1995 and the other which was purchased during 1996, are now reported as
owned equipment by the Partnership.
3. General Partner and Transactions with Affiliates
An officer of PLM Securities Corp. (PLM Securities) contributed
$100 of the Partnership's initial capital. Under the equipment management
agreement, IMI receives a monthly management fee attributable to either
owned equipment or interests in equipment owned by the USPE's equal to the
lesser of (i) the fees which would be charged by an independent third party
for similar services for similar equipment or (ii) the sum of (A) 5% of the
Gross Lease Revenues attributable to equipment which is subject to
operating leases, (B) 2% of the Gross Lease Revenues, as defined in the
agreement which is subject to full payout net leases, and (C) 7% of the
Gross Lease Revenues attributable to Equipment, if any, which is subject to
per diem leasing arrangements and thus is operated by the Partnership.
Partnership management fees of $952,000, and $1,459,000 were payable as of
December 31, 1996 and 1995, respectively. The Partnership's proportional
share of USPE's management fees of $26,000, and $0 were payable as of
December 31, 1996 and 1995, respectively. The Partnership's proportional
share of USPE's management fees expense during 1996
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. General Partner and Transactions with Affiliates (continued)
was $304,000. An affiliate of the General Partner was reimbursed for data
processing and administrative expenses directly attributable to the
Partnership, in the amount of $838,000, $612,000, and $436,000, during
1996, 1995, and 1994, respectively. The Partnership's proportional share of
USPE's data processing and administrative expenses was $73,000 during 1996.
Debt placement fees are paid to FSI in an amount equal to 1% of the
Partnership's long-term borrowings.
The Partnership and USPE's paid or accrued lease negotiation and
equipment acquisition fees of $1,617,000 and $1,603,000 to TEC and WMS in
1996 and 1995, respectively. During 1994, the Partnership did not purchase
any equipment; therefore, neither of these fees were required to be accrued
or paid. TEC is a wholly-owned subsidiary of FSI. WMS is a wholly-owned
subsidiary of PLM International. The Partnership paid $768,000, $1,015,000,
and $841,000 in 1996, 1995, and 1994, respectively, to Transportation
Equipment Indemnity Company, Ltd. (TEI) which provides marine insurance
coverage and other insurance brokerage services. The Partnership's
proportional share of USPE's marine insurance coverage paid to TEI was
$231,000 during 1996. TEI is an affiliate of the General Partner. A
substantial portion of this amount was paid to third-party reinsurance
underwriters or placed in risk pools managed by TEI on behalf of affiliated
partnerships and PLM International which provide threshold coverages on
marine vessel loss of hire and hull and machinery damage. All pooling
arrangement funds are either paid out to cover applicable losses or
refunded pro rata by TEI.
As of December 31, 1996, approximately 69% of the Partnership's trailer
equipment is in rental facilities operated by an affiliate of the General
Partner. Revenues collected under short-term rental agreements with the
rental yards' customers are credited to the owners of the related equipment
as received. Direct expense associated with the equipment are charged
directly to the Partnership. An allocation of other direct expenses of the
rental yard operations are billed to the Partnership monthly.
The Partnership owns certain equipment in conjunction with affiliated
partnerships. At December 31, 1996, this equipment included an interest in
two entities owning marine vessels, an interest in two trusts comprised of
three aircraft, two aircraft engines, and a package of aircraft rotables,
and an interest in a trust comprised of two commercial aircraft on a direct
finance lease. At December 31, 1995, this equipment included an interest in
two entities owning marine vessels, an interest in two trusts comprised of
three aircraft, two aircraft engines, and a package of aircraft rotables,
and an interest in a trust comprised of seven commercial aircraft.
The balance due to affiliates at December 31, 1996, includes $0.9
million due to FSI and its affiliates and $0.3 million due from affiliated
investments in USPE's. The balance due to affiliates at December 31, 1995,
includes $1.3 million due to FSI and its affiliates and $0.3 million due
from affiliated investments in USPE's.
4. Equipment
The components of equipment at December 31, 1996 and 1995, are as follows
(in thousands):
Equipment held for operating leases: 1996 1995
-------------------------------------
Marine vessels $ 52,259 $ 52,259
Mobile offshore drilling units -- 25,204
Marine containers 24,451 28,278
Aircraft 57,205 32,903
Rail equipment 11,406 11,041
Trailers 9,683 9,629
------------------------------------
155,004 159,314
Less accumulated depreciation (81,541 ) (85,564 )
------------------------------------
====================================
Net equipment $ 73,463 $ 73,750
====================================
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
Revenues are earned by placing the equipment under operating leases
which are billed monthly or quarterly. Some of the Partnership's marine
containers and marine vessels are leased to operators of utilization-type
leasing pools which include equipment owned by unaffiliated parties. Insuch
instances revenues received by the Partnership consist of a specified
percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment.
Rents for other equipment are based on fixed rates.
As of December 31, 1996, all equipment was on lease or operating in
PLM-affiliated short-term trailer rental yards except 14 railcars with a
net book value of $0.2 million. As of December 31, 1995, all equipment was
on lease or operating in PLM-affiliated short-term trailer rental yards.
One commercial aircraft is on lease to Continental Airlines Inc.
(Continental). Continental filed for protection under Chapter 11 of the
U.S. Bankruptcy code in December 1990. Unpaid past due rent payments
totaling $1.4 million were converted into 2 promissory notes by the
Bankruptcy Court with terms of 42 and 48 equal monthly installments, with
interest accruing at the rate of 8.64% and 12% per annum. As of December
31, 1996, $27,000 was outstanding under these notes ($322,000 outstanding
as of December 31, 1995).
Continental remains current on all payments due under the promissory notes.
During 1996, the Partnership disposed of a rig with a net book value of
$10.7 million for proceeds of $21.3 million, 2 aircraft engines, 1 commuter
aircraft, 926 marine containers, 1 trailer and 4 railcars with an aggregate
net book value of $5.1 million for proceeds of $8.7 million.
During 1995, the Partnership disposed of 1,519 marine containers, 1
commuter aircraft, 1 railcar, and 1 marine vessel with an aggregate net
book value of $10.0 million for proceeds of $10.6 million. The Partnership
also sold 97 railcars, which were held for sale as of December 31, 1994,
with a net book value of $1.9 million at the date of sale for proceeds of
$2.6 million and 1 marine vessel, which was also held for sale, with a net
book value of $4.0 million at the date of sale for proceeds of $5.1
million. Included in the gain of $2.9 million from sale of the marine
vessels, is the unused portion of accrued drydocking of $1.3 million and
commissions related to the sale.
Periodically, PLM International will purchase groups of assets whose
ownership may be allocated among affiliated partnerships and PLM
International. Generally in these cases, only assets that are on lease will
be purchased by the affiliated partnerships. PLM International will
generally assume the ownership and remarketing risks associated with
off-lease equipment. Allocation of the purchase price will be determined by
a combination of third party industry sources, and recent transactions or
published fair market value references. During 1996, PLM International
realized $0.7 million of gains on the sale of 69 off-lease railcars
purchased by PLM International as part of a group of assets in 1994 which
had been allocated to PLM Equipment Growth Funds IV, VI, VII, Professional
Lease Management Income Fund I, L.L.C. (Fund I) and PLM International. At
December 31, 1995, PLM International included these assets as held for
sale. During 1995, PLM International realized $1.3 million in gains on
sales of railcars and aircraft purchased by PLM International in 1994 and
1995 as part of a group of assets which had been allocated to the
Partnership, PLM Equipment Growth Funds IV, VI, VII, Fund I, and PLM
International.
All leases are being accounted for as operating leases except one
finance lease. Future minimum rentals receivable under noncancelable
operating leases at December 31, 1996, for owned and partially owned
equipment during each of the next five years are approximately $14,900,000
- 1997; $11,200,000 - 1998; $9,200,000 - 1999; $7,900,000 -2000; and
$8,100,000 - thereafter. Contingent rentals based upon utilization were
approximately $3,107,000, $4,785,000, and $6,431,000 in 1996, 1995, and
1994, respectively.
The Partnership owns certain equipment which is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
resulting from foreign currency transactions are included in the results of
operations and are not material.
The Partnership leases or leased its aircraft, railcars, mobile
offshore drilling unit and trailers to lessees domiciled in five geographic
regions: North America, South America, Europe, Asia, and Australia. Marine
vessels and marine containers are leased to multiple lessees in different
regions who operate the marine vessels and marine containers worldwide. The
tables below set forth geographic information about the Partnership's owned
equipment and investments in USPE's grouped by domicile of the lessee as of
and for the years ended December 31, 1996, 1995 and 1994 (in thousands):
Investments
in U.S.P.E. Owned Equipment
---------------- --------------------------------------
Region 1996 1996 1995 1994
------------------------- ------------ ---------------------------------------
Revenues:
United States $ -- $ 7,806 $ 6,666 $ 7,734
Canada 1,509 1,821 892 713
South America -- 763 -- --
Asia -- 1,062 2,556 3,080
Australia -- -- 258 --
Europe 1,765 493 1,671 1,083
Rest of the world 3,780 16,818 22,255 26,147
============ =========================================
Total revenues $ 7,054 $ 28,763 $ 34,298 $ 38,757
============ =========================================
The following table sets forth identifiable net income (loss)
information by region for the owned equipment and investments in USPE for
the years ended December 31, 1996, 1995 and 1994 (in thousands):
Investments
in U.S.P.E. Owned Equipment
---------------- --------------------------------------
Region 1996 1996 1995 1994
------------------------------------------ ----------- -----------------------------------------
Net income (loss):
United States $ -- $ 1,543 $ 2,142 $ 1,680
Canada (753 ) (555 ) (75 ) 125
South America -- (1,419 ) -- --
Asia -- 10,715 114 58
Australia -- -- 646 --
Europe 490 3,190 410 284
Mexico (2 ) -- -- 5,152
Rest of the world 149 2,500 2,085 (1,143 )
----------- -----------------------------------------
Total identifiable income (loss) (116 ) 15,974 5,322 6,156
Administrative and other -- (3,417 ) (3,277 ) (2,963 )
=========== =========================================
Total net income (loss): $ (116 ) $ 12,557 $ 2,045 $ 3,193
=========== =========================================
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
The net book value of these assets at December 31, 1996, 1995 and 1994
are as follows (in thousands):
Investments
in U.S.P.E. Owned Equipment
------------------ ------------------------------------------------------
Region 1996 1995 1996 1995 1994
------------------------------ ----------------------------- ---------------------------------------------
Net book value:
United States $ -- $ -- $ 20,465 $ 24,971 $ 15,355
Canada -- 4,205 14,065 2,187 2,106
South America -- -- 13,909 -- --
Mexico 2,768 -- -- -- --
Asia -- -- -- 11,540 13,849
Europe 4,565 5,334 -- 3,377 4,052
Rest of the world 5,340 6,619 25,024 31,675 52,528
----------------------------- ---------------------------------------------
12,673 16,158 73,463 73,750 87,890
Equipment held for sale -- -- -- -- 6,082
============================= =============================================
$ 12,673 $ 16,158 $ 73,463 $ 73,750 $ 93,972
============================= =============================================
The lessees accounting for 10% or more of the total revenues during
1996 and 1995 were Halla Merchant Marine Company, Ltd. (11.6% in 1995),
Chembulk Trading, Inc. (12.2% in 1996; 11.1% in 1995), During 1994, there
were no lessees which accounted for 10% or more of the total revenues.
5. Net Investment in Direct Finance Lease
During December 1995, the Partnership entered into a direct finance lease
related to the installation of a Stage III hushkit on an advanced B727-200
aircraft for $2.5 million. The Partnership incurred acquisition and lease
negotiation fees of $139,000 to TEC related to this transaction. Gross
lease payments of $3.8 million are to be received over a five-year period,
which commenced in December of 1995.
The components of the net investment in direct finance lease at
December 31, 1996 and 1995 are as follows:
1996 1995
---------------------------------
Total minimum lease payments $ 2,978,000 $ 3,738,000
Residual value 125,000 125,000
Less: Unearned income (821,000 ) (1,226,000 )
=================================
$ 2,282,000 $ 2,637,000
=================================
Future minimum rentals receivable under the direct finance lease at
December 31, 1996, for the next five years are approximately $760,000 -
1997; $760,000 - 1998; $760,000 - 1999; and $698,000 -2000.
6. Notes Payable
In November 1991, the Partnership borrowed $38,000,000 under a nonrecourse
loan agreement. The loan was secured by certain marine containers, five
marine vessels, and one mobile offshore drilling unit owned by the
Partnership.
During 1996, the Partnership sold some of the assets in which the
lender had a secured interest. On September 26, 1996, the existing senior
loan agreement was amended and restated to reduce the interest rate, to
grant increased flexibility in allowable collateral, to pledge additional
equipment
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
6. Notes Payable (continued)
to the lenders and to amend the loan repayment schedule from 16 consecutive
equal quarterly installments to 20 consecutive quarterly installments with
lower principle payments for the first four payments. The Partnership
incurred a loan amendment fee of $133,000 to the lender in connection with
the restatement of this loan. Pursuant to the terms of the loan agreement
the Partnership must comply with certain financial covenants and maintain
certain financial ratios
During 1996, the loan required interest-only quarterly payments at a
rate of approximately LIBOR plus 1.2 percent per annum (6.825% at December
31, 1996). During 1995, the loan required interest-only quarterly payments
at a rate of approximately LIBOR plus 1.5 percent per annum (7.4375% at
December 31, 1995). The General Partner believes that the book value of the
note payable approximates fair value due to its variable interest rate.
The General Partner has entered into a joint $50 million credit
facility (the "Committed Bridge Facility") on behalf of the Partnership,
PLM Equipment Growth Fund IV, PLM Equipment Growth Fund VI, PLM Equipment
Growth & Income Fund VII and Professional Lease Management Income Fund I
("Fund I"), all affiliated investment programs, TEC Acquisub, Inc.
("TECAI"), an indirect wholly-owned subsidiary of the General Partner, and
American Finance Group, Inc. (AFG), a subsidiary of PLM International Inc.,
which may be used to provide interim financing of up to (i) 70% of the
aggregate book value or 50% of the aggregate net fair market value of
eligible equipment owned by the Partnership , plus (ii) 50% of unrestricted
cash held by the borrower. The Committed Bridge Facility became available
on December 20, 1993, and was amended and restated on October 31, 1996, to
expire on October 31, 1997 and increased the available borrowings for AFG
to $50 million. The Partnership, TECAI, Fund I and the other partnerships
collectively may borrow up to $35 million of the Committed Bridge Facility.
The Committed Bridge Facility also provides for a $5 million Letter of
Credit Facility for the eligible borrowers. Outstanding borrowings by Fund
I, TECAI, AFG or PLM Equipment Growth Funds IV through VII reduce the
amount available to each other under the Committed Bridge Facility.
Individual borrowings may be outstanding for no more than 179 days, with
all advances due no later than October 31, 1997. The Committed Bridge
Facility prohibits the Partnership from incurring any additional
indebtedness. Interest accrues at either the prime rate or adjusted LIBOR
plus 2.5% at the borrowers option and is set at the time of an advance of
funds. Borrowings by the Partnership are guaranteed by the General Partner.
As of December 31, 1996, the Partnership had borrowings of $2.5 million,
PLM Equipment Growth Fund VI had $1.3 million, PLM Equipment Growth and
Income Fund VII had $2.0 million, AFG had $26.9 million, and TECAI had $4.1
million in outstanding borrowings. Neither PLM Equipment Growth Fund IV nor
Fund I had any outstanding borrowings.
7. Income Taxes
The Partnership is not subject to income taxes as any income or loss is
included in the tax returns of the individual Partners. Accordingly, no
provision for income taxes has been made in the accounts of the
Partnership.
At December 31, 1996, there were temporary differences of approximately
$15,426,000 between the financial statement carrying values of assets and
liabilities and the federal income tax bases of such assets and
liabilities, principally due to the differences in depreciation methods.
8. Subsequent Event
PLM International (PLMI) along with FSI, IMI, TEC and PLM Securities,
and collectively with PLMI, FSI, IMI, TEC and PLM Securities, (the "PLM
Entities"), were named as defendants in a class action lawsuit filed in the
Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251. The
PLM Entities received service of the complaint on February 10, 1997, and
pursuant to an extension of time granted by plaintiffs' attorneys, have
sixty days to respond to the complaint. PLM
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
8. Subsequent Event continued)
International is currently reviewing the substance of the allegations with
its counsel, and believes the allegations to be completely without merit
and intends to defend this matter vigorously.
The plaintiffs, who filed the complaint on their own and on behalf of
all class members similarly situated, are six individuals who allegedly
invested in certain California limited partnerships sponsored by PLM
Securities, for which FSI acts as the general partner, including the
Partnership, PLM Equipment Growth Fund IV, PLM Equipment Growth Fund VI,
and PLM Equipment Growth and Income Fund VII (the "PLM Growth Funds"). The
complaint purports eight causes of action against all defendants as
follows: fraud and deceit, suppression, negligent misrepresentation and
suppression, intentional breach of fiduciary duty, negligent breach of
fiduciary duty, unjust enrichment, conversion, and conspiracy.
Additionally, plaintiffs allege a cause of action for breach of third party
beneficiary contracts against and in violation of the National Association
of Securities Dealers (NASD) rules of fair practice by PLM Securities
alone.
Plaintiffs allege that each defendant owed plaintiffs and the class
certain duties due to their status as fiduciaries, financial advisors,
agents, general partner, and control persons. Based on these duties,
plaintiffs assert liability against the PLM Entities for improper sales and
marketing practices, mismanagement of the PLM Growth Funds, and concealing
such mismanagement from investors in the PLM Growth Funds. Plaintiffs seek
unspecified compensatory and recissory damages, as well as punitive
damages, and have offered to tender their limited partnership units back to
the defendants.
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PLM EQUIPMENT GROWTH FUND V
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership. *
10.1 Management Agreement between the Partnership and *
PLM Investment Management, Inc.
10.2 Amended and restated $38,000,000 Loan Agreement,
dated as of September 26, 1996 *
10.4 Second Amended and restated Warehousing Credit Agreement,
dated as of May 31, 1996 with First Union National Bank
of North Carolina *
10.5 Amendment No. 1 to Second Amended and restated
Warehousing Credit Agreement, dated as of November 5, 1996
with First Union National Bank of North Carolina *
24. Powers of Attorney. *
* Incorporated by reference. See page 23 of this report.