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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, 1997
[ ] 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 on page 45.
Total number of pages in this report: 133.
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 limited partnership units
(including 2,500,000 option 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 and related 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:
(1) 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. All transactions over $1.0 million must be approved by the PLM
Credit Review Committee (the "Committee') which is made up of members of PLM's
senior management. In determining a lessee's creditworthiness, the Committee
will consider, among other factors, the financial statements, internal and
external credit ratings, and letters of credit;
(2) to generate sufficient net operating cash flow from lease operations to
meet liquidity requirements and to generate cash distributions to the limited
partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(3) to selectively sell 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 that 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
operating cash flow from operations (net cash provided by operating activities
plus distributions from unconsolidated special-purpose entities) that remains
after scheduled principal payments to debt and cash distributions have been made
to the partners, will be used to acquire additional equipment throughout the
six-year reinvestment phase of the Partnership. Before buying any additional
equipment for the Partnership, the General Partner will evaluate the market
conditions at the time of acquisition so that the specific equipment will meet
the investment objectives of the Partnership;
(4) to preserve and protect the value of the portfolio through quality
management, maintaining diversity, and constantly monitoring equipment markets.
The offering of Partnership units closed on December 23, 1991. As of December
31, 1997, there were 9,086,608 units outstanding. The General Partner
contributed $100 for its 5% general partner interest in the Partnership.
Beginning in the Partnership's seventh year of operation, which commences
January 1, 1999, the General Partner will stop reinvesting cash flow and surplus
funds, which, if any, less reasonable reserves, will be distributed to the
partners. In the ninth year of operation, the General Partner will begin to
liquidate the assets of the Partnership in an orderly fashion, unless the
Partnership is terminated earlier upon the 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 operation of the Partnership.
Table 1, below, lists the equipment and the cost of the equipment in the
Partnership portfolio as of December 31, 1997 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
- - ------------------------------------------------------------------------------------------------------------------
Owned equipment held for operating leases:
1 Product tanker Kaldnes M/V $ 16,276
5 737-200 Stage II commercial aircraft Boeing 26,405
1 DC-9-32 Stage II commercial aircraft McDonnell Douglas 10,056
2 DHC-8-102 commuter aircraft DeHavilland 7,629
1 DHC-8-300 commuter aircraft DeHavilland 5,748
531 Refrigerated marine containers Various 9,485
2,054 Various marine containers Various 8,107
125 Covered hopper cars Various 2,945
106 Anhydrous ammonia tank cars GATX 2,483
85 Sulphur tank cars ACF/RTC 2,907
73 Tank cars Various 1,917
44 Mill gondola cars Bethlehem Steel 1,248
183 Refrigerated trailers Various 5,557
154 Dry trailers Various 1,878
148 Piggyback refrigerated trailers Oshkosh 2,261
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Total equipment held for operating leases $ 104,902
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Investment in equipment owned by unconsolidated special-purpose
entities:
0.5 Bulk carrier Nipponkai & Toyama $ 9,705
0.48 Product tanker Boelwerf-Temse 9,492
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 Stage II JT8D aircraft engines Pratt & Whitney 195
Portfolio of aircraft rotables Various 325
0.60 727-200 Stage III commercial aircraft Boeing 3,759
0.25 Equipment on direct finance lease:
Two DC-9 Stage III commercial aircraft McDonnell Douglas 2,787
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Total investments $ 39,218
=============
Includes proceeds from capital contributions, undistributed cash flow from
operations, and partnership borrowings invested in equipment. Includes
costs capitalized 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 program.
Jointly owned: EGF V and two affiliated programs.
Jointly owned: EGF V and three affiliated programs.
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.
As of December 31, 1997, approximately 70% 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 doing business as PLM
Trailer Leasing. Revenues collected under short-term rental agreements with the
rental yards' customers are credited to the owners of the related equipment as
received. Direct expenses associated with the equipment are charged directly to
the Partnership. An allocation of other indirect expenses of the rental yard
operations is charged to the Partnership monthly.
The lessees of the equipment include but are not limited to: 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. The Partnership's management agreement with IMI are
to co-terminate with the dissolution of the Partnership, unless the partners
vote to terminate the agreement prior to that date or at the discretion of the
General Partner. IMI has agreed to perform all services necessary to manage the
equipment on behalf of the Partnership and to perform or contract for the
performance of all obligations of the lessor under the Partnership's leases. In
consideration for its services and pursuant to the Partnership Agreement, IMI is
entitled to a monthly management fee (see financial statements, Notes 1 and 2).
(C) Competition
(1) Operating Leases versus Full Payout Leases
Generally, the equipment owned or invested in by the Partnership is leased out
on an operating lease basis wherein the rents 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 a lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize
full payout leases on new equipment. Full payout leases are leases that have
terms equal to the expected economic life of the equipment and 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, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers who offer operating leases
and full payout leases. Manufacturers may provide ancillary services that the
Partnership cannot offer, such as specialized maintenance 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), GATX, General Electric Railcar Services
Corporation, General Electric Capital Aviation Services Corporation, and other
limited partnerships that lease the same types of equipment.
(D) Demand
The Partnership has investments in transportation-related capital equipment and
relocatable environments. Types of capital equipment owned by the Partnership
include aircraft, marine vessels, railcars, and trailers. Relocatable
environments are functionally self-contained transportable equipment, such as
marine containers. Except for those aircraft leased to passenger air carriers,
the Partnership's equipment is used to transport materials and commodities,
rather than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Aircraft
(a) Commercial Aircraft
The international commercial aircraft market experienced another good year in
1997, with a third consecutive year of profits by the world's airlines. Airline
managements have continued to emphasize cost reductions and a moderate increase
in capacity. However, even the limited volume of new aircraft deliveries has
caused the market to change from being in equilibrium at the end of 1996 to
having excess supply. This market imbalance is expected to continue, with the
number of surplus aircraft increasing from approximately 350 aircraft at the end
of 1996 to an estimated 600 aircraft by the end of the decade.
The changes taking place in the commercial aircraft market also reflect the
impact of noise legislation enacted in the United States and Europe. Between
1997 and the end of 2002, approximately 1,400 Stage II aircraft (Stage II
aircraft are aircraft that have been shown to comply with Stage II noise levels
prescribed in Federal Aviation Regulation section C36.5) are forecast to be
retired, primarily due to noncompliance with Stage III (Stage III aircraft are
aircraft that have been shown to comply with Stage III noise levels prescribed
in Federal Aviation Regulation section C36.5) noise requirements. This
represents about 41% of the Stage II aircraft now in commercial service
worldwide. By 2002, about 2,000 (59%) of the current fleet of Stage II aircraft
will remain in operational service outside of Stage III-legislated regions or as
aircraft that have had hushkits installed so that engine noise levels meet the
quieter Stage III requirements. The cost to install a hushkit is approximately
$1.5 million, depending on the type of aircraft. All aircraft currently being
manufactured meet Stage III requirements.
The Partnership's fleet consists primarily of late-model Stage II narrowbody
commercial aircraft and Stage II aircraft that have been hush-kitted. The Stage
II aircraft either are positioned with air carriers outside of Stage
III-legislated areas, are scheduled for Stage III hushkit installation in
1998-99, or are anticipated to be sold or leased outside Stage III areas before
the year 2000.
Specifically, the Partnership has scheduled some Stage II narrowbody aircraft
for sale during 1998. A Stage II narrowbody aircraft that has been hushed to
meet Stage III requirements, currently positioned in the United States (U.S.),
is also scheduled for sale in 1998. A Stage II narrowbody aircraft now on lease
in the U.S. will be sold or leased outside the Stage III-affected areas before
the year 2000.
The Partnership has entered into agreements to install hushkits on selected
late-model Boeing 737-200 Advanced aircraft over the next two years. These
modifications are expected to enhance the current and residual value of the
aircraft, while allowing them to continue operating in the Stage III-legislated
areas of North America.
(b) Commuter Aircraft
The commuter aircraft market is experiencing a revolution with the successful
entry of small regional jets into this market. Major turboprop manufacturers are
re-evaluating their programs, and several successful but larger models are now
being considered for phase-out. The original concept for regional jets was for
them to take over the hub-and-spoke routes served by the larger turboprops in
North America, but they are also finding successful niches in point-to-point
routes. The introduction of this smaller aircraft has allowed major airlines to
shift the regional jets to marginal routes previously operated by narrowbody
aircraft, allowing the larger-capacity aircraft to be more efficiently employed
in an airline's route system.
The Partnership leases commuter aircraft in the 36 to 50 seat turboprop
category. These aircraft are all positioned in North America, the
fastest-growing market for commuter aircraft in the world. The Partnership's
aircraft possess unique performance capabilities, compared to other turboprops,
which allow them to readily operate at maximum payloads from unimproved
surfaces, hot and high runways, and short runways. The market for turboprops is
undergoing rapid change due to the introduction of regional jets. The
manufacturer of the Partnership's commuter/regional aircraft has already
announced production cutbacks for some types of turboprops, which may adversely
affect both demand and near-term values for the Partnership's aircraft.
(c) Aircraft Engines and Rotables
The demand for spare engines has increased, particularly for the Pratt & Whitney
Stage II JT8D engine, which powers many of the Partnership's Stage II commercial
aircraft.
Aircraft rotables, or components, are replacement spare parts held in inventory
by an airline. These parts are components that are removed from an aircraft or
engine, undergo overhaul, and are recertified and refit to the aircraft in an
"as new" condition. 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, replacement doors, control surfaces, pumps, valves, and
other comparable equipment. The Partnership expects to sell this equipment
during 1998.
(2) Marine Vessels
The Partnership owns or has investments with other affiliated programs in small
to medium-sized dry bulk vessels and product tankers, which are traded in
worldwide markets and carry commodity cargoes. The markets for dry bulk vessels
and product tankers took different paths in 1997. Dry bulk markets experienced
flat freight rates, with supply increases outrunning demand growth. In the
product tanker trades, rates strengthened through most of the year and supply
and demand were well balanced. Demand for commodity shipping closely tracks
worldwide economic growth patterns; however, economic development alters trade
patterns from time to time, causing changes in volume on trade routes.
The General Partner operates the Partnership's marine vessels under spot
charters, period charters, and pooled-vessel operations. It believes that this
operating approach provides the flexibility to adapt to changing demand
patterns.
Freight rates for dry bulk vessels in 1997 maintained the levels experienced in
the fourth quarter of 1996. Freight rates had declined significantly in 1996
until a moderate recovery occurred late in the year due to an increase in grain
trade. The size of the overall dry bulk carrier fleet increased by 3%, as
measured by the number of vessels, and by 5%, as measured by deadweight tonnage.
Scrapping of ships was not a significant factor in 1997: 126 dry bulk ships were
scrapped while 247 were delivered. Total dry trade (as measured in deadweight
tons) grew by 3% in 1997, versus 1% in 1996. This balance of supply and demand
made market conditions soft, providing little foundation for increasing freight
rates.
Growth in 1998 is expected to be approximately 2%. The majority of growth is
forecast to come from grain (2%) and thermal coal (6%). The primary variable in
forecasts is Asian growth; if there is some recovery from the economic shake-up
of the second half of 1997, then there will be prospects for improvement in
1998. Delivery of ships in 1998 is expected to be about the same as in 1997;
however, an increase in scrapping is anticipated to strengthen the market.
Current rates do not justify any new construction of dry bulk carriers and there
should be a significant drop in orders over the next two years. If growth in
demand matches historic averages of around 3%, then the current excess supply
should be absorbed by the end of 1999, leading to the possible strengthening of
freight rates.
Marine Containers
The marine container market began 1997 with a continuation of the weakness in
industrywide container utilization and rate pressures that had been experienced
in 1996. A reversal of this trend began in early spring and continued throughout
the remainder of 1997, as utilization returned to the 80% range. Per diem rates
did not strengthen, however, since customers resisted attempts to raise daily
rental rates.
Industrywide consolidation continued in 1997. Late in the year, Genstar, one of
the world's largest container leasing companies, announced that it had reached
an agreement with SeaContainers, another large container leasing company,
whereby SeaContainers will take over the management of Genstar's fleet. Long
term, such industrywide consolidation should bring more rationalization to the
container leasing market and result in both higher fleetwide utilization and per
diem rates.
(4) Railcars
(a) Pressurized Tank Cars
Pressurized tank cars are used primarily in the petrochemical and fertilizer
industries to transport liquefied petroleum gas and anhydrous ammonia. The
demand for natural gas is anticipated to grow through 1999, as the developing
world, former Communist countries, and the industrialized world all increase
their energy consumption. World demand for fertilizer is expected to increase,
based on an awareness of the necessity of fertilizing crops and improving diets,
the shortage of farm land, and population growth in developing nations. Based on
ongoing renewals with current lessees, demand for these cars continues to be
strong and is projected to remain so during 1998.
The utilization rate of the Partnership's fleet of pressurized tank cars was
over 98% during 1997.
(b) General Purpose (Nonpressurized) Tank Cars
General purpose or nonpressurized tank cars are used to transport a wide variety
of bulk liquid commodities, such as petroleum fuels, lubricating oils, vegetable
oils, molten sulfur, corn syrup, asphalt, and specialty chemicals. Chemical
carloadings for the first 45 weeks of 1997 were up 4%, compared to the same
period in 1996. The demand for petroleum is anticipated to grow, as the
developing world, former Communist countries, and the industrialized world
increase energy consumption.
The demand for general purpose tank cars in the Partnership's fleet has remained
healthy over the last three years, with utilization remaining above 98%.
(c) Covered Hopper (Grain) Cars
Industrywide, the size of the covered hopper car fleet has increased only 9%
over the last 10 years, from a total of 299,172 cars in 1985 to 325,882 cars in
1995. Covered hopper cars accounted for 30% of all new railcar deliveries in
1995 and 50% of new deliveries in 1996. During 1997, there was some downward
pressure on rental rates, as demand for covered hopper cars softened somewhat.
Grain car loadings decreased 2% compared to the same period in 1996.
(d) Mill Gondolas
Mill gondolas are typically used to haul scrap steel from processors to steel
mills throughout the United States. Recycled scrap steel constitutes nearly all
of the raw material used by small steel mills, called minimills. For example, in
1960 minimills produced only 8% of the total steel output in the U.S., but by
1996 that figure had reached 42%. The overall stability of the U.S. economy and
relatively steady levels of steel production have strengthened demand for mill
gondolas over the last year. In 1997, the national gondola fleet increased from
90,583 to 91,351 cars, a change consistent with the anticipated continuing
expansion of demand for steel mill products through 2000, averaging 2.5% to 3% a
year.
(5) Trailers
(a) Intermodal Trailers
In all intermodal equipment areas, 1997 was a remarkably strong year. The US
inventory of intermodal equipment was approximately 164,000 units in 1997,
divided between about 55% intermodal trailers (piggyback) 20 and 45% domestic
containers. Trailer loadings increased approximately 4% in 1997 due to a robust
economy and a continuing shortage of drivers in over-the-road markets. The
expectation is for flat to slightly declining utilization of intermodal trailer
fleets in the near future.
(b) Over-the-Road Dry Trailers
The U.S. over-the-road dry trailer market began to recover in mid-1997, as an
oversupply of equipment from 1996 subsided. The strong domestic economy, a
continuing focus on integrated logistics planning by American companies, and
numerous service problems on Class I railroads contributed to the recovery in
the dry van market. In addition, federal regulations requiring antilock brake
systems on all new trailers, effective in March 1998, have helped stimulate new
trailer production, and the market is anticipated to remain strong in the near
future. There continues to be much consolidation of the trailer leasing industry
in North America, as the two largest lessors of dry vans now control over 60% of
the market. The reduced level of competition, coupled with anticipated continued
strong utilization, may lead to an increase in rates.
(c) Over-the-Road Refrigerated Trailers
The temperature-controlled over-the-road trailer market recovered in 1997;
freight levels improved and equipment oversupply was reduced as industry players
actively retired older trailers and consolidated fleets. Most refrigerated
carriers posted revenue growth of between 2% and 5% in 1997, and accordingly are
planning fleet upgrades. In addition, with refrigeration and trailer
technologies changing rapidly and industry regulations becoming tighter,
trucking companies are managing their refrigerated fleets more effectively.
As a result of changes in the refrigerated trailer market, it is anticipated
that trucking companies will utilize short-term trailer leases more frequently
to supplement their fleets. Such a trend should benefit the Partnership, which
generally leases its equipment of this type on a short-term basis from rental
yards owned and operated by PLM International subsidiaries.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require its removal from service or extensive modification to meet these
regulations, at considerable cost to the Partnership. Such regulations include
(but are not limited to):
(1) the U.S. Oil Pollution Act of 1990 (which established liability for
operators and owners of vessels and mobile offshore drilling units
that create environmental pollution). This regulation has resulted in
higher oil pollution liability insurance. The lessee typically
reimburses the Partnership for these additional costs;
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990
(which limits or eliminates the operation of commercial aircraft in
the U.S. that do not meet certain noise, aging, and corrosion
criteria). In addition, under U.S. Federal Aviation Regulations, after
December 31, 1999, no person shall operate an aircraft to or from any
airport in the contiguous United States unless that airplane has been
shown to comply with Stage III noise levels. The Partnership has Stage
II aircraft that do not meet Stage III requirements;
(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 and over-the-road refrigerated
trailers);
(4) the U.S. Department of Transportation's Hazardous Materials
Regulations (which regulate the classification and packaging
requirements of hazardous materials and which apply particularly to
the Partnership's tank cars).
As of December 31, 1997, the Partnership is in compliance with the above
governmental regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased for leasing purposes. As of December 31, 1997, 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 along with FSI, TEC, IMI and PLM Securities (the PLM
Entities), are named as defendants in a lawsuit filed as a class action on
January 22, 1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case
No. CV-97-251 (the Koch action). 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
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 Growth Funds). The complaint asserts eight causes of
action against all defendants, as follows: fraud and deceit, suppression,
negligent misrepresentation and suppression, intentional breach of fiduciary
duty, negligent breach of fiduciary duty, unjust enrichment, conversion, and
conspiracy. Additionally, plaintiffs allege a cause of action against PLM
Securities for breach of third party beneficiary contracts in violation of the
National Association of Securities Dealers rules of fair practice. Plaintiffs
allege that each defendant owed plaintiffs and the class certain duties due to
their status as fiduciaries, financial advisors, agents, general partner, and
control persons. Based on these duties, plaintiffs assert liability against the
defendants for improper sales and marketing practices, mismanagement of the
Growth Funds, and concealing such mismanagement from investors in the Growth
Funds. Plaintiffs seek unspecified compensatory and recissory damages, as well
as punitive damages, and have offered to tender their limited partnership units
back to the defendants.
On March 6, 1997, the defendants removed the Koch action from the state court to
the United States District Court for the Southern District of Alabama, Southern
Division (Civil Action No. 97-0177-BH-C) based on the district court's diversity
jurisdiction, following which plaintiffs filed a motion to remand the action to
the state court. On September 24, 1997, the district court denied plaintiffs'
motion and dismissed without prejudice the individual claims of the California
class representative, reasoning that he had been fraudulently joined as a
plaintiff. On October 3, 1997, plaintiffs filed a motion requesting that the
district court reconsider its ruling or, in the alternative, that the court
modify its order dismissing the California plaintiff's claims so that it is a
final appealable order, as well as certify for an immediate appeal to the
Eleventh Circuit Court of Appeals that part of its order denying plaintiffs'
motion to remand. On October 7, 1997, the district court denied each of these
motions. In responses to such denial, plaintiffs filed a petition for writ of
mandamus with the Eleventh Circuit, which was denied on November 18, 1997. On
November 24, 1997, plaintiffs filed with the Eleventh Circuit a petition for
rehearing and consideration of the full court's order denying the petition for a
writ of mandamus, which petition was supplemented by plaintiffs on January 27,
1998.
On October 10, 1997, defendants filed a motion to compel arbitration of
plaintiffs' claims, based on an agreement to arbitrate contained in the limited
partnership agreement of each Growth Fund, and to stay further proceedings
pending the outcome of such arbitration. Notwithstanding plaintiffs' opposition,
the district court granted the motion on December 8, 1997. On December 15, 1997,
plaintiffs filed with the Eleventh Circuit a notice of appeal from the district
court's order granting defendants' motion to compel arbitration and to stay the
proceedings, and of the district court's September 24, 1997 order denying
plaintiffs' motion to remand and dismissing the claims of the California
plaintiff. Plaintiffs filed an amended notice of appeal on December 31, 1997.
The PLM Entities believe that the allegations of the Koch action are completely
without merit and intend to continue to defend this matter vigorously.
On June 5, 1997, the PLM Entities were named as defendants in another purported
class action filed in the San Francisco Superior Court, San Francisco,
California, Case No. 987062 (the Romei action). The plaintiff is an investor in
PLM Equipment Growth Fund V, and filed the complaint on her own behalf and on
behalf of all class members similarly situated who invested in certain
California limited partnerships for which FSI acts as the general partner,
including the Growth Funds. The complaint alleges the same facts and the same
nine causes of action as in the Koch action, plus five additional causes of
action against all of the defendants, as follows: violations of California
Business and Professions Code Sections 17200, et seq. for alleged unfair and
deceptive practices, constructive fraud, unjust enrichment, violations of
California Corporations Code Section 1507, and a claim for treble damages under
California Civil Code Section 3345.
On July 31, 1997, the PLM Entities filed with the district court for the
Northern District of California (Case No. C-97-2847 WHO) a petition under the
Federal Arbitration Act seeking to compel arbitration of plaintiff's claims and
for an order staying the state court proceedings pending the outcome of the
arbitration. In connection with this motion, plaintiff agreed to a stay of the
state court action pending the district court's decision on the petition to
compel arbitration. By memorandum and order dated October 23, 1997, the district
court denied the PLM Entities' petition to compel arbitration. On November 5,
1997, the PLM Entities filed an expedited motion for leave to file a motion for
reconsideration of this order, which motion was granted on November 14, 1997.
The parties have agreed to have oral argument on the reconsideration motion set
for April 23, 1998. The state court action has been stayed pending the district
court's decision on this motion.
In connection with her opposition to the Company's petition to compel
arbitration, on August 22, 1997, the plaintiff filed an amended complaint with
the state court alleging two new causes of action for violations of the
California Securities Law of 1968 (California Corporations Code Sections 25400
and 25500) and for violation of California Civil Code Section 1709 and 1710.
Plaintiff has also served certain discovery requests on defendants. Because of
the stay, no response to the amended complaint or to the discovery is currently
required. The PLM Entities believe that the allegations of the amended complaint
in the Romei action are completely without merit and intend to defend this
matter vigorously.
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, 1997.
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 at the close of such year. The
remaining interests in the profits and losses and distributions of the
Partnership are owned, as of December 31, 1997, by the 9,855 holders of Units in
the Partnership.
Several secondary exchanges facilitate sales and purchases of limited
partnership units. Secondary markets are characterized as having few buyers for
limited partnership interests and, therefore, are generally viewed as
inefficient vehicles for the sale of limited partnership units. 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 percentage or number permitted by certain safe
harbors promulgated by the Internal Revenue Service. A transfer may be
prohibited if the intended transferee is not a U.S. citizen or if the transfer
would cause any portion of the units to be treated as "plan assets." The
Partnership may redeem a certain number of units each year under the terms of
the Partnership's Limited Partnership Agreement, beginning January 1, 1994. If
the number of units made available for purchase by limited partners in any
calendar year exceeds the number that can be purchased with reinvestment plan
proceeds, then the Partnership may, subject to certain terms and conditions,
redeem up to 2% of the outstanding units each year. The purchase price to be
offered by the Partnership for these units will be equal to 110% of the
unrecovered principal attributable to the units. The unrecovered principal for
any unit will be equal to the excess of (i) the capital contribution
attributable to the unit over (ii) the distributions from any source paid with
respect to the units. As of December 31, 1997, the Partnership agreed to
purchase approximately 9,000 units for an aggregate price of approximately $0.1
million. The General Partner anticipates that these units will be repurchased in
the first and second quarters of 1998. The General Partner may purchase
additional units on behalf of the Partnership in the future.
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the years ended December 31, 1997, 1996, 1995,
1994, and 1993 (In thousands of dollars, except
weighted-average unit amounts)
1997 1996 1995 1994 1993
------------------------------------------------------------------------------
Operating results:
Total revenues $ 41,123 $ 44,322 $ 39,142 $ 44,291 $ 38,476
Net gain (loss) on disposition
of equipment 10,990 14,199 3,835 4,920 (584)
Loss on revaluation of
equipment -- -- -- -- (4,125)
Equity in net loss of unconsolidated
special-purpose entities (264) (116) -- -- --
Net income (loss) 7,921 12,441 2,045 3,193 (8,443)
At year-end:
Total assets $ 80,033 $ 98,419 $ 102,109 $ 120,114 $ 135,582
Total liabilities 35,947 46,123 44,092 44,221 43,462
Notes payable 32,000 40,463 38,000 38,000 38,000
Cash distribution $ 15,346 $ 18,083 $ 19,342 $ 19,420 $ 19,430
`
Cash distribution that represent
a return of capital $ 7,425 $ 5,642 $ 17,297 $ 16,227 $ 18,460
Per weighted-average of limited partnership
unit:
Net income (loss) $ 0.79 $ 1.26 $ 0.12 $ 0.24 $ (1.02)
Cash distribution $ 1.60 $ 1.87 $ 2.00 $ 2.00 $ 2.00
Cash distribution that represent
a return of capital $ 0.81 $ 0.61 $ 1.89 $ 1.76 $ 2.00
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth Fund V
(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.
(B) Results of Operations - Factors Affecting Performance
(1) Re-leasing and Repricing Activity
The exposure of the Partnership's equipment portfolio to re-pricing 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 of transport capacity, desirability of the equipment in the leasing
market, market conditions for the particular industry segment in which the
equipment is to be leased, and various regulations concerning the use of the
equipment. Equipment that is idle or out of service between the expiration of
one lease and the assumption of a subsequent lease can result in a reduction of
contribution to the Partnership. The Partnership experienced re-leasing or
repricing activity in 1997 primarily in its trailer, marine vessels, and marine
container portfolios.
(a) Trailers: The majority of the Partnership's trailer portfolio operates
in short-term rental facilities or with short-line railroad systems.
The relatively short duration of most leases in these operations
exposes the trailers to considerable re-leasing activity.
Contributions from the Partnership's trailers were higher than
projected due to higher utilization and lease rates.
(b) Marine vessels: Certain of the partnership's marine vessels operated
in the voyage charter market. 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
contributions due to the higher lease rates in the voyage charter
market. Higher revenues were partially offset by the higher operating
costs associated with this type of charter.
(c) 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 Partnership saw higher
re-lease rates earned on the remaining marine containers fleet during
1997.
(d) Other: While market conditions and other factors may have had some
impact on lease rates in other markets in which the Partnership owns
equipment, the majority of this equipment was unaffected.
(2) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment, unless accompanied by immediate
replacement of additional equipment earning similar rates (see Reinvestment
Risk, below), represents a reduction in the size of the equipment portfolio and
may result in reductions of contributions to the Partnership. Lessees not
performing under the terms of their leases, either by not paying rent, not
maintaining or operating the equipment in accordance with the conditions of the
leases, or other possible departures from the lease terms, can result not only
in reductions in contributions, but also may require the Partnership to assume
additional costs to protect its interests under the leases, such as repossession
or legal fees.
(a) Liquidations: During the year, the Partnership received proceeds of
approximately $25.8 million from the sale of vessels, aircraft, marine
containers, trailers, a jet engine, and a railcar. The sale proceeds
represented approximately 52% of the original cost of the assets. By
year end, the Partnership had reinvested or reached agreements to
reinvest approximately $18.5 million of these proceeds. The remainder
was used to pay down debt.
(b) Nonperforming lessees: As of December 31, 1997, the lessee of the
Partnership's hushkit had been delinquent in lease payments for the
full year. The Partnership took an ownership interest in an aircraft
as compensation for the past due amounts. This aircraft, now jointly
owned with two affiliated Partnerships, along with the attached
hushkit, was sold in the first quarter of 1998.
(3) 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 the 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 income from
operating and finance leases, together with the proceeds from sales of
equipment, are intended to enhance financial returns to the partners.
During 1997, the Partnership purchased an interest in an entity owning a marine
vessel for $9.1 million and reached an agreement to buy an anchor-handling
vessel for $9.2 million. The purchase of the anchor-handling vessel is expected
to be completed in the first quarter of 1998. During 1997, the Partnership began
paying quarterly installments on the principal portion of the senior loan. In
addition the Partnership paid down $2.5 million on a short-term borrowing
facility used to purchase equipment in 1996. The total amount of $8.5 million
accounts for the difference between sale proceeds and reinvested cash.
(4) 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. No reductions were
required to the carrying value of equipment during 1997, 1996 or 1995.
As of December 31, 1997, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including equipment owned by
unconsolidated special-purpose entities (USPEs), to be approximately $100.3
million.
(C) Financial Condition - Capital Resources, Liquidity, and Unit Redemption
Plan
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering and permanent debt financing of
$38.0 million. No further capital contributions from original partners are
permitted under the terms of the Partnership's limited partnership agreement.
The total outstanding debt, currently $32.0 million, can only be increased with
borrowings from the short-term Committed Bridge Facility. 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, 1997, the Partnership generated sufficient operating cash to meet its
operating obligations, make principal debt payments, and pay distributions.
For the year ended December 31, 1997, the Partnership generated $15.5 million in
operating cash (net cash provided by operating activities plus cash
distributions from unconsolidated special-purpose entities) to meet its
operating obligations and maintain the current level of distributions (total
1997 of approximately $15.3 million) to the partners.
Pursuant to the terms of the limited partnership agreement, beginning January 1,
1994, if the number of units made available for purchase by limited partners in
any calendar year exceeds the number that can be purchased with reinvestment
plan proceeds, then the Partnership may, subject to certain terms and
conditions, redeem up to 2% of the outstanding limited partnership 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.
During 1997, the Partnership repurchased 82,000 units for $0.8 million. As of
December 31, 1997, the Partnership agreed to purchase approximately 9,000 units
for an aggregate price of approximately $0.1 million. The General Partner
anticipates that these units will be repurchased in the first and second
quarters of 1998. The General Partner may purchase additional units on behalf of
the Partnership in the future.
During 1997 the Partnership borrowed $1.6 million from the General Partner for
45 days. The General Partner charged the Partnership market interest rates.
Total interest paid to the General Partner was $10,000.
The General Partner has entered into a joint $50.0 million credit facility (the
Committed Bridge Facility) on behalf of the Partnership, PLM Equipment Growth
Fund VI (Fund VI), PLM Equipment Growth & Income Fund VII (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, 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 December 2, 1997 to expire on November
2, 1998. The Partnership, Funds VI and VII, Fund I, and TECAI may collectively
borrow up to $35.0 million of the Committed Bridge Facility, and AFG may borrow
up to $50.0 million. The Committed Bridge Facility also provides for a $5.0
million Letter of Credit Facility for the eligible borrowers. Outstanding
borrowings by one borrower reduce the amount available to each of the other
borrowers under the Committed Bridge Facility. Individual borrowings for the
Partnership may be outstanding for no more than 179 days, with all advances due
no later than November 2, 1998. Interest accrues at either the prime rate or
adjusted LIBOR plus 1.625%, at the borrower's 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, 1997, AFG had $23.0 million in outstanding
borrowings. No other eligible borrower had any outstanding borrowings. The
General Partner believes it will renew the Committed Bridge Facility upon its
expiration with similar terms as those in the current Committed Bridge Facility.
The General Partner has not planned any expenditures, nor is it aware of any
contingencies that would cause it to require any additional capital to that
mentioned above.
(D) Results of Operations - Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1997 and 1996
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance, marine
equipment operation, and asset-specific insurance expenses) on owned equipment
decreased during the year ended December 31, 1997, when compared to the same
period of 1996. The following table presents lease revenues less direct expenses
by owned equipment type (in thousands of dollars):
For the Years Ended
December 31,
1997 1996
---------------------------------
Aircraft and aircraft engines $ 9,304 $ 6,348
Marine vessels 2,650 4,910
Rail equipment 2,062 1,532
Marine containers 2,057 2,790
Trailers 1,918 1,567
Mobile offshore drilling unit -- 1,062
Aircraft and aircraft engines: Aircraft lease revenues and direct expenses were
$9.4 million and $0.1 million, respectively, for the year ended December 31,
1997, compared to $6.5 million and $0.1 million, respectively, during the same
period of 1996. The increase in aircraft contribution was due to the transfer of
two commercial aircraft into the Partnership from unconsolidated special-purpose
entities and the purchase of three commercial aircraft and a commuter aircraft
during the second and third quarters of 1996. The increase in aircraft
contribution caused by these events was offset, in part, by a decrease in the
contribution from the aircraft engine that was off lease and subsequently sold
during 1997. This engine was on lease during 1996.
Marine vessels: Marine vessel lease revenues and direct expenses were $12.8
million and $10.1 million, respectively, for the year ended December 31, 1997,
compared to $14.0 million and $9.1 million, respectively, during the same period
of 1996. The decrease in marine vessel contribution was primarily due to the
sale of two marine vessels during the fourth quarter of 1997. Additionally, the
marine vessels liability insurance increased $1.0 million during 1997 when
compared to 1996.
Rail equipment: Rail equipment lease revenues and direct expenses were $2.5
million and $0.5 million, respectively, for the year ended December 31, 1997,
compared to $2.4 million and $0.9 million, respectively, during the same period
of 1996. Although the railcar fleet remained relatively the same size for both
years, the increase in railcar contribution resulted from a decrease in repairs
required on certain of the railcars in the fleet during 1997, when compared to
the same period of 1996.
Marine containers: Marine container lease revenues and direct expenses were $2.1
million and $17,000, respectively, for the year ended December 31, 1997,
compared to $2.8 million and $25,000, respectively, during the same quarter of
1996. The number of marine containers owned by the Partnership has been
declining over the past 12 months due to sales and dispositions. The result of
this declining fleet has been a decrease in marine container contribution.
Trailers: Trailer lease revenues and direct expenses were $2.8 million and $0.8
million, respectively, for the year ended December 31, 1997, compared to $2.0
million and $0.5 million, respectively, during the same period of 1996. The
number of trailers that transferred to the PLM-affiliated short-term rental
yards increased during 1996, resulting in a larger number of the Partnership's
trailers operating in the rental yards during 1997, when compared to the same
period of 1996. Trailers earned higher lease rates while in the affiliated
short-term rental yards than they earned during the same period of 1996 while
they were on term lease; however, the trailers also incurred higher maintenance
costs.
Mobile offshore drilling unit: Mobile offshore drilling unit lease revenues and
direct expenses were $1.1 million and $3,000, respectively, for the year ended
December 31, 1996. The elimination of the mobile offshore drilling unit
contribution during 1997 was due to the sale of this equipment during the second
quarter of 1996.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $21.4 million for the year ended December 31, 1997
increased from $21.1 million for the same period in 1996. The significant
variances are explained as follows:
(i) A $0.8 million increase in depreciation and amortization expenses from
1996 levels reflects the purchase of three commercial aircraft and a commuter
aircraft, and the transfer of two commercial aircraft from USPEs during 1996;
the increase was offset in part by the double-declining balance method of
depreciation and the sale of two marine vessels during 1997.
(ii) A $0.3 million decrease in bad debt expenses was due to the recovery
of receivables previously reserved for as bad debts.
(iii) A $0.2 million decrease in interest expense was due to a lower
average balance outstanding on the notes payable in 1997 compared to 1996.
(c) Net Gain on Disposition of Owned Equipment
The net gain on the disposition of equipment for the year ended December 31,
1997 totaled $11.0 million, which resulted from the sale of an aircraft engine,
a commuter aircraft, marine containers, trailers, and a railcar, with an
aggregate net book value of $4.7 million, for proceeds of $7.8 million, and the
sale of two marine vessels with a net book value of $10.9 million for proceeds
of $18.0 million. Included in the gain of $7.9 million from the sale of the
marine vessels is the unused portion of accrued drydocking of $0.8 million. For
the same period in 1996, a $14.2 million net gain resulted from the sale of a
mobile offshore drilling unit with a net book value of $10.7 million, for
proceeds of $21.3 million, and marine containers, aircraft engines, a commuter
aircraft, a trailer and railcars with an aggregate net book value of $5.1
million, for proceeds of $8.7 million.
(d) Interest and Other Income
Interest and other income decreased $0.7 million for the year ended December 31,
1997, when compared to the same period of 1996. This was partially due to a $0.3
business interruption claim that was received during 1996. No such claim was
received during 1997. In addition, interest income decreased $0.3 million due to
lower average cash balances available for investment throughout most of 1997,
when compared to the same period of 1996. Additionally, interest income from the
direct finance lease decreased $0.1 million, due to a lower balance due from the
lessee and the termination of the direct finance lease during 1997(see Note 5 to
the financial statements).
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
(USPEs)
Net income (loss) generated from the operation of jointly owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Years Ended
December 31,
1997 1996
---------------------------------
Aircraft, rotable components, and aircraft engines $ 1,215 $ (265)
Marine vessels (1,479) 149
Aircraft, rotable components, and aircraft engines: As of December 31, 1997, the
Partnership had an interest in two trusts that own three commercial aircraft,
two aircraft engines, and a portfolio of aircraft rotables; an interest in two
commercial aircraft on a direct finance lease; and an interest in a commercial
aircraft that was transferred from a direct finance lease (see Notes 4 and 5 to
the financial statements). As of December 31, 1996, the Partnership owned the
interest in the two trusts that own three commercial aircraft, two aircraft
engines, and a portfolio of aircraft rotables, as well as an interest in two
commercial aircraft on a direct finance lease. During the year ended December
31, 1997, revenues of $2.3 million were offset by depreciation and
administrative expenses of $1.0 million. During 1996, revenues of $3.3 million
were offset by depreciation and administrative expenses of $3.5 million. The
decrease in revenues and administrative expenses was due to the transfer of two
commercial aircraft from the USPEs to the Partnership during 1996, which was
offset in part by the revenue earned from the interest in the direct finance
lease that was purchased in the fourth quarter of 1996.
Marine vessels: As of December 31, 1997, the Partnership owned an interest in
three marine vessels, one of which was purchased on the last day of the third
quarter of 1997. As of December 31, 1996, the Partnership owned an interest in
two marine vessels. During the year ended December 31, 1997, revenues of $4.2
million were offset by depreciation and administrative expenses of $5.7 million.
During the same period of 1996, lease revenues of $3.9 million were offset by
depreciation and administrative expenses of $3.7 million. The primary reason for
the increase in revenues and depreciation and administrative expenses during
1997 was due to the purchase of an additional marine vessel in the third quarter
of 1997.
(f) Net Income
As a result of the foregoing, the Partnership's net income for the period ended
December 31, 1997 was $7.9 million, compared to net income of $12.4 million
during the same period in 1996. The Partnership's ability to operate and
liquidate assets, secure leases, and re-lease those assets whose leases expire
is subject to many factors, and the Partnership's performance during the year
ended December 31, 1997 is not necessarily indicative of future periods. In the
year ended December 31, 1997, the Partnership distributed $14.6 million to the
limited partners, or $1.60 per weighted-average limited partnership unit.
(2) 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
increased 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 of dollars):
For the Years Ended
December 31,
1996 1995
------------------------------
Aircraft and aircraft engines $ 6,348 $ 4,727
Marine vessels 4,910 3,542
Marine containers 2,790 3,939
Trailers 1,567 1,436
Rail equipment 1,532 1,797
Mobile offshore drilling unit 1,062 2,553
Aircraft and aircraft engines: 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 latter 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 two aircraft from the USPEs to comply with the credit
agreement (see Note 4 to the financial statements). 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 that were operating under a voyage charter during the first six months
of 1996 and transferred 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, 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.
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 $0.1 million, respectively, during the same period
of 1995. The number of marine containers owned by the Partnership has been
declining over the past 12 months due to sales and dispositions. The result of
this declining fleet has been a decrease in marine container net contribution.
In addition, the container fleet experienced a decline in the utilization rate
during 1996, compared to 1995.
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 12
months the number of trailers in the PLM-affiliated short-term rental yards has
increased due to the 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 in the number of trailers in the PLM-affiliated
short-term rental yards, repairs to maintain these trailers in running condition
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 was due to the sale of 98 railcars
in May 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 latter 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:
(i) 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.
(ii) A $0.3 million increase in bad debt expenses was due to an increase in
uncollectable amounts owing from certain lessees.
(iii) 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.
(iv) 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 partly offset
by the purchase of two commercial aircraft during 1996.
(c) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment for the year ended December 31, 1996
totaled $14.2 million, and resulted from the sale of a rig with a net book value
of $10.7 million for proceeds of $21.3 million; and aircraft engines, a commuter
aircraft, marine containers, railcars, and a trailer with an aggregate net book
value of $5.1 million for proceeds of $8.7 million. The net gain on disposition
of equipment during the same period of 1995 of $3.8 million was realized on the
disposal of marine containers, marine vessels, an aircraft, and railcars, with
an aggregate net book value of $15.8 million, for proceeds of $18.3 million.
Included in the gain on the 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 that
was received during 1996 and interest earned from a finance lease that 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.
Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Net income (loss) generated from the operation of jointly owned assets accounted
for under the equity method (see Note 4 to the financial statements) is shown in
the following table by equipment type (in thousands):
For the Year Ended
December 31,
1996 1995
------------------------------
Marine vessels $ 149 $ 135
Aircraft, rotable components, and aircraft engines (265 ) (87)
Marine vessels: As of December 31, 1996, the Partnership owned an interest in
two entities that 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 compared to the same period of 1995, was also due to
the transfer of one marine vessel to a time charter during 1996, which had been
a voyage charter during the same period of 1995. Depreciation expense decreased
$0.2 million due to the double-declining balance method of depreciation.
Aircraft, rotable components, and aircraft engines: As of December 31 1996, the
Partnership had an interest in two trusts that owned three commercial aircraft,
two aircraft engines, and a portfolio of aircraft rotables. The Partnership had
also purchased an interest in an additional trust during 1996, which was
transferred into equipment held for operating lease during the latter part of
the third quarter of 1996 (see Notes 3 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 expenses, management fees,
and administrative costs of $3.5 million. As of December 31 1995, the
Partnership had an interest in three trusts that owned four commercial aircraft,
two 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 in 1995, of $0.7 million, were offset by depreciation and
amortization expenses and management fees of $0.8 million.
(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 a 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 remainder of the Partnership is subject to many factors, and the
Partnership's performance in the 12 months ended December 31, 1996 is not
necessarily indicative of future periods. In the 12 months ended December 31,
1996, the Partnership distributed $17.2 million to the limited partners, or
$1.87 per weighted average limited partnership unit.
(E) Geographic Information
The Partnership operates certain of its equipment in international markets.
Although these operations expose the Partnership to certain currency, political,
credit, and economic risks, the General Partner believes that these risks are
minimal or has implemented strategies to control the risks. Currency risks are
at a minimum because all invoicing, with the exception of a small number of
railcars operating in Canada, is conducted in US dollars. Political risks are
minimized by avoiding operations in countries that do not have a stable judicial
system and established commercial business laws. Credit support strategies for
lessees range from letters of credit supported by US banks to cash deposits.
Although these credit support mechanisms generally allow the Partnership to
maintain its lease yield, there are risks associated with slow-to-respond
judicial systems when legal remedies are required to secure payment or repossess
equipment. Economic risks are inherent in all international markets, and the
General Partner strives to minimize this risk with market analysis prior to
committing equipment to a particular geographic area. Refer to the financial
statements, Note 3 for information on the revenues, income, and net book value
of equipment in various geographic regions.
Revenues and net operating income by geographic region are impacted by the time
period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years of
ownership due to the use of the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to change significantly in the future, as assets come
off lease and decisions are made to either redeploy the assets in the most
advantageous geographic location or sell the assets.
The Partnership's equipment on lease to U.S.-domiciled lessees consists of
trailers, railcars, and aircraft. During 1997, U.S. lease revenues accounted for
21% of the total lease revenues of wholly and partially owned equipment while
net income accounted for $4.5 million of the total aggregate net income for the
Partnership of $7.9 million. The primary reason for this is that a large gain
was realized from the sale of assets in the United States and another geographic
region, while the other geographic region recorded a loss.
The Partnership's owned equipment and its ownership share in equipment owned by
USPEs on lease to Canadian-domiciled lessees consists of railcars. During 1997,
Canadian lease revenues accounted for 12% of the total lease revenues of wholly
and partially owned equipment, and recorded a net income of $0.9 million,
compared to the total aggregate net income for the Partnership of $7.9 million.
The Partnership's owned aircraft on lease to a South American-domiciled lessee
during 1997 accounted for 8% of the total lease revenues of wholly and partially
owned equipment, and recorded a net loss of $2.7 million, compared to the total
aggregate net income for the Partnership of $7.9 million.
The Partnership's ownership share of equipment owned by USPEs on lease to
European-domiciled lessees consisted of aircraft, aircraft engines, and aircraft
rotables, and accounted for 5% of lease revenues of wholly and partially owned
equipment and $0.8 million of the Partnership's total aggregate net income. The
primary reason for this is that the Partnership sold some of the aircraft
equipment and realized a gain on the sales.
The Partnership's owned equipment and its ownership share in USPEs on lease to
lessees in the rest of the world consisted of marine vessels and marine
containers. During 1997, lease revenues for these lessees accounted for 54% of
the total lease revenues of wholly and partially owned equipment and recorded a
net income of $7.5 million, compared to the total aggregate net income for the
Partnership. The primary reason for this is that a large gain was realized from
the sale of assets in worldwide markets
(F) Year 2000 Compliance
The General Partner is currently addressing the Year 2000 computer software
issue. The General Partner is creating a timetable for carrying out any program
modifications that may be required. The General Partner does not anticipate that
the cost of these modifications allocable to the Partnership will be material.
(G) Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new
statements: SFAS No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in equity
from nonowner sources; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for a public company's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Partnership's fiscal year ended December
31, 1998, with earlier application permitted. The effect of adoption of these
statements will be limited to the form and content of the Partnership's
disclosures and will not impact the Partnership's results of operations, cash
flow, or financial position.
(H) Inflation
Inflation had no significant impact on the Partnership's operations during 1997,
1996, or 1995.
(I) Forward-Looking Information
Except for historical information contained herein, the discussion in this Form
10-K contains forward-looking statements that involve risks and uncertainties,
such as statements of the Partnership's plans, objectives, expectations, and
intentions. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.
(J) Outlook for the Future
Several factors may affect the Partnership's operating performance in 1998 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 1997, market conditions, supply and demand equilibrium,
and other factors varied in several markets. In the dry over-the-road trailer
markets, strong demand produced high utilization and returns. The marine vessel,
rail, and mobile offshore drilling unit markets can generally be categorized by
increasing rates, as the demand for equipment is increasing faster than the size
of worldwide fleets. Finally, the 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 a decline in
performance and in others in an improvement in 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,
and government or other regulations. The unpredictability of some of these
factors makes it difficult for the General Partner to clearly define trends or
influences that may impact the performance of the Partnership's equipment. The
General Partner 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 that these acquisitions may cause the Partnership to generate
additional earnings and cash flow for the Partnership.
(1) Repricing and Reinvestment Risk
Certain portions of the Partnership's marine container, marine vessel, and
trailer portfolios will be remarketed in 1998 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.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the General Partner has
observed rising insurance costs to operate certain vessels into US ports,
resulting from implementation of the US Oil Pollution Act of 1990. Ongoing
changes in the regulatory environment, both in the US and internationally,
cannot be predicted with accuracy, and preclude the General Partner from
determining the impact of such changes on Partnership operations, purchases, or
sale of equipment.
(3) Distributions
Pursuant to the limited partnership agreement, the Partnership will cease to
reinvest in additional equipment beginning in its seventh year of operation,
which commences on January 1, 1999. 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 that is sufficient to meet its
obligations and sustain a predictable level of distributions to the partners.
The General Partner believes that the current level of distributions to the
partners can be maintained throughout 1998, using cash from operations,
undistributed available cash from prior periods, and proceeds from the sale or
disposition 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 on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
(this space intentionally left blank)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM INTERNATIONAL AND
PLM FINANCIAL SERVICES, INC.
As of the date of this annual report, the directors and executive officers of
PLM International (and key executive officers of its subsidiaries) and of PLM
Financial Services, Inc. are as follows:
Name Age Position
- - -------------------------------------------------------------------------------------------------------------------------
Robert N. Tidball 59 Chairman of the Board, Director, President,
and Chief Executive Officer, PLM International, Inc.;
Director, PLM Financial Services, Inc.;
Vice President, PLM Railcar Management Services, Inc.;
President, PLM Worldwide Management Services Ltd.
Randall L.-W. Caudill 50 Director, PLM International, Inc.
Douglas P. Goodrich 51 Director and Senior Vice President, PLM International;
Director and President, PLM Financial Services, Inc.;
President, PLM Transportation Equipment Corporation;
President, PLM Railcar Management Services, Inc.
Harold R. Somerset 63 Director, PLM International, Inc.
Robert L. Witt 57 Director, PLM International, Inc.
J. Michael Allgood 49 Vice President and Chief Financial Officer,
PLM International, Inc. and PLM Financial Services, Inc.
Stephen M. Bess 51 President, PLM Investment Management, Inc.
and PLM Securities Corp.; Vice President and Director,
PLM Financial Services, Inc.
Richard K Brock 35 Vice President and Corporate Controller,
PLM International, Inc. and PLM Financial Services, Inc.
Frank Diodati 43 President, PLM Railcar Management Services Canada Limited
Steven O. Layne 43 Vice President, PLM Transportation Equipment Corporation;
Vice President, PLM Worldwide Management Services Ltd.
Susan C. Santo 35 Vice President, Secretary, and General Counsel,
PLM International, Inc. and PLM Financial Services, Inc.
Thomas L. Wilmore 55 Vice President, PLM Transportation Equipment Corporation;
Vice President, PLM Railcar Management Services, Inc.
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment, he was Executive Vice President of PLM International.
Mr. Tidball became a director of PLM International in April 1989. Mr. Tidball
was appointed Director of PLM Financial Services, Inc. in July 1997 and was
elected President of PLM Worldwide Management Services Limited in February 1998.
He has served as an officer of PLM Railcar Management Services, Inc. since June
1987. Mr. Tidball was Executive Vice President of Hunter Keith, Inc., a
Minneapolis-based investment banking firm, from March 1984 to January 1986.
Prior to Hunter Keith, he was Vice President, General Manager, and Director of
North American Car Corporation and a director of the American Railcar Institute
and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997.
He is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm serving emerging growth companies in the United States
and abroad, as well as a senior advisor to the investment banking firm of
Prudential Securities, where he has been employed since 1987. Mr. Caudill also
serves as a director of VaxGen, Inc. and SBE, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Senior Vice President of PLM International in March 1994, and
appointed Director and President of PLM Financial Services, Inc. in June 1996.
Mr. Goodrich has also served as Senior Vice President of PLM Transportation
Equipment Corporation since July 1989 and as President of PLM Railcar Management
Services, Inc. since September 1992, having been a senior vice president since
June 1987. Mr. Goodrich was an executive vice president of G.I.C. Financial
Services Corporation, a subsidiary of Guardian Industries Corporation of
Chicago, Illinois, from December 1980 to September 1985.
Harold R. Somerset was elected to the Board of Directors of PLM International in
July 1994. From February 1988 to December 1993, Mr. Somerset was President and
Chief Executive Officer of California & Hawaiian Sugar Corporation (C&H Sugar),
a recently acquired subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined
C&H Sugar in 1984 as Executive Vice President and Chief Operating Officer,
having served on its Board of Directors since 1978, 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 of
Agriculture and 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 US Naval Academy. Mr. Somerset also serves on the boards of directors
for various other companies and organizations, including Longs Drug Stores,
Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993,
Mr. Witt has been a principal with WWS Associates, a consulting and investment
group specializing in start-up situations and private organizations about to go
public. Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel Corporation, an international advanced materials company with sales
primarily in the aerospace, transportation, and general industrial markets. Mr.
Witt also serves on the boards of directors for various other companies and
organizations.
J. Michael Allgood was appointed Vice President and Chief Financial Officer of
PLM International in October 1992 and Vice President and Chief Financial Officer
of PLM Financial Services, Inc. in December 1992. Between July 1991 and October
1992, Mr. Allgood was a consultant to various private and public-sector
companies and institutions specializing in financial operations systems
development. In October 1987, Mr. Allgood co-founded Electra Aviation Limited
and its holding company, Aviation Holdings Plc of London, where he served as
Chief Financial Officer until July 1991. Between June 1981 and October 1987, Mr.
Allgood served as a first vice president with American Express Bank Ltd. In
February 1978, Mr. Allgood founded and until June 1981 served as a director of
Trade Projects International/Philadelphia Overseas Finance Company, a joint
venture with Philadelphia National Bank. From March 1975 to February 1978, Mr.
Allgood served in various capacities with Citibank, N.A.
Stephen M. Bess was appointed Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Securities Corporation 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 Corporation, a manufacturer of computer peripheral equipment, from
October 1975 to November 1978.
Richard K Brock was appointed Vice President and Corporate Controller of PLM
International and PLM Financial Services, Inc. in June 1997, having served as an
accounting manager beginning in September 1991 and as Director of Planning and
General Accounting beginning in February 1994. Mr. Brock was a division
controller of Learning Tree International, a technical education company, from
February 1988 through July 1991.
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 of PLM Transportation Equipment
Corporation's Air Group in November 1992, and was appointed Vice President and
Director of PLM Worldwide Management Services Limited in September 1995. Mr.
Layne was its Vice President, Commuter and Corporate Aircraft beginning in July
1990. Prior to joining PLM, Mr. Layne was Director of 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 a senior pilot with 13 years of accumulated
service.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM
International and PLM Financial Services, Inc. in November 1997. She has worked
as an attorney for PLM International since 1990 and served as its Senior
Attorney since 1994. Previously, Ms. Santo was engaged in the private practice
of law in San Francisco. Ms. Santo received her J.D. from the University of
California, Hastings College of the Law.
Thomas L. Wilmore was appointed Vice President, Rail of PLM Transportation
Equipment Corporation in March 1994, and has served as Vice President of
Marketing for PLM Railcar Management Services, Inc. since May 1988. Prior to
joining PLM, Mr. Wilmore was Assistant Vice President and Regional Manager for
MNC Leasing Corporation in Towson, Maryland from February 1987 to April 1988.
From July 1985 to February 1987, he was President and co-owner of Guardian
Industries Corporation, Chicago, 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 PLM International are elected for a three-year term and the
directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM International or PLM Financial
Services, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership has no
pension, profit sharing, retirement, or similar benefit plan in effect as of
December 31, 1997.
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. As of December 31, 1997, 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, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
During 1997, the Partnership paid or accrued the following fees to FSI
or its affiliates: management fees, $1.5 million, and administrative
and data processing services performed on behalf of the Partnership,
$1.0 million. The Partnership paid Transportation Equipment Indemnity
Company Ltd. (TEI), a wholly-owned, Bermuda-based subsidiary of PLM
International, $0.8 million for insurance coverages during 1997; these
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 1997, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Partnership's proportional share of ownership):
management fees, $0.3 million; administrative and data processing services, $0.1
million; equipment acquisition fees, $0.4 million; and lease negotiation fees,
$0.1 million. The USPEs also paid TEI $0.3 million for insurance coverages
during 1997
(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 on Form 10-K.
(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.
10.3 Amendment No. 1 to the Amended and Restated $38,000,000 Loan
Agreement, dated as of December 29, 1997
10.4 Third amended and restated Warehousing Credit Agreement, dated as
of December 2, 1997 with First Union National Bank of North
Carolina and others.
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 24, 1998 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/ Richard K Brock
----------------------------
Richard K Brock
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
*___________________
Robert N. Tidball Director, FSI March 24, 1998
*___________________
Douglas P. Goodrich Director, FSI March 24, 1998
*___________________
Stephen M. Bess Director, FSI March 24, 1998
*Susan Santo, by signing her name hereto, does sign this document on behalf of
the persons indicated above pursuant to powers of attorney duly executed by such
persons and filed with the Securities and Exchange Commission.
/s/ Susan Santo
- - -----------------------
Susan Santo
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Report of independent auditors 30
Balance sheets as of December 31, 1997 and 1996 31
Statements of income for the years ended
December 31, 1997, 1996, and 1995 32
Statements of changes in partners' capital for the
years ended December 31, 1997, 1996, and 1995 33
Statements of cash flows for the years ended
December 31, 1997, 1996, and 1995 34
Notes to financial statements 35 - 44
All other financial statement schedules have been omitted, because 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 have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1997 and 1996 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
- - --------------------------------
SAN FRANCISCO, CALIFORNIA
March 12, 1998
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
Assets
1997 1996
---------------------------------
Equipment held for operating lease, at cost $ 104,902 $ 155,004
Less accumulated depreciation (62,320) (81,541 )
-------------------------------------
Net equipment 42,582 73,463
Cash and cash equivalents 9,884 4,662
Restricted cash 111 553
Accounts and note receivable, less allowance for doubtful
accounts of $113 in 1997 and $236 in 1996 3,229 3,508
Investments in unconsolidated special-purpose entities 22,758 12,673
Net investment in direct finance lease -- 2,282
Lease negotiation fees to affiliate, less accumulated
amortization of $325 in 1997 and $184 in 1996 156 319
Debt issuance and loan costs, less accumulated amortization
of $331 in 1997 and $255 in 1996 192 268
Debt placement fees to affiliate, less accumulated
amortization of $292 in 1997 and $245 in 1996 87 134
Prepaid expenses and other assets 114 557
Equipment acquisition deposit 920 --
-------------------------------------
Total assets $ 80,033 $ 98,419
=====================================
Liabilities and partners' capital
Liabilities
Accounts payable and accrued expenses $ 1,826 $ 1,060
Due to affiliates 477 699
Short-term note payable -- 2,463
Lessee deposits and reserve for repairs 1,644 3,901
Note payable 32,000 38,000
-------------------------------------
Total liabilities 35,947 46,123
-------------------------------------
Partners' capital
Limited partners (limited partnership units of 9,086,608 in 1997
and 9,169,019 in 1996) 44,086 52,296
General Partner -- --
-------------------------------------
Total partners' capital 44,086 52,296
-------------------------------------
Total liabilities and partners' capital $ 80,033 $ 98,419
=====================================
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 weighted-average unit amounts)
1997 1996 1995
------------------------------------------------
Revenues
Lease revenue $ 29,493 $ 28,763 $ 34,298
Interest and other income 640 1,360 1,009
Net gain on disposition of equipment 10,990 14,199 3,835
------------------------------------------------
Total revenues 41,123 44,322 39,142
------------------------------------------------
Expenses
Depreciation and amortization 15,693 14,941 17,321
Management fees to affiliate 1,480 1,458 1,767
Repairs and maintenance 2,690 2,843 4,004
Equipment operating expenses 6,088 6,016 7,736
Interest expense 2,593 2,789 3,048
Insurance expense to affiliate 838 768 1,015
Other insurance expenses 1,933 985 1,080
General and administrative expenses to affiliates 981 838 612
Other general and administrative expenses 731 903 514
Provision for (recovery of) bad debts (89) 224 --
------------------------------------------------
Total expenses 32,938 31,765 37,097
------------------------------------------------
Equity in net loss of unconsolidated
special-purpose entities (264) (116) --
------------------------------------------------
Net income $ 7,921 $ 12,441 $ 2,045
================================================
Partners' share of net income
Limited partners $ 7,154 $ 11,524 $ 1,077
General Partner 767 917 968
------------------------------------------------
Total $ 7,921 $ 12,441 $ 2,045
================================================
Net income per weighted-average limited partnership unit
(9,107,121, 9,170,232, and 9,181,103 limited partnership
units in 1997, 1996, and 1995, respectively) $ 0.79 $ 1.26 $ 0.12
================================================
Cash distribution $ 15,346 $ 18,083 $ 19,342
================================================
Cash distribution per weighted-average limited
partnership unit $ 1.60 $ 1.87 $ 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, 1997, 1996, and 1995 (in thousands of dollars)
Limited General
Partners Partner Total
--------------------------------------------------
Partners' capital as of December 31, 1994 $ 75,893 $ -- $ 75,893
Net income 1,077 968 2,045
Repurchase of limited partnership units (579) -- (579)
Cash distribution (18,374) (968) (19,342)
-------------------------------------------------------
Partners' capital as of December 31, 1995 58,017 -- 58,017
Net income 11,524 917 12,441
Repurchase of limited partnership units (79) -- (79)
Cash distribution (17,166) (917) (18,083)
-------------------------------------------------------
Partners' capital as of December 31, 1996 52,296 -- 52,296
Net income 7,154 767 7,921
Repurchase of limited partnership units (785) -- (785)
Cash distribution (14,579) (767) (15,346)
-------------------------------------------------------
Partners' capital as of December 31, 1997 $ 44,086 $ -- $ 44,086
=======================================================
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 of dollars)
1997 1996 1995
---------------------------------------------
Operating activities
Net income $ 7,921 $ 12,441 $ 2,045
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 15,693 14,941 17,321
Net gain on disposition of equipment (10,990) (14,199) (3,835)
Equity in net (income) loss of unconsolidated
special-purpose entities 264 116 --
Changes in operating assets and liabilities, net:
Restricted cash 442 (330) (36)
Accounts and note receivable, net (374) (455) 1,973
Prepaid expenses and other assets 443 (364) (152)
Accounts payable and accrued expenses 766 (294) 7
Due to affiliates (222) (414) 785
Lessee deposits and reserve for repairs (1,438) 285 620
--------------------------------------------------
Net cash provided by operating activities 12,505 11,727 18,728
---------------------------------------------------
Investing activities
Proceeds from disposition of equipment 25,831 29,992 18,375
Payments for purchase of equipment (165) (21,378) (27,128)
Payments for equipment acquisition deposits (920) -- --
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 (10,453) (8,952) --
Distribution from unconsolidated special-purpose entities 3,018 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 17,311 3,187 (12,856)
---------------------------------------------------
Financing activities
Proceeds from short-term note payable 9,110 8,073 --
Payments of short-term note payable (11,573) (5,610) --
Payments of note payable (6,000) -- --
Proceeds from short-term loan from affiliate 1,610 -- --
Payment of short-term loan to affiliate (1,610) -- --
Cash distribution paid to affiliate (767) (917) (968 )
Cash distribution paid to limited partners (14,579) (17,166) (18,374 )
Payment for loan costs -- (136) --
Repurchase of limited partnership units (785) (79) (579 )
---------------------------------------------------
Net cash used in financing activities (24,594) (15,835) (19,921 )
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,222 (921) (14,049 )
Cash and cash equivalents at beginning of year (see Note 4) 4,662 5,583 20,200
---------------------------------------------------
Cash and cash equivalents at end of year $ 9,884 $ 4,662 $ 6,151
===================================================
Supplemental information
Interest paid $ 2,843 $ 2,815 $ 2,970
===================================================
Noncash transfer of equipment at net book value from
unconsolidated special-purpose entities $ -- $ 7,901 $ --
===================================================
Receipt of interest in an unconsolidated special-purpose
entity in settlement of receivables $ (2,914) $ -- $ --
===================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
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 on April 11, 1990 and significant operations commenced 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 and related 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 Limited Partnership Unit, below). The General Partner is
entitled to subordinated incentive fees 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. If the number of units made available for
purchase by limited partners in any calendar year exceeds the number that
can be purchased with reinvestment plan proceeds, then the Partnership may
redeem up to 2% of the outstanding units each year, subject to certain
terms and conditions. The purchase price to be offered by the Partnership
for these units will be equal to 110% of the unrecovered principal
attributable to the units. The unrecovered principal for any unit will be
equal to the excess of (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, 1997 and 1996, the Partnership had
repurchased 82,411 and 6,925 limited partnership units for $0.8 million and
$0.1 million, respectively.
As of December 31, 1997, the Partnership agreed to repurchase approximately
9,000 units for an aggregate price of approximately $0.1 million. The
General Partner anticipates that these units will be repurchased in the
first and second quarters of 1998. The General Partner may purchase
additional units on behalf of the Partnership in the future.
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, along with 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 owned by the Partnership is managed, under a continuing
management agreement, by PLM Investment Management, Inc. (IMI), a
wholly-owned subsidiary of FSI. IMI receives a monthly management fee from
the Partnership for managing the equipment (see Note 2). FSI, in
conjunction with its subsidiaries, sells 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 programs.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
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, "Accounting for Leases" (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.
Certain aircraft are depreciated under the double-declining balance
depreciation method over the lease term. 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 related loan. Major expenditures that are expected to
extend the useful lives or reduce operating expenses for equipment are
capitalized and amortized over the remaining life of the equipment.
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, since
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. No reductions to the carrying value of
equipment were required during either 1997, 1996 or 1995.
Investments in Unconsolidated Special-Purpose Entities (USPEs)
The Partnership has interests in unconsolidated special-purpose entities
(USPEs) that own transportation equipment. These interests are accounted
for using the equity method.
The Partnership's investment in USPEs includes acquisition and lease
negotiation fees paid by the Partnership to PLM Transportation Equipment
Corporation (TEC) and PLM Worldwide Management Services (WMS). TEC is a
wholly-owned subsidiary of FSI and WMS is a wholly-owned subsidiary of PLM
International. The Partnership's equity interest in net income of USPEs is
reflected net of management fees paid or payable to IMI and the
amortization of acquisition and lease negotiation fees paid to TEC and WMS.
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, 1997
1. Basis of Presentation (continued)
Net Income (Loss) and Distributions per Limited Partnership 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 based on the
number of limited partnership units owned by each limited partner and on
the number of days of the year each limited partner has participated in the
Partnership.
Cash distributions are recorded when paid. Monthly unitholders receive a
distribution check 15 days after the close of the previous month and
quarterly unitholders receive a distribution check 45 days after the close
of the quarter
Cash distributions to investors in excess of net income are considered to
represent a return of capital. Cash distributions to the limited partners
of $7.4 million, $5.6 million, and $17.3 million in 1997, 1996, and 1995,
respectively, were deemed to be a return of capital.
Cash distributions of $2.8 million, $2.8 million, and $3.5 million related
to the fourth quarter of 1997, 1996, and 1995, respectively, were paid
during January and February 1998, 1997, or 1996.
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.
Reclassification
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1997 and 1996 presentation.
2. General Partner and Transactions with Affiliates
An officer of PLM Securities Corp. (PLM Securities) contributed $100 of the
Partnership's initial capital. PLM Securities is a wholly-owned subsidiary
of the General Partner. Under the equipment management agreement, IMI
receives a monthly management fee attributable to either owned equipment or
interests in equipment owned by the USPEs equal to the lesser of (i) the
fees that would be charged by an independent third party for similar
services for similar equipment or (ii) the sum of (a) 5% of the gross lease
revenues attributable to equipment that is subject to operating leases, (b)
2% of the gross lease revenues, as defined in the agreement, that is
subject to full payout net leases, and (c) 7% of the gross lease revenues
attributable to equipment, if any, that is subject to per diem leasing
arrangements and thus is operated by the Partnership. Partnership
management fees of $0.4 million and $1.0 million were payable as of
December 31, 1997 and 1996, respectively. The Partnership's proportional
share of USPE management fees of $0.1 million and $26,000 were payable as
of December 31, 1997 and 1996, respectively. The Partnership's proportional
share of USPE management fees expense was $0.3 million and $0.3 million
during 1997 and 1996, respectively. An affiliate of the General Partner was
reimbursed for data processing and administrative expenses directly
attributable to the Partnership in the amount of $1.0 million, $0.8
million, and $0.6 million during 1997, 1996, and 1995, respectively. The
Partnership's proportional share of USPE data processing and administrative
expenses was $0.1 million during 1997 and 1996. Debt placement fees were
paid to FSI in an amount equal to 1% of the Partnership's long-term
borrowings.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
2. General Partner and Transactions with Affiliates (continued)
The Partnership and the USPEs paid or accrued lease negotiation and
equipment acquisition fees of $0.5 million, $1.6 million, and $1.6 million
to TEC and WMS in 1997, 1996, and 1995, respectively.
The Partnership paid $0.8 million, $0.8 million, and $1.0 million in 1997,
1996, and 1995, respectively, to Transportation Equipment Indemnity
Company, Ltd. (TEI), an affiliate of the General Partner, which provides
marine insurance coverage and other insurance brokerage services. The
Partnership's proportional share of USPE marine insurance coverage paid to
TEI was $0.3 million and $0.2 million during 1997 and 1996, respectively. A
substantial portion of this amount was paid to third-party reinsurance
underwriters or placed in risk pools managed by TEI on behalf of affiliated
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, 1997, approximately 70% of the Partnership's trailer
equipment was 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 expenses associated with the equipment are charged
directly to the Partnership. An allocation of indirect expenses of the
rental yard operations is charged to the Partnership monthly.
The Partnership owned certain equipment in conjunction with affiliated
programs during 1997 and 1996 (see Note 4).
During 1997 the Partnership borrowed $1.6 million from the General Partner
for 45 days. The General Partner charged the Partnership market interest
rates. Total interest paid to the General Partner was $10,000.
The balance due to affiliates as of December 31, 1997 included $0.4 million
due to FSI and its affiliates for management fees and $0.1 million due to
affiliated USPEs. The balance due to affiliates as of December 31, 1996 included
$0.9 million due to FSI and its affiliates for management fees and $0.3 million
due from affiliated USPEs.
3. Equipment
The components of equipment as of December 31, 1997 and 1996 were as
follows (in thousands of dollars):
Equipment held for operating leases: 1997 1996
-----------------------------------
Aircraft $ 49,838 $ 57,205
Marine containers 17,592 24,451
Marine vessels 16,276 52,259
Rail equipment 11,500 11,406
Trailers 9,696 9,683
--------------------------------------
104,902 155,004
Less accumulated depreciation (62,320) (81,541)
--------------------------------------
Net equipment $ 42,582 $ 73,463
======================================
Revenues are earned by placing the equipment under operating leases that
are billed monthly or quarterly. Some of the Partnership's marine
containers and marine vessels are leased to operators of utilization-type
leasing pools that include equipment owned by unaffiliated parties. In such
instances, revenues received by the Partnership consist of a specified
percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. Rents for other equipment are based on fixed rates.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
3. Equipment (continued)
As of December 31, 1997, all equipment was on lease or operating in
PLM-affiliated short-term trailer rental yards. As of December 31, 1996,
all equipment was on lease or operating in PLM-affiliated short-term
trailer rental yards, except for 14 railcars with a net book value of $0.2
million.
As of December 31, 1997, the Partnership had entered into a commitment to
purchase a marine vessel for $9.2 million. The Partnership made a deposit
of $0.9 million toward this purchase which is included in this balance
sheet as equipment acquisition deposits. The Partnership expects to
purchase this equipment during the first quarter of 1998 and will pay $0.5
million for acquisition and lease negotiation fees to FSI related to this
acquisition.
During 1997, the Partnership disposed of an aircraft engine, a commuter
aircraft, marine containers, railcars, and trailers with an aggregate net
book value of $4.7 million for $7.8 million. The Partnership also sold two
marine vessels with a net book value of $10.9 million for proceeds of $18.0
million. Included in the gain of $7.9 million from the sale of the marine
vessels is the unused portion of accrued drydocking $0.8 million.
During 1996, the Partnership disposed of a rig with a net book value of
$10.7 million for proceeds of $21.3 million, as well as aircraft engines,
marine containers, railcars, a commuter aircraft, and a trailer with an
aggregate net book value of $5.1 million for proceeds of $8.7 million.
Periodically, PLM International purchases groups of assets whose ownership
may be allocated among affiliated programs and PLM International. Generally
in these cases, only assets that are on lease are purchased by an
affiliated program. PLM International generally assumes the ownership and
remarketing risks associated with off-lease equipment. Allocation of the
purchase price is determined by a combination of third-party industry
sources, recent transactions, and published fair market value references.
During 1996, PLM International realized a $0.7 million gain on the sale of
69 off-lease railcars purchased by PLM International as part of a group of
assets in 1994 that had been allocated to PLM Equipment Growth Funds IV,
VI, and VII, Professional Lease Management Income Fund I, LLC (Fund I), and
PLM International. As of December 31, 1995, PLM International held these
assets 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 that had been allocated to the
Partnership, PLM Equipment Growth Funds IV, VI, and VII, Fund I, and PLM
International.
All owned equipment on lease is being accounted for as operating leases.
Future minimum rentals receivable under noncancelable operating leases, as
of December 31, 1997, for owned and partially owned equipment during each
of the next five years are approximately $14.5 million in 1998, $11.3
million in 1999, $8.5 million in 2000, $5.6 million in 2001, and $2.3
million thereafter. Contingent rentals based upon utilization were
approximately $2.2 million, $3.1 million, and $4.8 million in 1997, 1996,
and 1995, respectively.
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions is
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Partnership leases or leased its aircraft, railcars, 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 that operate the marine vessels and marine containers worldwide.
The tables below set forth geographic information about the Partnership's
owned equipment and investments in USPEs,
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
3. Equipment (continued)
grouped by domicile of the lessee as of and for the years ended December
31, 1997, 1996, and 1995 (in thousands of dollars):
Investments in USPEs Owned Equipment
----------------------------- -------------------------------------------
Region 1997 1996 1997 1996 1995
------------------------------------------------------------ --------------------------------------------
Lease revenues:
United States $ -- $ -- $ 7,553 $ 7,806 $ 6,666
Canada -- 1,509 4,096 1,821 892
South America -- -- 3,011 763 --
Asia -- -- -- 1,062 2,556
Australia -- -- -- -- 258
Europe 1,765 1,765 -- 493 1,671
Rest of the world 4,103 3,780 14,833 16,818 22,255
------------------------------- ------------------------------------------------
Total lease revenues $ 5,868 $ 7,054 $ 29,493 $ 28,763 $ 34,298
=============================== ================================================
The following table sets forth identifiable net income (loss) information
by region for the owned equipment and investments in USPEs for the years ended
December 31, 1997, 1996, and 1995 (in thousands of dollars):
Investments in USPEs Owned Equipment
--------------------------- -------------------------------------------
Region 1997 1996 1997 1996 1995
---------------------------------------------------------------- -----------------------------------------------
Net income (loss):
United States $ -- $ -- $ 4,549 $ 1,543 $ 2,142
Canada -- (753) 926 (555) (75)
South America -- -- (2,712) (1,419) --
Asia -- -- -- 10,715 114
Australia -- -- -- -- 646
Europe 773 490 -- 3,190 410
Mexico 442 (2) -- -- --
Rest of the world (1,479) 149 8,950 2,500 2,085
----------------------------- -----------------------------------------------
Total identifiable loss (264) (116) 11,713 15,974 5,322
Administrative and other -- -- (3,528) (3,417) (3,277)
----------------------------- -----------------------------------------------
Total net income (loss): $ (264) $ (116) $ 8,185 $ 12,557 $ 2,045
============================= ===============================================
The net book value of these assets as of December 31, 1997, 1996, and 1995
are as follows (in thousands of dollars):
Investments in USPEs Owned Equipment
----------------------------------------- ---------------------------------------
Region 1997 1996 1995 1997 1996 1995
---------------------------------------------------------------------- ---------------------------------------
Net book value:
United States $ -- $ -- $ -- $ 14,602 $ 20,465 $ 24,971
Canada -- -- 4,205 11,366 14,065 2,187
South America -- -- -- 8,345 13,909 --
Mexico 2,863 2,768 -- -- -- --
Asia -- -- -- -- -- 11,540
Europe 4,027 4,565 5,334 -- -- 3,377
Rest of the world 12,090 5,340 6,619 8,269 25,024 31,675
------------------------------------------ ------------------------------------------
18,980 12,673 16,158 42,582 73,463 73,750
Equipment held for sale 3,778 -- -- -- -- --
------------------------------------------ ------------------------------------------
Total net book value $ 22,758 $ 12,673 $ 16,158 $ 42,582 $ 73,463 $ 73,750
========================================== ==========================================
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. Equipment (continued)
The lessees that accounted for 10% or more of the total revenues during
1997, 1996, and 1995 were M. T. Maritime (10.6% in 1997), Halla Merchant
Marine Company Ltd. (11.6% in 1995) and Chembulk Trading, Inc. (12.2% in
1996; 11.1% in 1995).
4. Investments in Unconsolidated Special-Purpose Entities
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 and 1997.
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 principal differences between the previous accounting method and the
equity method concern 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 USPEs, 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 partners' 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 this reclassification.
During 1997, the Partnership purchased an interest in an entity owning a
product tanker for $9.1 million and incurred acquisition and lease
negotiation fees to FSI of $0.5 million. In addition, the Partnership
received a partial interest in an entity that owns a commercial aircraft in
exchange for past due receivables and the outstanding balance on a direct
finance lease (see Note 5). The Partnership liquidated its interest in this
entity in January 1998 when the aircraft was sold at its approximate book
value. The Partnership received liquidating proceeds of $3.7 million.
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's.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
4. Investments in Unconsolidated Special-Purpose Entities (continued)
The following summarizes the financial information for the special-purpose
entities and the Partnership's interest therein as of and for the years ended
December 31, 1997 and 1996 (in thousands of dollars):
1997 1996
------------ ------------
Net Interest Net Interest
Total of Partnership Total of Partnership
USPEs USPEs
-------------------------------- ----------------------------------
Net Investments $ 67,208 $ 22,758 $ 48,660 $ 12,673
Lease revenues 28,822 5,868 30,337 7,054
Net income (loss) 11,390 (264) (1,692) (116 )
The net investments in USPEs include the following jointly-owned equipment
(and related assets and liabilities) as of December 31 1997 and 1996 (in
thousands of dollars):
1997 1996
----------------------------------
48% interest in an entity owning a product tanker $ 8,266 $ --
17% interest in two trusts owning three commercial aircraft, two
aircraft engines, and a portfolio of aircraft rotables 4,027 4,565
60% interest in a commercial aircraft 3,778 --
25% interest in two commercial aircraft on direct finance lease 2,863 2,768
50% interest in an entity owning a bulk carrier 2,277 3,196
50% interest in an entity owning a product tanker 1,547 2,144
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Net investments $ 22,758 $ 12,673
============= =============
The Partnership had beneficial interests in two USPEs 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
of which was purchased during 1996, are now reported as owned equipment by
the Partnership.
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 Boeing
727-200 aircraft, at a cost of $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 were to be received over
a five-year period, which commenced in December of 1995.
The components of the net investment in direct finance lease as of December
31, 1996 are as follows (in thousands of dollars):
1996
-------------
Total minimum lease payments $ 2,978
Residual value 125
Less unearned income (821)
-------------
$ 2,282
=============
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
5. Net Investment in Direct Finance Lease (continued)
During 1997, the lessee encountered financial difficulties. The General
Partner established reserves against these receivables due to the
determination that collection of these lease payments were uncertain. Due
to the uncertainty of collection, the General Partner exercised its option
under the terms of the settlement agreement. During June 1997, the
Partnership, together with two affiliated programs to which the lessee also
owed past due receivables, repossessed the Boeing 727-200 aircraft. This is
the aircraft on which the Stage III hushkit was installed and that was
owned by the lessee and pledged as security for the financing of the
hushkit. As a result, the balance due from the lessee from the direct
finance lease and the balances due to affiliated programs were reclassified
to an investment in an entity that owns a commercial aircraft. The fair
market value of the Partnership's interest in this aircraft approximated
its outstanding receivable from the lessee.
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 to the lenders, and to amend the loan repayment schedule from 16
consecutive equal quarterly installments to 20 consecutive quarterly
installments with lower payments of principle 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.
On December 29, 1997, the existing senior loan agreement was amended and
restated to allow the Partnership to deduct the next scheduled principal
payment from the equipment sales proceeds which had previously been used to
paydown the loan.
During 1997, the loan required quarterly principal payments of $1.5 million
and quarterly interest payments at a rate of approximately LIBOR plus 1.2
percent per annum (6.962% at December 31, 1997 and 6.825% at December 31,
1996). 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 $50.0 million credit facility
(the Committed Bridge Facility) on behalf of the Partnership, PLM Equipment
Growth Fund VI (EGF VI), PLM Equipment Growth & Income Fund VII (EGF 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. The Committed Bridge Facility 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 December 2, 1997 to expire on
November 2, 1998. The Partnership, Fund I, TECAI, and the other programs
may collectively borrow up to $35.0 million of the Committed Bridge
Facility. AFG may borrow up to $50.0 million of the Committed Bridge
Facility. The Committed Bridge Facility also provides for a $5.0 million
Letter of Credit Facility for the eligible borrowers. Outstanding
borrowings by one borrower reduce the amount available to each of the other
borrowers under the Committed Bridge Facility. Individual borrowings may be
outstanding for no more than 179 days, with all advances due no later than
November 2, 1998. Interest accrues at either the prime rate or adjusted
LIBOR plus 1.625% at the borrower's option and is set at the time of an
advance of funds. Borrowings by the Partnership
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
6. Notes Payable (continued)
are guaranteed by the General Partner. As of December 31, 1997, AFG had
$23.0 million in outstanding borrowings. No other eligible borrower had
outstanding borrowings. The General Partner believes it will renew the
Committed Bridge Facility upon its expiration with similar terms as those
in the current Committed Bridge Facility.
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.
As of December 31, 1997, there were temporary differences of approximately
$34.1 million between the financial statement's carrying values of assets and
liabilities and the federal income tax basis of such assets and liabilities,
principally due to the differences in depreciation methods and the tax treatment
of underwriting commissions and syndication costs.
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 *
10.3 Amendment No. 1 to the Amended and Restated $38,000,000
Loan Agreement, dated as of December 29, 1997 46-50
10.4 Third Amended and Restated Warehousing Credit Agreement, dated as of
December 2, 1997 with First Union National Bank of North Carolina and
others 51-130
24. Powers of Attorney. 131-133
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* Incorporated by reference. See page 27 of this report.