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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 33-32258
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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 50.
Total number of pages in this report: 53.
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 or PLMI),
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 (the units) including 2,500,000 optional 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 investing in a diversified equipment portfolio consisting primarily
of used, long-lived, low-obsolescence capital equipment that is easily
transportable by and among prospective users.
The Partnership 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 maintain a diversified portfolio of low-obsolescence equipment with
long lives and high residual values which were purchased with the net proceeds
of the initial Partnership offering, supplemented by debt financing, and surplus
operating cash during the investment phase of the Partnership. All transactions
over $1.0 million must be approved by the PLMI Credit Review Committee (the
"Committee') which is made up of members of PLMI's senior management. In
determining a lessee's creditworthiness, the Committee will consider, among
other factors, the lessee's financial statements, internal and external credit
ratings, and letters of credit;
(2) to generate sufficient net operating cash flow from lease operations to
meet liquidity requirements and to generate cash distributions to the limited
partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(3) to selectively sell equipment when the General Partner believes that,
due to market conditions, market prices for equipment exceed inherent equipment
values or expected future benefits from continued ownership of a particular
asset. Proceeds from these sales, together with excess net operating cash flows
from operations (net cash provided by operating activities plus distributions
from unconsolidated special-purpose entities (USPEs)) are used to repay the
Partnership's outstanding indebtedness and for distributions to the partners;
(4) to preserve and protect the value of the portfolio through quality
management, maintaining diversity, and constantly monitoring equipment markets.
The offering of units of the Partnership closed on December 23, 1991. As of
December 31, 1998, there were 9,081,028 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 commenced on
January 1, 1999, the General Partner stopped reinvesting cash flow and surplus
funds, which, if any, less reasonable reserves, will be distributed to the
partners. During the period between the seventh year of operation and the ninth
year of operation, the Partnership will not be able to purchase any additional
equipment. In the ninth year of operations of the Partnership, the General
Partner intends to begin the dissolution and liquidation of the Partnership in
an orderly fashion, unless the Partnership is terminated earlier upon sale of
all of the equipment or by certain other events. In no event will the
Partnership be extended beyond December 31, 2010.
Table 1, below, lists the equipment and the cost of equipment in the
Partnership's portfolio, and the cost of investments in unconsolidated
special-purpose entities as of December 31, 1998 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
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Owned equipment held for operating leases:
5 737-200 Stage II commercial aircraft Boeing $ 27,658
1 DC-9-32 Stage II commercial aircraft McDonnell Douglas 10,056
2 DHC-8-102 commuter aircraft DeHavilland 7,628
1 DHC-8-300 commuter aircraft DeHavilland 5,748
1 Product tanker Kaldnes M/V 16,276
1 Brown water vessel Marine Fabricators 9,614
333 Refrigerated marine containers Various 6,237
1,127 Various marine containers Various 5,605
85 Sulphur tank railcars ACF/RTC 2,907
121 Covered hopper railcars Various 2,863
106 Anhydrous ammonia tank railcars GATX 2,484
72 Tank railcars Various 1,881
44 Mill gondola railcars Bethlehem Steel 1,248
182 Refrigerated trailers Various 5,520
148 Piggyback refrigerated trailers Oshkosh 2,261
125 Dry trailers Various 1,529
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Total owned equipment held for operating leases $ 109,515
===========
Investments in unconsolidated special-purpose entities:
0.50 Bulk carrier Nipponkai & Toyama $ 9,705
0.48 Product tanker Boelwerf-Temse 9,492
0.50 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
0.25 Equipment on direct finance lease:
Two DC-9 Stage III commercial aircraft McDonnell Douglas 3,005
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Total investments in unconsolidated special-purpose entities $ 35,677
===========
Includes equipment and investments purchased with the proceeds from capital
contributions, undistributed cash flow from operations, and Partnership
borrowings. 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 three affiliated programs.
Jointly owned: EGF V and two affiliated programs.
The equipment is generally leased under operating leases with terms of one to
six years. The Partnership's marine containers are leased to operators of
utilization-type leasing pools, which include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment.
As of December 31, 1998, approximately 67% 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., Canadian Airlines International, Varig South America, Aero California, 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 Partnership's equipment. The Partnership's management
agreement with IMI is to co-terminate with the dissolution of the Partnership,
unless the limited partners vote to terminate the agreement prior to that date
or at the discretion of the General Partner. IMI has agreed to perform all
services necessary to manage the equipment on behalf of the Partnership and to
perform or contract for the performance of all obligations of the lessor under
the Partnership's leases. In consideration for its services and pursuant to the
partnership agreement, IMI is entitled to a monthly management fee (see Notes 1
and 2 to the audited financial statements).
(C) Competition
(1) Operating Leases versus Full Payout Leases
Generally, the equipment owned or invested in by the Partnership is leased out
on an operating lease basis wherein the rents received during the initial
noncancelable term of the lease are insufficient to recover the Partnership's
purchase price of the equipment. The short- to mid-term nature of operating
leases generally commands a higher rental rate than the longer-term full payout
leases and offers lessees relative flexibility in their equipment commitment. In
addition, the rental obligation under an operating lease need not be capitalized
on the lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize
full payout leases on new equipment, i.e., leases that have terms equal to the
expected economic life of the equipment. While some lessees prefer the
flexibility offered by a shorter-term operating lease, other lessees prefer the
rate advantages possible with a full payout lease. Competitors may write full
payout leases at considerably lower rates and for longer terms than the
Partnership offers, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers who offer operating leases
and full payout leases. Manufacturers may provide ancillary services that the
Partnership cannot offer, such as specialized maintenance service (including
possible substitution of equipment), training, warranty services, and trade-in
privileges.
The Partnership also competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), GATX Corp., General Electric
Railcar Services Corporation, General Electric Capital Aviation Services
Corporation, Xtra Corporation, and other investment programs that lease the same
types of equipment.
(D) Demand
The Partnership operates in the following operating segments: aircraft leasing,
marine vessel leasing, marine container leasing, railcar leasing, and trailer
leasing. Each equipment leasing segment engages in short-term to mid-term
operating leases to a variety of customers. Except for those aircraft leased to
passenger air carriers, the Partnership's equipment and investments are used to
transport materials and commodities, rather than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Aircraft
(a) Commercial Aircraft
The world's major airlines experienced a fourth consecutive year of profits,
showing a combined marginal net income (net income measured as a percentage of
revenue) of 6%, compared to the industry's historical annual rate of 1%.
Airlines recorded positive marginal net annual income of 2% in 1995, 4% in 1996,
6% in 1997, and 6% in 1998. The two factors that have led to this increase in
profitability are improvements in yield management systems and reduced operating
costs, particularly lowered fuel costs. These higher levels of profitability
have allowed many airlines to re-equip their fleets with new aircraft, resulting
in a record number of orders for manufacturers.
Major airlines increased their fleets from 7,181 aircraft in 1997 to 7,323 in
1998, which has resulted in more used aircraft available on the secondary
market. Despite these increases, the number of Stage II aircraft in these fleets
(similar to those owned by the Partnership) decreased by 26% from 1997 to 1998,
and sharper decreases are expected in 1999. This trend is due to Federal
Aviation Regulation section C36.5, which requires airlines to convert 100% of
their fleets to Stage III aircraft, which have lower noise levels than Stage II
aircraft, by the year 2000 in the United States and the year 2002 in Canada and
Europe. Stage II aircraft can be modified to Stage III with the installation of
a hushkit that significantly reduces engine noise. The cost of hushkit
installation ranges from $1.0 to $2.0 million for the types of aircraft owned by
the Partnership.
Orders for new aircraft have risen rapidly worldwide in recent years: 691 in
1995, 1,182 in 1996, 1,328 in 1997, and an estimated 1,500 in 1998. As a result
of this increase in orders, manufacturers have expanded their production, and
new aircraft deliveries have increased from 482 in 1995, 493 in 1996, and 674 in
1997, to an estimated 825 in 1998.
The industry now has in place two of the three conditions that led to financial
problems in the early 1990s: potential excess orders and record deliveries. The
missing element is a worldwide recession. Should a recession occur, the industry
will experience another period of excess aircraft capacity and surplus aircraft
on the ground.
The Partnership's fleet consists of a mix of Stage II narrowbody (single-aisle)
commercial aircraft and aircraft that have had hushkits installed to comply with
Stage III regulations. The Stage II aircraft are positioned with air carriers
outside of Stage III-legislated areas, scheduled for Stage III hushkit
installation in 1999, or anticipated to be sold or leased outside Stage III
areas before the year 2000.
(b) Commuter Aircraft
Major changes have occurred in the commuter market due to the 1993 introduction
of small regional jets. The original concept for regional jets was to take over
the North American hub-and-spoke routes served by the large turboprops, but they
are also finding successful niches in point-to-point routes. The introduction of
this smaller aircraft has allowed major airlines to shift the regional jets to
those marginal routes previously operated by narrowbody (single-aisle) aircraft,
allowing larger-capacity aircraft to be more efficiently employed in an
airline's route system.
The Partnership leases commuter turboprops containing from 36 to 50 seats. These
aircraft all fly in North America, which continues to be the fastest-growing
market for commuter aircraft in the world. The Partnership's aircraft possess
unique performance capabilities, compared to other turboprops, which allow them
to readily operate at maximum payloads from unimproved surfaces, hot and high
runways, and short runways. However, the growing use of regional jets in the
commuter market has resulted in an increase in demand for regional jets at the
expense of turboprops. Several major turboprop programs have been terminated and
all turboprop manufacturers are cutting back on production due to reduced
demand.
(c) Aircraft Engines
Availability has decreased over the past two years for the Pratt & Whitney Stage
II JT8D engine, which powers many of the Partnership's Stage II commercial
aircraft. This decrease in supply is due primarily to the limited production of
spare parts to support these engines. Due to the fact that demand for this type
of aircraft currently exceeds supply, the partnership expects to sell its JT8D
engines in 1999.
(d) Rotables
Aircraft rotables, or components, are replacement spare parts held in an
airline's inventory. They are recycled parts that are first removed from an
aircraft or engine, overhauled, and then recertified, returned to an airline's
inventory, and ultimately refit to an aircraft in as-new condition. Rotables
carry identification numbers that allow them to be individually tracked during
their use.
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, and valves. The market for the Partnership's rotables
remains stable.
The Partnership expects to sell the rotables used on its Stage II aircraft
during 1999 as part of a package to sell several aircraft, engines, and rotables
jointly owned by the Partnership and an affiliated program.
(2) Marine Vessels
The Partnership owns or has investments in small to medium-sized dry bulk
vessels and product tankers that trade in worldwide markets and carry commodity
cargoes. Demand for commodity shipping closely follows worldwide economic growth
patterns, which can alter demand by causing changes in volume on trade routes.
The General Partner operates the Partnership's vessels through spot and period
charters, an operating approach that provides the flexibility to adapt to
changing market situations.
The markets for both dry bulk vessels and product tankers weakened in 1998. Dry
bulk vessels experienced a decline in freight rates, as demand for commodity
shipments remained flat and fleet capacity increased marginally. Freight rates
for product tankers weakened during the course of the year, after a very strong
1997. Demand for product shipments decreased, while the fleet grew moderately.
The Asian recession has had significant effects on world shipping markets, and
demand is unlikely to improve until Pacific Rim economies experience a sustained
recovery. (a) Dry Bulk Vessels
Freight rates for dry bulk vessels decreased for all ship sizes in 1998, with
the largest vessels experiencing the greatest declines. After a relatively
stable year in 1997, rates declined due to a decrease in cargo tonnage moving
from the Pacific Basin and Asia to western ports. The size of the overall dry
bulk carrier fleet decreased by 3%, as measured by the number of vessels, but
increased by 1%, as measured by deadweight (dwt) tonnage. While scrapping of
ships was a significant factor in 1998 (scrapping increased by 50% over 1997)
overall there was no material change in the size of the dry bulk vessel fleet,
as deliveries and scrappings were nearly equal.
Total dry trade (as measured in deadweight tons) was flat, compared to a 3%
growth in 1997. As a result, the market had no foundation for increasing freight
rates, and charter rates declined as trade not only failed to grow, but actually
declined due to economic disruptions in Asia. Overall activity is expected to
remain flat in 1999, with trade in two of the three major commodities static or
decreasing in volume. Iron ore volume is expected to decrease, and grain trade
is anticipated to be flat, while a bright spot remains in an estimated increase
in steam coal trade.
Ship values experienced a significant decline in 1998, as expectations for trade
growth were dampened. The decline in ship values was also driven by bargain
pricing for newbuilding in Asian yards.
The uncertainty in forecasts is the Asian economic situation; if there is some
recovery from the economic shake-up that started in the second half of 1997,
then 1999 has prospects for improvement. The delivery of ships in 1999 is
expected to be less than in 1998, and high scrapping levels should continue. Dry
bulk shipping is a cyclical business -- inducing capital investment during
periods of high freight rates and discouraging investment during periods of low
rates. The current environment thus discourages investment. However, the history
of the industry implies that this period will be followed by one of increasing
rates and investment in new ships, driven by growth in demand. Over time, demand
grows at an average of 3% a year, so when historic levels of growth in demand
resume, the industry is expected to experience a significant increase in freight
rates and ship values.
(b) Product Tankers
Product tanker markets experienced a year in which a fall in product trade
volume and an increase in total fleet size induced a decline in freight rates.
Charter rates for standard-sized product tankers averaged $10,139 per day in
1998, compared to $13,277 per day in 1997. The weakening in rates resulted
primarily from a decrease in product import levels to the United States and
Japan. Significantly lower crude oil prices worldwide induced higher volumes of
imports of crude oil to the United States, thereby lessening domestic demand for
refined products. Product trade in 1998 fell by an estimated 5% worldwide. The
crude oil trade, which is closely related to product trades, especially in
larger vessels, remained stable in 1998. Crude trade grew 1% in volume, led by
imports to Europe, which grew 6%.
Overall, the entire product tanker fleet grew only 1% in 1998. Supply growth in
1998 was moderated by high scrapping levels, especially of larger ships. In
1999, the fleet is expected to receive an additional 9% in capacity from newly
built deliveries, most of which will be in large tankers (above 80,000 dwt tons)
carrying crude products. Smaller tankers (below 80,000 dwt tons) are expected to
receive 7% in new deliveries over current fleet levels.
While these new deliveries represent a high percentage of the existing fleet,
the tanker markets are now beginning to feel the effects of the United States
Oil Pollution Act of 1990. Under the act, older tankers are restricted from
trading to the United States once they exceed 25 years old if they do not have
double bottoms and/or double hulls. Similar though somewhat less stringent
restrictions are in place in other countries with developed economies. The
retirement of older, noncomplying tankers may allow the fleet to absorb what
would otherwise be an excessive number of new orders in relation to current
demand prospects. Given that a large proportion of the current tanker fleet does
not meet these regulatory requirements, coupled with anticipated flat demand yet
continuing high delivery levels, charter rates for 1999 are not anticipated to
increase significantly from 1998 levels.
Two of the Partnership's tankers are single-bottom, single-hull tankers that
will be restricted from trading in the United States when they reach 25 years of
age, in 2000 and 2001, respectively. At those times, the General Partner intends
to move the vessels to markets not affected by these regulations.
(3) Marine Containers
The marine container market began 1998 with industrywide utilization in the low
80% range. This percentage eroded somewhat during the year, while per diem
rental rates remained steady. One factor affecting the market was the
availability of historically low-priced marine containers from Asian
manufacturers. This trend is expected to remain in 1999, and will continue to
put pressure on economic results fleetwide.
The trend toward industrywide consolidation continued in 1998, as the U.S.
parent company of one of the industry's top ten container lessors announced that
it would be outsourcing the management of its container fleet to a competitor.
While this announcement has yet to be finalized, over the long term, such
industrywide consolidation should bring more rationalization to the container
leasing market and result in both higher fleetwide utilization and per diem
rates.
(4) Railcars
(a) Pressurized Tank Railcars
Pressurized tank cars transport primarily two chemicals: liquefied petroleum gas
(natural gas) and anhydrous ammonia (fertilizer). Natural gas is used in a
variety of ways in businesses, electric plants, factories, homes, and now even
cars. The demand for fertilizer is driven by a number of factors, including
grain prices, the status of government farm subsidy programs, the amount of
farming acreage and mix of crops planted, weather patterns, farming practices,
and the value of the U.S. dollar.
In North America, 1998 carload originations of both chemicals and petroleum
products remained relatively constant, compared to 1997. The 98% utilization
rate of the Partnership's pressurized tank cars was consistent with this
statistic.
(b) General Purpose (Nonpressurized) Tank Railcars
Tank cars that do not require pressurization are used to transport a variety of
bulk liquid commodities and chemicals, including certain petroleum fuels and
products, liquified asphalt, lubricating and vegetable oils, molten sulfur, and
corn syrup. The largest consumers of chemical products are the manufacturing,
automobile, and housing sectors. Because the bulk liquid industry is so diverse,
its overall health is reflected by such general indicators as changes in the
Gross Domestic Product, personal consumption expenditures, retail sales,
currency exchange rates, and national and international economic forecasts.
In North America, railcar loadings for the commodity group that includes
chemicals and petroleum products remained essentially unchanged, compared to
1997. The Partnership's general purpose cars continue to be in high demand, with
utilization over 98% in 1998.
(c) Covered Hopper (Grain) Railcars
Covered hopper railcars are used to transport grain to domestic food processors,
poultry breeders, cattle feed lots, and for export. Demand for covered hopper
cars softened In 1998, as total North American grain shipments declined 8%,
compared to 1997, with grain shipments within Canada contributing to most of
this decrease. This has put downward pressure on lease rates, which has been
exacerbated by a significant increase in the number of covered hopper cars built
in the last few years. Since 1988, there has been a nearly 20% increase in rail
transportation capacity assigned to agricultural service. In 1996, just over
one-half of all new railcars built were covered hopper cars; in 1997, this
percentage dropped somewhat, to 38% of all cars built.
The Partnership's covered hopper cars were not impacted by the decrease in lease
rates during 1998, as all of the cars continued to operate on long-term leases.
(d) Mill Gondola Railcars
Mill gondolas are railcars that are typically used to carry scrap steel from
steel processors to small steel mills called minimills for recycling In 1997,
minimills were responsible for 43% of the total steel output in the United
States, relatively unchanged from the 42% level of 1996. North American car
loadings of scrap steel fell slightly in 1998, down 4% over 1997 levels.
All of the Partnership's mill gondolas continued to operate on long-term leases
during 1998.
(5) Trailers
(a) Intermodal Trailers
Intermodal (piggyback) trailers are used to ship goods either by truck or by
rail. Activity within the North American intermodal trailer market declined
slightly in 1998, with trailer shipments down 4% from 1997 levels, due primarily
to rail service problems associated with the mergers in this area. Utilization
of the intermodal per diem rental fleet, consisting of approximately 170,000
units, was 73%. Intermodal utilization in 1999 is expected to decline another 2%
from 1998 levels, due to a slight leveling off of overall economic activity in
1999, after a robust year in 1998.
The General Partner has initiated expanded marketing and asset management
efforts for its intermodal trailers, from which it expects to achieve improved
trailer utilization and operating results. During 1998, average utilization
rates for the Partnership's intermodal trailer fleet approached 80%.
(b) Over-the-Road Dry Trailers
The U.S. over-the-road nonrefrigerated (dry) trailer market continued to recover
in 1998, with a strong domestic economy resulting in heavy freight volumes. The
leasing outlook continues to be positive, as equipment surpluses of recent years
are being absorbed by a buoyant market. In addition to high freight volumes,
declining fuel prices have led to a strong trucking industry and improved
equipment demand.
The Partnership's nonrefrigerated van fleet experienced strong utilization
throughout 1998, with utilization rates remaining well above 70% throughout the
year.
(c) Over-the-Road Refrigerated Trailers
The temperature-controlled over-the-road trailer market remained strong in 1998
as freight levels improved and equipment oversupply was reduced. Many
refrigerated equipment users retired older trailers and consolidated their
fleets, making way for new, technologically improved units. Production of new
equipment is backlogged into the third quarter of 1999. In light of the current
tight supply of trailers available on the market, it is anticipated that
trucking companies and other refrigerated trailer users will look outside their
own fleets more frequently by leasing trailers on a short-term basis to meet
their equipment needs.
This leasing trend should benefit the Partnership, which makes most of its
trailers available for short-term leasing from rental yards owned and operated
by a PLM International subsidiary. The Partnership's utilization of refrigerated
trailers showed improvement in 1998, with utilization rates approaching 70%,
compared to 60% in 1997.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign government 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 of the equipment typically
reimburses the Partnership for these additional costs;
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990,
which limits or eliminates the operation of commercial aircraft in the
United States that do not meet certain noise, aging, and corrosion
criteria. In addition, under U.S. Federal Aviation Regulations, after
December 31, 1999, no person may operate an aircraft to or from any airport
in the contiguous United States unless that aircraft has been shown to
comply with Stage III noise levels. The Partnership has Stage II aircraft
that do not meet Stage III requirements. These Stage II aircraft are
scheduled either to be modified to meet Stage III requirements, sold, or
re-leased in countries that do not require this regulation before the year
2000. The cost to install a hushkit to meet quieter Stage III requirements
is approximately $1.5 million, depending on the type of aircraft;
(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 railcars.
As of December 31, 1998, the Partnership was in compliance with the above
governmental regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased and its interests in entities that own equipment for leasing
purposes. As of December 31, 1998, the Partnership owned a portfolio of
transportation and related equipment and investments in equipment owned by
unconsolidated special-purpose entities (USPEs) as described in Item 1, Table 1.
The Partnership acquired equipment with the proceeds of the Partnership offering
of $184.3 million through the first quarter of 1992, with proceeds from the debt
financing of $38.0 million, and by reinvesting a portion of its operating cash
flow in additional equipment.
The Partnership maintains its principal office at One Market, Steuart Street
Tower, Suite 800, San Francisco, California 94105-1301. All office facilities
are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
PLM International, (the Company) and various of its affiliates are named as
defendants in a lawsuit filed as a purported class action on January 22, 1997 in
the Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251 (the
Koch action). Plaintiffs, who filed the complaint on their own and on behalf of
all class members similarly situated (the class), are six individuals who
invested in certain California limited partnerships (the Partnerships) for which
the Company's wholly-owned subsidiary, PLM Financial Services, Inc. (FSI), acts
as the general partner, including the Partnership, PLM Equipment Growth Funds IV
and VI, and PLM Equipment Growth & Income Fund VII (the Growth Funds). The state
court ex parte certified the action as a class action (i.e., solely upon
plaintiffs' request and without the Company being given the opportunity to file
an opposition). The complaint asserts eight causes of action against all
defendants, as follows: fraud and deceit, suppression, negligent
misrepresentation and suppression, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, unjust enrichment, conversion, and
conspiracy. Additionally, plaintiffs allege a cause of action against PLM
Securities Corp. for breach of third party beneficiary contracts in violation of
the National Association of Securities Dealers rules of fair practice.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, and
control persons. Based on these duties, plaintiffs assert liability against
defendants for improper sales and marketing practices, mismanagement of the
Growth Funds, and concealing such mismanagement from investors in the Growth
Funds. Plaintiffs seek unspecified compensatory and recissory damages, as well
as punitive damages, and have offered to tender their limited partnership units
back to the defendants.
In March 1997, the defendants removed the Koch action from the state court to
the United States District Court for the Southern District of Alabama, Southern
Division (Civil Action No. 97-0177-BH-C) based on the district court's diversity
jurisdiction, following which plaintiffs filed a motion to remand the action to
the state court. Removal of the action to federal court automatically nullified
the state court's ex parte certification of the class. In September 1997, the
district court denied plaintiffs' motion to remand the action to state court and
dismissed without prejudice the individual claims of the California plaintiff,
reasoning that he had been fraudulently joined as a plaintiff. In October 1997,
defendants filed a motion to compel arbitration of plaintiffs' claims, based on
an agreement to arbitrate contained in the limited partnership agreement of each
Growth Fund, and to stay further proceedings pending the outcome of such
arbitration. Notwithstanding plaintiffs' opposition, the district court granted
defendants' motion in December 1997.
Following various unsuccessful requests that the district court reverse, or
otherwise certify for appeal, its order denying plaintiffs' motion to remand the
case to state court and dismissing the California plaintiff's claims, plaintiffs
filed with the U.S. Court of Appeals for the Eleventh Circuit a petition for a
writ of mandamus seeking to reverse the district court's order. The Eleventh
Circuit denied plaintiffs' petition in November 1997, and further denied
plaintiffs subsequent motion in the Eleventh Circuit for a rehearing on this
issue. Plaintiffs also appealed the district court's order granting defendants'
motion to compel arbitration, but in June 1998 voluntarily dismissed their
appeal pending settlement of the Koch action, as discussed below.
On June 5, 1997, the Company and the affiliates who are also defendants in the
Koch action were named as defendants in another purported class action filed in
the San Francisco Superior Court, San Francisco, California, Case No. 987062
(the Romei action). The plaintiff is an investor in the Partnership, and filed
the complaint on her own behalf and on behalf of all class members similarly
situated who invested in certain California limited partnerships for which FSI
acts as the general partner, including the Growth Funds. The complaint alleges
the same facts and the same nine causes of action as in the Koch action, plus
five additional causes of action against all of the defendants, as follows:
violations of California Business and Professions Code Sections 17200, et seq.
for alleged unfair and deceptive practices, constructive fraud, unjust
enrichment, violations of California Corporations Code Section 1507, and a claim
for treble damages under California Civil Code Section 3345.
On July 31, 1997, defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition) under
the Federal Arbitration Act seeking to compel arbitration of plaintiff's claims
and for an order staying the state court proceedings pending the outcome of the
arbitration. In connection with this motion, plaintiff agreed to a stay of the
state court action pending the district court's decision on the petition to
compel arbitration. In October 1997, the district court denied the Company's
petition to compel arbitration, but in November 1997, agreed to hear the
Company's motion for reconsideration of this order. The hearing on this motion
has been taken off calendar and the district court has dismissed the petition
pending settlement of the Romei action, as discussed below. The state court
action continues to be stayed pending such resolution. In connection with her
opposition to the petition to compel arbitration, plaintiff filed an amended
complaint with the state court in August 1997 alleging two new causes of action
for violations of the California Securities Law of 1968 (California Corporations
Code Sections 25400 and 25500) and for violation of California Civil Code
Sections 1709 and 1710. Plaintiff also served certain discovery requests on
defendants. Because of the stay, no response to the amended complaint or to the
discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a memorandum
of understanding (MOU) related to the settlement of those actions (the monetary
settlement). The monetary settlement contemplated by the MOU provides for
stipulating to a class for settlement purposes, and a settlement and release of
all claims against defendants and third party brokers in exchange for payment
for the benefit of the class of up to $6.0 million. The final settlement amount
will depend on the number of claims filed by authorized claimants who are
members of the class, the amount of the administrative costs incurred in
connection with the settlement, and the amount of attorneys' fees awarded by the
Alabama district court. The Company will pay up to $0.3 million of the monetary
settlement, with the remainder being funded by an insurance policy.
The parties to the monetary settlement have also agreed in principle to an
equitable settlement (the equitable settlement) which provides, among other
things, (a) for the extension of the operating lives of the Partnership, PLM
Equipment Growth Fund VI, and PLM Equipment Growth & Income Fund VII (the Funds)
by judicial amendment to each of their partnership agreements, such that FSI,
the general partner of each such Fund, will be permitted to reinvest cash flow,
surplus partnership funds or retained proceeds in additional equipment into the
year 2004, and will liquidate the partnerships' equipment in 2006; (b) that FSI
be entitled to earn front end fees (including acquisition and lease negotiation
fees) in excess of the compensatory limitations set forth in the North American
Securities Administrators Association, Inc. Statement of Policy by judicial
amendment to the Partnership Agreements for each Fund; (c) for a one time
redemption of up to 10% of the outstanding units of each Fund at 80% of such
partnership's net asset value; and (d) for the deferral of a portion of FSI's
management fees. The equitable settlement also provides for payment of the
equitable settlement attorneys' fees from Partnership funds in the event that
distributions paid to investors in the Funds during the extension period reach a
certain internal rate of return.
Defendants will continue to deny each of the claims and contentions and admit no
liability in connection with the proposed settlements. The monetary settlement
remains subject to numerous conditions, including but not limited to: (a)
agreement and execution by the parties of a settlement agreement (the settlement
agreement), (b) notice to and certification of the monetary class for purposes
of the monetary settlement, and (c) preliminary and final approval of the
monetary settlement by the Alabama district court. The equitable settlement
remains subject to numerous conditions, including but not limited to: (a)
agreement and execution by the parties of the settlement agreement, (b) notice
to the current unitholders in the Funds (the equitable class) and certification
of the equitable class for purposes of the equitable settlement, (c)
preparation, review by the Securities and Exchange Commission (SEC), and
dissemination to the members of the equitable class of solicitation statements
regarding the proposed extensions, (d) disapproval by less than 50% of the
limited partners in each of the Funds of the proposed amendments to the limited
partnership agreements, (e) judicial approval of the proposed amendments to the
limited partnership agreements, and (f) preliminary and final approval of the
equitable settlement by the Alabama district court. The parties submitted the
settlement agreement to the Alabama district court on February 12, 1999, and the
preliminary class certification hearing is scheduled for March 24, 1999. If the
district court grants preliminary approval, notices to the monetary class and
equitable class will be sent following review by the SEC of the solicitation
statements to be prepared in connection with the equitable settlement. The
monetary settlement, if approved, will go forward regardless of whether the
equitable settlement is approved or not. The Company continues to believe that
the allegations of the Koch and Romei actions are completely without merit and
intends to continue to defend this matter vigorously if the monetary settlement
is not consummated.
The Partnership is involved as plaintiff or defendant in various other legal
actions incident to its business. Management does not believe that any of these
actions will be material to the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS
Pursuant to the terms of the partnership agreement, net income (loss) and
distributions of the Partnership are generally allocated 95% to the limited
partners and 5% to the General Partner, subject to certain special allocations.
Special allocations of income are made 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 General Partner will generally receive an
annual allocation of income equal to the General Partner's cash distributions
paid during the current year. The remaining interests in the profits and losses
and cash distributions of the Partnership are allocated to the limited partners.
As of December 31, 1998, there were 9,743 limited partners holding units in the
Partnership.
There are several secondary markets in which limited partnership units trade.
Secondary markets are characterized as having few buyers for limited partnership
interests and, therefore, are generally viewed as inefficient vehicles for the
sale of limited partnership units. Presently, there is no public market for the
units and none is likely to develop. To prevent the units from being considered
"publicly traded" and thereby to avoid taxation of the Partnership as an
association treated as a corporation under the Internal Revenue Code, the units
will not be transferable without the consent of the General Partner, which may
be withheld 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 an U.S.
citizen or if the transfer would cause any portion of the units of a "Qualified
Plan" as defined by the Employee Retirement Income Security Act of 1974 and
Individual Retirement Accounts to exceed the allowable limit. The 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, 1998, the Partnership agreed to purchase approximately 18,100 units for an
aggregate price of $0.1 million. The General Partner anticipates that these
units will be repurchased in the first and second quarters of 1999. As of
December 31, 1998, the Partnership has repurchased a cumulative total of 138,904
units at a cost of $1.5 million. In addition to these units, the General Partner
may purchase additional units on behalf of the Partnership in the future.
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ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the Years Ended December 31, (In
thousands of dollars, except weighted-average unit
amounts)
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
Operating results:
Total revenues $ 24,129 $ 41,123 $ 44,322 $ 39,142 $ 44,291
Net gain on disposition
of equipment 814 10,990 14,199 3,835 4,920
Equity in net income (loss) of uncon-
solidated special-purpose entities 234 (264 ) (116 ) -- --
Net income 2,370 7,921 12,441 2,045 3,193
At year-end:
Total assets $ 61,376 $ 80,033 $ 98,419 $ 102,109 $ 120,114
Total liabilities 26,970 35,947 46,123 44,092 44,221
Notes payable 23,588 32,000 40,463 38,000 38,000
Cash distribution $ 12,008 $ 15,346 $ 18,083 $ 19,342 $ 19,420
`
Cash distribution representing
a return of capital to the limited
partners $ 9,638 $ 7,425 $ 5,642 $ 17,297 $ 16,227
Per weighted-average limited partnership unit:
Net income $ 0.20 $ 0.79 $ 1.26 $ 0.12 $ 0.24
Cash distribution $ 1.26 $ 1.60 $ 1.87 $ 2.00 $ 2.00
Cash distribution representing
a return of capital $ 1.06 $ 0.81 $ 0.61 $ 1.89 $ 1.76
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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 segments in which
it operates and its effect on the Partnership's overall financial condition.
(B) Results of Operations - Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Partnership's equipment portfolio to repricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and the
equipment must be remarketed. Major factors influencing the current market rate
for Partnership equipment include supply and demand for similar or comparable
types of transport capacity, desirability of the equipment in the leasing
market, market conditions for the particular industry segment in which the
equipment is to be leased, overall economic conditions, and various regulations
concerning the use of the equipment. Equipment that is idle or out of service
between the expiration of one lease and the assumption of a subsequent lease can
result in a reduction of contribution to the Partnership. The Partnership
experienced re-leasing or repricing activity in 1998 primarily in its trailer,
marine vessels, and marine container portfolios.
(a) Trailers: 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 operate 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. As a
result of this, the Partnership experienced a decrease in lease revenues due to
the weakness in the voyage charter market. Voyage charter lease 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 lower re-lease rates and lower
utilization on the remaining marine containers fleet during 1998.
(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 Lessee
Liquidation of Partnership equipment and investments in unconsolidated
special-purpose entities (USPEs) represents a reduction in the size of the
equipment portfolio and may result in 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. The Partnership experienced the
following in 1998:
(a) Liquidations: During the year, the Partnership disposed of owned
equipment that included marine containers, trailers, and railcars, and an
interest in a USPE trust that owned a commercial aircraft for total proceeds of
$6.2 million.
(b) Non-performing lessee: A Brazilian lessee is having financial
difficulties. The lessee has contacted the General Partner and asked for an
extended repayment schedule for the lease payment arrearage. The General Partner
is currently in negotiation with the lessee to work out a suitable settlement
for both parties to collect the two months lease payments that are overdue.
(3) Equipment Valuation
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the General Partner reviews the carrying value of the
Partnership's equipment portfolio at least quarterly in relation to expected
future market conditions for the purpose of assessing the recoverability of the
recorded amounts. If the projected undiscounted future lease revenue plus
residual values are less than the carrying value of the equipment, a loss on
revaluation is recorded. No reductions were required to the carrying value of
the equipment during 1998, 1997, or 1996.
As of December 31, 1998, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including the Partnership's
interest in equipment owned by USPEs, to be $90.8 million. This estimate is
based on recent market transactions for equipment similar to the Partnership's
equipment portfolio and the Partnership's interest in equipment owned by USPEs.
Ultimate realization of fair market value by the Partnership may differ
substantially from the estimate due to specific market conditions, technological
obsolescence, and government regulations, among other factors, that the General
Partner cannot accurately predict.
(C) Financial Condition - Capital Resources, Liquidity, and Unit
Redemption Plan
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering of $184.3 million and permanent
debt financing of $38.0 million. No further capital contributions from limited
partners are permitted under the terms of the Partnership's limited partnership
agreement. The Partnership relies on operating cash flow to meet its operating
obligations and make cash distributions to limited partners.
For the year ended December 31, 1998, the Partnership generated $16.2 million in
operating cash (net cash provided by operating activities plus non-liquidating
cash distributions from USPEs) to meet its operating obligations, make principal
debt payments, and pay distributions of $12.0 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 units will be equal to 110% of
the unrecovered principal attributed 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, 1998, the Partnership agreed to
purchase approximately 18,100 units for an aggregate price of $0.1 million. The
General Partner anticipates that these units will be repurchased in the first
and second quarters of 1999. In addition to these units, the General Partner may
purchase additional units on behalf of the Partnership in the future.
During 1998 the Partnership borrowed $1.0 million for 1 day, $0.5 million for 13
days and $0.5 million for 14 days from the General Partner. The General Partner
charged the Partnership market interest rates. Total interest paid to the
General Partner was $3,000.
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.
The General Partner had entered into a joint $50.0 million credit facility (the
Committed Bridge Facility) on behalf of the Partnership, PLM Equipment Growth
Fund VI, PLM Equipment Growth & Income Fund VII, Professional Lease Management
Income Fund I, all affiliated investment programs; American Finance Group,
Inc.(AFG), a subsidiary of PLM International, and TEC Acquisub, Inc., an
indirect wholly-owned subsidiary of the General Partner. The Committed Bridge
Facility was amended and restated on December 15, 1998, to remove the
Partnership and AFG as eligible borrowers.
(D) Results of Operations - Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1998 and 1997
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
decreased during the year ended December 31, 1998, when compared to the same
period of 1997. Gains or losses from the sale of equipment and certain expenses,
such as depreciation and amortization and general and administrative expenses
relating to the operating segments (see Note 5 to the audited financial
statements), are not included in the owned equipment operation discussion
because they are indirect in nature and not a result of operations, but the
result of owning a portfolio of equipment. The following table presents lease
revenues less direct expenses by segment (in thousands of dollars):
For the Years
Ended December 31,
1998 1997
----------------------------
Aircraft and aircraft engines $ 8,823 9,304
Marine vessels 2,777 2,650
Trailers 2,150 1,918
Rail equipment 1,928 2,062
Marine containers 1,206 2,057
Aircraft and aircraft engines: Aircraft lease revenues and direct expenses were
$8.9 million and $0.1 million, respectively, for the year ended December 31,
1998, compared to $9.4 million and $0.1 million, respectively, during the same
period of 1997. The decrease in aircraft contribution was due to the sale of two
commuter aircraft and an aircraft engine during 1997.
Marine vessels: Marine vessel lease revenues and direct expenses were $7.5
million and $4.7 million, respectively, for the year ended December 31, 1998,
compared to $12.8 million and $10.1 million, respectively, during the same
period of 1997. The decrease in marine vessel lease revenues was due to the sale
of two marine vessels during the fourth quarter of 1997 offset in part, by the
purchase of an additional marine vessel during March 1998. Marine vessel direct
operating expenses also decreased, a direct result of the sale of two marine
vessels. Overall, marine vessel contribution increased as a result of the
purchase of the marine vessel which is operating under a bareboat charter and
the receipt of a $0.3 million loss-of-hire insurance refund from Transportation
Equipment Indemnity Company, Ltd., an affiliate of the General Partner, due to
lower claims from the insured Partnership and other insured affiliated
partnerships.
Trailers: Trailer lease revenues and direct expenses were $2.8 million and $0.7
million, respectively, for the year ended December 31, 1998, compared to $2.8
million and $0.8 million, respectively, during the same period of 1997. The
trailer contribution increased during 1998 due to fewer maintenance repairs
needed to trailers in the PLM affiliated rental yards, when compared to 1997.
Rail equipment: Rail equipment lease revenues and direct expenses were $2.5
million and $0.6 million, respectively, for the year ended December 31, 1998,
compared to $2.5 million and $0.5 million, respectively, during the same period
of 1997. The decrease in railcar contribution was due to required repairs to
certain railcars during 1998 that were not needed during 1997.
Marine containers: Marine container lease revenues and direct expenses were $1.2
million and $10,000, respectively, for the year ended December 31, 1998,
compared to $2.1 million and $17,000, respectively, during the same period of
1997. The number of marine containers owned by the Partnership has been
declining over the past two years due to sales and dispositions. The result of
this declining fleet has been a decrease in marine container contribution.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $15.9 million for the year ended December 31, 1998
decreased from $21.4 million for the same period in 1997. Significant variances
are explained as follows:
(i) A $4.5 million decrease in depreciation and amortization expense from
1997 levels was caused primarily by the sale of two marine vessels and two
commuter aircraft during 1997 and equipment sales during 1998, along with the
double-declining balance method of depreciation which results in greater
depreciation in the first years an asset is owned. These decreases were
partially offset by the purchase of a marine vessel during the first quarter of
1998.
(ii) A $0.6 million decrease in interest expense was due to a lower average
outstanding debt balance when compared to the same period of 1997.
(iii) A $0.3 million decrease in management fees to affiliate was due to
lower lease revenues.
(iv) A $0.2 million decrease in administrative expenses was due to lower
costs for professional services needed to collect past-due receivables due from
certain nonperforming lessees and lower costs associated with the Partnership
trailers at the PLM-affiliated short-term rental yards.
(v) A $0.1 million increase in bad debt expenses was due to the General
Partner's evaluation of the collectibility of receivables due from certain
lessees.
(c) Net Gain on Disposition of Owned Equipment
The net gain on the disposition of equipment for the year ended December 31,
1998 totaled $0.8 million, which resulted from the sale of marine containers,
railcars, and trailers, with an aggregate net book value of $1.7 million, for
proceeds of $2.5 million. The net gain on the disposition of equipment for 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.
(d) Interest and Other Income
Interest and other income decreased $0.2 million for the year ended December 31,
1998, when compared to the same period of 1997. A decrease of $0.3 million in
other income was due to the repossession of the aircraft that was on a direct
finance lease during 1997 (see Note 7 to the audited financial statements). This
decrease was offset, in part, by an increase of $0.1 million in interest income
due to higher average cash balances available for investment in 1998 when
compared to 1997.
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
(USPEs)
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Years
Ended December 31,
1998 1997
-----------------------------
Aircraft, rotable components, and aircraft engines $ 386 $ 1,215
Marine vessels (152 ) (1,479 )
=================================================================================== ===========
Equity in net income (loss) of USPEs $ 234 $ (264 )
=================================================================================== ===========
Aircraft, rotable components, and aircraft engines: As of December 31, 1998 and
1997, the Partnership had an interest in two trusts that own a total of three
commercial aircraft, two aircraft engines, and a portfolio of aircraft rotables,
and also had an interest in an entity owning two commercial aircraft on a direct
finance lease. During the year ended December 31, 1998, revenues of $1.2 million
were offset by depreciation expense, direct expenses, and administrative
expenses of $0.8 million. During the same period of 1997, lease revenues of $2.3
million were offset by depreciation expense, direct expenses, and administrative
expenses of $1.0 million. The decrease in lease revenues is due to the renewal
of the leases for three commercial aircraft, two aircraft engines, and a
portfolio of aircraft rotables at lower rates than were in place during the same
period of 1997. The decrease in depreciation expense, when compared to the same
period of 1997, was due to the double-declining balance method of depreciation,
which results in greater depreciation in the first years an asset is owned.
Marine vessels: As of December 31, 1998 and 1997, the Partnership owned an
interest in three marine vessels. During the year ended December 31, 1998, lease
revenues of $6.4 million were offset by depreciation expense, direct expenses,
and administrative expenses of $6.6 million. During the same period of 1997,
lease revenues of $4.2 million were offset by depreciation expense, direct
expenses, and administrative expenses of $5.7 million. The primary reason for
the increase in lease revenues and depreciation expense, direct expenses, and
administrative expenses during 1998 was the purchase of an interest in an entity
that owns a marine vessel during the third quarter of 1997.
(f) Net Income
As a result of the foregoing, the Partnership's net income for the year ended
December 31, 1998 was $2.4 million, compared to a net income of $7.9 million
during the same period in 1997. The Partnership's ability to operate assets,
liquidate assets, and re-lease those assets whose leases expire is subject to
many factors, and the Partnership's performance during the year ended December
31, 1998 is not necessarily indicative of future periods. In the year ended
December 31, 1998, the Partnership distributed $11.4 million to the limited
partners, or $1.26 per weighted-average limited partnership unit.
(2) 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. Gains or losses from the sale of equipment and certain expenses,
such as depreciation and amortization and general and administrative expenses
relating to the operating segments (see Note 5 to the audited financial
statements), are not included in the owned equipment operation discussion
because they are indirect in nature and not a result of operations, but the
result of owning a portfolio of equipment. The following table presents lease
revenues less direct expenses by segment (in thousands of dollars):
For the Years Ended
December 31,
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,
marine vessel 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 7
to the audited financial statements).
(e) Equity in Net Income (Loss) of USPEs
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Years Ended
December 31,
1997 1996
-------------------------------
Aircraft, rotable components, and aircraft engines $ 1,215 $ (265 )
Marine vessels (1,479 ) 149
=================================================================================== ============
Equity in net lossof USPEs $ (264 ) $ (116 )
=================================================================================== ============
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 audited 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 expense,
direct expenses, and administrative expenses of $1.0 million. During 1996,
revenues of $3.3 million were offset by depreciation expense, direct expenses,
and administrative expenses of $3.5 million. The decrease in revenues and
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 expense, direct expenses, and administrative
expenses of $5.7 million. During the same period of 1996, lease revenues of $3.9
million were offset by depreciation expense, direct expenses, and administrative
expenses of $3.7 million. The primary reason for the increase in revenues and
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 year 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.
(E) Geographic Information
Certain of the Partnership's equipment operates in international markets.
Although these operations expose the Partnership to certain currency, political,
credit, and economic risks, the General Partner believes these risks are minimal
or has implemented strategies to control the risks. Currency risks are at a
minimum because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
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 U.S. banks to cash deposits. Although
these credit support mechanisms generally allow the Partnership to maintain its
lease yield, there are risks associated with slow-to-respond judicial systems
when legal remedies are required to secure payment or repossess equipment.
Economic risks are inherent in all international markets, and the General
Partner strives to minimize this risk with market analysis prior to committing
equipment to a particular geographic area. Refer to Note 6 to the audited
financial statements for information on the lease revenues, net income (loss),
and net book value of equipment in various geographic regions.
Revenues and net operating income by geographic region are impacted by the time
period the 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 1998, U.S. lease revenues accounted for
23% of the total lease revenues of wholly- and partially-owned equipment while
net income accounted for $2.2 million of the total aggregate net income for the
Partnership of $2.4 million. The primary reason for this is that a large gain
was realized from the sale of assets in the United States.
The Partnership's owned equipment on lease to Canadian-domiciled lessees
consists of railcars and aircraft. During 1998, Canadian lease revenues
accounted for 14% of the total lease revenues of wholly- and partially-owned
equipment, and recorded net income of $1.6 million, compared to the total
aggregate net income for the Partnership of $2.4 million.
The Partnership's owned aircraft on lease to a South American-domiciled lessee
during 1998 accounted for 10% of the total lease revenues of wholly- and
partially-owned equipment, and recorded a net loss of $0.5 million, compared to
the total aggregate net income for the Partnership of $2.4 million.
The Partnership's ownership share of equipment owned by USPEs on lease to a
Mexican-domiciled lessee consisted of aircraft on a direct finance lease and
recorded a net income of $0.4 million of the Partnership's total aggregate net
income of $2.4 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 3% of lease revenues of wholly and partially owned
equipment and $39,000 of the Partnership's total aggregate net income of $2.4
million.
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 1998, lease revenues for these lessees accounted for 50% of
the total lease revenues of wholly- and partially-owned equipment and recorded a
net income of $1.4 million, compared to the total aggregate net income for the
Partnership of $2.4 million.
(F) Effects of Year 2000
It is possible that the General Partner's currently installed computer systems,
software products, and other business systems, or the Partnership's vendors,
service providers, and customers, working either alone or in conjunction with
other software or systems, may not accept input of, store, manipulate, and
output dates on or after January 1, 2000 without error or interruption (a
problem commonly known as the "Year 2000" or "Y2K" problem). Since the
Partnership relies substantially on the General Partner's software systems,
applications, and control devices in operating and monitoring significant
aspects of its business, any Year 2000 problem suffered by the General Partner
could have a material adverse effect on the Partnership's business, financial
condition, and results of operations.
The General Partner has established a special Year 2000 oversight committee to
review the impact of Year 2000 issues on its software products and other
business systems in order to determine whether such systems will retain
functionality after December 31, 1999. The General Partner (a) is currently
integrating Year 2000-compliant programming code into its existing internally
customized and internally developed transaction processing software systems and
(b) the General Partner's accounting and asset management software systems have
either already been made Year 2000-compliant or Year 2000-compliant upgrades of
such systems are planned to be implemented by the General Partner before the end
of fiscal 1999. Although the General Partner believes that its Year 2000
compliance program can be completed by the end of 1999, there can be no
assurance that the compliance program will be completed by that date. To date,
the costs incurred and allocated to the Partnership to become Year 2000
compliant have not been material. Also, the General Partner believes the future
cost allocable to the Partnership to become Year 2000 compliant will not be
material.
It is possible that certain of the Partnership's equipment lease portfolio may
not be Year 2000 compliant. The General Partner is currently contacting
equipment manufacturers of the Partnership's leased equipment portfolio to
assure Year 2000 compliance or to develop remediation strategies. The General
Partner does not expect that non-Year 2000 compliance of its leased equipment
portfolio will have an adverse material impact on its financial statements.
Some risks associated with the Year 2000 problem are beyond the ability of the
Partnership or the General Partner to control, including the extent to which
third parties can address the Year 2000 problem. The General Partner is
communicating with vendors, services providers, and customers in order to assess
the Year 2000 compliance readiness of such parties and the extent to which the
Partnership is vulnerable to any third-party Year 2000 issues. There can be no
assurance that the software systems of such parties will be converted or made
Year 2000 compliant in a timely manner. Any failure by the General Partner or
such other parties to make their respective systems Year 2000 compliant could
have a material adverse effect on the business, financial position, and results
of operations from the Partnership. The General Partner will make an ongoing
effort to recognize and evaluate potential exposure relating to third-party Year
2000 noncompliance, and will develop a contingency plan if the General Partner
determines that third-party noncompliance will have a material adverse effect on
the Partnership's business, financial position, or results of operation.
The General Partner is currently developing a contingency plan to address the
possible failure of any systems due to the Year 2000 problems. The General
Partner anticipates these plans will be completed by September 30, 1999.
(G) Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of December 31, 1998,
the General Partner is reviewing the effect this standard will have on the
Partnership's consolidated financial statements.
(H) Inflation
Inflation had no significant impact on the Partnership's operations during 1998,
1997, or 1996.
(I) Forward-Looking Information
Except for historical information contained herein, the discussion in this Form
10-K contains forward-looking statements that involve risks and uncertainties,
such as statements of the Partnership's plans, objectives, expectations, and
intentions. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.
(J) Outlook for the Future
Since the Partnership is in its holding or passive liquidation phase, the
General Partner will be seeking to selectively re-lease or sell assets as the
existing leases expire. Sale decisions will cause the operating performance of
the Partnership to decline over the remainder of its life.
Several factors may affect the Partnership's operating performance in 1999 and
beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
The Partnership's operation of a diversified equipment portfolio in a broad base
of markets is intended to reduce its exposure to volatility in individual
equipment sectors.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent on many factors, such
as specific market conditions and economic activity, technological obsolescence,
and government or other regulations. The unpredictability of 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.
The Partnership intends to use cash flow from operations to satisfy its
operating requirements, pay principal and interest on debt, and pay cash
distributions to the partners.
(1) Repricing Risk
Certain portions of the Partnership's aircraft, railcar, marine container,
marine vessel, and trailer portfolios will be remarketed in 1999 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. 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 U.S. ports,
resulting from implementation of the U. S. Oil Pollution Act of 1990. Ongoing
changes in the regulatory environment, both in the United States and
internationally, cannot be predicted with accuracy, and preclude the General
Partner from determining the impact of such changes on Partnership operations or
sale of equipment. Under U.S. Federal Aviation Regulations, after December 31,
1999, no person may operate an aircraft to or from any airport in the contiguous
United States unless that aircraft has been shown to comply with Stage III noise
levels. The Partnership's Stage II aircraft are scheduled to be either modified
to meet Stage III requirements, sold, or re-leased in countries that do not
require this regulation before the year 2000.
(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 commenced 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 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.
The Partnership's permanent debt obligation began to mature in February 1997.
The General Partner believes that sufficient cash flow from operations and
equipment sales will be available in the future for repayment of debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of interest rate and
currency risk. The Partnership's senior secured note is a variable rate debt.
The Partnership estimates a one percent increase or decrease in the
Partnership's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $0.2 million in 1999, $0.1 million in 2000,
and $39,000 in 2001. The Partnership estimates a two percent increase or
decrease in the Partnership's variable rate debt would result in an increase or
decrease, respectively, in interest expense of $0.4 million in 1999, $0.2
million in 2000, and $0.1 million in 2001.
During 1998, 76% of the Partnership's total lease revenues from wholly- and
partially-owned equipment came from non-United States domiciled lessees. Most of
the Partnership's leases require payment in United States (U.S.) currency. If
these lessees currency devalues against the U.S. dollar, the lessees could
potentially encounter difficulty in making the U.S. dollar denominated lease
payments.
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 of PLM Financial Services, Inc. (and key executive
officers of its subsidiaries) are as follows:
Name Age Position
- - ---------------------------------------- ------- -------------------------------------------------------------------
Robert N. Tidball 60 Chairman of the Board, Director, President, and Chief Executive
Officer, PLM International, Inc.;
Director, PLM Financial Services, Inc.;
Vice President, PLM Railcar Management Services, Inc.; President,
PLM Worldwide Management Services Ltd.
Randall L.-W. Caudill 51 Director, PLM International, Inc.
Douglas P. Goodrich 52 Director and Senior Vice President, PLM International, Inc.;
Director and President, PLM Financial Services, Inc.; President,
PLM Transportation Equipment Corporation; President, PLM Railcar
Management Services, Inc.
Warren G. Lichtenstein 33 Director, PLM International, Inc.
Howard M. Lorber 50 Director, PLM International, Inc.
Harold R. Somerset 63 Director, PLM International, Inc.
Robert L. Witt 58 Director, PLM International, Inc.
J. Michael Allgood 50 Vice President and Chief Financial Officer, PLM International,
Inc. and PLM Financial Services, Inc.
Robin L. Austin 52 Vice President, Human Resources, PLM International, Inc. and PLM
Financial Services, Inc.
Stephen M. Bess 52 President, PLM Investment Management, Inc.; Vice President and
Director, PLM Financial Services, Inc.
Richard K Brock 36 Vice President and Corporate Controller, PLM International, Inc.
and PLM Financial Services, Inc.
James C. Chandler 50 Vice President, Planning and Development, PLM International, Inc.
and PLM Financial Services, Inc.
Susan C. Santo 36 Vice President, Secretary, and General Counsel, PLM
International, Inc. and PLM Financial Services, Inc.
Janet M. Turner 42 Vice President, Investor Relations and Corporate Communications,
PLM International, Inc. and PLM Investment Management, Inc.
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment as President and Chief Executive Officer, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989. Mr. Tidball was appointed a Director of PLM
Financial Services, Inc. in July 1997 and was elected President of PLM Worldwide
Management Services Limited in February 1998. He has served as an officer of PLM
Railcar Management Services, Inc. since June 1987. Mr. Tidball was Executive
Vice President of Hunter Keith, Inc., a Minneapolis-based investment banking
firm, from March 1984 to January 1986. Prior to Hunter Keith, he was Vice
President, General Manager, and Director of North American Car Corporation and a
director of the American Railcar Institute and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997.
He is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm serving emerging growth companies. Prior to founding
Dunsford Hill Capital Partners, Mr. Caudill held senior investment banking
positions at Prudential Securities, Morgan Grenfell Inc., and The First Boston
Corporation. Mr. Caudill also serves as a director of Northwest Biotherapeutics,
Inc., VaxGen, Inc., SBE, Inc., and RamGen, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Senior Vice President of PLM International in March 1994, and
appointed Director and President of PLM Financial Services, Inc. in June 1996.
Mr. Goodrich has also served as Senior Vice President of PLM Transportation
Equipment Corporation since July 1989 and as President of PLM Railcar Management
Services, Inc. since September 1992, having been a Senior Vice President since
June 1987. Mr. Goodrich was an executive vice president of G.I.C. Financial
Services Corporation of Chicago, Illinois, a subsidiary of Guardian Industries
Corporation, from December 1980 to September 1985.
Warren G. Lichtenstein was elected to the Board of Directors in December 1998.
Mr. Lichtenstein is the Chief Executive Officer of Steel Partners II, L.P.,
which is PLM International's largest shareholder, currently owning 16% of the
Company's common stock. Additionally, Mr. Lichtenstein is Chairman of the Board
of Aydin Corporation, a NYSE-listed defense electronics concern, as well as a
director of Gateway Industries, Rose's Holdings, Inc., and Saratoga Beverage
Group, Inc. Mr. Lichtenstein is a graduate of the University of Pennsylvania,
where he received a Bachelor of Arts degree in economics.
Howard M. Lorber was elected to the Board of Directors in January 1999. Mr.
Lorber is President and Chief Operating Officer of New Valley Corporation, an
investment banking and real estate concern. He is also Chairman of the Board and
Chief Executive Officer of Nathan's Famous, Inc., a fast food company.
Additionally, Mr. Lorber is a director of United Capital Corporation and Prime
Hospitality Corporation and serves on the boards of several community service
organizations. He is a graduate of Long Island University, where he received a
Bachelor of Arts degree and a Masters degree in taxation. Mr. Lorber also
received charter life underwriter and chartered financial consultant degrees
from the American College in Bryn Mawr, Pennsylvania. He is a trustee of Long
Island University and a member of the Corporation of Babson College.
Harold R. Somerset was elected to the Board of Directors of PLM International in
July 1994. From February 1988 to December 1993, Mr. Somerset was President and
Chief Executive Officer of California & Hawaiian Sugar Corporation (C&H Sugar),
a subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined C&H Sugar in 1984
as Executive Vice President and Chief Operating Officer, having served on its
Board of Directors since 1978. Between 1972 and 1984, Mr. Somerset served in
various capacities with Alexander & Baldwin, Inc., a publicly held land and
agriculture company headquartered in Honolulu, Hawaii, including Executive Vice
President of Agriculture and Vice President and General Counsel. Mr. Somerset
holds a law degree from Harvard Law School as well as a degree in civil
engineering from the Rensselaer Polytechnic Institute and a degree in marine
engineering from the U.S. Naval Academy. Mr. Somerset also serves on the boards
of directors for various other companies and organizations, including Longs Drug
Stores, Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993,
Mr. Witt has been a principal with WWS Associates, a consulting and investment
group specializing in start-up situations and private organizations about to go
public. Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel Corporation, an international advanced materials company with sales
primarily in the aerospace, transportation, and general industrial markets. Mr.
Witt also serves on the boards of directors for various other companies and
organizations.
J. Michael Allgood was appointed Vice President and Chief Financial Officer of
PLM International in October 1992 and Vice President and Chief Financial Officer
of PLM Financial Services, Inc. in December 1992. Between July 1991 and October
1992, Mr. Allgood was a consultant to various private and public-sector
companies and institutions specializing in financial operations systems
development. In October 1987, Mr. Allgood co-founded Electra Aviation Limited
and its holding company, Aviation Holdings Plc of London, where he served as
Chief Financial Officer until July 1991. Between June 1981 and October 1987, Mr.
Allgood served as a first vice president with American Express Bank Ltd. In
February 1978, Mr. Allgood founded and until June 1981 served as a director of
Trade Projects International/Philadelphia Overseas Finance Company, a joint
venture with Philadelphia National Bank. From March 1975 to February 1978, Mr.
Allgood served in various capacities with Citibank, N.A.
Robin L. Austin became Vice President, Human Resources of PLM Financial
Services, Inc. in 1984, having served in various capacities with PLM Investment
Management, Inc., including Director of Operations, from February 1980 to March
1984. From June 1970 to September 1978, Ms. Austin served on active duty in the
United States Marine Corps and served in the United States Marine Corp Reserves
from 1978 to 1998. She retired as a Colonel of the United States Marine Corps
Reserves in 1998. Ms. Austin has served on the Board of Directors of the
Marines' Memorial Club and is currently on the Board of Directors of the
International Diplomacy Council.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Investment Management, Inc. in
August 1989, having served as Senior Vice President of PLM Investment
Management, Inc. beginning in February 1984 and as Corporate Controller of PLM
Financial Services, Inc. beginning in October 1983. Mr. Bess served as Corporate
Controller of PLM, Inc. beginning in December 1982. Mr. Bess was Vice
President-Controller of Trans Ocean Leasing Corporation, a container leasing
company, from November 1978 to November 1982, and Group Finance Manager with the
Field Operations Group of Memorex Corporation, a manufacturer of computer
peripheral equipment, from October 1975 to November 1978.
Richard K Brock was appointed Vice President and Corporate Controller of PLM
International and PLM Financial Services, Inc. in June 1997, having served as an
accounting manager beginning in September 1991 and as Director of Planning and
General Accounting beginning in February 1994. Mr. Brock was a division
controller of Learning Tree International, a technical education company, from
February 1988 through July 1991.
James C. Chandler became Vice President, Planning and Development of PLM
International in April 1996. From 1994 to 1996 Mr. Chandler worked as a
consultant to public companies, including PLM, in the formulation of business
growth strategies. Mr. Chandler was Director of Business Development at Itel
Corporation from 1987 to 1994, serving with both the Itel Transportation Group
and Itel Rail.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM
International and PLM Financial Services, Inc. in November 1997. She has worked
as an attorney for PLM International since 1990 and served as its Senior
Attorney since 1994. Previously, Ms. Santo was engaged in the private practice
of law in San Francisco. Ms. Santo received her J.D. from the University of
California, Hastings College of the Law.
Janet M. Turner became Vice President of Investor Services of PLM International
in 1994, having previously served as Vice President of PLM Investment
Management, Inc. since 1990. Before 1990, Ms. Turner held the positions of
manager of systems development and manager of investor relations at the Company.
Prior to joining PLM in 1984, she was a financial analyst with The
Toronto-Dominion Bank in Toronto, Canada.
The directors of PLM International, Inc. are elected for a three-year term and
the directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM International Inc. or PLM
Financial Services, Inc., PLM Transportation Equipment Corp., or PLM Investment
Management, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership had no
pension, profit sharing, retirement, or similar benefit plan in effect as of
December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 5% interest in the
profits and losses (subject to certain special allocations of income),
cash available for distributions, and net disposition proceeds of the
Partnership. As of December 31, 1998, no investor was known by the
General Partner to beneficially own more than 5% of the limited
partnership units of the Partnership.
(B) Security Ownership of Management
Neither the General Partner and its affiliates nor any officer or
director of the General Partner and its affiliates own any limited
partnership units of the Partnership as of December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
During 1998, the Partnership paid or accrued the following fees to FSI
or its affiliates: management fees, $1.1 million, equipment acquisition
fees, $0.5 million; lease negotiation fees, $0.1 million, and
administrative and data processing services performed on behalf of the
Partnership, $1.0 million. The Partnership paid $0.1 million to
Transportation Equipment Indemnity Company Ltd. (TEI), a wholly-owned,
Bermuda-based subsidiary of PLM International, for insurance coverages
during 1998; these amounts were paid substantially to third-party
reinsurance underwriters or from risk pools managed by TEI on behalf of
affiliated programs and PLM International, which provide threshold
coverages on marine vessel loss of hire and hull and machinery damage.
All pooling arrangement funds are either paid out to cover applicable
losses or refunded pro rata by TEI. During 1998, the Partnership
received a loss-of-hire insurance refund from TEI of $0.3 million due
to lower claims from the insured Partnership and other insured
affiliated programs for insurance coverages during previous years.
During 1998, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Partnership's proportional share of
ownership): management fees, $0.4 million; and administrative and data
processing services, $0.1 million. The USPEs paid $47,000 to TEI and
also received a refund from TEI of $0.1 million for loss-of-hire
insurance coverages during 1998.
(This space intentionally left blank.)
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 18, 1997.
10.3 Amendment No. 1 to the Amended and Restated $38,000,000 Loan
Agreement, dated as of December 29, 1997. Incorporated by
reference to the Partnership's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1998.
24. Powers of Attorney.
(This space intentionally left blank.)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on
behalf of the Partnership by duly authorized officers.
Dated: March 17, 1999 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 17, 1999
*_________________
Douglas P. Goodrich Director, FSI March 17, 1999
*__________________
Stephen M. Bess Director, FSI March 17, 1999
*Susan Santo, by signing her name hereto, does sign this document on behalf of
the persons indicated above pursuant to powers of attorney duly executed by such
persons and filed with the Securities and Exchange Commission.
/s/ Susan C. Santo
- - -----------------------
Susan C. Santo
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' report 32
Balance sheets as of December 31, 1998 and 1997 33
Statements of income for the years ended
December 31, 1998, 1997, and 1996 34
Statements of changes in partners' capital for the
years ended December 31, 1998, 1997, and 1996 35
Statements of cash flows for the years ended
December 31, 1998, 1997, and 1996 36
Notes to financial statements 37-49
All other financial statement schedules have been omitted, as the required
information is not pertinent to the Registrant or is not material, or because
the information required is included in the financial statements and notes
thereto.
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth Fund V:
We have audited the accompanying financial statements of PLM Equipment Growth
Fund V (the Partnership), as listed in the accompanying index to financial
statements. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1998 and 1997 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/S/ KPMG LLP
- - --------------------------
SAN FRANCISCO, CALIFORNIA
March 12, 1999
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
1998 1997
-----------------------------------
Assets
Equipment held for operating leases, at cost $ 109,515 $ 104,902
Less accumulated depreciation (68,711 ) (62,320 )
-----------------------------------
Net equipment 40,804 42,582
Cash and cash equivalents 1,774 9,884
Restricted cash 108 111
Accounts receivable, less allowance for doubtful accounts of
$77 in 1998 and $113 in 1997 3,188 3,229
Investments in unconsolidated special-purpose entities 15,144 22,758
Lease negotiation fees to affiliate, less accumulated
amortization of $293 in 1998 and $325 in 1997 119 156
Debt issuance costs, less accumulated amortization
of $405 in 1998 and $331 in 1997 118 192
Debt placement fees to affiliate, less accumulated
amortization of $340 in 1998 and $292 in 1997 40 87
Prepaid expenses and other assets 81 114
Equipment acquisition deposits -- 920
-----------------------------------
Total assets $ 61,376 $ 80,033
===================================
Liabilities and partners' capital
Liabilities
Accounts payable and accrued expenses $ 593 $ 1,826
Due to affiliates 339 477
Lessee deposits and reserve for repairs 2,450 1,644
Note payable 23,588 32,000
-----------------------------------
Total liabilities 26,970 35,947
-----------------------------------
Partners' capital
Limited partners (limited partnership units of 9,081,028 and
9,086,608 as of December 31, 1998 and 1997, respectively) 34,406 44,086
General Partner -- --
-----------------------------------
Total partners' capital 34,406 44,086
-----------------------------------
Total liabilities and partners' capital $ 61,376 $ 80,033
===================================
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)
1998 1997 1996
-------------------------------------------
Revenues
Lease revenue $ 22,911 $ 29,493 $ 28,763
Interest and other income 404 640 1,360
Net gain on disposition of equipment 814 10,990 14,199
-------------------------------------------
Total revenues 24,129 41,123 44,322
-------------------------------------------
Expenses
Depreciation and amortization 11,237 15,693 14,941
Repairs and maintenance 2,278 2,690 2,843
Equipment operating expenses 3,763 6,088 6,016
Insurance expense to affiliate (214 ) 838 768
Other insurance expenses 259 1,933 985
Management fees to affiliate 1,133 1,480 1,458
Interest expense 1,950 2,593 2,789
General and administrative expenses to affiliates 974 981 838
Other general and administrative expenses 586 731 903
Provision for (recovery of) bad debts 27 (89 ) 224
-------------------------------------------
Total expenses 21,993 32,938 31,765
-------------------------------------------
Equity in net income (loss) of unconsolidated
special-purpose entities 234 (264 ) (116 )
------------------------------------------------------------------------------------------------------------------
Net income $ 2,370 $ 7,921 $ 12,441
===========================================
Partners' share of net income
Limited partners $ 1,796 $ 7,154 $ 11,524
General Partner 574 767 917
-------------------------------------------
Total $ 2,370 $ 7,921 $ 12,441
===========================================
Net income per weighted-average limited partnership unit $ 0.20 $ 0.79 $ 1.26
===========================================
Cash distribution $ 12,008 $ 15,346 $ 18,083
===========================================
Cash distribution per weighted-average limited
partnership unit $ 1.26 $ 1.60 $ 1.87
===========================================
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,
(in thousands of dollars)
Limited General
Partners Partner Total
---------------------------------------------------
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
Net income 1,796 574 2,370
Repurchase of limited partnership units (42 ) -- (42 )
Cash distribution (11,434 ) (574 ) (12,008 )
---------------------------------------------------
Partners' capital as of December 31, 1998 $ 34,406 $ -- $ 34,406
========================================================================================================
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)
1998 1997 1996
-----------------------------------------------
Operating activities
Net income $ 2,370 $ 7,921 $ 12,441
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,237 15,693 14,941
Net gain on disposition of equipment (814 ) (10,990 ) (14,199 )
Equity in net (income) loss of unconsolidated
special-purpose entities (234 ) 264 116
Changes in operating assets and liabilities:
Restricted cash 3 442 (330 )
Accounts and note receivable, net 40 (374 ) (455 )
Prepaid expenses and other assets 33 443 (364 )
Accounts payable and accrued expenses (1,233 ) 766 (294 )
Due to affiliates (138 ) (222 ) (414 )
Lessee deposits and reserve for repairs 806 (1,438 ) 285
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,070 12,505 11,727
---------------------------------------------
Investing activities
Proceeds from disposition of equipment 2,488 25,831 29,992
Payments for purchase of equipment and capitalized repairs (9,482 ) (165 ) (21,378 )
Payments for equipment acquisition deposits -- (920 ) --
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 4,124 3,018 4,348
Distributions from liquidation of unconsolidated
special-purpose entities 3,724 -- --
Payments of acquisition fees to affiliate (468 ) -- (936 )
Payments of lease negotiation fees to affiliate (104 ) -- (214 )
---------------------------------------------
Net cash provided by investing activities 282 17,311 3,187
---------------------------------------------
Financing activities
Proceeds from short-term note payable 3,950 9,110 8,073
Payments of short-term note payable (3,950 ) (11,573 ) (5,610 )
Payments of note payable (8,412 ) (6,000 ) --
Proceeds from short-term loan from affiliate 1,981 1,610 --
Payment of short-term loan to affiliate (1,981 ) (1,610 ) --
Cash distribution paid to General Partner (574 ) (767 ) (917 )
Cash distribution paid to limited partners (11,434 ) (14,579 ) (17,166 )
Payment for loan costs -- -- (136 )
Repurchase of limited partnership units (42 ) (785 ) (79 )
---------------------------------------------
Net cash used in financing activities (20,462 ) (24,594 ) (15,835 )
---------------------------------------------
Net (decrease) increase in cash and cash equivalents (8,110 ) 5,222 (921 )
Cash and cash equivalents at beginning of year 9,884 4,662 5,583
---------------------------------------------
Cash and cash equivalents at end of year $ 1,774 $ 9,884 $ 4,662
=============================================
Supplemental information
Interest paid $ 2,047 $ 2,843 $ 2,815
=============================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation
Organization
PLM Equipment Growth Fund V, a California limited partnership (the
Partnership), was formed on November 14, 1989 to engage in the business of
owning, leasing, or otherwise investing in predominately used
transportation and related equipment. PLM Financial Services, Inc. (FSI) is
the General Partner of the Partnership. FSI is a wholly-owned subsidiary of
PLM International, Inc. (PLM International).
Beginning in the Partnership's seventh year of operations, which commenced
on January 1, 1999, the General Partner stopped reinvesting excess cash.
Surplus cash, 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 Partnership will be terminated by December 31,
2010, unless terminated earlier upon sale of all equipment or by certain
other events.
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, subject to certain special
allocations (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, 1998, 1997, and 1996, the
Partnership had repurchased 5,580, 82,411 and 6,925 limited partnership
units for $42,000, $0.8 million, and $0.1 million, respectively.
As of December 31, 1998, the Partnership agreed to repurchase approximately
18,100 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 1999. In addition to these units, 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, 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 equipment to investor programs and
third parties, manages pools of equipment under agreements with the
investor programs, and is a general partner of other programs.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Accounting for Leases
The Partnership's leasing operations generally consist of operating leases.
Under the operating lease method of accounting, the leased asset is
recorded at cost and depreciated over its estimated useful life. Rental
payments are recorded as revenue over the lease term. Lease origination
costs 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 Financial
Accounting Standards Board Statement No. 13, "Accounting for Leases".
Depreciation and Amortization
Depreciation of transportation equipment, held for operating leases, is
computed on the double-declining balance method, taking a full month's
depreciation in the month of acquisition, based upon estimated useful lives
of 15 years for railcars and typically 12 years for most other types of
equipment. The depreciation method changes to straight-line when annual
depreciation expense using the straight-line method exceeds that calculated
by the double-declining balance method. Acquisition fees and certain other
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 (see Note 8). Major expenditures that are expected to extend the
useful lives or reduce future operating expenses of equipment are
capitalized and amortized over the remaining life of the equipment.
Transportation Equipment
In accordance with the Financial Accounting Standards Board's Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the General Partner reviews the carrying value
of the Partnership's equipment at least quarterly in relation to expected
future market conditions for the purpose of assessing recoverability of the
recorded amounts. If projected undiscounted future lease revenue plus
residual values are less than the carrying value of the equipment, a loss
on revaluation is recorded. No reductions to the carrying value of
equipment were required during either 1998, 1997, or 1996.
Equipment held for operating leases is stated at cost.
Investments in Unconsolidated Special-Purpose Entities
The Partnership has interests in unconsolidated special-purpose entities
(USPEs) that own transportation equipment. These interests are accounted
for using the equity method.
The Partnership's investment in USPEs includes acquisition and lease
negotiation fees paid by the Partnership to PLM Transportation Equipment
Corporation (TEC) and PLM Worldwide Management Services (WMS). TEC is a
wholly-owned subsidiary of FSI and WMS is a wholly-owned subsidiary of PLM
International. The Partnership's interest in USPEs are managed by IMI. The
Partnership's equity interest in the net income (loss) of USPEs is
reflected net of management fees paid or payable to IMI and the
amortization of acquisition and lease negotiation fees paid to TEC and WMS.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Repairs and Maintenance
Repair and maintenance costs related to marine vessels, railcars, and trailers
are usually the obligation of the Partnership. Maintenance costs of most of
the other equipment are the obligation of the lessee. If they are not
covered by the lessee, they are generally charged against operations as
incurred. To meet the maintenance requirements of certain aircraft
airframes and engines, reserve accounts are prefunded by the lessee.
Estimated costs associated with marine vessel drydocking are accrued and
charged to income ratably over the period prior to such drydocking. The
reserve accounts are included in the balance sheet as lessee deposits and
reserve for repairs.
Net Income (Loss) and Distributions Per Limited Partnership Unit
The net income (loss) of the Partnership is generally allocated 95% to the
limited partners and 5% to the General Partner. Special allocations of
income are made to the General Partner 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. Cash distributions of the Partnership are generally
allocated 95% to the limited partners and 5% to the General Partner and may
include amounts in excess of net income. The limited partners' net income
(loss) are allocated among the limited partners based on the number of
limited partnership units owned by each limited partner and on the number
of days of the year each limited partner is in the Partnership.
Cash distributions are recorded when paid. Monthly unitholders receive a
distribution check 15 days after the close of the previous month's business
and quarterly unitholders receive a distribution check 45 days after the
close of the quarter.
Cash distributions to investors in excess of net income are considered a
return of capital. Cash distributions to the limited partners of $9.6
million, $7.4 million, and $5.6 million in 1998, 1997, and 1996,
respectively, were deemed to be a return of capital.
Cash distributions related to the fourth quarter of 1998 of $1.4 million,
1997 and 1996 of $2.8 million for each year, were paid during the first
quarter of 1999, 1998, or 1997, respectively.
Net Income (Loss) Per Weighted-Average Partnership Unit
Net income (loss) per weighted-average Partnership unit was computed by
dividing net income (loss) attributable to limited partners by the
weighted-average number of Partnership units deemed outstanding during the
year. The weighted-average number of Partnership units deemed outstanding
during the years ended December 31, 1998, 1997, and 1996 was 9,082,093,
9,107,121, and 9,170,232, respectively.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of one year
or less as cash equivalents. The carrying amount of cash equivalents
approximates fair market value due to the short-term nature of the
investments.
Comprehensive Income
During 1998, the Partnership adopted Financial Accounting Standards Board's
Statement No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in
equity from nonowner sources. The Partnership's net income (loss) is equal
to comprehensive income for the years ended December 31, 1998, 1997, and
1996.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Restricted Cash
As of December 31, 1998 and 1997, restricted cash represented lessee
security deposits held by the Partnership.
2. General Partner and Transactions with Affiliates
An officer of PLM Securities Corp., a wholly-owned subsidiary of the
General Partner, contributed $100 of the Partnership's initial capital.
Under the equipment management agreement, IMI, subject to certain
reductions, receives a monthly management fee attributable either to 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, or (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 $0.2 million and $0.4 million were payable as of
December 31, 1998 and 1997, respectively. The Partnership's proportional
share of USPE management fee expense of $0.1 million were payable as of
December 31, 1998 and 1997. The Partnership's proportional share of USPE
management fee expense was $0.4 million, $0.3 million and $0.3 million
during 1998, 1997, and 1996, respectively. The Partnership reimbursed FSI
for data processing and administrative expenses directly attributable to
the Partnership in the amount of $1.0 million, $1.0 million, and $0.8
million during 1998, 1997, and 1996, respectively. The Partnership's
proportional share of USPE data processing and administrative expenses
reimbursed to FSI was $0.1 million during 1998, 1997, and 1996. Debt
placement fees were paid to FSI in an amount equal to 1% of the
Partnership's long-term borrowings.
The Partnership paid $0.1 million, $0.8 million, and $0.8 million in 1998,
1997, and 1996, 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 $47,000, $0.3 million, and $0.2 million during 1998, 1997, and
1996, respectively. A substantial portion of this amount was paid to
third-party reinsurance underwriters or placed in risk pools managed by TEI
on behalf of affiliated programs and PLM International, which provide
threshold coverages on marine vessel loss of hire and hull and machinery
damage. All pooling arrangement funds are either paid out to cover
applicable losses or refunded pro rata by TEI. Also, during 1998, the
Partnership and the USPEs received a $0.4 million loss-of-hire insurance
refund from TEI due to lower claims from the insured Partnership and other
insured affiliated programs. PLM International plans to liquidate TEI in
1999. During 1998, TEI did not provide the same level of insurance coverage
as had been provided during 1997 and 1996. These services were provided by
an unaffiliated third party.
The Partnership and the USPEs paid or accrued lease negotiation and
equipment acquisition fees of $0.6 million, $0.5 million, and $1.6 million
to TEC and WMS in 1998, 1997, and 1996, respectively.
As of December 31, 1998, approximately 67% of the Partnership's trailer
equipment was in rental facilities operated by PLM Rental, Inc., an
affiliate of the General Partner, doing business as PLM Trailer Leasing.
Revenues collected under short-term rental agreements with the rental
yards' customers are credited to the owners of the related equipment as
received. Direct expenses associated with the equipment are charged
directly to the Partnership. An allocation of indirect expenses of the
rental yard operations is charged to the Partnership monthly.
The Partnership owned certain equipment in conjunction with affiliated
programs during 1998, 1997, and 1996 (see Note 4).
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
2. General Partner and Transactions with Affiliates (continued)
The Partnership borrowed $2.0 million and $1.6 million from the General
Partner for a period of time during 1998 and 1997, respectively. The
General Partner charged the Partnership market interest rates for the time
the loan was outstanding. Total interest paid to the General Partner was
$3,000 and $10,000 during 1998 and 1997, respectively. There were no loans
made by the General Partner to the Partnership in 1996.
The balance due to affiliates as of December 31, 1998 included $0.2 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, 1997
included $0.4 million due to FSI and its affiliates for management fees and
$0.1 million due to affiliated USPEs.
3. Equipment
The components of owned equipment as of December 31 were as follows (in
thousands of dollars):
Equipment Held for Operating Leases 1998 1997
------------------------------------------------------ ------------------------------------
Aircraft and rotable components $ 51,090 $ 49,838
Marine vessels 25,890 16,276
Marine containers 11,842 17,592
Rail equipment 11,383 11,500
Trailers 9,310 9,696
------------------------------------
109,515 104,902
Less accumulated depreciation (68,711 ) (62,320 )
------------------------------------
====================================
Net equipment $ 40,804 $ 42,582
====================================
Revenues are earned by placing the equipment under operating leases. A
portion of the Partnership's marine containers is 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 railcars are based on mileage traveled
or a fixed rate; rents for all other equipment are based on fixed rates.
As of December 31, 1998, all owned equipment was on lease or operating in
PLM-affiliated short-term trailer rental yards except for 10 railcars with
a net book value of $0.1 million. As of December 31, 1997, all owned
equipment was on lease or operating in PLM-affiliated short-term trailer
rental yards.
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 the balance sheet
as equipment acquisition deposits. During March 1998, the Partnership
completed the purchase of the marine vessel for $9.6 million, including
acquisition fees of $0.4 million paid to FSI.
The Partnership also purchased a Boeing 737-200 hushkit which was installed
on one of the Partnership's stage II aircraft during 1998 for $1.3 million,
including acquisition fees of $0.1 million paid to FSI.
During 1998, the Partnership disposed of marine containers, railcars, and
trailers, with an aggregate net book value of $1.7 million, for $2.5
million.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
3. Equipment (continued)
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.
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 and
VI, and PLM Equipment Growth & Income Fund VII, Professional Lease
Management Income Fund I, LLC, and PLM International.
All wholly- and partially-owned equipment on lease is accounted for as
operating leases, except for one finance lease. Future minimum rentals
under noncancelable operating leases, as of December 31, 1998, for wholly-
and partially-owned equipment during each of the next five years are
approximately $13.7 million in 1999, $9.2 million in 2000, $6.3 million in
2001, $3.8 million in 2002, and $3.9 million thereafter. Contingent rentals
based upon utilization were approximately $1.4 million, $2.2 million, and
$3.1 million in 1998, 1997, and 1996, respectively.
4. Investments in Unconsolidated Special-Purpose Entities
The net investments in USPEs include the following jointly-owned equipment
(and related assets and liabilities) as of December 31 (in thousands of
dollars):
1998 1997
------------------------------
48% interest in an entity owning a product tanker $ 6,890 $ 8,266
25% interest in two commercial aircraft on direct finance lease 2,771 2,863
17% interest in two trusts owning a total of three commercial aircraft,
two aircraft engines, and a portfolio of aircraft rotables 2,059 4,027
50% interest in an entity owning a bulk carrier 1,872 2,277
50% interest in an entity owning a product tanker 1,552 1,547
60% interest in a trust that owned a commercial aircraft -- 3,778
------------------------------------------------------------------------------------------- -----------
Net investments $ 15,144 $ 22,758
========== ===========
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, during 1997 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 7). 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.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
4. Investments in Unconsolidated Special-Purpose Entities (continued)
The following summarizes the financial information for the USPEs and the
Partnership's interest therein as of and for the years ended December 31
(in thousands of dollars):
1998 1997 1996
Net Net Net
Total Interest Total Interest Total Interest
USPEs of USPEs of USPEs of
Partnership Partnership Partnership
--------------------------- --------------------------- ---------------------------
Net Investments $ 44,678 $ 15,144 $ 67,208 $ 22,758 $ 48,660 $ 12,673
Lease revenues 12,317 7,194 17,510 5,868 30,337 7,054
Net income (loss) 2,048 234 4,604 (264 ) (1,692 ) (116 )
5. Operating Segments
The Partnership operates or operated primarily in six operating segments:
aircraft leasing, marine container leasing, marine vessel leasing, trailer
leasing, railcar leasing, and mobile offshore drilling unit (Rig) leasing.
Each equipment leasing segment engages in short-term to mid-term operating
leases to a variety of customers.
The General Partner evaluates the performance of each segment based on
profit or loss from operations before allocation of interest expense,
general and administrative expenses, and certain other expenses. The
segments are managed separately due to different business strategies for
each operation.
The following tables present a summary of the operating segments (in
thousands of dollars):
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1998 Leasing Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 8,903 $ 1,217 $ 7,478 $ 2,817 $ 2,496 $ -- $ 22,911
Interest income and other 45 11 74 -- 25 249 404
Gain on disposition of equipment -- 665 -- 144 5 -- 814
------------------------------------------------------------------------
Total revenues 8,948 1,893 7,552 2,961 2,526 249 24,129
------------------------------------------------------------------------
Costs and expenses
Operations support 422 71 5,073 853 740 60 7,219
Depreciation and amortization 6,846 846 1,894 809 695 147 11,237
Interest expense -- -- -- -- -- 1,950 1,950
General and administrative expenses 68 1 54 632 48 757 1,560
Provision for (recovery of) bad -- -- -- 30 (3 ) -- 27
debts
------------------------------------------------------------------------
Total costs and expenses 7,336 918 7,021 2,324 1,480 2,914 21,993
------------------------------------------------------------------------
Equity in net income (loss) of USPEs 386 -- (152 ) -- -- -- 234
------------------------------------------------------------------------
========================================================================
Net income (loss) $ 1,998 $ 975 $ 379 $ 637 $ 1,046 $ (2,665 ) $ 2,370
========================================================================
As of December 31, 1998
Total assets $ 24,765 $ 3,281 $ 22,112 $ 4,052 $ 4.060 $ 3.106 $ 61,376
========================================================================
Includes interest income and costs not identifiable to a particular
segment, such as general and administrative, interest expense, and certain
operations support expense.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
5. Operating Segments (continued)
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1997 Leasing Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 9,388 $ 2,073 $ 12,760 $ 2,758 $ 2,514 $ -- $ 29,493
Interest income and other 388 12 65 -- 19 156 640
Gain (loss) on disposition of 2,259 828 7,902 6 (5 ) -- 10,990
equipment
------------------------------------------------------------------------
Total revenues 12,035 2,913 20,727 2,764 2,528 156 41,123
------------------------------------------------------------------------
Costs and expenses
Operations support 438 120 10,747 1,027 622 75 13,029
Depreciation and amortization 10,037 1,286 2,413 994 813 150 15,693
Interest expense -- -- -- -- -- 2,593 2,593
General and administrative expenses 53 1 116 563 46 933 1,712
Provision for (recovery of) bad (127 ) 4 -- (20 ) 54 -- (89 )
debts
------------------------------------------------------------------------
Total costs and expenses 10,401 1,411 13,276 2,564 1,535 3,751 32,938
------------------------------------------------------------------------
Equity in net income (loss) of USPEs 1,215 -- (1,479 ) -- -- -- (264 )
------------------------------------------------------------------------
========================================================================
Net income (loss) $ 2,849 $ 1,502 $ 5,972 $ 200 $ 993 $ (3,595 ) $ 7,921
========================================================================
As of December 31, 1997
Total assets $ 35,802 $ 5,956 $ 15,953 $ 5,061 $ 4,796 $ 12,465 $ 80,033
========================================================================
Includes interest income and costs not identifiable to a particular
segment, such as general and administrative, interest expense, and certain
operations support expense.
Marine Marine
Aircraft Container Vessel Rig Railcar All
For the Year Ended December 31, 1996 Leasing Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 6,453 $ 2,816 $ 14,005 $ 1,062 $ 2,390 $ 2,037 $ 28,763
Interest income and other 26 -- 406 -- -- 928 1,360
Gain (loss) on disposition of 3,259 426 -- 10,521 (12 ) 5 14,199
equipment
------------------------------------------------------------------------
Total revenues 9,738 3,242 14,411 11,583 2,378 2,970 44,322
------------------------------------------------------------------------
Costs and expenses
Operations support 389 167 9,794 56 1,023 641 12,070
Depreciation and amortization 6,838 1,803 3,312 802 885 1,301 14,941
Interest expense -- -- -- -- -- 2,789 2,789
General and administrative expenses 47 1 76 9 50 1,558 1,741
Provision for (recovery of) bad 126 -- -- -- (28 ) 126 224
debts
------------------------------------------------------------------------
Total costs and expenses 7,400 1,971 13,182 867 1,930 6,415 31,765
------------------------------------------------------------------------
Equity in net income (loss) of USPEs (265 ) -- 149 -- -- -- (116 )
------------------------------------------------------------------------
========================================================================
Net income (loss) $ 2,073 $ 1,271 $ 1,378 $ 10,716 $ 448 $ (3,445 ) $ 12,441
========================================================================
As of December 31, 1996
Total assets $ 46,689 $ 9,608 $ 22,923 $ -- $ 5,500 $ 13,699 $ 98,419
========================================================================
Includes interest income and costs not identifiable to a particular
segment, such as general and administrative, interest expense, and certain
operations support expenses. Also includes income and expenses from owned
trailers.
6. Geographic Information
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
6. Geographic Information (continued)
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 worldwide.
The table below sets forth lease revenues by geographic region for the
Partnership's owned equipment and investments in USPEs, grouped by domicile
of the lessee as of and for the years ended December 31 (in thousands of
dollars):
Owned Equipment Investments in USPEs
------------------------------------- ----------------------------------
Region 1998 1997 1996 1998 1997 1996
-------------------------- ------------------------------------- -----------------------------------
United States $ 7,109 $ 7,553 $ 7,806 $ -- $ -- $ --
Canada 4,096 4,096 1,821 -- -- 1,509
South America 3,011 3,011 763 -- -- --
Asia -- -- 1,062 -- -- --
Europe -- -- 493 780 1,765 1,765
Rest of the world 8,695 14,833 16,818 6,414 4,103 3,780
------------------------------------- -------------------------------------
===================================== =====================================
Lease revenues $ 22,911 $ 29,493 $ 28,763 $ 7,194 $ 5,868 $ 7,054
===================================== =====================================
The following table sets forth net income (loss) information by region for
the owned equipment and investments in USPEs for the years ended December
31 (in thousands of dollars):
Owned Equipment Investments in USPEs
------------------------------------- -----------------------------------
Region 1998 1997 1996 1998 1997 1996
----------------------------------- ------------------------------------- -----------------------------------
United States $ 2,199 $ 4,549 $ 1,543 $ -- $ -- $ --
Canada 1,555 926 (555 ) -- -- (753 )
South America (478 ) (2,712 ) (1,419 ) -- -- --
Asia -- -- 10,715 -- -- --
Europe -- -- 3,190 39 773 490
Mexico -- -- -- 407 442 (2 )
Rest of the world 1,505 8,950 2,500 (152 ) (1,479 ) 149
------------------------------------- -------------------------------------
Regional income (loss) 4,781 11,713 15,974 294 (264 ) (116 )
Administrative and other (2,645 ) (3,528 ) (3,417 ) (60 ) -- --
===================================== =====================================
Net income (loss) $ 2,136 $ 8,185 $ 12,557 $ 234 $ (264 ) $ (116 )
===================================== =====================================
The net book value of these assets as of December 31 are as follows (in
thousands of dollars):
Owned Equipment Investments in USPEs
------------------------------------- ----------------------------------
Region 1998 1997 1996 1998 1997 1996
-------------------------- ------------------------------------- -----------------------------------
United States $ 11,670 $ 14,602 $ 20,465 $ -- $ -- $ --
Canada 10,467 11,366 14,065 -- -- --
South America 5,008 8,345 13,909 -- -- --
Europe -- -- -- 2,059 4,027 4,565
Mexico -- -- -- 2,772 2,863 2,768
Rest of the world 13,659 8,269 25,024 10,313 12,090 5,340
------------------------------------- -------------------------------------
40,804 42,582 73,463 15,144 18,980 12,673
Equipment held for sale -- -- -- -- 3,778 --
===================================== =====================================
Net book value $ 40,804 $ 42,582 $ 73,463 $ 15,144 $ 22,758 $ 12,673
===================================== =====================================
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
7. Net Investment in Direct Finance Lease
During 1995, the Partnership entered into a direct finance lease related to
the installation of a Stage III hushkit on an 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 1995.
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.
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
(see Note 4). The fair market value of the Partnership's interest in this
aircraft approximated its outstanding receivable from the lessee.
8. Notes Payable
In November 1991, the Partnership borrowed $38.0 million 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 principal 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.
The Partnership made the regularly scheduled principal payments and
quarterly interest payments at a rate of LIBOR plus 1.2% per annum (6.6% at
December 31, 1998 and 7.0% at December 31, 1997) to the lender of the
senior loan during 1998 and 1997. The Partnership also paid the lender of
the senior loan an additional $0.5 million from equipment sale proceeds, as
required by the loan agreement.
The General Partner had entered into a joint $50.0 million credit facility
(the Committed Bridge Facility) on behalf of the Partnership, PLM Equipment
Growth Fund VI, PLM Equipment Growth & Income Fund VII and Professional
Lease Management Income Fund I, all affiliated investment programs;
American Finance Group, Inc.(AFG), a subsidiary of PLM International, and
TEC Acquisub, Inc., an indirect wholly-owned subsidiary of the General
Partner. The Committed Bridge Facility was amended and restated on December
15, 1998, to remove the Partnership and AFG as eligible borrowers.
9. Concentrations of Credit Risk
As of December 31, 1998, the only Partnership customer that accounted for
10% or more of the total consolidated revenues for the owned equipment and
partially owned equipment during 1998 was
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
9. Concentrations of Credit Risk (continued)
Canadian Airlines International (10% in 1998). No single lessee accounted
for more than 10% of the consolidated revenues for the years ended December
31, 1997 and 1996. In 1996, however, Dual Marine Company, also a lessee,
purchased the mobile offshore drilling unit that they were leasing from the
Partnership. The lease revenues and the gain from the sale accounted for
23% of total consolidated revenues during 1996.
As of December 31, 1998 and 1997, the General Partner believes the
Partnership had no other significant concentrations of credit risk that
could have a material adverse effect on the Partnership.
10. Income Taxes
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
As of December 31, 1998, there were temporary differences of approximately
$40.7 million between the financial statement carrying values of certain
assets and liabilities and the federal income tax basis of such assets and
liabilities, primarily due to differences in depreciation methods,
equipment reserves, provisions for bad debts, lessees' prepaid deposits,
and the tax treatment of underwriting commissions and syndication costs.
11. Contingencies
PLM International, (the Company) and various of its affiliates are named as
defendants in a lawsuit filed as a purported class action on January 22,
1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case No.
CV-97-251 (the Koch action). Plaintiffs, who filed the complaint on their
own and on behalf of all class members similarly situated (the class), are
six individuals who invested in certain California limited partnerships
(the Partnerships) for which the Company's wholly-owned subsidiary, PLM
Financial Services, Inc. (FSI), acts as the general partner, including the
Partnership, PLM Equipment Growth Funds IV and VI, and PLM Equipment Growth
& Income Fund VII (the Growth Funds). The state court ex parte certified
the action as a class action (i.e., solely upon plaintiffs' request and
without the Company being given the opportunity to file an opposition). The
complaint asserts eight causes of action against all defendants, as
follows: fraud and deceit, suppression, negligent misrepresentation and
suppression, intentional breach of fiduciary duty, negligent breach of
fiduciary duty, unjust enrichment, conversion, and conspiracy.
Additionally, plaintiffs allege a cause of action against PLM Securities
Corp. for breach of third party beneficiary contracts in violation of the
National Association of Securities Dealers rules of fair practice.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, and
control persons. Based on these duties, plaintiffs assert liability against
defendants for improper sales and marketing practices, mismanagement of the
Growth Funds, and concealing such mismanagement from investors in the
Growth Funds. Plaintiffs seek unspecified compensatory and recissory
damages, as well as punitive damages, and have offered to tender their
limited partnership units back to the defendants.
In March 1997, the defendants removed the Koch action from the state court
to the United States District Court for the Southern District of Alabama,
Southern Division (Civil Action No. 97-0177-BH-C) based on the district
court's diversity jurisdiction, following which plaintiffs filed a motion
to remand the action to the state court. Removal of the action to federal
court automatically nullified the state court's ex parte certification of
the class. In September 1997, the district court denied plaintiffs' motion
to remand the action to state court and dismissed without prejudice the
individual claims of the California plaintiff, reasoning that he had been
fraudulently joined as a plaintiff. In October 1997, defendants filed a
motion to compel arbitration of plaintiffs' claims, based on an agreement
to arbitrate contained in the limited partnership agreement of each Growth
Fund, and to
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
11. Contingencies (continued)
stay further proceedings pending the outcome of such arbitration.
Notwithstanding plaintiffs' opposition, the district court granted
defendants' motion in December 1997.
Following various unsuccessful requests that the district court reverse, or
otherwise certify for appeal, its order denying plaintiffs' motion to
remand the case to state court and dismissing the California plaintiff's
claims, plaintiffs filed with the U.S. Court of Appeals for the Eleventh
Circuit a petition for a writ of mandamus seeking to reverse the district
court's order. The Eleventh Circuit denied plaintiffs' petition in November
1997, and further denied plaintiffs subsequent motion in the Eleventh
Circuit for a rehearing on this issue. Plaintiffs also appealed the
district court's order granting defendants' motion to compel arbitration,
but in June 1998 voluntarily dismissed their appeal pending settlement of
the Koch action, as discussed below.
On June 5, 1997, the Company and the affiliates who are also defendants in
the Koch action were named as defendants in another purported class action
filed in the San Francisco Superior Court, San Francisco, California, Case
No. 987062 (the Romei action). The plaintiff is an investor in the
Partnership, and filed the complaint on her own behalf and on behalf of all
class members similarly situated who invested in certain California limited
partnerships for which FSI acts as the general partner, including the
Growth Funds. The complaint alleges the same facts and the same nine causes
of action as in the Koch action, plus five additional causes of action
against all of the defendants, as follows: violations of California
Business and Professions Code Sections 17200, et seq. for alleged unfair
and deceptive practices, constructive fraud, unjust enrichment, violations
of California Corporations Code Section 1507, and a claim for treble
damages under California Civil Code Section 3345.
On July 31, 1997, defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition)
under the Federal Arbitration Act seeking to compel arbitration of
plaintiff's claims and for an order staying the state court proceedings
pending the outcome of the arbitration. In connection with this motion,
plaintiff agreed to a stay of the state court action pending the district
court's decision on the petition to compel arbitration. In October 1997,
the district court denied the Company's petition to compel arbitration, but
in November 1997, agreed to hear the Company's motion for reconsideration
of this order. The hearing on this motion has been taken off calendar and
the district court has dismissed the petition pending settlement of the
Romei action, as discussed below. The state court action continues to be
stayed pending such resolution. In connection with her opposition to the
petition to compel arbitration, plaintiff filed an amended complaint with
the state court in August 1997 alleging two new causes of action for
violations of the California Securities Law of 1968 (California
Corporations Code Sections 25400 and 25500) and for violation of California
Civil Code Sections 1709 and 1710. Plaintiff also served certain discovery
requests on defendants. Because of the stay, no response to the amended
complaint or to the discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a
memorandum of understanding (MOU) related to the settlement of those
actions (the monetary settlement). The monetary settlement contemplated by
the MOU provides for stipulating to a class for settlement purposes, and a
settlement and release of all claims against defendants and third party
brokers in exchange for payment for the benefit of the class of up to $6.0
million. The final settlement amount will depend on the number of claims
filed by authorized claimants who are members of the class, the amount of
the administrative costs incurred in connection with the settlement, and
the amount of attorneys' fees awarded by the Alabama district court. The
Company will pay up to $0.3 million of the monetary settlement, with the
remainder being funded by an insurance policy.
The parties to the monetary settlement have also agreed in principle to an
equitable settlement (the equitable settlement) which provides, among other
things, (a) for the extension of the operating lives of the Partnership,
PLM Equipment Growth Fund VI, and PLM Equipment Growth & Income Fund VII
(the Funds) by judicial amendment to each of their partnership agreements,
such that FSI, the
PLM EQUIPMENT GROWTH FUND V
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
11. Contingencies (continued)
general partner of each such Fund, will be permitted to reinvest cash flow,
surplus partnership funds or retained proceeds in additional equipment into
the year 2004, and will liquidate the partnerships' equipment in 2006; (b)
that FSI be entitled to earn front end fees (including acquisition and
lease negotiation fees) in excess of the compensatory limitations set forth
in the North American Securities Administrators Association, Inc. Statement
of Policy by judicial amendment to the Partnership Agreements for each
Fund; (c) for a one time redemption of up to 10% of the outstanding units
of each Fund at 80% of such partnership's net asset value; and (d) for the
deferral of a portion of FSI's management fees. The equitable settlement
also provides for payment of the equitable settlement attorneys' fees from
Partnership funds in the event that distributions paid to investors in the
Funds during the extension period reach a certain internal rate of return.
Defendants will continue to deny each of the claims and contentions and
admit no liability in connection with the proposed settlements. The
monetary settlement remains subject to numerous conditions, including but
not limited to: (a) agreement and execution by the parties of a settlement
agreement (the settlement agreement), (b) notice to and certification of
the monetary class for purposes of the monetary settlement, and (c)
preliminary and final approval of the monetary settlement by the Alabama
district court. The equitable settlement remains subject to numerous
conditions, including but not limited to: (a) agreement and execution by
the parties of the settlement agreement, (b) notice to the current
unitholders in the Funds (the equitable class) and certification of the
equitable class for purposes of the equitable settlement, (c) preparation,
review by the Securities and Exchange Commission (SEC), and dissemination
to the members of the equitable class of solicitation statements regarding
the proposed extensions, (d) disapproval by less than 50% of the limited
partners in each of the Funds of the proposed amendments to the limited
partnership agreements, (e) judicial approval of the proposed amendments to
the limited partnership agreements, and (f) preliminary and final approval
of the equitable settlement by the Alabama district court. The parties
submitted the settlement agreement to the Alabama district court on
February 12, 1999, and the preliminary class certification hearing is
scheduled for March 24, 1999. If the district court grants preliminary
approval, notices to the monetary class and equitable class will be sent
following review by the SEC of the solicitation statements to be prepared
in connection with the equitable settlement. The monetary settlement, if
approved, will go forward regardless of whether the equitable settlement is
approved or not. The Company continues to believe that the allegations of
the Koch and Romei actions are completely without merit and intends to
continue to defend this matter vigorously if the monetary settlement is not
consummated.
The Partnership is involved as plaintiff or defendant in various other
legal actions incident to its business. Management does not believe that
any of these actions will be material to the financial condition of the
Company.
12. Subsequent Event
During February 1999, the Partnership made its regularly scheduled
principal payment of $2.0 million to the lender of the senior loan.
During February and March 1999, the Partnership sold part of its interest
in two trusts that owned a total of three stage II commercial aircraft with
a net book value of $1.7 million for proceeds of $3.0 million. The
Partnership expects to sell its remaining interest in the two trust that
still own two stage II aircraft engines and a portfolio of aircraft
rotables before the end of March 1999.
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. *
24. Powers of Attorney. 51-53
* Incorporated by reference. See page 29 of this report.