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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, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-26594
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PLM EQUIPMENT GROWTH & INCOME FUND VII
(Exact name of registrant as specified in its
charter)
CALIFORNIA 94-3168838
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MARKET, STEUART STREET TOWER
SUITE 800, SAN FRANCISCO, CA 94105-1301
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (415) 974-1399
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Aggregate market value of voting stock: N/A
An index of exhibits filed with this Form 10-K is located at page 28.
Total number of pages in this report: 57.
PART I
ITEM 1. BUSINESS
(A) Background
In December 1992, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly-owned subsidiary of PLM International, Inc. (PLM International or PLMI),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 7,500,000 limited partnership
units (the units) in PLM Equipment Growth & Income Fund VII, a California
limited partnership (the Partnership, the Registrant, or EGF VII). The
Partnership's offering became effective on May 25, 1993. FSI, as General
Partner, owns a 5% interest in the Partnership. The Partnership engages in the
business of investing in a diversified equipment portfolio consisting primarily
of used, long-lived, low-obsolescence capital equipment that is easily
transportable by and among prospective users.
The Partnership's primary objectives are:
(1) to invest in a diversified portfolio of low-obsolescence equipment
having long lives and high residual values, at prices that the General Partner
believes to be below inherent values, and to place the equipment on lease or
under other contractual arrangements with creditworthy lessees and operators of
equipment. 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 cash distributions, which may be substantially tax-deferred
(i.e., distributions that are not subject to current taxation) during the early
years of the Partnership;
(3) to create a significant degree of safety relative to other equipment
leasing investments through the purchase of a diversified equipment portfolio.
This diversification reduces the exposure to market fluctuations in any one
sector. The purchase of used, long-lived, low-obsolescence equipment, typically
at prices that are substantially below the cost of new equipment, also reduces
the impact of economic depreciation and can create the opportunity for
appreciation in certain market situations, where supply and demand return to
balance from oversupply conditions; and
(4) to increase the Partnership's revenue base by reinvesting a portion of
its operating cash flow in additional equipment during the first six years of
the Partnership's operation in order to grow the size of its portfolio. Since
net income and distributions are affected by a variety of factors, including
purchase prices, lease rates, and costs and expenses, growth in the size of the
Partnership's portfolio does not necessarily mean that the Partnership's
aggregate net income and distributions will increase upon the reinvestment of
operating cash flow.
The offering of units of the Partnership closed on April 25, 1995. As of
December 31, 1999, there were 5,323,819 limited partnership units outstanding.
The General Partner contributed $100 for its 5% general partner interest in the
Partnership.
Beginning in the Partnership's seventh year of operation, which commences
January 1, 2002, the General Partner will stop reinvesting cash flow into
additional equipment. Surplus funds, if any, less reasonable reserves, will be
distributed to the partners. In the ninth year of the operation, which commences
January 1, 2004, the General Partner intends to begin the dissolution and
liquidation of the Partnership in an orderly fashion, unless it is terminated
earlier upon sale of all of the equipment or by certain other events. Under
certain circumstances, however, the term of the Partnership may be extended,
although in no event will the Partnership be extended beyond December 31, 2013.
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, 1999 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
- -------------------------------------------------------------------------------------------------------------------
Owned equipment held for operating leases:
2 Bulk carrier marine vessels Ishikawa Jima $ 22,212
760 Dry trailers Trailmobile/Stoughton 10,605
245 Dry piggyback trailers Various 3,760
57 Refrigerated trailers Various 1,719
61 Flatbed trailers Great Dane 515
14 Foodservice distribution trailers 296
435 Marine containers Various 12,498
1 737-200 Stage II commercial aircraft Boeing 5,483
1 DHC-8 commuter aircraft DeHavilland 3,814
328 Pressurized tank railcars Various 8,649
67 Woodchip gondola railcars National Steel 1,028
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Total owned equipment held for operating leases $ 70,5791
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Investments in unconsolidated special-purpose entities:
0.38 737-300 Stage III commercial aircraft Boeing $ 8,9742
0.50 MD-82 Stage III commercial aircraft McDonnell Douglas 8,1252
0.50 MD-82 Stage III commercial aircraft McDonnell Douglas 7,1322
0.80 Bulk-carrier marine vessel Tsuneishi Zosen 14,2122
0.44 Bulk-carrier marine vessel Naikai Ship Building & Engineering Co. 5,6282
0.75 Marine containers Various 7,9272
============
Total investments in unconsolidated special-purpose entities $ 51,9981
============
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1 Includes equipment and investments purchased with the proceeds from capital
contributions, undistributed cash flow from operations, and Partnership
borrowings. Includes costs capitalized, and equipment acquisition fees
paid to PLM Transportation Equipment Corporation (TEC), or PLM Worldwide
Management Services (WMS).
2 Jointly Owned: EGF VII and an affiliated program.
Generally, equipment is leased under operating leases for a term of one to six
years except for trailers operating in the short-term rental yards and marine
vessels operating on voyage charter which are usually leased for less than one
year.
As of December 31, 1999, approximately 78% 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. Rents are reported as revenue in accordance with Financial
Accounting Standards Board Statement No. 13 "Accounting for Leases". Direct
expenses associated with the equipment are charged directly to the Partnership.
An allocation of other indirect expenses related to the rental yard operations
is charged to the Partnership monthly.
The lessees of the equipment include but are not limited to: Alcoa Inc., Aero
California, Exxon Chemical America, Amoco Canada Petrole, CF Industries,
Farmland Industries, Skeena Cellulose Inc., Trans World Airlines, and Varig
South America.
(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 longer-term full payout
leases and offers lessees relative flexibility in their equipment commitment. In
addition, the rental obligation under an operating lease need not be capitalized
on the lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize
full payout leases on new equipment, i.e., leases that have terms equal to the
expected economic life of the equipment. While some lessees prefer the
flexibility offered by a shorter-term operating lease, other lessees prefer the
rate advantages possible with a full payout lease. Competitors may write full
payout leases at considerably lower rates and for longer terms than the
Partnership offers, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers that offer operating
leases and full payout leases. Manufacturers may provide ancillary services that
the Partnership cannot offer, such as specialized maintenance services
(including possible substitution of equipment), training, warranty services, and
trade-in privileges.
The Partnership also competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), GATX Corp., General Electric
Railcar Services Corporation, General Electric Aviation Services Corporation,
Xtra Corporation, and other investment programs that may lease the same types of
equipment.
(D) Demand
The Partnership currently operates in the following operating segments: marine
vessel leasing, trailer leasing, marine container, aircraft leasing, and railcar
leasing. Each equipment leasing segment engages in short-term to mid-term
operating leases to a variety of customers. Except for those aircraft leased to
passenger air carriers, the Partnership's transportation equipment is used to
transport materials and commodities, rather than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Marine Vessels
The Partnership owns or has investments in small to medium-sized dry bulk
vessels that operate in international markets carrying a variety of
commodity-type cargoes. Demand for commodity-based shipping is closely tied to
worldwide economic growth patterns, which can affect demand by causing changes
in volume on trade routes. The General Partner operates the Partnership's
vessels through a combination of spot and period charters, an approach that
provides the flexibility to adapt to changes in market conditions.
Dry bulk shipping is a cyclical business that induces capital investment during
periods of high freight rates and leads to a contraction in investment during
periods of low rates. Currently, the industry environment is one of slow growth.
Fleet size is relatively stable, the overall bulk carrier fleet grew by less
than 1%, as measured by deadweight tons, and the total number of ships shrank
slightly in 1999.
Freight rates, after declining in 1998 due in large part to the Asian recession,
improved for dry bulk vessels of all sizes towards the end of 1999. Freight
rates increased late during the year such that by the end of 1999, they had
reverted back to 1997 levels, although these levels are still moderate by
historical comparison. The 1999 improvement was driven by increases in United
States (U.S.) grain exports as well as stronger trade in iron ore and steel
products.
Total dry bulk trade, as measured in deadweight tons, is estimated to have grown
by approximately 2% during 1999, compared to a flat year in 1998. Forecasts for
2000 indicate that bulk trade should continue to grow, albeit at slow rates.
During 1999, ship values reversed the declines of the prior year, ending as much
as 30% above the levels seen at the beginning of the year for certain vessel
types. This upturn in ship values was due to a general improvement in dry bulk
trade as well as increases in the cost of new building as compared to 1998. A
slow but steady rise in trade volumes, combined with low fleet expansion, both
of which are anticipated to continue in 2000, may provide some basis for
increases in freight rates and ship values in the future. For example, it is
believed that should growth in demand return to historic levels of 3% annually,
this could stimulate increases in freight rates and ship values, and ultimately,
induce further investment in new building.
(2) Trailers
(a) Dry Trailers
The U.S. nonrefrigerated (dry) trailer market continued to improve during 1999,
as the strong domestic economy resulted in heavy freight volumes. With
unemployment low, consumer confidence high, and industrial production sound, the
outlook for leasing this type of trailer remains positive, particularly as the
equipment surpluses of recent years are being absorbed by the buoyant market. In
addition to high freight volumes, improvements in inventory turnover and tighter
turnaround times have lead to a stronger overall trucking industry and increased
equipment demand. While utilization in the industry increased, utilization on
the Partnership's trailers decreased as they were transitioning to yards
specializing in this type of trailer during 1999.
(b) Intermodal (Piggyback) Trailers
Intermodal (piggyback) trailers are used to transport a variety of goods either
by truck or by rail. Over the past decade, intermodal trailers have been
gradually displaced by domestic containers as the preferred method of transport
for such goods. During 1999, demand for intermodal trailers was more volatile
than usual. Slow demand occurred over the first half of the year due to customer
concerns over rail service problems associated with mergers in the rail
industry. Demand picked up significantly over the second half of the year due to
both a resolution of these service problems, and the continued strength of the
U.S. economy. Due to rise in demand which occurred over the latter half of 1999,
overall, activity within the intermodal trailer market declined less than
expected for the year, as total intermodal trailer shipments decreased by only
approximately 2% compared to the prior year. Average utilization of the entire
intermodal fleet rose from 73% in 1998 to 77% in 1999, primarily due to demand
exceeding the available supply of intermodal trailers during the second part of
the year.
The General Partner stepped up its marketing and asset management program for
the Partnership's intermodal trailers during 1999. These efforts resulted in
average utilization for the Partnership's intermodal trailers of approximately
82% for the year, up 2% compared to 1998 levels.
Although the trend towards using domestic containers instead of intermodal
trailers is expected to continue in the future, overall, intermodal trailer
shipments are forecast to decline by only 2%, to 3% in 2000, compared to the
prior year, due to the anticipated continued strength of the overall economy. As
such, the nationwide supply of intermodal trailers is expected to remain
essentially in balance with demand for 2000. For the Partnership's intermodal
fleet, the General Partner will continue to seek to expand its customer base
while minimizing trailer downtime at repair shops and terminals.
(c) Refrigerated Trailers
The temperature-controlled trailer market continued to expand during 1999,
although not as quickly as in 1998 when the market experienced very strong
growth. The leveling off in 1999 occurred as equipment users began to absorb the
increases in supply created over the prior two years. Refrigerated trailer users
have been actively retiring their older units and consolidating their fleets in
response to improved refrigerated trailer technology. Concurrently, there is a
backlog of six to nine months on orders for new equipment.
As a result of these changes in the refrigerated trailer market, it is
anticipated that trucking companies and shippers will utilize short-term trailer
leases more frequently to supplement their existing fleets. Such a trend should
benefit the Partnership, whose trailers are typically leased on a short-term
basis.
(d) Flatbed Trailers
Flatbed trailers are used primarily in the construction and steel industries.
Production of new flatbeds has remained stable over the last few years, and
demand has kept ahead of supply.
The Partnership has a small flatbed fleet that primarily serves the construction
industry. The fleet performed well in 1999, with over 80% utilization.
(e) Foodservice Distribution Trailers
Sales within the foodservice distribution industry, which represents the
wholesale supply of food and related products to restaurants, grocers,
hospitals, schools, and other purveyors of prepared food, have grown at a 4.1%
annual rate over the past five years. Foodservice distribution sales with the
United States are estimated to have reached over $150 billion during 1999 and
are expected to surpass $180 billion by 2005.
This growth is being driven by changes in consumer demographics and lifestyles,
as more and more consumers demand fresher, more convenient food products.
Increased service demands by consumers coupled with heightened fears over food
safety have accelerated the development of new technology for refrigerated
trailers and have caused foodservice distributors to seek to upgrade their
fleets by either purchasing or leasing newer, more technologically advanced
trailers. More foodservice distributors are considering leasing trailers due to
the lower capital outlays and quicker access to better equipment that this
option offers, particularly in view of the current six to twelve month backlog
on new trailer orders.
Reflecting the foodservice industry's strong demand for late-model equipment,
overall utilization and size of the General Partner's specialized refrigerated
trailer fleet continued to increase during 1999.
(3) Marine Containers
The marine container leasing market started 1999 with industrywide utilization
rates in the mid 70% range, down somewhat from the beginning of 1998. The market
strengthened throughout the year such that most container leasing companies
reported utilization of 80% by the end of 1999. Offsetting this favorable trend
was a continuation of historically low acquisition prices for new containers
acquired in the Far East, predominantly China. These low prices put pressure on
fleetwide per diem leasing rates.
The Partnership took advantage of attractive purchase prices by acquiring
several groups of containers during the year. It is the General Partner's belief
that acquiring containers at these historically low prices will yield strong
long-terms results for the Partnership.
Industry consolidation continued in 1999 as the parent of one of the world's top
ten container lessors finalized the outsourcing of the management of its
container fleet to a competitor. However, the General Partner believes that such
consolidation is a positive trend for the overall container leasing industry,
and ultimately will lead to higher industrywide utilization and increased per
diem rates.
(4) Aircraft
(a) Commercial Aircraft
After experiencing relatively robust growth over the prior four years, demand
for commercial aircraft softened somewhat in 1999. Boeing and Airbus, the two
primary manufacturers of new commercial aircraft, saw a decrease in their volume
of orders, which totaled 368 and 417 during 1999, compared to 656 and 556 in
1998. The slowdown in aircraft orders can be partially attributed to the full
implementation of U.S. Stage III environmental restrictions, which became fully
effective on December 31, 1999. Since these restrictions effectively prohibit
the operation of noncompliant aircraft in the United States after 1999, carriers
operating within or into the United States either replaced or modified all of
their noncompliant aircraft before the end of the year. The continued weakness
of the Asian economy has also served to slow the volume of new aircraft orders.
However, with the Asian economy now showing signs of recovery, air carriers in
this region are beginning to resume their fleet building efforts.
Demand for, and values of, used commercial aircraft have been adversely affected
by the Stage III environmental restrictions and an oversupply of older aircraft
as manufacturers delivered more new aircraft than the overall market required.
Boeing predicts that the worldwide fleet of jet-powered commercial aircraft will
increase from approximately 12,600 airplanes as of the end of 1998 to about
13,700 aircraft by the end of 2003, an average increase of 220 units per year.
However, actual deliveries for the first two years of this period, 1998 and
1999, already averaged 839 units annually. Although some of the resultant
surplus used aircraft have been retired, the net effect has been an overall
increase in the number of used aircraft available. This has resulted in a
decrease in both market prices and lease rates for used aircraft. Weakness in
the used commercial aircraft market may be mitigated in the future as
manufacturers bring their new production more in line with demand and given the
anticipated continued growth in air traffic. Worldwide, demand for air passenger
services is expected to increase at about 5% annually and freight services at
about 6% per year, for the foreseeable future.
The Partnership currently owns 38% of one Stage III-compliant aircraft and 50%
of two Stage III-compliant aircraft. It also wholly owns one Stage II aircraft
operating outside the U.S. and thus not subject to Stage III environmental
restrictions. All aircraft remained on lease throughout 1999 and were not
affected by the soft market conditions described above except for the one 38%
owned aircraft which was off lease during the year.
(b) Commuter Aircraft
The Partnership owns a commuter turboprop with 36 to 50 seats. This aircraft
flies in North America, which continues to be the largest market in the world
for this type aircraft. However, the introduction of regional jet aircraft
continues to have adverse impact on the turboprop market. Regional jets have
been well received in the commuter market and their growing use has been at the
expense of turboprops. Due to this trend, the turboprop market has experienced a
decrease in aircraft values and lease rates.
The Partnership's turboprop aircraft was off lease in 1999 and is expected to be
sold in 2000.
(5) Railcars
(a) Pressurized Tank Railcars
Pressurized tank cars are used to transport primarily liquefied petroleum gas
(natural gas) and anhydrous ammonia (fertilizer). The major U.S. markets for
natural gas are industrial applications (40% of estimated demand in 1998),
residential use (21%), electrical generation (15%), and commercial applications
(14%). Within the fertilizer industry, demand is a function of several factors,
including the level of grain prices, the status of government farm subsidy
programs, amount of farming acreage and mix of crops planted, weather patterns,
farming practices, and the value of the U.S. dollar. Population growth and
dietary trends also play an indirect role.
On an industrywide basis, North American carloadings of the commodity group that
includes petroleum and chemicals increased 2.5% in 1999, compared to 1998.
Correspondingly, demand for pressurized tank cars remained solid during 1999,
with utilization of this type of railcar within the Partnership remaining above
98%. While renewals of existing leases continue at similar rates, some cars have
been renewed for "winter only" terms of approximately six months. As a result,
it is anticipated that there will be more pressurized tank cars than usual
coming up for renewal in the spring.
(b) Woodchip Gondola Railcars
These railcars are used to transport woodchips from sawmills to pulp mills,
where the woodchips are converted into pulp. Thus, demand for woodchip cars is
directly related to demand for paper, paper products, particleboard, and
plywood. In Canada, where the Partnership's woodchip railcars operate, 1999
carloadings of forest products increased 4.3% over 1998 levels.
Future prospects for the wood products industry are somewhat mixed. This sector
is expected to have relatively good performance in 2000, although not at the
peaks seen during the second quarter of 1999. The biggest positive for the wood
products industry is the anticipated strength in housing demand, as the
homebuilding market is expected to continue to post health gains.
The Partnership's woodchip gondola cars continued to operate on long-term leases
during 1999.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in governmental regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require its removal from service or extensive modification 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 marine vessels 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 shall operate an aircraft to or from any
airport in the contiguous United States unless that airplane has been shown
to comply with Stage III noise levels. The Partnership has a Stage II
aircraft that does not meet Stage III requirements. The cost to install a
hushkit to meet quieter Stage III requirements is approximately $2.0
million, depending on the type of aircraft. Currently, the Partnership's
Stage II aircraft is operating in countries that do not require this
regulation;
(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 to the stratospheric ozone
layer and that are used extensively as refrigerants in refrigerated marine
cargo containers and refrigerated trailers;
(4) the U.S. Department of Transportation's Hazardous Materials Regulations
regulates the classification and packaging requirements of hazardous
materials which apply particularly to the Partnership's tank railcars. The
Federal Railroad Administration has mandated that effective July 1, 2000,
all jacketed and non-jacketed tank railcars must be re-qualified to insure
tank shell integrity. Tank shell thickness, weld seams, and weld
attachments must be inspected and repaired if necessary to re-qualify a
tank railcar for service. The average cost of this inspection is $1,800 for
non-jacketed tank railcars and $3,600 for jacketed tank railcars, not
including any necessary repairs. This inspection is to be performed at the
next scheduled tank test.
As of December 31, 1999, the Partnership was in compliance with the above
governmental regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased and its interest in entities that own equipment for leasing
purposes. As of December 31, 1999, the Partnership owned a portfolio of
transportation and related equipment and investments in equipment owned by
unconsolidated special-purpose entities (USPEs), as described in Item 1, Table
1. The Partnership acquired equipment with the proceeds of the Partnership
offering of $107.4 million through the third quarter of 1995, with proceeds from
the debt financing of $23.0 million, and by reinvesting a portion of its
operating cash flow in additional equipment.
The Partnership maintains its principal office at 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 wholly-owned subsidiaries are
named as defendants in a lawsuit filed as a purported class action in January
1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251
(the Koch action). The named plaintiffs are six individuals who invested in PLM
Equipment Growth Fund IV (Fund IV), PLM Equipment Growth Fund V (Fund V), PLM
Equipment Growth Fund VI (Fund VI), and PLM Equipment Growth & Income Fund VII
(Fund VII) (the Funds), each a California limited partnership for which the
Company's wholly-owned subsidiary, FSI, acts as the General Partner. The
complaint asserts causes of action against all defendants for fraud and deceit,
suppression, negligent misrepresentation, negligent and intentional breaches of
fiduciary duty, unjust enrichment, conversion, and conspiracy. 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 Funds, and concealing such
mismanagement from investors in the Funds. Plaintiffs seek unspecified
compensatory 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) (the court) based on the court's
diversity jurisdiction. In December 1997, the court granted defendants motion to
compel arbitration of the named plaintiffs' claims, based on an agreement to
arbitrate contained in the limited partnership agreement of each Partnership.
Plaintiffs appealed this decision, but in June 1998 voluntarily dismissed their
appeal pending settlement of the Koch action, as discussed below.
In June 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 Fund V, and filed the complaint
on her own behalf and on behalf of all class members similarly situated who
invested in the Funds. The complaint alleges the same facts and the same causes
of action as in the Koch action, plus additional causes of action against all of
the defendants, including alleged unfair and deceptive practices and violations
of state securities law. In July 1997, defendants filed a petition (the
petition) in federal district court under the Federal Arbitration Act seeking to
compel arbitration of plaintiff's claims. In October 1997, the district court
denied the Company's petition, but in November 1997, agreed to hear the
Company's motion for reconsideration. Prior to reconsidering its order, the
district court dismissed the petition pending settlement of the Romei action, as
discussed below.
The state court action continues to be stayed pending such resolution.
In February 1999 the parties to the Koch and Romei actions agreed to settle the
lawsuits, with no admission of liability by any defendant, and filed a
Stipulation of Settlement with the court. The settlement is divided into two
parts, a monetary settlement and an equitable settlement. The monetary
settlement provides for a settlement and release of all claims against
defendants in exchange for payment for the benefit of the class of up to $6.6
million. The final settlement amount will depend on the number of claims filed
by class members, the amount of the administrative costs incurred in connection
with the settlement, and the amount of attorneys' fees awarded by the court to
plaintiffs' attorneys. The Company will pay up to $0.3 million of the monetary
settlement, with the remainder being funded by an insurance policy. For
settlement purposes, the monetary settlement class consists of all investors,
limited partners, assignees, or unit holders who purchased or received by way of
transfer or assignment any units in the Funds between May 23, 1989 and June 29,
1999. The monetary settlement, if approved, will go forward regardless of
whether the equitable settlement is approved or not.
The equitable settlement provides, among other things, for: (a) the extension
(until January 1, 2007) of the date by which FSI must complete liquidation of
the Funds' equipment, (b) the extension (until December 31, 2004) of the period
during which FSI can reinvest the Funds' funds in additional equipment, (c) an
increase of up to 20% in the amount of front-end fees (including acquisition and
lease negotiation fees) that FSI is entitled to earn in excess of the
compensatory limitations set forth in the North American Securities
Administrator's Association's Statement of Policy, (d) a one-time repurchase by
each of Funds V, VI, and VII of up to 10% of that partnership's outstanding
units for 80% of net asset value per unit, and (e) the deferral of a portion of
the management fees paid to an affiliate of FSI until, if ever, certain
performance thresholds have been met by the Funds. Subject to final court
approval, these proposed changes would be made as amendments to each
Partnership's limited partnership agreement if less than 50% of the limited
partners of each Partnership vote against such amendments. The limited partners
will be provided the opportunity to vote against the amendments by following the
instructions contained in solicitation statements that will be mailed to them
after being filed with the Securities and Exchange Commission. The equitable
settlement also provides for payment of additional attorneys' fees to the
plaintiffs' attorneys from Partnership funds in the event, if ever, that certain
performance thresholds have been met by the Funds. The equitable settlement
class consists of all investors, limited partners, assignees or unit holders who
on June 29, 1999 held any units in Funds V, VI, and VII, and their assigns and
successors in interest.
The court preliminarily approved the monetary and equitable settlements in June
1999. The monetary settlement remains subject to certain conditions, including
notice to the monetary class and final approval by the court following a final
fairness hearing. The equitable settlement remains subject to certain
conditions, including: (a) notice to the equitable class, (b) disapproval of the
proposed amendments to the partnership agreements by less than 50% of the
limited partners in one or more of Funds V, VI, and VII, and (c) judicial
approval of the proposed amendments and final approval of the equitable
settlement by the court following a final fairness hearing. No hearing date is
currently scheduled for the final fairness hearing. 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 has initiated litigation in various official forums in India
against a defaulting Indian airline lessee to recover damages for failure to pay
rent and failure to maintain such property in accordance with relevant lease
contracts. The Partnership has repossessed its property previously leased to
such airline. In response to the Partnership's collection efforts, the airline
filed counter-claims against the Partnership in excess of the Partnership's
claims against the airline. The General Partner believes that the airlines'
counterclaims are completely without merit, and the General Partner will
vigorously defend against such counterclaims. The General Partner believes the
likelihood of an unfavorable outcome from the counterclaims is remote.
The Company is involved as plaintiff or defendant in various other legal actions
incidental to its business. Management does not believe that any of these
actions will be material to the financial condition of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS
Pursuant to the terms of the partnership agreement, the General Partner is
entitled to 5% of the cash distributions of the Partnership. Net income is
allocated to the General Partner to the extent necessary to cause the General
Partner's capital account to equal zero. The remaining interests in the profits,
losses, and cash distributions of the Partnership are allocated to the limited
partners. As of December 31, 1999, there were 7,986 limited partners holding
units in the Partnership.
There are several secondary markets in which limited partnership units trade.
Secondary markets are characterized as having few buyers for limited partnership
interests and, therefore, are generally viewed as inefficient vehicles for the
sale of limited partnership units. Presently, there is no public market for the
limited partnership units and none is likely to develop. To prevent the limited
partnership units from being considered publicly traded and thereby to avoid
taxation of the Partnership as an association treated as a corporation under the
Internal Revenue Code, the limited partnership units will not be transferable
without the consent of the General Partner, which may be withheld in its
absolute discretion. The General Partner intends to monitor transfers of limited
partnership units in an effort to ensure that they do not exceed the percentage
or number permitted by certain safe harbors promulgated by the Internal Revenue
Service. A transfer may be prohibited if the intended transferee is not 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 October 25, 1997.
As of December 31, 1999, the Partnership had agreed to purchase approximately
1,000 limited partnership units for an aggregate price of $10,000. The General
Partner anticipates that these limited partnership units will be repurchased in
the first and second quarters of 2000. As of December 31, 1999, the Partnership
had purchased a cumulative total of 46,478 limited partnership units at a cost
of $0.6 million. In addition to these limited partnership units, the General
Partner may purchase additional limited partnership 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 Year Ended December 31,
(In thousands of dollars, except weighted-average unit amounts)
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
Operating results:
Total revenues $ 20,849 $ 18,200 $ 17,885 $ 16,316 $ 19,289
Net gain (loss) on disposition of
equipment 1,140 (31) 1,803 42 182
Equity in net income (loss) of uncon-
solidated special-purpose entities 6,067 6,493 1,430 (797) --
Net income (loss) 6,708 5,824 1,101 (2,976) (1,192)
At year-end:
Total assets $ 65,966 $ 76,537 $ 82,623 $ 89,852 $ 101,488
Total liabilities 23,219 26,505 30,050 27,865 25,820
Notes payable 20,000 23,000 23,000 25,000 23,000
Cash distribution $ 10,083 $ 10,127 $ 10,176 $ 10,178 $ 9,627
Cash distribution representing
a return of capital to the limited
partners $ 3,375 $ 4,303 $ 9,075 $ 9,669 $ 9,157
Per weighted-average limited partnership unit:
Net income (loss) $ 1.161 $ 0.991 $ 0.111 $ (0.65)1 $ * 1
Cash distribution $ 1.80 $ 1.80 $ 1.80 $ 1.80 $ *
Cash distribution representing
a return of capital $ 0.64 $ 0.81 $ 1.69 $ 1.80 $ *
* Various according to interim closings
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- ------------------------------------
1 After reduction of income necessary to cause the General Partner's capital
account to equal zero of $0.2 million ($0.03 per weighted-average depositary
unit) in 1999, $0.2 million ($0.04 per weighted-average depositary unit) in
1998, $0.5 million ($0.08 per weighted-average depositary unit) in 1997, $0.7
million ($0.12 per weighted-average depositary unit) in 1996, and $0.5
million ($0.10 per weighted-average depositary unit) in 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth & Income
Fund VII (the Partnership). The following discussion and analysis of operations
focuses on the performance of the Partnership's equipment in various segments in
which it operates and its effect on the Partnership's overall financial
condition.
(B) Results of Operations - Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Partnership's equipment portfolio to repricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and the
equipment must be remarketed. Major factors influencing the current market rate
for Partnership equipment include supply and demand for similar or comparable
types of transport capacity, desirability of the equipment in the leasing
market, market conditions for the particular industry segment in which the
equipment is to be leased, overall economic conditions, and various regulations
concerning the use of the equipment. Equipment that is idle or out of service
between the expiration of one lease and the assumption of a subsequent lease can
result in a reduction of contribution to the Partnership. The Partnership
experienced re-leasing or repricing activity in 1999 primarily in its aircraft,
railcar, marine container, trailer, and marine vessel portfolios.
(a) Aircraft: The Partnership owns a DeHavilland DCH-8 and a Boeing 737-300
aircraft that were off lease throughout 1999. As of December 31, 1999, the
DeHavilland commuter aircraft was being marketed for sale and the Boeing 737-300
commercial aircraft was being marketed for lease.
(b) Railcars: While this equipment experienced some re-leasing activity, lease
rates in this market remain relatively constant.
(c) Marine containers: Some of the Partnership's marine containers that are on
lease are leased to operators of utilization-type leasing pools and, as such,
are highly exposed to repricing activity. The increase in marine container
contributions in 1999 was due to equipment purchases. Market conditions were
relatively constant in repricing activity during 1999.
(d) 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.
(e) Marine vessels: Certain of the Partnership's marine vessels operated in the
voyage charter market. Voyage charters are usually short in duration and reflect
short-term demand and pricing trends in the marine vessel market. As a result of
this, certain of the Partnership's marine vessels will be remarketed during 2000
exposing them to repricing and releasing risk.
(2) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment and investments in unconsolidated
special-purpose entities (USPEs), unless accompanied by an immediate replacement
of additional equipment earning similar rates (see Reinvestment Risk, below),
represents a reduction in the size of the equipment portfolio and may result in
a reduction of contribution to the Partnership. Lessees not performing under the
terms of their leases, either by not paying rent, not maintaining or operating
the equipment in accordance with the conditions of the leases, or other possible
departures from the lease terms, can result not only in reductions in
contribution, but also may require the Partnership to assume additional costs to
protect its interests under the leases, such as repossession or legal fees. The
Partnership experienced the following in 1999:
(a) Liquidations: During the year, the Partnership disposed of owned equipment
that included an aircraft, portable heaters, trailers, railcars, and modular
buildings and disposed of an interest in three USPEs that owned an interest in a
commercial aircraft, aircraft rotables, and a mobile offshore drilling unit for
total proceeds of $25.5 million.
(b) Non-performing Lessee: A Brazilian lessee is having financial difficulties.
The lessee has contacted the General Partner and asked to work out a repayment
schedule for the lease payment arrearage of $0.1 million. The General Partner
has negotiated a settlement for all lease payments that are overdue.
(3) Reinvestment Risk
Reinvestment risk occurs when; the Partnership cannot generate sufficient
surplus cash after fulfillment of operating obligations and distributions to
reinvest in additional equipment during the reinvestment phase of Partnership,
equipment is sold or liquidated for less than threshold amounts, proceeds from
dispositions, or surplus cash available for reinvestment cannot be reinvested at
the threshold lease rates, or proceeds from sales or surplus cash available for
reinvestment cannot be deployed in a timely manner.
During the first seven years of its operations which end on December 31, 2001,
the Partnership intends to increase its equipment portfolio by investing surplus
cash in additional equipment, after fulfilling operating requirements and paying
distributions to the partners. Subsequent to the end of the reinvestment period,
the Partnership will continue to operate for an additional three years, then
begin an orderly liquidation over an anticipated two-year period.
Other nonoperating funds for reinvestment are generated from the sale of
equipment prior to the Partnership's planned liquidation phase, the receipt of
funds realized from the payment of stipulated loss values on equipment lost or
disposed of while it was subject to lease agreements, or from the exercise of
purchase options in certain lease agreements. Equipment sales generally result
from evaluations by the General Partner that continued ownership of certain
equipment is either inadequate to meet Partnership performance goals, or that
market conditions, market values, and other considerations indicate it is the
appropriate time to sell certain equipment.
During 1999, the Partnership purchased a portfolio of portable heaters for $0.2
million, including acquisition fees of $9,000, and marine containers for $12.5
million, including acquisition fees of $0.5 million. All acquisition fees were
paid to PLM Financial Services, Inc. (FSI).
During 1999, the Partnership purchased an interest in a trust owning a Boeing
737-300 Stage III commercial aircraft for $9.0 million including acquisition and
lease negotiation fees of $0.4 million. The Partnership also increased its
interest in marine containers by $0.5 million including acquisition and lease
negotiation fees of $24,000. All fees were paid to FSI. The remaining interest
was purchased by an affiliated program.
(4) 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 and whenever circumstances
indicate that the carrying value of an asset may not be recoverable in relation
to expected future market conditions, for the purpose of assessing the
recoverability of the recorded amounts. If the projected undiscounted cash flows
and the fair market value of the equipment 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 1999, 1998, or 1997.
As of December 31, 1999, 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 $82.4 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 $107.4 million and permanent
debt financing of $23.0 million. No further capital contributions from the
limited partners are permitted under the terms of the Partnership's limited
partnership agreement. The total outstanding debt, currently $20.0 million, can
only be increased with borrowings from the short-term Committed Bridge Facility,
subject to specific covenants in existing debt agreements, unless the
Partnership's senior lender will issue a waiver. The agreement requires the
Partnership to maintain certain financial covenants related to fixed-charge
coverage and maximum debt.
The Partnership relies on operating cash flow to meet its operating obligations,
make cash distributions, and increase the Partnership's equipment portfolio with
any remaining available surplus cash.
For the year ended December 31, 1999, the Partnership generated $12.6 million in
operating cash (net cash provided by operating activities less minority
interests, plus non-liquidating cash distributions from USPEs) to meet its
operating obligations and make distributions of $10.1 million to the partners.
Pursuant to the terms of the limited partnership agreement, beginning in 1997,
the Partnership is obligated, at the sole discretion of the General Partner, to
redeem up to 2% of the outstanding limited partnership units each year. The
purchase price to be offered for such outstanding units will be equal to 105% of
the unrecovered principal attributed to the units. Unrecovered principal is
defined as the excess of the capital contribution attributable to the unit over
the distributions from any source paid with respect to that unit. As of December
31, 1999, the Partnership agreed to purchase approximately 1,000 limited
partnership units for an aggregate price of $10,000. The General Partner
anticipates that these limited partnership units will be repurchased in the
first and second quarters of 2000. In addition to these units, the General
Partner may purchase additional limited partnership units on behalf of the
Partnership in the future.
The General Partner has entered into a joint $24.5 million credit facility (the
Committed Bridge Facility) on behalf of the Partnership, PLM Equipment Growth
Fund VI (EGF VI) and Professional Lease Management Income Fund I (Fund I), both
affiliated investment programs; and TEC Acquisub, Inc. (TECAI), an indirect
wholly-owned subsidiary of the General Partner. This credit facility may be used
to provide interim financing of up to (i) 70% of the aggregate book value or 50%
of the aggregate net fair market value of eligible equipment owned by the
Partnership, plus (ii) 50% of unrestricted cash held by the borrower. The
Partnership, EGF VII, Fund I, and TECAI collectively may borrow up to $24.5
million of the Committed Bridge Facility. Outstanding borrowings by one borrower
reduce the amount available to each of the other borrowers under the Committed
Bridge Facility. The Committed Bridge Facility also provides for a $5.0 million
Letter of Credit Facility for the eligible borrowers. Individual borrowings may
be outstanding for no more than 179 days, with all advances due no later than
June 30, 2000. Interest accrues at either the prime rate or adjusted LIBOR plus
1.625% at the borrower's option and is set at the time of an advance of funds.
Borrowings by the Partnership are guaranteed by the General Partner. As of
December 31, 1999 and March 29, 2000, no eligible borrower had any outstanding
borrowings. The General Partner believes it will be able to renew the Committed
Bridge Facility upon its expiration with similar terms as those in the current
Committed Bridge Facility.
The General Partner has not planned any expenditures, nor is it aware of any
contingencies that would cause it to require any additional capital to that
mentioned above.
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(D) Results of Operations - Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1999 and 1998
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
increased during the year ended December 31, 1999, when compared to the same
period of 1998. Gains or losses from the sale of equipment, interest and other
income, and certain expenses such as depreciation and amortization and general
and administrative expenses relating to the operating segments (see Note 5 to
the audited financial statements), are not included in the owned equipment
operation discussion because these expenses are indirect in nature and not a
result of operations, but the result of owning a portfolio of equipment.
In September 1999, the General Partner amended the corporate-by-laws of certain
USPEs in which the Partnership, or any affiliated program, owns an interest
greater than 50%. The amendment to the corporate-by-laws provided that all
decisions regarding the acquisition and disposition of the investment as well as
other significant business decisions of that investment would be permitted only
upon unanimous consent of the Partnership and all the affiliated programs that
have an ownership in the investment (the Amendment). As such, although the
Partnership may own a majority interest in a USPE, the Partnership does not
control its management and thus the equity method of accounting will be used
after adoption of the Amendment. As a result of the Amendment, as of September
30, 1999, all jointly owned equipment in which the Partnership owned a majority
interest, which had been consolidated, were reclassified to investments in
USPEs. Lease revenues and direct expenses for jointly owned equipment in which
the Partnership held a majority interest were reported under the consolidation
method of accounting during the nine months ended September 30, 1999 and were
included with the owned equipment operations. For the three months ended
December 31, 1999, lease revenues and direct expenses for these entities are
reported under the equity method of accounting and are included with the
operations of the USPEs.
The following table presents lease revenues less direct expenses by segment (in
thousands of dollars):
For the Years
Ended December 31,
1999 1998
----------------------------
Marine vessels $ 3,880 $ 3,363
Trailers 3,302 3,819
Marine containers 2,518 513
Railcars 2,090 2,000
Portable heaters 736 764
Aircraft 642 1,712
Modular buildings 3 47
Marine vessels: Marine vessel lease revenues and direct expenses were $7.8
million and $3.9 million, respectively, for the year ended December 31, 1999,
compared to $7.1 million and $3.7 million, respectively, during the same period
of 1998. During virtually all of the year ended December 31, 1998, two of the
three marine vessels were operating under bareboat charters in which the lessee
pays a flat lease rate and also pays for certain operating expenses while on
lease. During the year ended December 31, 1999, these two marine vessels were
operating under a lease arrangement in which the lessee pays a higher lease
rate, however, the Partnership now pays for all operating expenses. The increase
in marine vessel contribution from these two marine vessels was due to the
increase in the lease revenues of $1.7 million from the new lease arrangement
exceeding the increase in operating expenses caused by the new lease arrangement
of $1.0 million.
The September 30, 1999 Amendment changed the accounting method of majority held
equipment from the consolidation method of accounting to the equity method of
accounting. This impacted the reporting of lease revenues and direct expenses of
one marine vessel. Lease revenues for the Partnership's majority held marine
vessel decreased $1.1 million for the year ended December 31, 1999 when compared
to the same period of 1998. The decline in lease revenues of $0.4 million was
caused by a decline in lease rates and a decline of $0.7 million due to the
Amendment. Direct expenses for the Partnership's majority held marine vessel
also decreased $0.6 million due to the Amendment.
Trailers: Trailer lease revenues and direct expenses were $4.2 million and $0.9
million, respectively, for the year ended December 31, 1999, compared to $4.7
million and $0.9 million, respectively, during the same period of 1998. Trailer
lease revenues decreased $0.5 million during the year ended December 31, 1999
primarily due to lower lease revenues earned on the Partnership's over-the-road
dry trailers caused by the transition of these trailers to a PLM short-term
rental facility specializing in this type of trailer. Additionally, equipment
sales during the past 12 months caused lease revenues to decrease $0.1 million.
Direct expenses increased $0.1 million during the year ended December 31, 1999
due to higher repair and maintenance expenses when compared to the same period
of 1998.
Marine containers: Lease revenues and direct expenses for marine containers were
$2.5 million and $0, respectively, for the year ended December 31, 1999,
compared to $0.5 million and $0, respectively, during the same period of 1998.
The increase in marine container lease revenues was due to the purchase of
additional equipment in March 1999.
Railcars: Railcar lease revenues and direct expenses were $2.7 million and $0.6
million, respectively, for the year ended December 31, 1999, compared to $2.7
million and $0.7 million, respectively, during the same period of 1998. The
increase in rail equipment contribution was due to lower direct expenses to
certain railcars in the fleet during the year ended December 31, 1999 when
compared to the same period of 1998.
Portable heaters: Portable heaters lease revenues and direct expenses were $0.7
million and $0, respectively, for the year ended December 31, 1999, compared to
$0.8 million and $0, respectively, during the same period of 1998. The decrease
in portable heater contribution was due to the sale of this equipment during the
third quarter of 1999.
Aircraft: Aircraft lease revenues and direct expenses were $1.5 million and $0.9
million, respectively, for the year ended December 31, 1999, compared to $2.0
million and $0.3 million, respectively, during the same period of 1998. The
decrease in aircraft contribution was due to higher repairs of $0.6 million
needed to the commuter aircraft during 1999 when compared to the same period of
1998. In addition, aircraft lease revenues were $0.5 million lower due to the
sale of three commercial aircraft in June 1999.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $14.0 million for the year ended December 31, 1999,
increased from $13.4 million for the same period in 1998. Significant variances
are explained as follows:
(i) A $0.9 million increase was due to an increase in the provision for bad
debts based on the General Partner's evaluation of the collectability of
receivables due, primarily, from a lessee that was leasing portable heaters.
(ii)A $0.2 million increase in administrative expenses was due to higher
costs for professional services needed to collect past due receivables due from
certain nonperforming lessees.
(iii) A $0.4 million decrease in depreciation and amortization expenses
from 1998 levels reflects the decrease of $1.4 million caused by the
double-declining balance method of depreciation which results in greater
depreciation in the first years an asset is owned, a decrease of $0.3 million
due to the sale of certain equipment during 1999 and 1998, and a decrease of
$0.7 million as a result of the Amendment which changed the accounting method
used for majority held equipment from the consolidation method of accounting to
the equity method of accounting. These decreases were offset in part, by an
increase of $1.9 million in depreciation and amortization expenses resulting
from the purchase of additional equipment during 1999.
(c) Net Gain (Loss) on Disposition of Owned Equipment
The net gain on disposition of equipment for the year ended December 31, 1999
totaled $1.1 million, and resulted from the sale of commercial aircraft,
portable heaters, trailers, modular buildings, and railcars with an aggregate
net book value of $6.5 million for proceeds of $7.6 million. The net loss on
disposition of equipment for the year ended December 31, 1998 totaled $31,000,
and resulted from the sale of trailers, modular buildings, and a railcar, with
an aggregate net book value of $0.4 million, for proceeds of $0.3 million.
(d) Minority interests
A $43,000 decrease in minority interest income was due to a decrease in lease
revenues of $0.2 million and direct and indirect expenses of $0.4 million during
1999 when compared to the same period of 1998, as it relates to the minority's
percentage of ownership in these interests.
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Years
Ended December 31,
1999 1998
-------------------------
Aircraft, rotable components, and aircraft engines $ 6,160 $ 6,390
Mobile offshore drilling unit 92 82
Marine containers 7 --
Marine vessels (192) 21
--------- ----------
Equity in net income of USPEs $ 6,067 $ 6,493
========= ==========
Aircraft, rotable components, and aircraft engines: During the year ended
December 31, 1999, lease revenues of $2.6 million and the gain from the sale of
the Partnership's interest in three trusts of $8.9 million were offset by
depreciation expense, direct expenses, and administrative expenses of $5.3
million. During the same period of 1998, lease revenues of $5.8 million and the
gain from the sale of the Partnership's interest in two trusts of $8.8 million
were offset by depreciation expense, direct expenses, and administrative
expenses of $8.2 million. Lease revenues decreased $3.5 million due to the sale
of the Partnership's investment in five trusts during 1999 and 1998. The
decrease in lease revenues caused by these sales was partially offset by lease
revenues of $0.3 million resulting from the Partnership's investment in an
additional trust during May 1998. The Partnership's purchase of an interest in a
trust owning a Boeing 737 in June 1999 did not generate any lease revenues since
it has been off-lease since its purchase. The decrease in depreciation expense,
direct expenses, and administrative expenses of $2.8 million was primarily due
to lower depreciation expense of $2.4 million resulting from the Partnership's
sale of it's investment in five trusts during 1999 and 1998, $1.4 million caused
by the double-declining balance method of depreciation which results in greater
depreciation in the first years an asset is owned, partially offset by the
Partnership's investment in an additional trust during 1999 which increased
depreciation expense $1.0 million.
Mobile offshore drilling unit: During the year ended December 31, 1999, lease
revenues of $0.4 million were offset by the loss from the sale of the
Partnership's interest in this entity of $0.1 million and by depreciation
expense, direct expenses, and administrative expenses of $0.2 million. During
the same period of 1998, lease revenues of $0.4 million were offset by
depreciation expense, direct expenses, and administrative expenses of $0.3
million. The increase in the contribution from this equipment was the result of
lower depreciation expense caused by the double-declining balance method of
depreciation offset by the loss from the sale of this entity.
Marine containers: The September 30, 1999 Amendment that changed the accounting
method of majority held equipment from the consolidation method of accounting to
the equity method of accounting, affected the lease revenues and direct expenses
of marine containers for the year ended December 31, 1999. During the year ended
December 31, 1999, lease revenues of $0.3 million were offset by depreciation
expense, direct expenses, and administrative expenses of $0.3 million. Marine
container lease revenues and depreciation expense, direct expenses, and
administrative expenses for the year ending December 31, 1998, were reported
under the consolidation method of accounting under Owned Equipment Operations.
Marine vessels: During the year ended December 31, 1999, lease revenues of $1.4
million were offset by depreciation expense, direct expenses, and administrative
expenses of $1.6 million. During the same period of 1998, lease revenues of $1.1
million were offset by depreciation expense, direct expenses, and administrative
expenses of $1.1 million. Marine vessel lease revenues increased $0.5 million
during the year ended December 31, 1999, due to the Amendment dated September
30, 1999 which change the accounting treatment of majority held equipment from
the consolidation method of accounting to the equity method of accounting. The
increase in lease revenues caused by the Amendment was partially offset by a
decrease of $0.3 million caused lower lease rates earned on the existing marine
vessel. The increase in expenses of $0.5 million was primarily due to the
Amendment. The increase in expenses of $0.6 million caused by the Amendment was
partially offset by a decrease in expenses of the remaining marine vessel due to
lower depreciation expense of $0.1 million caused by the use of the
double-declining balance method of depreciation which results in greater
depreciation in the first years an asset is owned.
(f) Net Income
As a result of the foregoing, the Partnership had net income of $6.7 million for
the year ended December 31, 1999, compared to net income of $5.8 million during
the same period of 1998. The Partnership's ability to acquire, operate, and
liquidate assets, secure leases, and re-lease those assets whose leases expire
is subject to many factors. Therefore, the Partnership's performance in the year
ended December 31, 1999 is not necessarily indicative of future periods. In the
year ended December 31, 1999, the Partnership distributed $9.6 million to the
limited partners, or $1.80 per weighted-average limited partnership unit.
(2) 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 repairs 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, interest and other
income, and certain expenses, such as depreciation and amortization and general
and administrative expenses relating to the operating segments (see Note 5 to
the 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
---------------------------
Trailers $ 3,819 $ 3,275
Marine vessels 3,363 4,286
Rail equipment 2,000 1,994
Aircraft 1,712 2,001
Portable heaters 764 --
Marine containers 513 --
Modular buildings 47 426
Trailers: Trailer lease revenues and direct expenses were $4.7 million and $0.9
million, respectively, for the year ended December 31, 1998, compared to $3.8
million and $0.6 million, respectively, during the same period of 1997. The
increase in trailer contribution was due to the purchase of additional equipment
during the fourth quarter of 1997.
Marine vessels: Marine vessel lease revenues and direct expenses were $7.1
million and $3.7 million, respectively, for the year ended December 31, 1998,
compared to $6.7 million and $2.4 million, respectively, during the same period
of 1997. Lease revenues and direct expenses increased during the year ended
December 31, 1998, when compared to the same period of 1997, due to a change in
the lease arrangement of the marine vessels. During 1997, the marine vessels
operated under a bareboat charter lease in which the lessee paid a flat lease
rate, as well as certain operating expenses. During the third quarter of 1998,
the marine vessels switched from a bareboat charter to a lease arrangement in
which the lessee pays a higher lease rate. The Partnership, however, now pays
the operating expenses. The decrease in marine vessel contribution was due to
the increase in operating expenses, which exceeded the increase in the lease
rate.
Rail equipment: Rail equipment lease revenues and direct expenses were $2.7
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. Rail equipment contribution was approximately the same as in 1997 due
to the stability of the railcar fleet.
Aircraft: Aircraft lease revenues and direct expenses were $2.0 million and $0.3
million, respectively, for the year ended December 31, 1998, compared to $2.0
million and $20,000, respectively, during the same period of 1997. The decrease
in aircraft contribution was due to required repairs to the two commuter
aircraft that were off-lease during 1998. Similar repairs were not needed during
1997.
Portable heaters: Portable heater lease revenues and direct expenses were $0.8
million and $0, respectively, for the year ended December 31, 1998. The
Partnership purchased this equipment during the first quarter of 1998.
Marine containers: Marine containers had lease revenues of $0.5 million and no
direct expenses for the year ended December 31, 1998. The Partnership purchased
this equipment during September 1998.
Modular buildings: Modular building lease revenues and direct expenses were
$47,000 and $0, respectively, for the year ended December 31, 1998, compared to
$0.4 million and $12,000, respectively, during the same period of 1997. The
decrease in lease revenues and direct expenses was due to the sale of virtually
all of this equipment during the second quarter of 1997.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses were $13.2 million for the year ended December 31, 1998,
decreased from $14.4 million for the same period in 1997. Significant variances
are explained as follows:
(i) A $1.2 million decrease in depreciation and amortization expenses from
1997 levels reflects the double-declining balance method of depreciation which
results in greater depreciation in the first years an asset is owned. This
decrease was partially offset by $0.8 million in additional depreciation and
amortization expenses from the purchase of portable heaters and marine
containers during 1998.
(ii)A $0.3 million decrease in the provision for bad debts was due, in
part, to the collection of $0.1 million from past due receivables during the
year ended December 31, 1998 that had previously been reserved for as a bad debt
and the General Partner's evaluation of the collectability of receivables due
from certain lessees.
(iii) A $0.2 million increase in administrative expenses was due to higher
professional services during 1998, which were not needed during 1997, and higher
data processing costs.
(iv)A $0.1 million increase in management fees was due to higher lease
revenues earned by the Partnership during 1998, when compared to the same period
in 1997.
(c) Net Gain (Loss) on Disposition of Owned Equipment
The net loss on disposition of equipment for the year ended December 31, 1998
totaled $31,000, and resulted from the sale of trailers, modular buildings, and
a railcar, with an aggregate net book value of $0.4 million, for proceeds of
$0.3 million. The net gain on disposition of equipment for the year ended
December 31, 1997 totaled $1.8 million, and resulted from the sale of trailers
and modular buildings, with an aggregate net book value of $2.6 million, for
proceeds of $4.4 million.
(d) 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 $ 6,390 $ 1,721
Mobile offshore drilling unit 82 1
Marine vessels 21 (292)
--------- ----------
Equity in net income of USPEs $ 6,493 $ 1,430
========== ==========
Aircraft, rotable components, and aircraft engines: During the year ended
December 31, 1998, lease revenues of $5.8 million and the gain from the sale of
the Partnership's interest in two trusts of $8.8 million were offset by
depreciation expense, direct expenses, and administrative expenses of $8.2
million. During the same period of 1997, lease revenues of $8.2 million were
offset by depreciation expense, direct expenses, and administrative expenses of
$6.5 million. Lease revenues decreased $2.3 million due to the sale of the
Partnership's investment in two trusts containing ten commercial aircraft and
$1.9 million due to a lower lease rate earned on certain equipment during 1998
when compared to the same period of 1997. The decrease in lease revenues was
partially offset by an increase of $1.8 million from the Partnership's
investment in two additional trusts during 1998, each owning an MD-82 commercial
aircraft. Depreciation expense, direct expenses, and administrative expenses
increased $5.1 million due to the Partnership's investment in two additional
trusts during 1998. This increase was offset by a decrease of $2.7 million from
the sale of the Partnership's interest in two other trusts, and a decrease of
$0.7 million due primarily to the double-declining balance method of
depreciation which results in greater depreciation in the first years an asset
is owned.
Mobile offshore drilling unit: During the year ended December 31, 1998, revenues
of $0.4 million were offset by depreciation expense, direct expenses, and
administrative expenses of $0.3 million. During the same period of 1997, lease
revenues of $0.4 million were offset by depreciation expense, direct expenses,
and administrative expenses of $0.4 million. The increase in the contribution
from this equipment was due to a lower depreciation expense caused by the
double-declining balance method of depreciation, which results in greater
depreciation in the first years an asset is owned.
Marine vessels: During the year ended December 31, 1998, lease revenues of $1.1
million were offset by depreciation expense, direct expenses, and administrative
expenses of $1.1 million. During the same period of 1997, lease revenues of $1.1
million were offset by depreciation expense, direct expenses, and administrative
expenses of $1.4 million. The decrease of $0.3 million in depreciation expense,
direct expenses, and administrative expenses, was due primarily to lower
insurance expense of $0.2 million and $0.1 million from the double-declining
balance method of depreciation which results in greater depreciation in the
first years an asset is owned.
(e) Net Income
As a result of the foregoing, the Partnership's net income for the year ended
December 31, 1998 was $5.8 million, compared to a net income of $1.1 million
during the same period of 1997. The Partnership's ability to acquire, operate,
and liquidate assets, secure leases, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance in the year
ended December 31, 1998 is not necessarily indicative of future periods. In the
year ended December 31, 1998, the Partnership distributed $9.6 million to the
limited partners, or $1.80 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 either to redeploy the assets in the most
advantageous geographic location or sell the assets.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to U.S.-domiciled lessees consists of aircraft, modular buildings,
portable heaters, trailers, and railcars. During 1999, U.S. lease revenues
accounted for 37% of the total lease revenues of wholly- and partially-owned
equipment while this region reported a net loss of $3.1 million compared to the
Partnership's net income of $6.7 million. The net loss was due primarily to the
double-declining balance method of depreciation on the aircraft purchased during
1999 and 1998, which results in greater depreciation in the first years an asset
is owned.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to Canadian-domiciled lessees consisted of aircraft and railcars. During
1999, Canadian lease revenues accounted for 6% of the total lease revenues of
wholly- and partially-owned equipment while this region reported a net income of
$0.6 million compared to the Partnership's net income of $6.7 million.
The Partnership's owned equipment and investments in equipment that was owned by
USPEs on lease to South American-domiciled lessees consisted of aircraft. During
1999, South American lease revenues accounted for 6% of the total lease revenues
of wholly and partially owned equipment while this region reported a net income
of $7.5 million compared to the Partnership's net income of $6.7 million. The
primary reason for this relationship is that a gain of $5.8 million was realized
from the sale of an aircraft in this geographic region.
The Partnership's investment in equipment that was owned by a USPE and was on
lease to a lessee in Europe, consisted of commercial aircraft, aircraft engines,
and aircraft rotable components. Although this region did not generate any lease
revenues, this region reported a net income of $3.0 million compared to the
Partnership's net income of $6.7 million. The primary reason for this
relationship is that a gain of $3.1 million was realized from the sale of the
equipment in this geographic region.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to lessees in the rest of the world consisted of marine vessels, marine
containers, and a rig. During 1999, lease revenues for these operations
accounted for 52% of the total lease revenues of wholly and partially owned
equipment while this region reported a net income of $0.9 million compared to
the Partnership's net income of $6.7 million.
(F) Effects of Year 2000
As of March 29, 2000, the Partnership has not experienced any material Year 2000
(Y2K) issues with either its internally developed software or purchased
software. In addition, to date, the Partnership has not been impacted by any Y2K
problems that may have impacted our customers and suppliers. The amount
allocated to the Partnership by the General Partner related to Y2K issues has
not been material. The General Partner continues to monitor its systems for any
potential Y2K issues.
(G) Inflation
Inflation had no significant impact on the Partnership's operations during 1999,
1998, or 1997.
(H) 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.
(I) Outlook for the Future
The Partnership's operation of a diversified equipment portfolio in a broad base
of markets is intended to reduce its exposure to volatility in individual
equipment sectors.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent 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
continually monitors both the equipment markets and the performance of the
Partnership's equipment in these markets. The General Partner may make an
evaluation to reduce the Partnership's exposure to those equipment markets in
which it determines that it cannot operate equipment and achieve acceptable
rates of return. Alternatively, the General Partner may make a determination to
enter those equipment markets in which it perceives opportunities to profit from
supply/demand instabilities or other market imperfections.
The Partnership intends to use excess cash flow, if any, after payment of
operating expenses, pay principal and interest on debt, and cash distributions
to the partners to acquire additional equipment during the first six years of
Partnership operations which ends on December 31, 2001. The General Partner
believes that these acquisitions may cause the Partnership to generate
additional earnings and cash flow for the Partnership.
Factors affecting the Partnership's contribution in 2000 and beyond include:
1. The Partnership is experiencing difficulty in leasing a commercial aircraft
in which the Partnership has a partial interest and selling its commuter
aircraft.
2. Depressed economic conditions in Asia during most of 1999 led to low freight
rates for dry bulk marine vessels. As Asia began its economic recovery later in
1999 freight rates began to increase and, in the absence of new additional
orders, this market would be expected to continue to show improvement and
stabilize over the next one to two years.
3. Railcar loadings in North America have continued to be high, however a
softening in the market is expected which may lead to lower utilization and
lower contribution to the Partnership as existing leases expire and renewal
leases are negotiated.
Several other factors may affect the Partnership's operating performance in 2000
and beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
(1) Repricing and Reinvestment Risk
Certain of the Partnership's aircraft, marine vessels, marine containers,
railcars, and trailers will be remarketed in 2000 as existing leases expire,
exposing the Partnership to some repricing risk/opportunity. Additionally, the
General Partner may elect to sell certain underperforming equipment or equipment
whose continued operation may become prohibitively expensive. In either case,
the General Partner intends to re-lease or sell equipment at prevailing market
rates; however, the General Partner cannot predict these future rates with any
certainty at this time, and cannot accurately assess the effect of such activity
on future Partnership performance. The proceeds from the sold or liquidated
equipment will be redeployed to purchase additional equipment, as the
Partnership is in its reinvestment phase.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the General Partner has
observed rising insurance costs to operate certain vessels in U.S. ports,
resulting from implementation of the U.S. Oil Pollution Act of 1990. Under U.S.
Federal Aviation Regulations, after December 31, 1999, no person shall operate
an aircraft to or from any airport in the contiguous United States unless that
airplane has been shown to comply with Stage III noise levels. The Partnership's
Stage II aircraft is currently leased in a country that does not require this
regulation. The U.S. Federal Railroad Administration has mandated that effective
July 1, 2000, all jacketed and non-jacketed tank railcars must be re-qualified
to insure tank shell integrity. Tank shell thickness, weld seams, and weld
attachments must be inspected and repaired if necessary to re-qualify a tank
railcar for service. The average cost of this inspection is $1,800 for
non-jacketed tank railcars and $3,600 for jacketed tank railcars, not including
any necessary repairs. This inspection is to be performed at the next scheduled
tank test. Ongoing changes in the regulatory environment, both in the United
States and internationally, cannot be predicted with accuracy, and preclude the
General Partner from determining the impact of such changes on Partnership
operations, purchases, or sale of equipment.
(J) Additional Capital Resources and Distribution Levels
The Partnership's initial contributed capital was composed of the proceeds from
its initial offering of $107.4 million, supplemented by permanent debt in the
amount of $23.0 million. 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 Partnership intends to rely on
operating cash flow to meet its operating obligations, make cash distributions
to limited partners, make debt payments, and increase the Partnership's
equipment portfolio with any remaining surplus cash available.
Pursuant to the limited partnership agreement, the Partnership will cease to
reinvest surplus cash in additional equipment beginning in its seventh year of
operations, which commences on January 1, 2002. Prior to that date, the General
Partner intends to continue its strategy of selectively redeploying equipment to
achieve competitive returns. By the end of the reinvestment period, the General
Partner intends to have assembled an equipment portfolio capable of achieving a
level of operating cash flow for the remaining life of the Partnership
sufficient to meet its obligations and sustain a predictable level of
distributions to the partners.
The General Partner 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 precludes the General Partner from
accurately determining the impact of changing market conditions on liquidity or
distribution levels.
The Partnership's permanent debt obligation began to mature in December 1999.
The General Partner believes that sufficient cash flow will be available in the
future for repayment of debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of currency devaluation
risk. During 1999, 63% 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 in 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 OF 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 61 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 52 Director, PLM International, Inc.
Douglas P. Goodrich 53 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 34 Director, PLM International, Inc.
Howard M. Lorber 51 Director, PLM International, Inc.
Harold R. Somerset 64 Director, PLM International, Inc.
Robert L. Witt 59 Director, PLM International, Inc.
Robin L. Austin 53 Vice President, Human Resources, PLM International, Inc. and PLM
Financial Services, Inc.
Stephen M. Bess 53 President, PLM Investment Management, Inc.; Vice President and
Director, PLM Financial Services, Inc.
Richard K Brock 37 Vice President and Chief Financial Officer, PLM International,
Inc. and PLM Financial Services, Inc.
Susan C. Santo 37 Vice President, Secretary, and General Counsel, PLM
International, Inc. and PLM Financial Services, Inc.
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment 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.
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 Chief Financial Officer of PLM
International and PLM Financial Services, Inc. in January 2000, after having
served as Acting CFO since June 1999. Mr. Brock served as Corporate Controller
of PLM International and PLM Financial Services, Inc. beginning in June 1997, as
Director of Planning and General Accounting beginning in February 1994, and as
an accounting manager beginning in September 1991. Mr. Brock was a division
controller of Learning Tree International, a technical education company, from
February 1988 through July 1991.
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.
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, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 5% interest in the
profits and losses (subject to certain allocations of income), cash
available for distributions, and net disposition proceeds of the
Partnership. As of December 31, 1999, no investor was known by the
General Partner to beneficially own more than 5% of the limited
partnership units of the Partnership.
(B) Security Ownership of Management
Neither the General Partner and its affiliates nor any executive
officer or director of the General Partner and its affiliates owned any
limited partnership units of the Partnership as of December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
During 1999, the Partnership paid or accrued the following fees to FSI
or its affiliates: management fees, $1.0 million; equipment acquisition
fees, $0.5 million; and lease negotiation fees, $0.1 million. The
Partnership reimbursed FSI or its affiliates $0.9 million for
administrative and data processing services performed on behalf of the
Partnership during 1999.
During 1999, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Partnership's proportional share of
ownership): management fees, $0.2 million, equipment acquisition fees,
$0.4 million; lease negotiation fees, $4,000, and administrative and
data processing services, $0.1 million.
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. 33-55796), which became effective with the Securities and
Exchange Commission on May 25, 1993.
4.1 First Amendment to the Third Amendment and Restated Partnership
Agreement, dated May 10, 1993.
4.2 Second Amendment to the Third Amendment and Restated Partnership
Agreement, dated May 10, 1999.
4.3 Third Amendment to the Third Amendment and Restated Partnership
Agreement, dated March 25, 1999.
10.1 Management Agreement between Partnership and PLM Investment
Management, Inc., incorporated by reference to the Partnership's
Registration Statement on Form S-1 (Reg. No. 33-55796), which
became effective with the Securities and Exchange Commission on May
25, 1993.
10.2 Note Agreement, dated as of December 1, 1995, regarding $23.0
million of 7.27% senior notes due December 21, 2005. Incorporated
by reference to the Partnership's Annual Report on Form 10-K
dated December 31, 1995 filed with the Securities and Exchange
Commission on March 20, 1996.
10.3 Fourth Amended and Restated Warehousing Credit Agreement, dated as
of December 15, 1998, with First Union National Bank of North
Carolina incorporated by reference the Partnership's Annual Report
on Form 10-K/A dated December 31, 1998 filed with the Securities
and Exchange Commission on January 5, 2000.
10.4 First amendment to the Fourth Amended and Restated Warehouse
Credit Agreement dated December 10, 1999.
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 29, 2000 PLM EQUIPMENT GROWTH & INCOME FUND VII
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
Chief Financial Officer
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 29, 2000
*_______________________
Douglas P. Goodrich Director, FSI March 29, 2000
*_______________________
Stephen M. Bess Director, FSI March 29, 2000
*Susan C. 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 & INCOME FUND VII
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' report 31
Balance sheets as of December 31, 1999 and 1998 32
Statements of income for the years ended
December 31, 1999, 1998, and 1997 33
Statements of changes in partners' capital for the
years ended December 31, 1999, 1998, and 1997 34
Statements of cash flows for the years ended
December 31, 1999, 1998, and 1997 35
Notes to financial statements 36-48
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 & Income Fund VII:
We have audited the accompanying financial statements of PLM Equipment Growth &
Income Fund VII (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 & Income
Fund VII as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
SAN FRANCISCO, CALIFORNIA
March 12, 2000
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
1999 1998
-----------------------------------
Assets
Equipment held for operating leases, at cost $ 70,579 $ 97,404
Less accumulated depreciation (36,466) (46,578)
-----------------------------------
Net equipment 34,113 50,826
Cash and cash equivalents 2,495 404
Restricted cash 111 219
Accounts receivable, less allowance for doubtful accounts of
$382 in 1999 and $251 in 1998 1,099 1,893
Investments in unconsolidated special-purpose entities 27,843 22,817
Lease negotiation fees to affiliate, less accumulated
amortization of $21 in 1999 and $153 in 1998 99 116
Debt issuance costs, less accumulated amortization
of $104 in 1999 and $78 in 1998 152 177
Prepaid expenses and other assets 54 85
-----------------------------------
Total assets $ 65,966 $ 76,537
===================================
Liabilities, minority interests, and partners' capital
Liabilities
Accounts payable and accrued expenses $ 1,267 $ 657
Due to affiliates 560 1,318
Lessee deposits and reserve for repairs 1,392 1,530
Notes payable 20,000 23,000
-----------------------------------
Total liabilities 23,219 26,505
-----------------------------------
Minority interests -- 3,785
Partners' capital
Limited partners (limited partnership units of 5,323,819 and
5,334,211 as of December 31, 1999 and 1998, respectively) 42,747 46,247
General Partner -- --
-----------------------------------
Total partners' capital 42,747 46,247
-----------------------------------
Total liabilities, minority interest, and partners' capital $ 65,966 $ 76,537
===================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
STATEMENTS OF INCOME
For the Years Ended December 31,
(in thousands of dollars, except weighted-average unit amounts)
1999 1998 1997
-----------------------------------------------
Revenues
Lease revenue $ 19,432 $ 17,851 $ 15,755
Interest and other income 277 380 327
Net gain (loss) on disposition of equipment 1,140 (31) 1,803
--------------------------------------------------
Total revenues 20,849 18,200 17,885
--------------------------------------------------
Expenses
Depreciation and amortization 9,013 9,461 10,613
Repairs and maintenance 3,121 2,590 1,883
Equipment operating expenses 2,629 2,637 1,312
Other insurance expenses 563 449 612
Management fees to affiliate 982 978 867
Interest expense 1,672 1,668 1,691
General and administrative expenses to affiliates 925 762 704
Other general and administrative expenses 602 573 470
Provision for (recovery of) bad debts 815 (92) 254
-----------------------------------------------
Total expenses 20,322 19,026 18,406
-----------------------------------------------
Minority interests 114 157 192
Equity in net income of unconsolidated
special-purpose entities 6,067 6,493 1,430
-----------------------------------------------
Net income $ 6,708 $ 5,824 $ 1,101
===============================================
Partners' share of net income
Limited partners $ 6,204 $ 5,317 $ 593
General Partner 504 507 508
-----------------------------------------------
Total $ 6,708 $ 5,824 $ 1,101
===============================================
Net income per weighted-average limited
partnership unit $ 1.16 $ 0.99 $ 0.11
===============================================
Cash distribution $ 10,083 $ 10,127 $ 10,176
===============================================
Cash distribution per weighted-average
limited partnership unit $ 1.80 $ 1.80 $ 1.80
===============================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
Limited General
Partners Partner Total
--------------------------------------------------
Partners' capital as of December 31, 1996 $ 60,137 $ -- $ 60,137
Net income 593 508 1,101
Cash distribution (9,668) (508) (10,176)
--------------------------------------------------
Partners' capital as of December 31, 1997 51,062 -- 51,062
Net income 5,317 507 5,824
Purchase of limited partnership units (512) -- (512)
Cash distribution (9,620) (507) (10,127)
-------------------------------------------------
Partners' capital as of December 31, 1998 46,247 -- 46,247
Net income 6,204 504 6,708
Purchase of limited partnership units (125) -- (125)
Cash distribution (9,579) (504) (10,083)
--------------------------------------------------
Partners' capital as of December 31, 1999 $ 42,747 $ -- $ 42,747
==================================================
See accompanying notes to financialstatements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(in thousands of dollars)
1999 1998 1997
--------------------------------------------
Operating activities
Net income $ 6,708 $ 5,824 $ 1,101
Adjustments to reconcile net income
to net cash provided by (used in ) operating activities:
Depreciation and amortization 9,013 9,461 10,613
Net (gain) loss on disposition of equipment (1,140) 31 (1,803)
Equity in net income from unconsolidated
special-purpose entities (6,067) (6,493) (1,430)
Changes in operating assets and liabilities:
Restricted cash (111) (28) (33)
Accounts receivable, net 608 (938) 355
Prepaid expenses and other assets (44) (57) 7
Accounts payable and accrued expenses (237) 15 197
Due to affiliates 251 315 79
Lessee deposits and reserve for repairs 233 (293) 327
Minority interests (443) 2,274 (338)
-------------------------------------------
Net cash provided by operating activities 8,771 10,111 9,075
--------------------------------------------
Investing activities
Payments for purchase of equipment and capitalized repairs (11,855) (13,465) (3,701)
Investment in and equipment purchased and placed in
unconsolidated special-purpose entities (8,975) (14,721) (683)
Distribution from unconsolidated special-purpose entities 3,382 8,958 6,529
Payments of acquisition fees to affiliate (567) (605) (162)
Payments of lease negotiation fees to affiliate (126) (134) (36)
Distributions from liquidation of unconsolidated special-purpose
entities 17,043 14,802 --
Proceeds from disposition of equipment 7,626 352 4,431
--------------------------------------------
Net cash provided by (used in) investing activities 6,528 (4,813) 6,378
--------------------------------------------
Financing activities
Payments due to affiliates -- (5,092) --
Cash received from affiliates -- 1,510 3,582
Cash distribution paid to limited partners (9,579) (9,620) (9,668)
Cash distribution paid to General Partner (504) (507) (508)
Purchase of limited partnership units (125) (512) --
Principal payments on notes payable (3,000) -- --
Principal payments on short-term note payable -- -- (2,000)
-------------------------------------------
Net cash used in financing activities (13,208) (14,221) (8,594)
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,091 (8,923) 6,859
Cash and cash equivalents at beginning of year 404 9,327 2,468
--------------------------------------------
Cash and cash equivalents at end of year $ 2,495 $ 404 $ 9,327
============================================
Supplemental information
Interest paid $ 1,672 $ 1,705 $ 1,664
============================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Basis of Presentation
Organization
PLM Equipment Growth & Income Fund VII, a California limited partnership (the
Partnership), was formed on December 2, 1992 to engage in the business of
owning, leasing, or otherwise investing in predominately used transportation and
related equipment. PLM Financial Services, Inc. (FSI) is the General Partner of
the Partnership. FSI is a wholly-owned subsidiary of PLM International, Inc.
(PLM International).
Beginning in the Partnership's seventh year of operations, which commences on
January 1, 2002, the General Partner will stop purchasing additional equipment.
Surplus cash, if any, less reasonable reserves, will be distributed to the
partners. Beginning in the Partnership's ninth year of operations, which
commences on January 1, 2004, the General Partner intends to begin an orderly
liquidation of the Partnership's assets. The Partnership will terminate on
December 31, 2013, unless terminated earlier upon sale of all equipment or by
certain other events.
FSI manages the affairs of the Partnership. Cash distributions of the
Partnership are generally allocated 95% to the limited partners and 5% to the
General Partner. Net income is allocated to the General Partner to the extent
necessary to cause the General Partner's capital account to equal zero. The
General Partner is also entitled to receive a subordinated incentive fee after
the limited partners receive a minimum return on, and a return of, their
invested capital.
The partnership agreement includes a redemption provision. Beginning in the 31st
month of operations, which was October 1997, the Partnership may, at the General
Partner's sole discretion, redeem up to 2% of the outstanding units each year.
The purchase price to be offered by the Partnership for outstanding units will
be equal to 105% of the unrecovered principal attributed to the units.
Unrecovered principal is defined as the excess of the capital contributions from
any source paid with respect to a unit. For the years ended December 31, 1999
and 1998, the Partnership repurchased 10,392 and 36,086 limited partnership
units for $0.1 million and $0.5 million, respectively.
As of December 31, 1999, the Partnership agreed to purchase approximately 1,000
units for an aggregate price of approximately $10,000. The General Partner
anticipates that these units will be purchased in the first and second quarters
of 2000. In addition to these units, the General Partner may purchase additional
limited partnership 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 of the Partnership is managed, under a continuing management
agreement, by PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary
of the FSI. IMI receives a monthly management fee from the Partnership for
managing the equipment (see Note 2). FSI, in conjunction with its subsidiaries,
sells equipment to investor programs and third parties, manages pools of
equipment under agreements with investor programs, and is a general partner of
other programs.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
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 as earned in accordance with Statement
of Financial Accounting Standards No. 13, "Accounting for Leases" (SFAS 13).
Lease origination costs are capitalized and amortized over the term of the
lease.
Depreciation and Amortization
Depreciation of transportation equipment held for operating leases is computed
on the double-declining balance method, taking a full month's depreciation in
the month of acquisition, based upon estimated useful lives of 15 years for
railcars and 12 years for other equipment. The depreciation method is changed to
straight line when annual depreciation expense using the straight-line method
exceeds that calculated by the double-declining balance method. Acquisition fees
and certain other acquisition costs have been capitalized as part of the cost of
the equipment. 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 7). Major expenditures that are expected to extend the useful lives or
reduce future operating expenses of equipment are capitalized and amortized over
the estimated remaining life of the equipment.
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" (SFAS 121), the General Partner reviews the carrying value of
the Partnership's equipment at least quarterly, and whenever circumstances
indicate that the carrying value of an asset may not be recoverable in relation
to expected future market conditions, for the purpose of assessing
recoverability of the recorded amounts. If projected undiscounted future cash
flows and the fair market value of the equipment 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 1999, 1998, and 1997.
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. The Partnership owns a majority interest in
two such entities. Prior to September 30, 1999, the Partnership controlled the
management of these entities and thus they were consolidated into the
Partnership's financial statements. On September 30, 1999, the corporate-by-laws
of these entities were changed to require a unanimous vote by all owners on
major business decisions. Thus, from September 30, 1999 forward, the Partnership
no longer controlled the management of these entities, and the accounting method
for the entities was changed from the consolidation method to 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 or WMS.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
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 and are accrued as incurred. Costs
associated with marine vessel dry-docking are estimated and accrued ratably over
the period prior to such dry-docking. Maintenance costs of aircraft and marine
containers are the obligation of the lessee. To meet the maintenance
requirements of certain aircraft airframes and engines, reserve accounts are
prefunded by the lessee over the period of the lease based on the number of
hours this equipment is used, times the estimated rate to repair this equipment.
If repairs exceed the amount prefunded by the lessee, the Partnership has the
obligation to fund and accrue the difference. In certain instances, if the
aircraft is sold and there is a balance in the reserve account for repairs to
that aircraft, the balance in the reserve account is reclassified as additional
sales proceeds. The aircraft reserve accounts and marine vessel dry-docking
reserve accounts are included in the balance sheet as lessee deposits and
reserve for repairs.
Net Income (Loss) and Distributions Per Limited Partnership Unit
Net income is allocated to the General Partner to the extent necessary to cause
the General Partner's capital account to equal zero. 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) and cash distributions 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 $3.3 million, $4.3
million, and $9.1 million for the years ended December 31, 1999, 1998, and 1997,
respectively, were deemed to be a return of capital.
Cash distributions relating to the fourth quarter of 1999, 1998, and 1997, of
$1.4 million for each year, were paid during the first quarter of 2000, 1999,
and 1998, 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, 1999, 1998, and 1997 was 5,326,161, 5,341,360, and 5,370,297,
respectively.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily convertible
to known amounts of cash with original maturities of three months or less as
cash equivalents. The carrying amount of cash equivalents approximates fair
market value due to the short-term nature of the investments.
Comprehensive Income
The Partnership's net income is equal to comprehensive income for the years
ended December 31, 1999, 1998, and 1997.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Basis of Presentation (continued)
Restricted Cash
As of December 31, 1999 and 1998, 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 to either owned equipment or interests in
equipment owned by the USPEs equal to the lesser of (i) the fees that would be
charged by an independent third party for similar services for similar equipment
or (ii) the sum of (A) for that equipment for which IMI provides only basic
equipment management services, (a) 2% of the gross lease revenues, as defined in
the agreement, attributable to equipment that is subject to full payout net
leases and (b) 5% of the gross lease revenues attributable to equipment that is
subject to operating leases, and (B) for that equipment for which IMI provides
supplemental equipment management services, 7% of the gross lease revenues
attributable to such equipment. Partnership management fees payable were $0.1
million as of December 31, 1999 and 1998. The Partnership's proportional share
of USPE management fees of $0.1 million and $45,000 were payable as of December
31, 1999 and 1998, respectively. The Partnership's proportional share of USPE
management fee expense was $0.2 million, $0.3 million, $0.4 million during 1999,
1998, and 1997 respectively. The Partnership reimbursed FSI $0.9 million during
1999, $0.8 million during 1998, and $0.7 million during 1997 for data processing
expenses and other administrative services performed on behalf of the
Partnership. The Partnership's proportional share of USPE data processing and
administrative expenses reimbursed to FSI was $0.1 million, $0.1 million and
$22,000 during 1999, 1998, and 1997, respectively.
The Partnership paid $49,000, in 1998 to Transportation Equipment Indemnity
Company, Ltd. (TEI), an affiliate of the General Partner that provides marine
insurance coverage and other insurance brokerage. No fees for owned equipment
were paid to TEI in either 1999 or 1997. The Partnership's proportional share of
USPE marine insurance coverage paid to TEI was $0 during 1998 and $0.1 million
during 1997. A substantial portion of this amount was paid to third-party
reinsurance underwriters or was placed in risk pools managed by TEI on behalf of
affiliated programs and PLM International, which provided threshold coverages on
marine vessel loss of hire and hull and machinery damage. All pooling
arrangement funds were either paid out to cover applicable losses or refunded
pro rata by TEI. The Partnership's proportional share of a refund of $14,000 was
received during 1998, from lower loss-of-hire insurance claims from the insured
USPEs and other insured affiliated programs. During 1999 and 1998, TEI did not
provide the same level of insurance coverage as had been provided during
previous years. These services were provided by an unaffiliated third party. PLM
International liquidated TEI during the first quarter of 2000.
The Partnership and USPEs paid or accrued lease negotiation and equipment
acquisition fees of $1.1 million, $1.5 million, and $0.2 million, during 1999,
1998, and 1997, respectively, to TEC and WMS.
TEC will also be entitled to receive an equipment liquidation fee equal to the
lesser of (i) 3% of the sales price of equipment sold on behalf of the
Partnership or (ii) 50% of the "Competitive Equipment Sale Commission," as
defined in the agreement, if certain conditions are met. In certain
circumstances, the General Partner will be entitled to a monthly re-lease fee
for re-leasing services following the expiration of the initial lease, charter,
or other contract for certain equipment equal to the lesser of (a) the fees that
PLM Equipment Growth & Income Fund VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
2. General Partner and Transactions with Affiliates (continued)
would be charged by an independent third party for comparable services for
comparable equipment or (b) 2% of gross lease revenues derived from such
re-lease, provided, however, that no re-lease fee shall be payable if such
re-lease fee would cause the combination of the equipment management fee paid to
IMI and the re-lease fee with respect to such transaction to exceed 7% of gross
lease revenues.
As of December 31, 1999, approximately 78% 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. Rents are recorded
as revenue in accordance with Financial Accounting Standards Board Statement No.
13 "Accounting for Leases". Direct expense 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
partnerships during 1999, 1998, and 1997 (see Note 4).
The balance due to affiliates as of December 31, 1999 includes $0.1 million due
to FSI and its affiliates for management fees and $0.5 million due to affiliated
USPEs. The balance due to affiliates as of December 31, 1998 includes $0.1
million due to FSI and its affiliates for management fees and $1.2 million due
to affiliated USPEs.
3. Equipment
The components of owned equipment as of December 31 are as follows (in thousands
of dollars):
Equipment Held for Operating Leases 1999 1998
----------------------------------------- -------------------------------
Marine vessels $ 22,212 $ 39,977
Trailers 16,895 17,280
Marine containers 12,498 9,957
Aircraft 9,297 15,933
Rail equipment 9,677 10,084
Portable heaters -- 4,085
Modular buildings -- 88
-------------------------------
70,579 97,404
Less accumulated depreciation (36,466) (46,578)
-------------------------------
Net equipment
$ 34,113 $ 50,826
===============================
Revenues are earned by placing the equipment under operating leases. Most of the
Partnership's marine vessels are leased to lessees on a voyage charter basis for
a specific trip. Rental revenues for railcars are based on a monthly fixed lease
rate however, in certain instances, rental revenues are based on mileage
traveled. Rental revenues for all other equipment are based on a monthly fixed
lease rate.
During September 1999, certain equipment in which the Partnership held a
majority ownership, was reclassified to investments in USPEs (see Note 4).
As of December 31, 1999, all owned equipment was on lease or operating in
PLM-affiliated short-term trailer rental facilities, except a commuter aircraft
and ten railcars. As of December 31, 1998 all owned equipment in the
Partnership's portfolio was on lease or operating in PLM-affiliated short-term
trailer rental yards, except for two commuter aircraft and three railcars. The
net book value of the equipment off lease was $1.5 million and $3.3 million as
of December 31, 1999 and 1998, respectively.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
3. Equipment (continued)
During 1999, the Partnership purchased a portfolio of portable heaters for $0.2
million, including acquisition fees of $9,000, and marine containers for $12.5
million, including acquisition fees of $0.5 million. During 1998, the
Partnership purchased a portfolio of portable heaters for $4.1 million,
including $0.2 million in acquisition fees. All acquisition fees were paid to
FSI.
During 1999, the Partnership disposed of or sold a commercial aircraft, portable
heaters, trailers, modular buildings, and railcars with an aggregate net book
value of $6.5 million for $7.6 million. During 1998, the Partnership disposed of
or sold modular buildings, trailers, and a railcar with a net book value of $0.4
million for $0.3 million.
All wholly- and partially-owned equipment on lease is accounted for as operating
leases. Future minimum rent under noncancelable operating leases as of December
31, 1999 for this equipment during each of the next five years are approximately
$13.7 million in 2000, $10.0 million in 2001, $4.3 million in 2002, $4.1 million
in 2003, $3.9 million in 2004, and $7.1 million thereafter. Per diem and
short-term rentals consisting of utilization rate lease payments included in
lease revenues amounted to $4.2 million in 1999, $4.7 million in 1998, and $3.8
million in 1997.
4. Investments in Unconsolidated Special-Purpose Entities (USPEs)
The Partnership owns equipment jointly with affiliated programs.
In September 1999, the General Partner amended the corporate-by-laws of certain
USPEs in which the Partnership, or any affiliated program, owns an interest
greater than 50%. The amendment to the corporate-by-laws provided that all
decisions regarding the acquisition and disposition of the investment as well as
other significant business decisions of that investment would be permitted only
upon unanimous consent of the Partnership and all the affiliated programs that
have an ownership in the investment. As such, although the Partnership may own a
majority interest in a USPE, the Partnership does not control its management and
thus the equity method of accounting will be used after adoption of the
amendment. As a result of the amendment, as of September 30, 1999, all jointly
owned equipment in which the Partnership owned a majority interest, which had
been consolidated, were reclassified to investments in USPEs. Accordingly, as of
December 31, 1999, the balance sheet reflects all investments in USPEs on an
equity basis.
The net investment in USPEs includes the following jointly-owned equipment (and
related assets and liabilities) as of December 31 (in thousands of dollars):
1999 1998
- --------------------------------------------------------------------------------------------------------------
38% interest in a trust owning a Boeing 737-300 Stage III commercial
aircraft $ 7,974 $ --
75% interest in an entity owning marine containers 6,656 --
50% interest in a trust owning an MD-82 Stage III commercial aircraft 5,066 6,804
80% interest in an entity owning a dry bulk-carrier marine vessel 4,224 --
44% interest in an entity owning a dry bulk-carrier marine vessel 1,917 2,211
50% interest in a trust owning an MD-82 Stage III commercial aircraft 1,808 3,546
50% interest in a trust that owned four Boeing 737-200A Stage II
commercial aircraft 122 222
25% interest in a trust that owned four Boeing 737-200A Stage II
commercial aircraft 79 141
33% interest in two trusts that owned a total of three Boeing 737-200A
Stage II commercial aircraft, two stage II aircraft engines, and
a portfolio of aircraft rotables -- 4,102
10% interest in an entity that owned a mobile offshore drilling unit -- 1,450
24% interest in a trust that owned a Boeing 767-200ER Stage III
commercial aircraft (3) 4,341
Net investments $ 27,843 $ 22,817
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
4. Investments in Unconsolidated Special-Purpose Entities (USPEs) (continued)
As of December 31, 1999, all jointly-owned equipment in the Partnership's USPE
portfolio was on lease except for a Boeing 737-300 commercial aircraft with a
net investment of $8.0 million. As of December 31, 1998, all jointly-owned
equipment in the Partnership's USPE portfolio was on lease.
During 1999, the Partnership purchased an interest in a trust owning a Boeing
737-300 Stage III commercial aircraft for $9.0 million including acquisition and
lease negotiation fees of $0.4 million. The Partnership also increased its
interest in marine containers by $0.5 million including acquisition and lease
negotiation fees of $24,000. All fees were paid to FSI. The remaining interest
was purchased by an affiliated program.
During 1999, the General Partner sold the Partnership's 33% interest in two
trusts that owned a total of three Boeing 737-200A Stage II commercial aircraft,
two stage II aircraft engines, and a portfolio of aircraft rotables for proceeds
of $7.1 million for its net investment of $4.0 million. The General Partner also
sold the Partnership's 24% interest in a Boeing 767-200ER Stage III commercial
aircraft for proceeds of $9.6 million which includes $0.7 million of unused
engine reserves for its net investment of $3.8 million and the Partnership's 10%
interest in a mobile offshore drilling unit for proceeds of $1.2 million for its
net investment of $1.3 million
During 1998, the Partnership completed its commitment to purchase an interest in
a trust owning a MD-82 Stage III commercial aircraft for $7.2 million, including
acquisition and lease negotiation fees of $0.4 million that were paid to FSI for
the purchase of this equipment. The Partnership made a deposit of $0.7 million
toward this purchase in 1997. The Partnership also purchased an interest in
another trust owning an MD-82 Stage III commercial aircraft for $8.2 million,
including acquisition and lease negotiation fees of $0.4 million that were paid
to FSI for the purchase of this equipment. The remaining interest in this trust
was purchased by an affiliated program.
In addition, during 1998, the Partnership purchased an interest in an entity
owning a portfolio of marine containers for $7.5 million, including acquisition
and lease negotiation fees of $0.4 million that were paid to FSI. The remaining
interest in this entity was purchased by an affiliated program.
The Partnership had a beneficial interests in two USPEs that owned multiple
aircraft (the Trusts). These Trusts contain provisions, under certain
circumstances, for allocating specific aircraft to the beneficial owners. During
1998, in one of these Trusts, the Partnership sold the two commercial aircraft
assigned to it, with a net book value of $3.4 million, for proceeds of $8.8
million. Also during the same period, in another trust, the Partnership sold the
commercial aircraft assigned to it, with a net book value of $2.7 million, for
proceeds of $6.0 million.
The following summarizes the financial information for the USPEs and the
Partnership's interest therein as of and for the year ended December 31 (in
thousands of dollars):
1999 1998 1997
Net Net Net
Total Interest Total Interest Total Interest
USPEs of USPEs of USPEs of
Partnership Partnership Partnership
--------------------------- --------------------------- ---------------------------
Net Investments $ 32,490 $ 27,843 $ 70,189 $ 22,817 $ 95,973 $ 25,363
Lease revenues 12,908 4,638 23,461 7,233 32,824 9,613
Net income 31,725 6,067 19,463 6,493 11,016 1,430
5. Operating Segments
The Partnership operates or operated in six primary operating segments: aircraft
leasing, modular building leasing, portable heater leasing, marine vessel
leasing, trailer leasing, and railcar leasing. Each equipment leasing segment
engages in short-term to mid-term operating leases to a variety of customers.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
5. Operating Segments (continued)
The General Partner evaluates the performance of each segment based on profit or
loss from operations before allocation of general and administrative expenses,
interest expense, and certain general and administrative, operations support,
and other expenses. The segments are managed separately due to the utilization
of different business strategies for each operation.
The 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, 1999 Leasing Leasing Leasing Leasing Leasing Other1 Total
--------- --------- --------- --------- --------- --------- -----------
REVENUES
Lease revenue $ 1,517 $ 2,520 $ 7,763 $ 4,228 $ 2,665 $ 739 $ 19,432
Interest income and other 29 1 -- -- 31 216 277
Gain (loss) on disposition of 977 -- -- 30 (31) 164 1,140
equipment
------------------------------------------------------------------------
Total revenues 2,523 2,521 7,763 4,258 2,665 1,119 20,849
COSTS AND EXPENSES
Operations support 875 2 3,883 926 575 52 6,313
Depreciation and amortization 1,318 2,449 2,481 1,557 735 473 9,013
Interest expense -- -- -- -- -- 1,672 1,672
Management fees to affiliate 76 140 388 185 186 7 982
General and administrative expenses 44 19 75 719 58 612 1,527
Provision for bad debts -- -- -- 201 20 594 815
------------------------------------------------------------------------
Total costs and expenses 2,313 2,610 6,827 3,588 1,574 3,410 20,322
------------------------------------------------------------------------
Minority interests -- (2) 116 -- -- -- 114
Equity in net income (loss) of USPEs 6,160 7 (192) -- -- 92 6,067
------------------------------------------------------------------------
Net income (loss) $ 6,370 $ (84) $ 860 $ 670 $ 1,091 $ (2,199) $ 6,708
========================================================================
Total assets as of December 31, 1999 $ 17,488 $ 18,001 $ 14,611 $ 8,137 $ 4,796 $ 2,933 $ 65,966
========================================================================
Portable Marine
Aircraft Heater Vessel Trailer Railcar All
For the Year Ended December 31, 1998 Leasing Leasing Leasing Leasing Leasing Other2 Total
--------- --------- --------- --------- --------- --------- -----------
REVENUES
Lease revenue $ 2,021 $ 764 $ 7,078 $ 4,685 $ 2,742 $ 561 $ 17,851
Interest income and other -- -- -- -- 20 360 380
Gain (loss) on disposition of -- -- -- (12) 9 (28) (31)
equipment
------------------------------------------------------------------------
Total revenues 2,021 764 7,078 4,673 2,771 893 18,200
COSTS AND EXPENSES
Operations support 309 -- 3,715 866 742 44 5,676
Depreciation and amortization 2,212 525 3,312 1,935 870 607 9,461
Interest expense 4 -- -- -- -- 1,664 1,668
Management fees to affiliate 101 38 354 272 195 18 978
General and administrative expenses 70 (15) 142 527 72 539 1,335
Provision for (recovery of) bad 2 -- -- 45 (30) (109) (92)
debts
------------------------------------------------------------------------
Total costs and expenses 2,698 548 7,523 3,645 1,849 2,763 19,026
------------------------------------------------------------------------
Minority interests -- -- 137 -- -- 20 157
Equity in net income of USPEs 6,390 -- 21 -- -- 82 6,493
------------------------------------------------------------------------
Net income (loss) $ 5,713 $ 216 $ (287) $ 1,028 $ 922 $ (1,768) $ 5,824
========================================================================
Total assets as of December 31, 1998 $ 25,510 $ 3,570 $ 19,104 $ 9,258 $ 5,645 $ 13,450 $ 76,537
========================================================================
- ----------------------------
1 Includes interest income and costs not identifiable to a particular
segment, such as, interest expense, and certain general and administrative
and operations support expenses. Also includes lease revenues and gain from
the sale of modular buildings and portable heaters and net income from an
investment in an entity that owned a mobile offshore drilling unit.
2 Includes interest income and costs not identifiable to a particular
segment, such as, interest expense, and certain general and administrative
and operations support expenses. Also includes lease revenues and direct
expenses of marine containers and modular buildings, loss from the sale of
modular buildings, and aggregate net income from an investment in an entity
that owned a mobile offshore drilling unit.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
5. Operating Segments (continued)
Modular Marine
Aircraft Building Vessel Trailer Railcar All
For the Year Ended December 31, 1997 Leasing Leasing Leasing Leasing Leasing Other3 Total
--------- --------- --------- --------- --------- --------- -----------
REVENUES
Lease revenue $ 2,021 $ 439 $ 6,688 $ 3,843 $ 2,764 $ -- $ 15,755
Interest income and other -- 6 -- -- -- 321 327
Gain (loss) on disposition of -- 1,805 -- (2) -- -- 1,803
equipment
------------------------------------------------------------------------
Total revenues 2,021 2,250 6,688 3,841 2,764 321 17,885
COSTS AND EXPENSES
Operations support 20 13 2,402 568 770 34 3,807
Depreciation and amortization 3,520 250 4,006 1,788 1,024 25 10,613
Interest expense -- -- -- -- -- 1,691 1,691
Management fees to affiliate 101 11 334 232 189 -- 867
General and administrative expenses 30 -- 105 454 82 503 1,174
Provision for (recovery of) bad -- 224 -- 57 (27) -- 254
debts
------------------------------------------------------------------------
Total costs and expenses 3,671 498 6,847 3,099 2,038 2,253 18,406
------------------------------------------------------------------------
Minority interests -- -- 192 -- -- -- 192
Equity in net income (loss) of USPEs 1,721 -- (292) -- -- 1 1,430
------------------------------------------------------------------------
Net income (loss) $ 71 $ 1,752 $ (259) $ 742 $ 726 $ (1,931) $ 1,101
========================================================================
Total assets as of December 31, 1997 $ 29,752 $ 77 $ 22,390 $ 11,456 $ 6,486 $ 12,462 $ 82,623
========================================================================
- -------------------
3 Includes interest income and costs not identifiable to a particular
segment, such as, interest expense, and certain general and administrative
and operations support expenses. Also includes lease revenues from modular
buildings and aggregate net income from an investment in an entity that
owned a mobile offshore drilling unit.
6. Geographic Information
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Partnership leases or leased its aircraft, portable heaters, modular
buildings, railcars, and trailers to lessees domiciled in four geographic
regions: the United States, Canada, South America, and Europe. Marine vessels,
marine containers, and the mobile offshore drilling unit 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 1999 1998 1997 1999 1998 1997
---------------------------- ------------------------------------- -------------------------------------
United States $ 6,719 $ 6,826 $ 5,985 $ 2,124 $ 1,783 $ --
Canada 1,345 1,413 1,061 -- 1,151 3,423
South America 1,085 2,021 2,021 394 1,231 1,181
Europe -- -- -- -- 1,560 3,530
Rest of the world 10,283 7,591 6,688 2,120 1,508 1,479
------------------------------------- -------------------------------------
Lease revenues $ 19,432 $ 17,851 $ 15,755 $ 4,638 $ 7,233 $ 9,613
===================================== =====================================
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
6. Geographic Information (continued)
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 1999 1998 1997 1999 1998 1997
---------------------------- ------------------------------------- -------------------------------------
United States $ (419) $ 479 $ 1,885 $ (2,636) $ (3,272) $ --
Canada 523 372 258 32 9,273 91
South America 1,734 588 (544) 5,811 311 85
Europe -- -- -- 2,953 78 1,545
Rest of the world 962 (369) 11 (93) 103 (291)
------------------------------------- -------------------------------------
Regional income 2,800 1,070 1,610 6,067 6,493 1,430
Administrative and other (2,159) (1,739) (1,939) -- -- --
===================================== =====================================
Net income (loss) $ 641 $ (669) $ (329) $ 6,067 $ 6,493 $ 1,430
===================================== =====================================
The net book value of these assets as of December 31, are as follows (in
thousands of dollars):
Owned Equipment Investments in USPEs
------------------------------------- --------------------------------------
Region 1999 1998 1997 1999 1998 1997
---------------------------- ------------------------------------- -------------------------------------
United States $ 11,218 $ 19,248 $ 15,500 $ 14,847 $ 10,350 $ 682
Canada 2,371 2,554 2,519 201 363 7,669
South America 1,026 3,061 4,392 (3) 4,341 4,824
Europe -- -- -- -- 4,102 8,036
Rest of the world 19,498 25,963 19,872 12,798 3,661 4,152
------------------------------------- -------------------------------------
34,113 50,826 42,283 27,843 22,817 25,363
Equipment held for sale -- -- 4,148 -- -- --
------------------------------------- -------------------------------------
Net book value $ 34,113 $ 50,826 $ 46,431 $ 27,843 $ 27,817 $ 25,363
===================================== =====================================
7. Notes Payable
In December 1995, the Partnership entered into an agreement to issue long-term
notes totaling $23.0 million to five institutional investors. The notes bear
interest at a fixed rate of 7.27% per annum and have a final maturity in 2005.
During 1995, the Partnership paid lender fees of $0.2 million in connection with
this loan.
Interest on the notes is payable semiannually. The notes will be repaid in five
principal payments of $3.0 million on December 31, 1999, 2000, 2001, 2002, and
2003 and in two principal payments of $4.0 million on December 31, 2004 and
2005. The agreement requires the Partnership to maintain certain financial
covenants related to fixed-charge coverage and maximum debt. Proceeds from the
notes were used to fund additional equipment acquisitions and to repay
obligations of the Partnership under the Committed Bridge Facility (see below).
The General Partner estimates, based on recent transactions, that the fair value
of the $20.0 million fixed-rate note is $19.6 million.
The Partnership made the regularly scheduled principal payment and semiannual
interest payments to the lenders of the notes during 1999.
The General Partner has entered into a joint $24.5 million credit facility (the
Committed Bridge Facility) on behalf of the Partnership, PLM Equipment Growth
Fund VI (EGF VI), and Professional Lease Management Income Fund I (Fund I), both
affiliated investment programs; and TEC Acquisub, Inc. (TECAI), an indirect
wholly-owned subsidiary of the General Partner. This credit facility may be used
to
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
7. Notes Payable (continued)
provide interim financing of up to (i) 70% of the aggregate book value or 50% of
the aggregate net fair market value of eligible equipment owned by the
Partnership, plus (ii) 50% of unrestricted cash held by the borrower. The
Partnership, EGF VI, Fund I, and TECAI collectively may borrow up to $24.5
million under the Committed Bridge Facility. Outstanding borrowings by one
borrower reduce the amount available to each of the other borrowers under the
Committed Bridge Facility. The Committed Bridge Facility also provides for a
$5.0 million Letter of Credit Facility for the eligible borrowers. Individual
borrowings may be outstanding for no more than 179 days, with all advances due
no later than June 30, 2000. Interest accrues at either the prime rate or
adjusted LIBOR plus 1.625%, at the borrower's option, and is set at the time of
an advance of funds. Borrowings by the Partnership are guaranteed by the General
Partner. As of December 31, 1999, no eligible borrower had any outstanding
borrowings under this Facility. The General Partner believes it will be able to
renew the Committed Bridge Facility upon its expiration with similar terms as
those in the current Committed Bridge Facility.
8. Concentrations of Credit Risk
The Partnership's lessees that accounted for 10% or more of the total
consolidated revenues for the owned equipment and partially owned equipment
during the past three years were TAP Air Portugal (13% in 1997) and Canadian
Airlines International. (13% in 1997). No single lessee accounted for more than
10% of the consolidated revenues for the year ended December 31, 1998 or 1999.
In 1999, however, AAR Allen Group International purchased a commercial aircraft
from the Partnership and the gain from the sale accounted for 17% of total
revenues from wholly- and partially-owned equipment during 1999. In 1998, Triton
Aviation Services, Ltd. purchased three commercial aircraft from the Partnership
and the gain from the sale accounted for 26% of total revenues from wholly- and
partially-owned equipment during 1998.
As of December 31, 1999 and 1998, the General Partner believed the Partnership
had no other significant concentrations of credit risk that could have a
material adverse effect on the Partnership.
9. Income Taxes
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
As of December 31, 1999, the financial statement carrying amount of assets and
liabilities was approximately $33.2 million lower than the federal income tax
basis of such assets and liabilities, primarily due to differences in
depreciation methods, equipment reserves, provisions for bad debts, lessees'
prepaid deposits, and the tax treatment of underwriting commissions and
syndication costs.
10. Contingencies
PLM International (the Company) and various of its wholly-owned subsidiaries are
named as defendants in a lawsuit filed as a purported class action in January
1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251
(the Koch action). The named plaintiffs are six individuals who invested in PLM
Equipment Growth Fund IV (Fund IV), PLM Equipment Growth Fund V (Fund V), PLM
Equipment Growth Fund VI (Fund VI), and PLM Equipment Growth & Income Fund VII
(Fund VII) (the Funds), each a California limited partnership for which the
Company's wholly-owned subsidiary, FSI, acts as the General Partner. The
complaint asserts causes of action against all defendants for fraud and deceit,
suppression, negligent misrepresentation, negligent and intentional breaches of
fiduciary duty, unjust enrichment, conversion, and conspiracy. 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 Funds, and concealing such
mismanagement from investors in the
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
10. Contingencies (continued)
Funds. Plaintiffs seek unspecified compensatory 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) (the court) based on the court's
diversity jurisdiction. In December 1997, the court granted defendants motion to
compel arbitration of the named plaintiffs' claims, based on an agreement to
arbitrate contained in the limited partnership agreement of each Partnership.
Plaintiffs appealed this decision, but in June 1998 voluntarily dismissed their
appeal pending settlement of the Koch action, as discussed below.
In June 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 Fund V, and filed the complaint
on her own behalf and on behalf of all class members similarly situated who
invested in the Funds. The complaint alleges the same facts and the same causes
of action as in the Koch action, plus additional causes of action against all of
the defendants, including alleged unfair and deceptive practices and violations
of state securities law. In July 1997, defendants filed a petition (the
petition) in federal district court under the Federal Arbitration Act seeking to
compel arbitration of plaintiff's claims. In October 1997, the district court
denied the Company's petition, but in November 1997, agreed to hear the
Company's motion for reconsideration. Prior to reconsidering its order, the
district court dismissed the petition pending settlement of the Romei action, as
discussed below. The state court action continues to be stayed pending such
resolution.
In February 1999 the parties to the Koch and Romei actions agreed to settle the
lawsuits, with no admission of liability by any defendant, and filed a
Stipulation of Settlement with the court. The settlement is divided into two
parts, a monetary settlement and an equitable settlement. The monetary
settlement provides for a settlement and release of all claims against
defendants in exchange for payment for the benefit of the class of up to $6.6
million. The final settlement amount will depend on the number of claims filed
by class members, the amount of the administrative costs incurred in connection
with the settlement, and the amount of attorneys' fees awarded by the court to
plaintiffs' attorneys. The Company will pay up to $0.3 million of the monetary
settlement, with the remainder being funded by an insurance policy. For
settlement purposes, the monetary settlement class consists of all investors,
limited partners, assignees, or unit holders who purchased or received by way of
transfer or assignment any units in the Funds between May 23, 1989 and June 29,
1999. The monetary settlement, if approved, will go forward regardless of
whether the equitable settlement is approved or not.
The equitable settlement provides, among other things, for: (a) the extension
(until January 1, 2007) of the date by which FSI must complete liquidation of
the Funds' equipment, (b) the extension (until December 31, 2004) of the period
during which FSI can reinvest the Funds' funds in additional equipment, (c) an
increase of up to 20% in the amount of front-end fees (including acquisition and
lease negotiation fees) that FSI is entitled to earn in excess of the
compensatory limitations set forth in the North American Securities
Administrator's Association's Statement of Policy, (d) a one-time repurchase by
each of Funds V, VI, and VII of up to 10% of that partnership's outstanding
units for 80% of net asset value per unit, and (e) the deferral of a portion of
the management fees paid to an affiliate of FSI until, if ever, certain
performance thresholds have been met by the Funds. Subject to final court
approval, these proposed changes would be made as amendments to each
Partnership's limited partnership agreement if less than 50% of the limited
partners of each Partnership vote against such amendments. The limited partners
will be provided the opportunity to vote against the amendments by following the
instructions contained in solicitation statements that will be mailed to them
after being filed with the Securities and Exchange Commission. The equitable
settlement also provides for payment of additional attorneys' fees to the
plaintiffs' attorneys from Partnership funds in the event, if ever, that certain
performance thresholds have been met by the Funds. The equitable settlement
class consists of all investors, limited partners, assignees or unit holders who
on June 29, 1999 held any units in Funds V, VI, and VII, and their assigns and
successors in interest.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
10. Contingencies (continued)
The court preliminarily approved the monetary and equitable settlements in June
1999. The monetary settlement remains subject to certain conditions, including
notice to the monetary class and final approval by the court following a final
fairness hearing. The equitable settlement remains subject to certain
conditions, including: (a) notice to the equitable class, (b) disapproval of the
proposed amendments to the partnership agreements by less than 50% of the
limited partners in one or more of Funds V, VI, and VII, and (c) judicial
approval of the proposed amendments and final approval of the equitable
settlement by the court following a final fairness hearing. No hearing date is
currently scheduled for the final fairness hearing. 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 has initiated litigation in various official forums in India
against a defaulting Indian airline lessee to recover damages for failure to pay
rent and failure to maintain such property in accordance with relevant lease
contracts. The Partnership has repossessed its property previously leased to
such airline. In response to the Partnership's collection efforts, the airline
filed counter-claims against the Partnership in excess of the Partnership's
claims against the airline. The General Partner believes that the airlines'
counterclaims are completely without merit, and the General Partner will
vigorously defend against such counterclaims. The General Partner believes the
likelihood of an unfavorable outcome from the counterclaims is remote.
The Company is involved as plaintiff or defendant in various other legal actions
incidental to its business. Management does not believe that any of these
actions will be material to the financial condition of the Partnership.
11. Subsequent Event
During March 2000, the Partnership sold a commuter aircraft with a net book
value of $1.3 million for proceeds of $2.5 million.
(This space intentionally left blank)
PLM EQUIPMENT GROWTH & INCOME FUND VII
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership. *
4.1 First Amendment to the Third Amendment and Restated *
Limited Partnership Agreement
4.2 Second Amendment to the Third Amendment and Restated *
Limited Partnership Agreement
4.3 Third Amendment to the Third Amendment and Restated *
Limited Partnership Agreement
10.1 Management Agreement between Partnership and PLM Investment *
Management, Inc.
10.2 Note Agreement, dated as of December 1, 1995, regarding
$23.0 million of 7.27% senior notes due December 21, 2005. *
10.3 Fourth Amended and Restated Warehousing Credit Agreement,
dated as of December 15, 1998, with First Union National
Bank of North Carolina *
10.4 First amendment to the Fourth Amended and Restated
Warehouse Credit Agreement dated December 10, 1999. 50-54
24. Powers of Attorney. 55-57
- ---------------------
* Incorporated by reference. See page 28 of this report.