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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year ended
December 31, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 33-55796
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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
-----------------------
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 40.
Total number of pages in this report: 43.
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), 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:
(i) Investment in equipment: 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;
(ii)Cash distributions: 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, to investors beginning in
the quarter following the month in which the minimum number of Units are sold, a
portion of which may represent a return of an investor's investment;
(iii) Safety: 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
(iv)Growth: to increase the Partnership's revenue base by reinvesting a
portion of its operating cash flow during the first six years of the
Partnership's operation in additional equipment 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 mean that in all cases 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. The
Partnership admitted Limited Partners at 24 interim closing dates during 1993
through 1995. As of December 31, 1996, there were 5,370,297 Units outstanding.
The General Partner contributed $100 for its 5% General Partner interest in the
Partnership.
In the ninth year of operations of the Partnership, which commences January
1, 2004, the General Partner intends to begin the dissolution and liquidation of
the Partnership in an orderly fashion, unless the Partnership is terminated
earlier upon sale of all of the equipment or by certain other events. However,
under certain circumstances, the term of the Partnership may be extended. In no
event will the Partnership extend beyond December 31, 2013.
Table 1, below, lists cumulative offering proceeds, the cost of equipment
in the Partnership's portfolio, and fees paid at December 31, 1996 (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
1 737-200 commercial aircraft Boeing 5,483
2 DHC-8 commuter aircraft DeHavilland 7,628
3 DC9 commercial aircraft McDonnell Douglas 2,822
111 Refrigerated trailers Various 2,586
600 Dry trailers Trailmobile/Stoughton 7,594
62 Flatbed trailers Great Dane 532
250 Dry piggyback trailers Various 3,835
68 Woodchip gondola railcars National Steel 1,044
347 Pressurized tank railcars Various 9,009
214 Modular buildings Various 4,696
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Total owned equipment held for operating leases $ 67,441
============
Investment in equipment owned by unconsolidated special purpose entities:
0.80 Bulk carrier marine vessel Tsuneishi Zosen 14,212
0.44 Bulk carrier marine vessel Naikai Ship Building & Engineering Co. 5,628
0.25 Trust comprised of four 737-200
Stage II commercial aircraft Boeing 5,862
0.33 Two trusts consisting of:
Three 737-200A Stage II commercial
aircraft Boeing 9,408
Two aircraft Stage II engines Pratt & Whitney 390
Portfolio of rotable components Various 650
0.29 Trust consisting of six 737-200A
Stage II commercial aircraft Boeing 8,987
0.24 767-200ER Stage III Commercial
aircraft Boeing 10,251
0.10 Mobile offshore drilling unit AT & CH de France 2,090
------------
Total investments in unconsolidated special purpose entities $ 57,478
============
Includes proceeds from capital contributions, undistributed cash flow from
operations, and Partnership borrowings invested in equipment. Includes
costs capitalized, subsequent to the date of purchase, and equipment
acquisition fees paid to PLM Transportation Equipment Corporation (TEC), a
wholly-owned subsidiary of FSI, or PLM Worldwide Management Services (WMS),
a wholly owned subsidiary of PLM International.
Jointly owned: EGF VII and an affiliated partnership.
Jointly owned: EGF VII and an affiliated partnership.
Jointly owned: EGF VII and two affiliated partnerships.
Jointly owned: EGF VII and three affiliated partnerships.
Jointly owned: EGF VII and five affiliated partnerships.
Jointly owned: EGF VII and two affiliated partnerships.
Jointly owned: EGF VII, two affiliated partnerships (65%), and TEC
Acquisub, Inc. (25%), an affiliate of PLM International.
The equipment is generally leased under operating leases for a term of one to
six years.
At December 31, 1996, approximately 76% of the Partnership's trailer
equipment operated in rental yards owned and maintained by PLM Rental, Inc., the
short-term trailer rental subsidiary of PLM International. Revenues collected
under short-term rental agreements with the rental yards' customers are credited
to the owners of the related equipment as received. Direct expenses associated
with the equipment are charged directly to the Partnership. An allocation of
other direct expenses of the rental yard operations are billed to the
Partnership monthly.
The lessees of the equipment include, but are not limited to: Hongkong
Mingwah Shipping Co., Ltd., Wah Yuen Shipping, Inc., Pacific Carriers, Ltd., SWR
Brazil 767, Inc., and Action Carriers, Incorporated. As of December 31, 1996,
all of the equipment was on lease or operating in PLM-affiliated short-term
trailer rental yards.
(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 equipment. IMI agreed to perform all services necessary to manage
the transportation equipment on behalf of the Partnership and to perform or
contract for the performance of all obligations of the lessor under the
Partnership's leases. In consideration for its services and pursuant to the
Partnership Agreement, IMI is entitled to a monthly management fee (see
financial statements, Notes 1 and 3).
(C) Competition
(1) Operating Leases versus. Full Payout Leases
Generally, the equipment owned or invested in by the Partnership is leased out
on an operating lease basis wherein rents owed during the initial noncancelable
term of the lease are insufficient to recover the 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 utilizing
full-payout leases on new equipment, i.e., leases that have terms equal to the
expected economic life of the equipment. Full payout leases are written for
longer terms and for lower monthly rates than the Partnership offers. While some
lessees prefer the flexibility offered by a shorter-term operating lease, other
lessees prefer the rate advantages possible with a full-payout lease.
Competitors of the Partnership may write full-payout leases at considerably
lower rates, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, and, as a result, the Partnership may be at a
competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership also competes with equipment manufacturers 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 competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), General Electric Railcar Services
Corporation, Greenbrier Leasing Company, General Electric Aviation Services
Corporation, and other limited partnerships that may lease the same types of
equipment.
(D) Demand
The Partnership invests in transportation-related capital equipment and in
"relocatable environments." "Relocatable environments" refers to capital
equipment constructed to be self-contained in function but transportable,
examples of which include mobile offshore drilling units, storage units, and
relocatable buildings. A general distinction can be drawn between equipment used
for the transport of either materials and commodities or people. With the
exception of aircraft leased to passenger air carriers, the Partnership's
equipment is used primarily for the transport of materials.
The following describes the markets for the Partnership's equipment:
(1) Commercial Aircraft
The market for commercial aircraft continued to improve in 1996, representing
two consecutive years of growth and profits in the airline industry. The $5.7
billion in net profits recorded by the world's top 100 airlines in 1995 grew to
over $6.0 billion in 1996. The profits are a result of the continued management
emphasis on costs. The demand for ever-lower unit costs by airline managements
has caused a significant reduction of surplus used Stage II and Stage III
commercial aircraft. The result is a return to supply/demand equilibrium. On the
demand side, passenger traffic is improving, cargo movement is up, and load
factors are generally higher across the major markets.
These changes are reflected in the performance of the world's 62 major
airlines that operate 60% of the world airline fleet but handle 78% of world
passenger traffic. Focusing on the supply/demand for Partnership-type narrowbody
commercial aircraft, 213 used narrowbody aircraft were available at year end
1995. In the first 10 months of 1996, this supply was reduced to 119 narrowbody
aircraft available for sale or lease. Forecasts for 1997 see a continuing
supply/demand equilibrium due to air travel growth and balanced aircraft supply.
The Partnership's narrowbody fleet are late-model (post-1974) Boeing
737-200 Advanced aircraft. There are a total of 939 Boeing 737-200 aircraft in
service, with 219 built prior to 1974. Independent forecasts estimate that 250
Boeing 737-200s will be retired, leaving approximately 700 aircraft in service
after 2003. The forecasts regarding hushkits estimate that half of the 700
Boeing 737-200s will be hushed to meet Stage III noise levels. The Partnership's
aircraft are all prospects for Stage III hushkits due to their age, hours,
cycles, engine configurations, and operating weights.
The Partnership has an investment in an entity that owns a widebody,
twin-engine, twin-aisle Boeing 767-200ER. The aircraft is a late-model aircraft
with high gross operating weights and the most advanced-technology engine
powerplants available on the market. The aircraft carries 216 passengers in a
mixed class over 6,800 nautical miles. There are currently 99 aircraft in
service with 26 different operators worldwide. The aircraft competes with
three-engine, older-generation widebody aircraft, such as the Lockheed L1011 and
the McDonnell Douglas DC-10. This fleet (L1011/DC-10) totals over 500 aircraft
today. These older aircraft will continue to be phased out of service, with 140
retired before 2003.
(2) Commuter/Regional Aircraft
Independent forecasts show that the regional aircraft market is growing at a
rate of 5.5% per year through 2013. This is slightly higher than the comparable
growth rate in commercial aircraft of 4.7% over the same period. Currently there
are 4,390 regional aircraft in service in the 15- to 70-seat class. Independent
forecasts show that this will grow to over 5,000 aircraft during the next 17
years. The highest growth markets are the 30- to 50-seat turboprops. The
emphasis on the larger aircraft in the future is a result of growing passenger
numbers, airport congestion, and the extension of regional airline route
networks requiring long-range aircraft. These events will continue the current
trend of the major airlines to hand down the operations of their marginal
short-haul routes to affiliated regional carriers.
The Partnership leases regional aircraft that are in the 30- to 50-seat
category. The Partnership's aircraft are in North America, which is the highest
growth market for this class. The 30-seat market is growing at the expense of
the smaller 19-seat aircraft.
(3) Aircraft Engines
The demand for spare engines has increased as a result of the air travel
industry's expansion over the last two years. The most significant area of
increase is in the Pratt & Whitney Stage II JT8D engine,which powers many of the
Partnership's Stage II commercial aircraft. Today over 3,000 Stage II commercial
jets are in service. In December 1993, there were 288 Stage II narrowbody
aircraft available for sale or lease. As of October 1996, the number of
available Stage II narrowbody aircraft was only 107. The increase in the Stage
II fleet has placed over 450 engines back into service. This level of demand has
placed a premium on spare JT8D engines and resulted in a good leasing market for
available engines. The Partnership's spare engines will all be re-leased or sold
over the next two years during this market cycle.
(4) Aircraft Rotables
Aircraft rotables are replacement spare parts held by an airline in inventory.
These parts are components that are removable from an aircraft or engine,
undergo overhaul, and are recertified and refit to the aircraft in an "as new"
condition. Components, or rotables, carry specific identification numbers,
allowing each part to be individually tracked. The types of rotables owned and
leased by the Partnership include landing gear, certain engine components,
avionics, auxiliary power units (APUs), replacement doors, control surfaces,
pumps, valves, and other comparable equipment. Generally a rotable has a useful
life that is either measured in terms of time in service or number of cycles
(takeoffs and landings). While there are no specific guidelines that apply to
the time or cycles between overhauls for rotable equipment, there is no
limitation on the number of times a rotable may be overhauled and recertified.
The component will be overhauled until the cost of such overhaul becomes
uneconomic relative to the unit's replacement cost.
The Partnership's investment in an entity that owns rotable parts will be
available for sale or lease in 1997. Rotables generally reflect the market
conditions of the aircraft they support. The Partnership's rotables support
primarily Boeing 737-300/400/500 and the Boeing 737-200 Advanced aircraft.
Independent forecasts for 1997 indicate a supply/demand equilibrium for these
aircraft types.
(5) Railcars/Pressurized Tank Cars
These cars are used primarily in the petrochemical and fertilizer industries.
They transport liquefied petroleum gas (LPG) and anhydrous ammonia. The
utilization rate on the Partnership's fleet of pressurized tank cars was over
98% during 1996. Independent forecasts show the demand for natural gas growing
during 1997 to 1999, as the developing world, former Communist countries, and
the industrialized world all increase their demand for energy. The fertilizer
industry was undergoing a rapid restructuring toward the end of 1996 after a
string of major mergers, which began in 1995. These mergers reduce the number of
companies that use pressurized tank cars for fertilizer service. Whether or not
the economies of the mergers allow the total fleet size to be reduced remains to
be seen.
(6) Marine Vessels
The Partnership owns and has investments in entities that own primarily small-
to medium-sized dry bulk vessels, which are traded in worldwide markets and
carry commodity cargoes .
The freight rates in the dry bulk shipping market are dependent on the
balance of supply and demand for shipping commodities and trading patterns for
such dry bulk commodities. In 1995, dry bulk shipping demand was robust (growing
at 5% over 1994) and there was a significant infusion of new vessel tonnage,
especially late in the year, causing some decline in freight rates after a peak
in midyear. The slide in freight rates continued in the first half of 1996, as
new tonnage was delivered and shipping demand slipped from the high growth rates
of 1995. In the third quarter of 1996, there was a significant acceleration in
the drop of freight rates, primarily caused by the lack of significant grain
shipment volumes and the infusion of new tonnage. The low freight rates induced
many ship owners to scrap older tonnage and to defer or cancel newbuilding
orders. In the fourth quarter, a strong grain harvest worldwide gave the market
new strength, and freight rates recovered to the levels experienced in early
1996, but not to 1995 levels. Overall, 1996 was a soft year for shipping, with
dry bulk demand growing only 1.8% and the dry bulk fleet growing 3% in tonnage.
The outlook for 1997 shows an expected improvement in demand, with growth at
2.4%, but a high orderbook remains. The year 1997 is expected to be a soft year
with relatively low freight rates; however, prospects may be strengthened by the
continued scrapping of older vessels in the face of soft rates and the deferment
or canceling of orders.
Demand for commodity shipping closely tracks worldwide economic growth;
however, economic development may alter demand patterns from time to time. The
General Partner operates its funds' vessels in spot charters, period charters,
and pooled vessel operations. This operating approach provides the flexibility
to adapt to changing demand patterns.
Independent forecasts show a long-term outlook (past 1997) of improvement
in freight rates earned by vessels; however, this is dependent on the
supply/demand balance and stability in growth levels. The newbuilding orderbook
currently is slightly lower than at the end of 1995 in tonnage. Shipyard
capacity is booked through late 1998; however, it remains to be seen how many of
these orders will actually be fulfilled. Historically, demand has averaged
approximately 3 percent in annual growth, fluctuating between flat growth and 6
percent annually. With predictable long-term demand growth, the long-term
outlook depends on the supply side, which is affected by interest rates,
government shipbuilding subsidy programs, and prospects for reasonable capital
returns in shipping.
(7) Trailers
Intermodal Trailers
The robust intermodal trailer market that began four years ago began to soften
in 1995 and reduced demand continued in 1996. Intermodal trailer loadings were
flat in 1996 versus 1995's depressed levels. This lack of growth has been the
result of many factors, ranging from truckload firms aggressively recapturing
market share from the railroads through aggressive pricing to the continuing
consolidation activities and asset efficiency improvements of the major U.S.
railroads.
All of these factors helped make 1996 a year of equalizing equipment
supply, as railroads and lessors were pressured to retire older and less
efficient trailers. The two largest suppliers of railroad trailers reduced the
available fleet in 1996 by over 15%. Overall utilization for intermodal
trailers, including the Partnership's fleet , was lower in 1996 than in previous
years.
Over-the-Road Dry Trailers
The over-the-road dry trailer market was weak in 1996, with utilization down
15%. The trailer industry experienced a record year in 1994 for new production,
and 1995 production levels were similar to 1994's. However, in 1996 , the truck
freight recession, along with an overbuilding situation, contributed to 1996's
poor performance. The year 1996 had too little freight and too much equipment.
Over-the-Road Refrigerated Trailers
The Partnership experienced fairly strong demand levels in 1996 for its
refrigerated trailers. With over 10% of the fleet in over-the-road refrigerated
trailers, the Partnership, PLM, and affiliated partnerships combined is the
largest supplier of short-term rental refrigerated trailers in the United
States.
(8) Mobile Offshore Drilling Units (Rigs)
Worldwide demand for mobile offshore drilling units (rigs) in 1996 increased in
all sectors of the business over the demand levels experienced in 1995 and 1994.
This increase in demand spread over all geographic regions of offshore drilling;
it also affected all equipment types in the offshore drilling sector. This
increase in demand without any increase in supply of rigs gave increased
utilization and higher contract day rates in the market. The improvement in the
market can be attributed to a number of factors, but primarily it can be
associated with continued growth worldwide in the use of oil and natural gas for
energy. Stable prices at moderate levels have encouraged such growth, while
providing adequate margins for oil and natural gas exploration and production
development.
The floating rig sector has also experienced an improving market.
Technological improvements and more efficient operations have improved the
economics of drilling and production in the deep-water operations for which
floating rigs are utilized. Overall, demand for floating rigs increased from 117
rig-years in 1995 to 128 rig-years in 1996, with no increase in supply of rigs.
The increase in demand and utilization prompted an approximate doubling of
contract day rates and an associated increase in floating rig market values.
Three floating rigs were ordered in 1996; however, these will not be delivered
until late in 1998 and will have a minimal effect on the market, as they are
committed to specific contracts.
The most significant trend in 1996 was the continued consolidation of the
offshore drilling industry. Five major mergers of offshore drilling contractors
occurred in 1996, leading to a more controlled and stable market in which higher
levels of day rates may be maintained. The consolidation of rig ownership into
fewer hands has a recognizable effect on stabilizing day rates in times of lower
utilization and on quicker improvement in times of increasing utilization.
Demand for floating rigs is projected by industry participants to continue
to increase through 1997, with no significant increases in rig supply. Day rates
are not yet at levels sufficiently high to justify the widespread ordering of
new equipment.
(9) Modular Buildings
The market for modular buildings of the type owned by the Partnership is
primarily California public and private school districts. The California school
population continues to expand, creating an increased need for classroom space.
However, funding for capital improvements and permanent capacity expansion are
increasingly difficult for school districts to obtain. School districts have
used modular buildings to meet temporary and, in some cases, permanent increases
in the demand for classroom space.
In 1996, the Partnership's lease rates and utilization increased over the
1995 levels. Future demand is closely correlated with demographic changes within
the state of California. If population inflows were to decrease or reverse to a
net outflow, then the demand for classroom space and the subsequent demand for
modular buildings could decrease.
(E) Government Regulations
The use, maintenance, and ownership of equipment is regulated by federal, state,
local, and/or foreign government authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require the removal from service or extensive modification of such equipment to
meet these regulations, at considerable cost to the Partnership. Such
regulations include (but are not limited to):
(1) the U.S. Oil Pollution Act of 1990 (which established liability for
operators and owners of vessels, mobile offshore drilling units, etc.
that create environmental pollution);
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990
(which limits or eliminates the operation of commercial aircraft in the
United States that do not meet certain noise, aging, and corrosion
criteria);
(3) the Montreal Protocol on Substances that Deplete the Ozone layer and
the U.S. Clean Air Act Amendments of 1990 (which call for the control
and eventual replacement of substances that have been found to cause or
contribute significantly to harmful effects on the stratospheric ozone
layer and which are used extensively as refrigerants in refrigerated
marine cargo containers, over-the-road trailers, etc.);
(4) the U.S. Department of Transportation's Hazardous Materials Regulations
(which regulate the classification of and packaging requirements for
hazardous materials and which could apply particularly to the
Partnership's tank cars).
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased for leasing purposes. At December 31, 1996, the Partnership
owned a portfolio of transportation equipment and investments in equipment owned
by special purpose entities, as described in Part I, Table 1. The Partnership
acquired equipment with the proceeds of the Partnership offering through the
third quarter of 1995. In December 1995, the Partnership closed a $23.0 million
long-term note with five institutional investors, the proceeds of which were
used to repay obligations of the Partnership under the Credit Facility (see
financial statements, Note 5) and to purchase additional equipment during 1995
and 1996.
The Partnership maintains its principal office at One Market, Steuart
Street Tower, Suite 800, San Francisco, California 94105-1301. All office
facilities are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
PLM International (PLMI) along with FSI, IMI, TEC, and PLM Securities Corp. (PLM
Securities), and collectively with PLMI, FSI, IMI, TEC, and PLM Securities, (the
"PLM Entities"), were named as defendants in a class action lawsuit filed in the
Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251. The PLM
Entities received service of the complaint on February 10, 1997 and, pursuant to
an extension of time granted by plaintiffs' attorneys, have 60 days to respond
to the complaint. PLM International is currently reviewing the substance of the
allegations with its counsel, and believes the allegations to be completely
without merit and intends to defend this matter vigorously.
The plaintiffs, who filed the complaint on their own and on behalf of all
class members similarly situated, are six individuals who allegedly invested in
certain California limited partnerships sponsored by PLM Securities, for which
FSI acts as the General Partner, including the Partnership, PLM Equipment Growth
Fund IV, PLM Equipment Growth Fund V, and PLM Equipment Growth Fund VI (the "PLM
Growth Funds"). The complaint purports eight causes of action against all
defendants, as follows: fraud and deceit, suppression, negligent
misrepresentation and suppression, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, unjust enrichment, conversion, and
conspiracy. Additionally, plaintiffs allege a cause of action for breach of
third party beneficiary contracts against and in violation of the National
Association of Securities Dealers (NASD) rules of fair practice by PLM
Securities alone.
Plaintiffs allege that each defendant owed plaintiffs and the class
certain duties due to their status as fiduciaries, financial advisors, agents,
general partner, and control persons. Based on these duties, plaintiffs assert
liability against the PLM Entities for improper sales and marketing practices,
mismanagement of the PLM Growth Funds, and concealing such mismanagement from
investors in the PLM Growth Funds. Plaintiffs seek unspecified compensatory and
recissory damages, as well as punitive damages, and have offered to tender their
Limited Partnership Units back to the defendants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's Limited Partners during
the fourth quarter of its fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS
Pursuant to the terms of the Partnership Agreement, the General Partner is
generally entitled to a 5% interest in the profits and losses and distributions
of the Partnership. The General Partner is the sole holder of such interests.
Gross income in each year of the Partnership will be specially allocated to the
General Partner in the amount equal to the lesser of (i) the deficit balance, if
any, in the General Partner's capital account, calculated under generally
accepted accounting principles using the straight-line method of depreciation,
and (ii) the deficit balance, if any, in the General Partner's capital account,
calculated under federal income tax regulations. The remaining interests in the
profits and losses and distributions of the Partnership are owned as of December
31, 1996 by the approximately 5,760 holders of 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, generally are viewed as inefficient
vehicles for the sale of partnership units. There is presently no public market
for the Units and none is likely to develop. To prevent the Units from being
considered "publicly traded" and, thereby, to avoid taxation of the Partnership
as an association treated as a corporation under the Internal Revenue Code, the
Units will not be transferable without the consent of the General Partner, which
may be withheld in its absolute discretion. The General Partner intends to
monitor transfers of Units in an effort to ensure that they do not exceed the
number permitted by certain safe harbors promulgated by the Internal Revenue
Service. A transfer may be prohibited if the intended transferee is not a U.S.
citizen or if the transfer would cause any portion of the Units to be treated as
"plan assets." The Partnership may also be obligated to redeem a certain number
of Units each year, beginning October 25, 1997.
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the year ended December 31, 1996, 1995,
1994, and 1993 (In thousands, except per
unit amounts)
1996 1995 1994 1993
---------------------------------------------------------------
Operating results:
Total revenues $ 12,703 $ 18,638 $ 9,217 $ 695
Net gain on disposition of equipment 42 182 22 --
Equity in net loss of unconsolidated
special purpose entities (880 ) -- -- --
Net loss (2,976 ) (1,192 ) (3,809 ) (862 )
At yearend:
Total assets $ 87,398 $ 98,194 $ 73,635 $ 39,628
Total liabilities 27,261 24,903 2,400 7,576
Notes payable 25,000 23,000 -- 5,123
Cash distributions $ 10,178 $ 9,627 $ 5,370 $ 366
Cash distributions that represent a
return of capital $ 9,669 $ 9,157 $ 5,133 $ 358
Per weighted-average Limited
Partnership Depositary Unit:
Net loss $ (0.65 ) Various according to interim closings
Cash distributions $ 1.80 Various according to interim closings
Cash distributions that represent
a return of capital $ 1.80 Various according to interim closings
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of 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 sectors of
the transportation industry and its effect on the Partnership's overall
financial condition.
Results of Operations - Factors Affecting Performance
(A) 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 transportation equipment include supply and demand for similar or comparable
types or kinds of transport capacity, desirability of the equipment in the lease
market, market conditions for the particular industry segment in which the
equipment is to be leased, various regulations concerning the use of the
equipment, and others. The equipment portfolio owned by the Partnership
experienced virtually no repricing exposure for the year ended December 31,
1996. The Partnership experienced re-leasing activity in 1996, primarily in its
modular building and trailer portfolios; however, the net effect of re-leasing
activity on Partnership income was minimal.
(B) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment, 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 leases, can result not only in reductions in
contribution, but also may require the Partnership to assume additional costs to
protect its interests under the leases, such as repossession or legal fees.
(1) Liquidations: During the year, the Partnership liquidated or sold
equipment for $0.4 million. The sale of the owned equipment represented
approximately 73% of the original cost of these assets. By year end, the
Partnership had reinvested all of the $0.4 million.
(2) Nonperforming Lessees: At December 31, 1996, various lessees of the
modular buildings have become delinquent in their lease payments to the
Partnership. The Partnership has established reserves against these receivables
and the General Partner is in the process of taking the necessary steps to
recover the lease payments from the lessee.
(C) Reinvestment Risk
Reinvestment risk occurs when (1) the partnership cannot generate sufficient
surplus cash after fulfillment of operating obligations and distributions to
reinvest in additional equipment during the reinvestment phase of partnership
operations; (2) equipment is sold or liquidated for less than threshold amounts;
(3) proceeds from sales, losses, or surplus cash available for reinvestment
cannot be reinvested at threshold lease rates; or (4) proceeds from sales,
losses, or surplus cash available for reinvestment cannot be deployed in a
timely manner.
During the first seven years of operations, 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 during the time it is subject to lease agreements, or the exercise
of purchase options written into certain lease agreements. Equipment sales
generally result from evaluations by the General Partner that continued
ownership of certain equipment is either inadequate to meet Partnership
performance goals or that market conditions, market values, and other
considerations indicate it is the appropriate time to sell certain equipment.
During 1996, the Partnership acquired one commercial aircraft for $5.2
million, 209 trailers for $3.2 million, 35 railcars for $0.5 million, an
interest in an entity owning a mobile offshore drilling unit (rig) for $2.0
million (the remaining interest in this rig is held by two affiliated
partnerships and TEC Acquisub, a subsidiary of PLM International), and an
interest in a trust containing four commercial aircraft for $5.6 million (the
remaining interests are held by affiliated partnerships). These purchases were
completed with $9.0 million in debt proceeds available from 1995 debt placement
and interim financing.
(3) Equipment Valuation and Write-downs
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of" (SFAS 121). This standard is effective for years
beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995,
the effect of which was not material, as the method previously employed by the
Partnership was consistent with SFAS 121. In accordance with SFAS 121, the
General Partner reviews the carrying value of the Partnership's equipment
portfolio at least annually in relation to expected future market conditions for
the purpose of assessing the recoverability of the recorded amounts. If the
projected future lease revenue plus residual values are less than the carrying
value of the equipment, a loss on revaluation is recorded. No reductions to the
carrying value of equipment were required during 1995.
As of December 31, 1996, the General Partner estimated the current fair
market value of the Partnership's equipment portfolio, including equipment owned
by USPE's, to be approximately $114.7 million.
(B) 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, permanent debt financing of $23
million, and interim financing of $2.0 million. The Partnership closed its
offering on April 25, 1995 and completed its Senior Debt Agreement on December
15, 1995. The agreement requires the Partnership to maintain certain financial
covenants related to fixed-charge coverage and maximum debt. The Partnership
exceeded its maximum debt level of $23 million as of December 31, 1996, and
received waivers from its senior lenders related to its maximum debt covenant.
Without this waiver, the Partnership would not have been able to borrow on the
short-term warehouse facility and remain in compliance with the loan covenant.
The Partnership relies on operating cash flow to meet its operating obligations,
make cash distributions to Limited Partners, and increase the Partnership's
equipment portfolio with any remaining available surplus cash.
For the year ended December 31, 1996, the Partnership generated sufficient
operating cash to meet its operating obligations and pay distributions to the
Limited Partners.
Beginning October 25, 1997, the Partnership may become obligated, under
certain conditions, to redeem up to 2% of the outstanding Depositary Units each
year. The purchase price to be offered for such outstanding units will be equal
to 105% of the unrecovered principal attributed to the units, where unrecovered
principal is defined as the excess of the capital contribution attributable to a
unit over the distributions from any source paid with respect to that unit.
The General Partner has entered into a joint $50 million credit facility
(Committed Bridge Facility) on behalf of the Partnership, PLM Equipment Growth
Fund IV, PLM Equipment Growth Fund V, PLM Equipment Growth Fund VI, and
Professional Lease Management Income Fund I (Fund I), all affiliated investment
programs; TEC Acquisub, Inc. (TECAI), an indirect wholly-owned subsidiary of the
General Partner; and American Finance Group, Inc. (AFG), a subsidiary of PLM
International Inc., which may be used to provide interim financing of up to (i)
70% of the aggregate book value or 50% of the aggregate net fair market value of
eligible equipment owned by the Partnership or Fund I, plus (ii) 50% of
unrestricted cash held by the borrower. The Committed Bridge Facility became
available on December 20, 1993, and was amended and restated on October 31, 1996
to expire on October 31, 1997 and increased the available borrowings for AFG to
$50 million. The Partnership, TECAI, Fund I, and the other partnerships
collectively may borrow up to $35 million of the Committed Bridge Facility. The
Committed Bridge Facility also provides for a $5 million Letter of Credit
Facility for the eligible borrowers. Outstanding borrowings by Fund I, TECAI,
AFG, or PLM Equipment Growth Funds IV through VII reduce the amount available to
each other under the Committed Bridge Facility. Individual borrowings may be
outstanding for no more than 179 days, with all advances due no later than
October 31, 1997. The Committed Bridge Facility prohibits the Partnership from
incurring any additional indebtedness. Interest accrues at either the prime rate
or adjusted LIBOR plus 2.5% at the 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, 1996, the Partnership had borrowings of $2.0
million, PLM Equipment Growth Fund V had $2.5 million, PLM Equipment Growth Fund
VI had $1.3 million, AFG had $26.9 million, and TECAI had $4.1 million in
outstanding borrowings. Neither PLM Equipment Growth Fund IV nor Fund I had any
outstanding borrowings.
The General Partner has not planned any expenditures, nor is it aware of
any contingencies that would cause it to require any additional capital to that
mentioned above.
(D) Results of Operations - Year-to-Year Detail Comparison
Comparison of the Partnership's Operating Results for the Year Ended
December 31, 1996 and 1995
(A) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance,
equipment operating, and asset -specific insurance expenses) on owned equipment
increased during the year ended December 31, 1996, when compared to the same
period of 1995. The following table presents lease revenues less direct expenses
by owned equipment type (in thousands):
For the year ended
December 31,
1996 1995
----------------------------
Aircraft $ 2,082 $ 1,381
Marine vessels 3,551 3,473
Trailers 2,290 2,537
Rail equipment 1,926 2,002
Modular buildings 582 763
Aircraft: Aircraft lease revenues and direct expenses were $2.1 million and
$41,000, respectively, for the year ended 1996, compared to $1.4 million and
$31,000, respectively, during the same period of 1995. The increase was due
primarily to the purchase of three DC-9 aircraft and two Dash 8-100 aircraft
during the later half of the second quarter of 1995, resulting in 12 full months
of lease revenues during 1996, compared to 7 months of lease revenues during
1995. Additionally, the Partnership purchased and leased a Boeing 737-200 during
the third quarter of 1996;
Marine vessels: Marine vessel lease revenues and direct expenses were $3.9
million and $0.3 million, respectively, for the year ended 1996, compared to
$3.9 million and $0.4 million, respectively, during the same period of 1995. The
decrease in direct expenses was due to the lower marine operating expenses and a
small insurance refund due to an overpayment in a prior year;
Trailers: Trailer lease revenues and direct expenses were $2.9 million and $0.6,
respectively, for the year ended 1996, compared to $2.8 million and $0.2
million, respectively, during the same period of 1995. Although revenues appear
to be relatively consistent for both periods, the Partnership purchased
additional trailers during 1996, which increased lease revenues; however, the
increase was offset by the trailer fleet in the PLM-affiliated short-term rental
yards, which is experiencing lower utilization of its equipment The increase of
$0.4 million in direct expenses is due to repairs needed to the trailers in the
above-mentioned rental yards to maintain rental-ready status;
Rail equipment: Railcar lease revenues and direct expenses were $2.6 million and
$0.7 million, respectively, for the year ended 1996, compared to $2.5 million
and $0.5 million, respectively, during the same period of 1995. The increase in
lease revenues during the year ended 1996 was due to the purchase of additional
railcars during 1996. This increase was offset by an increase in repairs needed
during 1996 that were not needed during the same period of 1995;
Modular buildings: Modular building lease revenues and direct expenses were $0.7
million and $0.1 million, respectively, for the year ended 1996, compared to
$0.8 million and $12,000, respectively, during the same period of 1995. The
number of modular buildings owned by the Partnership has been declining over the
past 12 months due to sales and dispositions; however, the Partnership is
earning a higher lease rate on the remaining units. Direct expenses increased
$0.1 million during the year ended 1996, due to required repairs needed to
maintain building standards.
(B) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $13.0 million for the year ended December 31, 1996
increased from $10.9 million for the same period in 1995. The variances are
explained as follows:
(a) A $1.4 million increase in interest expense from 1995 levels, reflecting the
increase in long-term debt of $23 million outstanding for the entire year of
1996, when compared to the same period of 1995. During 1995, the Partnership had
$5.3 million in short-term debt in place for 105 days, $4.3 million in
short-term debt in place for 75 days, and long-term debt of $23.0 million in
place for 15 days;
(b) A $0.3 million increase in administrative expenses from 1995 levels due to
repositioning, inspection, and storage cost of equipment, which was not needed
during the same period of 1995;
(c) A $0.5 million increase in depreciation and amortization expense during the
year ended 1996, due to the purchase of a commercial aircraft, 209 trailers, and
35 railcars during 1996. The increase was offset, in part, by a decrease in
depreciation expense caused by the double-declining balance method of
depreciation;
(d) These increases were offset, in part, by a decrease of $0.1 million in bad
debt expense, due to a higher increase in the allowance for doubtful accounts
receivable in 1995 than in 1996 to provide for potentially uncollectable
receivables.
(C) Net Gain on Disposition of Owned Equipment
Net gain on disposition of equipment for the year ended December 31, 1996
totaled $42,000, which resulted from the sale of 7 modular building and 13
trailers, with an aggregate net book value of $207,000, for proceeds of
$255,000. The Partnership also sold 58 trailers, which were held for sale as of
December 31, 1995, with a net book value of $156,000 at the date of sale, for
proceeds of $150,000. For the year ended December 31, 1995, the $182,000 net
gain on disposition of equipment resulted from the sale of 53 modular buildings
and 41 trailers, with an aggregate net book value of $1.2 million, for proceeds
of $1.4 million.
(D) Interest and Other Income
Interest and other income increased $59,000 during the year ended December 31,
1996, due primarily to higher cash balances available for investments during
certain periods of 1996, when compared to the same periods of 1995.
(E) Equity in Net Loss of Unconsolidated Special Purpose Entities
Equity in net loss of unconsolidated special purpose entities represents net
loss generated from the operation of jointly-owned assets accounted for under
the equity method (see Note 2 to the financial statements):
For the year ended
December 31,
1996 1995
----------------------------
Aircraft, rotable components, and aircraft engines $ (486 ) $ (709 )
Mobile offshore drilling unit (10 ) --
Marine vessels (384 ) (489 )
Aircraft, rotable components, and aircraft engines: As of December 31, 1996, the
Partnership had an interest in a trust owning a commercial aircraft and an
interest in four trusts that own 13 commercial aircraft, 2 aircraft engines, and
a portfolio of rotable components. During the same period of 1995, the
Partnership had the interest in the trust owning the commercial aircraft and had
just purchased an interest in three additional trusts that contained 10
commercial aircraft, 2 aircraft engines, and a portfolio of rotable components.
The Partnership's share of lease revenues for this equipment increased to $7.9
million during the year ended December 31, 1996, compared to $2.6 million during
the same period of 1995. Operating expenses, which are comprised primarily of
depreciation and administrative expenses, increased to $8.4 million during the
year ended December 31, 1996, from $3.3 million during the same period of 1995,
due to the Partnership's increased investments;
Mobile offshore drilling unit: As of December 31, 1996, the Partnership had an
interest in an entity that owns a rig, which was purchased during the last month
of 1996. During 1996, lease revenues of $21,000 were offset by depreciation and
administrative expenses of $31,000;
Marine vessels: As of December 31, 1996 and 1995, the Partnership had interests
in two entities owning dry bulk carrier marine vessels. The Partnership's share
of lease revenues decreased to $4.0 million during the year ended December 31,
1996, from $4.1 million during the same period of 1995. This decrease was due to
lower day rates in effect for the marine vessel on time charter in the pool,
when compared to the same period of 1995. This decrease was offset, in part, by
the change in the lease of the other marine vessel from bareboat charter to time
charter, which earned higher revenues during 1996 when compared to the same
period of 1995. As a result of these changes, direct operating expenses
increased to $2.0 million during the year ended December 31, 1996, from $1.6
million for the same period of 1995. Indirect operating expenses which are
comprised primarily of depreciation and administrative expenses, decreased to
$2.4 million during the year ended December 31, 1996, from $3.0 million during
the same period of 1995. The decrease of $0.6 million was due primarily to the
use of the double-declining balance method of depreciation.
(F) Net Loss
As a result of the foregoing, the Partnership's net loss of $3.0 million for the
year ended December 31, 1996 increased from a net loss of $1.2 million during
the same period in 1995. The Partnership's ability to operate and liquidate
assets, secure leases, and re-lease those assets whose leases expire during the
duration of the Partnership is subject to many factors, and the Partnership's
performance during the year ended December 31, 1996 is not necessarily
indicative of future periods. During the year ended December 31, 1996, the
Partnership distributed $9.7 million to the Limited Partners, or $1.80 per
weighted-average Depositary Unit.
Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1995 and 1994
(A) Revenues
PLM Equipment Growth & Income Fund VII was in the equity-raising stage during
1994 and the first four months of 1995. As of December 31, 1995, the Partnership
had purchased and placed into service $109 million of equipment compared to $79
million at December 31, 1994 (see financial statements, Note 4). Revenues of
$18.6 million were generated for the year ended December 31, 1995, compared to
$9.2 million for the same period in 1994. The primary reason for the increase is
due to higher lease revenues.
Lease revenues increased $9.1 million for the year ended December 31, 1995,
when compared to the same period in 1994. The following table list the changes
by equipment type (in thousands):
For the year
ended December 31,
1995 1994
------------------------------
Marine vessels $ 7,974 $ 4,794
Aircraft 4,052 1,181
Trailers 2,774 2,083
Railcars 2,506 241
Modular buildings 775 706
------------------------------
$ 18,081 $ 9,005
==============================
The primary reason there is such a large increase in revenues is due to the
Partnership's purchase of additional equipment during 1995; also, a number of
the assets that were purchased throughout 1994 were on lease a full 12 months
during 1995, compared to only part of the year during 1994. Until the
Partnership completes its initial equipment acquisition phase, there will be a
large fluctuation in lease revenues from year to year.
(B) Expenses
Expenses of $19.8 million for the year ended December 31, 1995 consisted
primarily of depreciation expense, using the double-declining balance method,
and the normal operating costs incurred when equipment is purchased and placed
in service. Expenses for the same period in 1994 totaled $13.0 million, also
consisting of depreciation expense and the normal operating costs incurred when
equipment is purchased and placed into service.
(C) Net Loss
The Partnership's net loss of $1.2 million in the year ended December 31, 1995
decreased from a net loss of $3.8 million during the same period in 1994. The
Partnership's ability to acquire, operate, or liquidate assets, secure leases,
and re-lease those assets whose leases expire during the duration of the
Partnership is subject to many factors, and the Partnership's performance for
the years ended December 31, 1995 is not necessarily indicative of future
periods. In the year ended December 31, 1995, the Partnership distributed $9.2
million to the Limited Partners.
Geographic Information
The Partnership operates its equipment in international markets. Although these
operations expose the Partnership to certain currency, political, credit, and
economic risks, the Manager believes these risks are minimal or has implemented
strategies to control the risks, as follows: Currency risks are at a minimum
because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
generally through the avoidance of operations in countries that do not have a
stable judicial system and established commercial business laws. Credit support
strategies for lessees range from letters of credit supported by U.S. banks to
cash deposits. Although these credit support mechanisms generally allow the
Partnership to maintain its lease yield, there are risks associated with
slow-to-respond judicial systems when legal remedies are required to secure
payment or repossess equipment. Economic risks are inherent in all international
markets and the Manager strives to minimize this risk with market analysis prior
to committing equipment to a particular geographic area. Refer to the financial
statements, Note 4 for information on the revenues, income, and assets in
various geographic regions.
Revenues and net operating income by geographic region are impacted by the
time period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years due to
the use of the double-declining balance method of depreciation. The
relationships of geographic revenues, net income (loss), and net book value are
expected to significantly change in the future, as assets come off lease and
decisions are made to redeploy the assets in the most advantageous geographic
location or sell the assets.
The Partnership's owned equipment on lease to U.S.-domiciled lessees
consists of aircraft, modular buildings, trailers, and railcars. During 1996,
U.S. lease revenues accounted for 31% of the total lease revenues, while the net
loss accounted for 20% of the net loss for the entire Partnership
The Partnership's owned equipment and investments in equipment owned by
USPEs on lease to Canadian-domiciled lessees consisted of various aircraft.
During 1996, Canadian lease revenues accounted for 17% of the total lease
revenues and a net loss of 43% when compared to the net loss for the entire
Partnership. These aircraft will be on lease beyond the year 2000, and are
expected to generate higher net profit in the future as depreciation charges
decline.
The Partnership's investment in an aircraft owned by a USPE, on lease to
South American-domiciled lessees during 1996, accounted for 5% of the total
lease revenues and a net loss of 3% when compared to the net loss for the entire
Partnership.
The Partnership's investment in equipment owned by a USPE, on lease to
lessees in Europe, consisted of commercial aircraft, aircraft engines, and
aircraft rotable components, which accounted for 15% of lease revenues; this
operation recorded net income of $1.0 million, compared to a net loss of $3.0
million for the entire Partnership. The primary reason for this relationship is
due to better-than-average lease rates.
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
and a rig. During 1996, lease revenues for these operations accounted for 33% of
the total lease revenues and net income of $37,000 when compared to the net loss
of $3.0 million for the entire Partnership.
Inflation
There was no significant impact on the Partnership's operations as a result of
inflation during 1996, 1995, or 1994.
Forward-Looking Information
Except for the historical information contained herein, the discussion in this
Form 10-K contains forward-looking statements that involve risks and
uncertainties, such as statements of the Partnership's plans, objectives,
expectations, and intentions. The cautionary statements made in this Form 10-K
should be read as being applicable to all related forward-looking statements
wherever they appear in this Form 10-K. The Partnership's actual results could
differ materially from those discussed here.
Outlook for the Future
Several factors may affect the Partnership's operating performance in 1997 and
beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
The Partnership's operation of a diversified equipment portfolio in a broad
base of markets is intended to reduce its exposure to volatility in individual
equipment sectors. In 1996, market conditions, supply and demand equilibrium,
and other factors varied in several markets. In the refrigerated over-the-road
trailer markets, oversupply conditions, industry consolidations, and other
factors resulted in falling rates and lower returns. In the dry over-the-road
trailer markets, strong demand and a backlog of new equipment deliveries
produced high utilization and returns. The marine vessel and rail markets could
be generally categorized by increasing rates, as the demand for equipment is
increasing faster than new additions net of retirements. Finally, demand for
narrowbody Stage II aircraft, such as those owned by the Partnership, has
increased, as expected savings from newer narrowbody aircraft have not
materialized and deliveries of the newer aircraft have slowed down. These
different markets have had individual effects on the performance of Partnership
equipment, in some cases resulting in declining performance and in others in
improved performance.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent on many factors, such
as specific market conditions and economic activity, technological obsolescence,
and government or other regulations. The unpredictability of some of these
factors or their occurrence makes it difficult for the General Partner to
clearly define trends or influences that may impact the performance of the
Partnership's equipment. The General Partner 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
expenses, loan principal, and cash distributions to acquire additional equipment
during the first seven years of Partnership operations. The General Partner
believes these acquisitions may cause the Partnership to generate additional
earnings and cash flow for the Partnership.
(A) Repricing and Reinvestment Risk
Certain of the Partnership's aircraft, marine vessel, modular buildings, and
trailers will be remarketed in 1997 as existing leases expire, exposing the
Partnership to some repricing risk/opportunity. Additionally, the General
Partner may select to sell certain underperforming equipment or equipment whose
continued operation may become prohibitively expensive. The proceeds from the
sold or liquidated equipment will be redeployed to purchase additional
equipment, as the Partnership is in its reinvestment phase.
(B) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the Manager 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. Ongoing changes in the
regulatory environment, both in the U.S. and internationally, cannot be
predicted with any accuracy, and preclude the General Partner from determining
the impact of such changes on Partnership operations, purchases, or sale of
equipment.
(C) Additional Capital Resources and Distribution Levels
The Partnership's initial contributed capital was composed of the proceeds from
its initial offering, supplemented later by permanent debt in the amount of $23
million and interim financing of $2.0 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, 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. The General Partner intends
to continue its strategy of selectively redeploying equipment to achieve
competitive returns. By the end of the reinvestment period, the General Partner
intends to have assembled an equipment portfolio capable of achieving a level of
operating cash flow for the remaining life of the Partnership sufficient to meet
its obligations and sustain a predictable level of distributions to the
partners.
The General Partner believes the current level of distributions to the
partners can be maintained throughout 1997 using cash from operations and
undistributed available cash from prior periods, if necessary. Subsequent to
this period, the General Partner will evaluate the level of distributions the
Partnership can sustain over extended periods of time and, together with other
considerations, may adjust the level of distributions accordingly. In the long
term, the difficulty in predicting market conditions precludes the General
Partner from accurately determining the impact of changing market conditions on
liquidity or distribution levels.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed on the Index to
Financial Statements included in Item 14(a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
As of the date of this Annual Report, the directors and executive officers of
PLM International (and key executive officers of its subsidiaries) are as
follows:
Name Age Position
-------------------------------------- ------------------ -------------------------------------------------------
J. Alec Merriam 61 Director, Chairman of the Board, PLM International,
Inc.; Director, PLM Financial Services, Inc.
Douglas P. Goodrich 50 Director and Senior Vice President, PLM
International; Director and President, PLM Financial
Services, Inc.; Senior Vice President, PLM
Transportation Equipment Corporation; President, PLM
Railcar Management Services, Inc.
Walter E. Hoadley 80 Director, PLM International, Inc.
Robert L. Pagel 60 Director, Chairman of the Executive Committee, PLM
International, Inc.; Director, PLM Financial
Services, Inc.
Harold R. Somerset 62 Director, PLM International, Inc.
Robert N. Tidball 58 Director, President and Chief Executive Officer, PLM
International, Inc.
J. Michael Allgood 48 Vice President and Chief Financial Officer, PLM
International, Inc. and PLM Financial Services, Inc.
Stephen M. Bess 50 President, PLM Investment Management, Inc.;
President, PLM Securities Corp.; Vice President, PLM
Financial Services, Inc.
David J. Davis 40 Vice President and Corporate Controller, PLM
International and PLM Financial Services, Inc.
Frank Diodati 42 President, PLM Railcar Management Services Canada
Limited.
Steven O. Layne 42 Vice President, PLM Transportation Equipment
Corporation; Vice President and Director, PLM
Worldwide Management Services, Ltd.
Stephen Peary 48 Senior Vice President, General Counsel and Secretary,
PLM International, Inc.; Vice President, General
Counsel and Secretary, PLM Financial Services, Inc.,
PLM Investment Management, Inc., PLM Transportation
Equipment Corporation; Vice President, PLM
Securities, Corp.
Thomas L. Wilmore 54 Vice President, PLM Transportation Equipment
Corporation; Vice President, PLM Railcar Management
Services, Inc.
J. Alec Merriam was appointed Chairman of the Board of Directors of PLM
International in September 1990, having served as a director since February
1988. In October 1988, he became a member of the Executive Committee of the
Board of Directors of PLM International. From 1972 to 1988, Mr. Merriam was
Executive Vice President and Chief Financial Officer of Crowley Maritime
Corporation, a San Francisco area-based company engaged in maritime shipping and
transportation services. Previously, he was Chairman of the Board and Treasurer
of LOA Corporation of Omaha, Nebraska, and served in various financial positions
with Northern Natural Gas Company, also of Omaha.
Douglas P. Goodrich was elected to the Board of Directors in July 1996, was
appointed Director and President of PLM Financial Services in June 1996, and was
appointed Senior Vice President of PLM International in March 1994. Mr. Goodrich
has also served as Senior Vice President of PLM Transportation Equipment
Corporation since July 1989, and as President of PLM Railcar Management
Services, Inc. since September 1992, having been a Senior Vice President since
June 1987. Mr. Goodrich was an Executive Vice President of G.I.C. Financial
Services Corporation, a subsidiary of Guardian Industries Corp. of Chicago,
Illinois, from December 1980 to September 1985.
Dr. Walter E. Hoadley joined PLM International's Board of Directors and its
Executive Committee in September 1989. He served as a Director of PLM, Inc. from
November 1982 to June 1984 and PLM Companies, Inc. from October 1985 to February
1988. Dr. Hoadley has been a Senior Research Fellow at the Hoover Institute
since 1981. He was Executive Vice President and Chief Economist for the Bank of
America from 1968 to 1981, and Chairman of the Federal Reserve Bank of
Philadelphia from 1962 to 1966. Dr. Hoadley served as a Director of Transcisco
Industries, Inc. from 1988 through August of 1995.
Robert L. Pagel was appointed Chairman of the Executive Committee of the
Board of Directors of PLM International in September 1990, having served as a
Director since February 1988. In October 1988, he became a member of the
Executive Committee of the Board of Directors of PLM International. From June
1990 to April 1991, Mr. Pagel was President and Co-Chief Executive Officer of
The Diana Corporation, a holding company traded on the New York Stock Exchange.
He is the former President and Chief Executive Officer of FanFair Corporation,
which specializes in sports fans' gift shops. He previously served as President
and Chief Executive Officer of Super Sky International, Inc., a publicly traded
company, located in Mequon, Wisconsin, which is engaged in the manufacture of
skylight systems. He was formerly Chairman and Chief Executive Officer of Blunt,
Ellis & Loewi, Inc., a Milwaukee-based investment firm. Mr. Pagel retired from
Blunt, Ellis & Loewi in 1985, after a career spanning 20 years in all phases of
the brokerage and financial industries. Mr. Pagel has also served on the Board
of Governors of the Midwest Stock Exchange.
Harold R. Somerset was elected to the Board of Directors of PLM
International in July 1994. From February 1988 to December 1993, Mr. Somerset
was President and Chief Executive Officer of California & Hawaiian Sugar
Corporation (C&H), a recently-acquired subsidiary of Alexander & Baldwin, Inc.
Mr. Somerset joined C&H in 1984 as Executive Vice President and Chief Operating
Officer, having served on its Board of Directors since 1978, a position in which
he continues to serve. Between 1972 and 1984, Mr. Somerset served in various
capacities with Alexander & Baldwin, Inc., a publicly-held land and agriculture
company headquartered in Honolulu, Hawaii, including Executive Vice President of
Agricultures, Vice President, General Counsel, and Secretary. In addition to a
law degree from Harvard Law School, Mr. Somerset also holds degrees in civil
engineering from the Rensselaer Polytechnic Institute and in marine engineering
from the U.S. Naval Academy. Mr. Somerset also serves on the Boards of Directors
for various other companies and organizations, including Longs Drug Stores,
Inc., a publicly-held company.
Robert N. Tidball was appointed President and Chief Executive Officer of
PLM International in March 1989. At the time of his appointment, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989 and a member of the Executive Committee of the
Board of Directors of PLM International in September 1990. Mr. Tidball was
elected President of PLM Railcar Management Services, Inc. in January 1986. Mr.
Tidball was Executive Vice President of Hunter Keith, Inc., a Minneapolis-based
investment banking firm, from March 1984 to January 1986. Prior to Hunter Keith,
Inc., he was Vice President, a General Manager, and a Director of North American
Car Corporation, and a Director of the American Railcar Institute and the
Railway Supply Association.
J. Michael Allgood was appointed Vice President and Chief Financial Officer
of PLM International in October 1992. Between July 1991 and October 1992, Mr.
Allgood was a consultant to various private- and public-sector companies and
institutions specializing in financial operational systems development. In
October 1987, Mr. Allgood co-founded Electra Aviation Limited and its holding
company, Aviation Holdings Plc of London, where he served as Chief Financial
Officer until July 1991. Between June 1981 and October 1987, Mr. Allgood served
as a First Vice President with American Express Bank, Ltd. In February 1978, Mr.
Allgood founded and, until June 1981, served as a Director of Trade Projects
International/Philadelphia Overseas Finance Company, a joint venture with
Philadelphia National Bank. From March 1975 to February 1978, Mr. Allgood served
in various capacities with Citibank, N.A.
Stephen M. Bess was appointed President of PLM Securities, Corp. in June
1996 and President of PLM Investment Management, Inc. in August 1989, having
served as Senior Vice President of PLM Investment Management, Inc. beginning in
February 1984 and as Corporate Controller of PLM Financial Services, Inc.
beginning in October 1983. Mr. Bess served as Corporate Controller of PLM, Inc.
beginning in December 1982. Mr. Bess was Vice President-Controller of Trans
Ocean Leasing Corporation, a container leasing company, from November 1978 to
November 1982, and Group Finance Manager with the Field Operations Group of
Memorex Corp., a manufacturer of computer peripheral equipment, from October
1975 to November 1978.
David J. Davis was appointed Vice President and Controller of PLM
International in January 1994. From March 1993 through January 1994, Mr. Davis
was engaged as a consultant for various firms, including PLM. Prior to that, Mr.
Davis was Chief Financial Officer of LB Credit Corporation in San Francisco from
July 1991 to March 1993. From April 1989 to May 1991, Mr. Davis was Vice
President and Controller for ITEL Containers International Corporation, which
was located in San Francisco. Between May 1978 and April 1989, Mr. Davis held
various positions with Transamerica Leasing Inc. in New York, including that of
Assistant Controller for their rail leasing division.
Frank Diodati was appointed President of PLM Railcar Management Services
Canada Limited in 1986. Previously, Mr. Diodati was Manager of Marketing and
Sales for G.E. Railcar Services Canada Limited.
Steven O. Layne was appointed Vice President of PLM Transportation
Equipment Corporation's Air Group in November 1992, and was appointed Vice
President and Director of PLM Worldwide Management Services, Ltd. in September
1995. Mr. Layne was PLM Transportation Equipment Corporation's Vice President of
Commuter and Corporate Aircraft beginning in July 1990. Prior to joining PLM,
Mr. Layne was the Director of Commercial Marketing for Bromon Aircraft
Corporation, a joint venture of General Electric Corporation and the Government
Development Bank of Puerto Rico. Mr. Layne is a Major in the United States Air
Force Reserves and senior pilot with 13 years of accumulated service.
Stephen Peary became Vice President, Secretary, and General Counsel of PLM
International in February 1988 and Senior Vice President in March 1994. Mr.
Peary was Assistant General Counsel of PLM Financial Services, Inc. from August
1987 through January 1988. Previously, Mr. Peary was engaged in the private
practice of law in San Francisco. Mr. Peary is a graduate of the University of
Illinois, Georgetown University Law Center, and Boston University (Masters of
Taxation Program).
Thomas L. Wilmore was appointed Vice President of Rail, PLM Transportation
Equipment Corporation, in March 1994, and has served as Vice President of
Marketing for PLM Railcar Management Services, Inc. since May 1988. Prior to
joining PLM, Mr. Wilmore was Assistant Vice President Regional Manager for MNC
Leasing Corp. in Towson, Maryland, from February 1987 to April 1988. From July
1985 to February 1987, he was President and Co-Owner of Guardian Industries
Corp., Chicago, Illinois, and between December 1980 and July 1985, Mr. Wilmore
was an Executive Vice President for its subsidiary, G.I.C. Financial Services
Corporation. Mr. Wilmore also served as Vice President of Sales for Gould
Financial Services located in Rolling Meadows, Illinois, from June 1978 to
December 1980.
The directors of the General Partner are elected for a one-year term or
until their successors are elected and qualified. There are no family
relationships between any director or any executive officer of the General
Partner.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership
has no pension, profit sharing, retirement ,or similar benefit plan in effect as
of December 31, 1996.
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 and distributions of the Partnership. At December
31, 1996, no investor was known by the General Partner to beneficially
own more than 5% of the Units of the Partnership.
(b) Security Ownership of Management
Neither the General Partner and its affiliates nor any executive
officer or director of the General Partner and its affiliates own any
Units of the Partnership as of December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
During 1996, the Partnership paid or accrued the following fees to FSI
or its affiliates: management fees - $744,000; equipment acquisition
fees - $402,000; and lease negotiation fees - $90,000. The Partnership
reimbursed FSI and/or its affiliates $582,000 for administrative and
data processing services performed on behalf of the Partnership during
1996.
During 1996, the USPEs paid or accrued the following fees to FSI
or its affiliates (based on the Partnership's proportional share of
ownership): management fees - $462,000; administrative and data
processing services - $97,000; equipment acquisition fees - $342,000;
and lease negotiation fees - $76,000. The USPEs also paid TEI $240,000
for insurance coverages during 1996.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report.
(b) Reports on Form 8-K
None.
(c) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated by
reference to the Partnership's Registration Statement on Form S-1
(Reg. No. 33-55796), which became effective with the Securities and
Exchange Commission on May 25, 1993.
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 Amended and restated Warehousing Credit Agreement, dated as of
September 27, 1996 with First Union National Bank of North Carolina
Incorporated by reference to the Partnership Quarterly Report on
Form 10Q, filed with the Securities and Exchange Commission on
November 10, 1996.
24. Powers of Attorney.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has
signed on behalf of the Partnership by duly authorized officers.
Dated: March 7, 1997 PLM EQUIPMENT GROWTH FUND VII
PARTNERSHIP
By: PLM Financial Services, Inc.
General Partner
By: /s/ Douglas P. Goodrich
-------------------------
Douglas P. Goodrich
President and Director
By: /s/ David J. Davis
-------------------------
David J. Davis
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
*_______________________
J. Alec Merriam Director - FSI March 7, 1997
*_______________________
Robert L. Pagel Director - FSI March 7, 1997
* Stephen Peary, by signing his name hereto, does sign this document on behalf
of the persons indicated above, pursuant to powers of attorney duly executed by
such persons and filed with the Securities and Exchange Commission.
/s/ Stephen Peary
- ------------------------
Stephen Peary
Attorney-in-Fact
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Report of Independent Auditors 26
Balance sheets as of December 31, 1996 and 1995 27
Statements of operations for the years ended
December 31, 1996, 1995, and 1994 28
Statements of changes in partners' capital for the
years ended December 31, 1996, 1995, and 1994 29
Statements of cash flows for the years ended December 31, 1996,
1995, and 1994 30
Notes to financial statements 31 - 39
All other financial statement schedules have been omitted, as the required
information is not pertinent to the Registrant or is not material, or because
the information required is included in the financial statements and notes
thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners
PLM Equipment Growth & Income Fund VII:
We have audited the accompanying financial statements of PLM Equipment Growth &
Income Fund VII 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 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, 1996 and 1995, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
- ------------------------------
SAN FRANCISCO, CALIFORNIA
February 28, 1997
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
BALANCE SHEETS
December 31,
(Dollars in thousands)
ASSETS
1996 1995
--------------------------------
Equipment held for operating leases, at cost $ 67,441 $ 58,333
Less accumulated depreciation (21,494 ) (12,796 )
--------------------------------
45,947 45,537
Equipment held for sale -- 156
------------------------------
Net equipment 45,947 45,693
Cash and cash equivalents 2,468 11,965
Restricted cash 158 401
Investments in unconsolidated special purpose entities 37,141 38,689
Accounts receivable, net of allowance for doubtful accounts of
$330 in 1996 and $238 in 1995 1,214 872
Prepaid expenses 58 40
Lease negotiation fees to affiliate, net of accumulated
amortization of $466 in 1996 and $266 in 1995 184 306
Debt issuance costs, net of accumulated amortization
of $27 in 1996 and $2 in 1995 228 228
--------------------------------
Total assets $ 87,398 $ 98,194
================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 296 $ 270
Due to affiliates 605 513
Lessee deposits and reserve for repairs 1,360 1,120
Short-term note payable 2,000 --
Note payable 23,000 23,000
--------------------------------
Total liabilities 27,261 24,903
Partners' capital:
Limited Partners (5,370,297 Depositary Units in 1996 and
in 1995) 60,137 73,291
General Partner -- --
--------------------------------
Total partners' capital 60,137 73,291
--------------------------------
Total liabilities and partners' capital $ 87,398 $ 98,194
================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
STATEMENTS OF OPERATIONS
For the years ended December 31,
(In thousands of dollars, except per unit amounts)
1996 1995 1994
-----------------------------------------------
Revenues:
Lease revenue $ 12,227 $ 18,081 $ 9,005
Interest and other income 434 375 190
Net gain on disposition of equipment 42 182 22
-----------------------------------------------
Total revenues 12,703 18,638 9,217
Expenses:
Depreciation and amortization 9,041 14,409 9,820
Management fees to affiliate 744 971 485
Repairs and maintenance 1,692 1,483 848
Equipment operating expenses 48 915 401
Insurance expense to affiliate -- 141 82
Other insurance expense 88 225 109
Interest expense 1,681 291 313
General and administrative expenses to affiliates 582 616 346
Other general and administrative expenses 780 534 620
Bad debt expense 143 245 2
-----------------------------------------------
Total expenses 14,799 19,830 13,026
-----------------------------------------------
Equity in net loss of unconsolidated
special purpose entities (880 ) -- --
-----------------------------------------------
Net loss $ (2,976 ) $ (1,192 ) $ (3,809 )
===============================================
Partners' share of net income (loss):
Limited Partners $ (3,485 ) $ (1,662 ) $ (4,046 )
General Partner 509 470 237
-----------------------------------------------
Total $ (2,976 ) $ (1,192 ) $ (3,809 )
===============================================
Net loss per weighted-average Depositary Unit:
(5,370,297 Units at December 31, 1996 and 1995,
4,426,210 Units at December 31, 1994) $ (0.65 ) $ (0.31 ) $ N/A
===============================================
Cash distributions $ 10,178 $ 9,627 $ 5,371
===============================================
Cash distributions per weighted-average Depositary Unit $ 1.80 $ N/A $ N/A
===============================================
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, 1996, 1995, and 1994
(In thousands)
Limited General
Partners Partners Total
--------------------------------------------------
Partners' capital at December 31, 1993 $ 30,423 $ -- $ 30,423
Partners' capital contributions 52,542 -- 52,542
Underwriting commission to affiliate (5,086 ) -- (5,086 )
Syndication costs to affiliates (1,704 ) -- (1,704 )
--------------------------------------------------
Partners' capital contributions, net 45,752 -- 45,752
Net income (loss) (4,046 ) 237 (3,809 )
Cash distributions (5,133 ) (237 ) (5,370 )
--------------------------------------------------
Partners' capital at December 31, 1994 66,996 -- 66,996
Partners' capital contributions 18,873 -- 18,873
Underwriting commission to affiliate (1,320 ) -- (1,320 )
Syndication costs to affiliates (440 ) -- (440 )
--------------------------------------------------
Partners' capital contributions, net 17,113 -- 17,113
Net income (loss) (1,661 ) 470 (1,191 )
Cash distributions (9,157 ) (470 ) (9,627 )
--------------------------------------------------
Partners' capital at December 31, 1995 73,291 -- 73,291
Net income (loss) (3,485 ) 509 (2,976 )
Cash distributions (9,669 ) (509 ) (10,178 )
--------------------------------------------------
Partners' capital at December 31, 1996 $ 60,137 $ -- $ 60,137
==================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31,
(In thousands)
1996 1995 1994
--------------------------------------------
Operating activities:
Net loss $ (2,976 ) $ (1,192 ) $ (3,809 )
Adjustments to reconcile net loss
to net cash provided by operating activities:
Net gain on disposition of equipment (42 ) (182 ) (22 )
Depreciation and amortization 9,041 14,409 9,820
Equity in net loss from unconsolidated special purpose entities 880 -- --
Decrease (increase) in restricted cash 243 -- (401 )
Increase in accounts receivable, net (505 ) (1,493 ) (336 )
Increase in prepaid expenses (18 ) (30 ) (36 )
Increase (decrease) in accounts payable
and accrued expenses 26 239 (40 )
Increase in due to affiliates 92 39 155
Increase in lessee deposits and reserve for repairs 240 1,211 730
--------------------------------------------
Net cash provided by operating activities 6,981 13,001 6,061
--------------------------------------------
Investing activities:
Payments for purchase of equipment (9,020 ) (29,737 ) (40,068 )
Investment in and equipment purchased and placed in
unconsolidated special purpose entities (8,029 ) -- --
Distributions from unconsolidated special purpose entities 8,697 -- --
Payments of acquisition fees to affiliate (402 ) (1,690 ) (2,623 )
Payments of lease negotiation fees to affiliate (90 ) (375 ) (311 )
Proceeds from equipment disposals 569 1,210 180
--------------------------------------------
Net cash used in investing activities (8,275 ) (30,592 ) (42,822 )
--------------------------------------------
Financing activities:
Partners' capital contributions, net of
syndication and underwriting costs -- 17,113 45,753
(Decrease) Increase in due to affiliates relating to
syndication activities -- (261 ) 167
Cash distributions paid to Limited Partners (9,669 ) (9,157 ) (5,133 )
Cash distributions paid to General Partner (509 ) (470 ) (237 )
(Decrease) increase in subscriptions in escrow -- (4,239 ) 2,610
Decrease (increase) in restricted cash from
subscription in escrow, net -- 4,010 (2,190 )
Proceeds from short-term note payable 2,000 23,000 --
Principal payments on note payable -- -- (5,123 )
Payments of debt issuance costs (25 ) (230 ) (63 )
--------------------------------------------
Net cash (used in) provided by financing activities (8,203 ) 29,766 35,784
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (9,497 ) 12,175 (977 )
Cash and cash equivalents at beginning of period (see Note 2) 11,965 199 1,176
--------------------------------------------
Cash and cash equivalents at end of period $ 2,468 $ 12,374 $ 199
============================================
Supplemental information:
Interest paid $ 1,774 $ 188 $ 314
============================================
Supplemental disclosure of noncash investing and financing activities:
Sales proceeds included in accounts receivable $ 50 $ 213 $ --
============================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. 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-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). The Partnership offering
became effective on May 25, 1993 and closed on April 25, 1995. As of
December 31, 1996, the Partnership had admitted 5,370,297 Depositary Units
($107.4 million).
The Partnership will terminate on December 31, 2013, unless terminated
earlier upon sale of all equipment or by certain other events. Beginning in
the Partnership's seventh year of operations, which commences on January 1,
2002, the General Partner will stop reinvesting excess cash, if any, which,
less reasonable reserves, will be distributed to the Partners. Beginning in
the Partnership's ninth year of operations, the General Partner intends to
begin an orderly liquidation of the Partnership's assets. The General
Partner anticipates that the liquidation of the assets will be completed by
the end of the Partnership's tenth year of operation.
FSI manages the affairs of the Partnership. The net income (loss) and
distributions of the Partnership are generally allocated 95% to the Limited
Partners and 5% to the General Partner, subject to certain special
allocations (see Net Income (Loss) and Distribution per Depositary Unit,
below). 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. Upon the
conclusion of the 30-month period immediately following the termination of
the offering, 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 amount Unitholders paid for the Units, less the
amount of cash distributions Unitholders have received relating to such
Units.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operations
The equipment of the Partnership is managed, under a continuing
management agreement, by PLM Investment Management, Inc. (IMI), a
wholly-owned subsidiary of the General Partner. IMI receives a monthly
management fee from the Partnership for managing the equipment (see Note
3). FSI, in conjunction with its subsidiaries, syndicates investor
programs, sells transportation equipment to investor programs and third
parties, manages pools of transportation equipment under agreements with
investor programs, and is a general partner of other limited partnerships.
Accounting for Leases
The Partnership's leasing operations generally consist of operating
leases. Under the operating lease method of accounting, the leased asset is
recorded at cost and depreciated over its estimated useful life. Rental
payments are recorded as revenue over the lease term. Lease origination
costs are capitalized and amortized over the term of the lease.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
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 all other types of 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 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 debt (see Note
5). Major expenditures that are expected to extend the useful lives or
reduce future operating expenses of equipment are capitalized.
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS 121). This standard is
effective for years beginning after December 15, 1995. The Partnership
adopted SFAS 121 during 1995, the effect of which was not material, as the
method previously employed by the Partnership was consistent with SFAS 121.
In accordance with SFAS 121, the General Partner reviews the carrying value
of the Partnership's equipment at least annually in relation to expected
future market conditions for the purpose of assessing recoverability of the
recorded amounts. If projected future lease revenue plus residual values
are less than the carrying value of the equipment, a loss on revaluation is
recorded. No reductions to the carrying value of equipment were required
during 1996.
Equipment held for operating leases is stated at cost. Equipment held
for sale is stated at the lower of the equipment's depreciated cost or fair
value, less cost to sell, and is subject to a pending contract for sale.
Investments in Unconsolidated Special Purpose Entities (USPEs)
The Partnership has interests in unconsolidated special purpose entities
that own transportation equipment. These interests are accounted for using
the equity method.
The Partnership's investment in unconsolidated special purpose entities
includes acquisition and lease negotiation fees paid by the Partnership to
PLM Transportation Equipment Corporation (TEC). The Partnership's equity
interest in the net income of USPEs is reflected net of management fees
paid or payable to IMI and the amortization of acquisition and lease
negotiation fees paid to TEC.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are
not covered by the lessee, they are charged against operations as incurred.
To meet the maintenance obligations of aircraft airframes and engines,
reserve accounts are prefunded by the lessee. Estimated costs associated
with marine vessel dry docking are accrued and charged to income ratably
over the period prior to such dry docking. The reserve accounts are
included in the balance sheet as lessee deposits and reserve for repairs.
Net Income (Loss) and Distribution per Depositary Unit
The net income (loss) and distributions of the Partnership are
generally allocated 95% to the Limited Partners and 5% to the General
Partner. Gross income in each year is specially allocated to the General
Partner in an amount equal to the lesser of (I) the deficit balance, if
any, in the General
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
Net Income (Loss) and Distribution per Depositary Unit (continued)
Partner's capital account, calculated under generally accepted accounting
principles using the straight-line method of depreciation, and (ii) the
deficit balance, if any, in the General Partner's capital account ,
calculated under federal income tax regulations. The Limited Partners' net
income (loss) and distribution are allocated among the Limited Partners
based on the number of Units owned by each Limited Partner and on the
number of days of the year each Limited Partner is in the Partnership. The
Partnership will compute net income (loss) per Unit beginning in the first
calendar year after the closing of the offering. The Partnership believes
disclosure of per Unit data prior to this date is not meaningful.
Cash distributions are recorded when paid. Cash distributions to
investors in excess of net income are considered to represent a return of
capital. All cash distributions to the Limited Partners in 1996, 1995, and
1994 were deemed to be a return of capital.
Cash distributions of $1,438,000, $1,443,000, and $1,175,000 relating
to the fourth quarter of 1996, 1995, and 1994, respectively, were paid or
are payable during January and February 1997, 1996, or 1995, respectively,
depending on whether the individual Unitholder elected to receive a monthly
or quarterly distribution check.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three
months or less as cash equivalents.
Restricted Cash
At December 31, 1995, restricted cash represents lessee security deposits.
2. Investments in Unconsolidated Special Purpose Entities (USPEs)
During the second half of 1995, the Partnership began to increase the level
of its participation in the ownership of large-ticket transportation assets
to be owned and operated jointly with affiliated programs.
This trend has continued during 1996.
Prior to 1996, the Partnership accounted for operating activities
associated with joint ownership of transportation equipment as undivided
interests, including its proportionate share of each asset with similar
wholly-owned assets in its financial statements. Under generally accepted
accounting principles, the effects of such activities, if material, should
be reported using the equity method of accounting. Therefore, effective
January 1, 1996, the Partnership adopted the equity method to account for
its investment in such jointly-held assets.
The principle differences between the previous accounting method and
the equity method relate to the presentation of activities relating to
these assets in the statement of operations. Whereas under the equity
method of accounting the Partnership's proportionate share is presented as
a single net amount, "equity in net income (loss) of unconsolidated special
purpose entities," under the previous method the Partnership's statement of
operations reflected its proportionate share of each individual item of
revenue and expense. Accordingly, the effect of adopting the equity method
of accounting has no cumulative effect on previously reported partner's
capital or on the Partnership's net income (loss) for the period of
adoption. Because the effects on previously issued financial statements of
applying the equity method of accounting to investments in jointly-owned
assets are not considered to be material to such financial statements taken
as a whole, previously issued
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
2. Investments in Unconsolidated Special Purpose Entities (continued)
financial statements have not been restated. However, certain items have
been reclassified in the previously issued balance sheet to conform to the
current-period presentation. The beginning cash and cash equivalent for
1996 is different from the ending cash and cash equivalent for 1995 on the
statement of cash flows due to this reclassification.
During the year ended December 31, 1996, the Partnership purchased an
interest in a trust owning five commercial aircraft for $5.6 million and an
interest in an entity owning a rig (the remaining interest in this rig is
held by two affiliated partnerships and TEC Acquisub, Inc.) for $2.0
million, and incurred acquisition and lease negotiation fees of $0.4
million to PLM Worldwide Management Services (WMS), an affiliate of PLM
International.
The following summarizes the financial information for the USPEs and
the Partnership's interest therein as of and for the year ended December
31, 1996 (in thousands):
Net
Total interest of
USPEs the
Partnership
------------------------------
Net investment $ 115,015 $ 37,141
Revenues 33,850 11,904
Net loss (3,606 ) (880 )
The net investment in USPEs includes the following jointly owned
equipment (and related assets and liabilities) at December 31, 1996 and
1995, (in thousands):
1996 1995
-----------------------------
80% interest in an entity owning a bulk carrier marine vessel $ 7,362 $ 8,903
44% interest in an entity owning a bulk carrier marine vessel 3,142 3,836
10% interest in an equity owning a mobile offshore drilling unit 2,100 --
24% in a trust owning a 767-200ER commercial aircraft 5,798 7,001
33% interest in 2 trusts that own 3 commercial aircraft,
2 aircraft engines, and a portfolio of aircraft rotables 9,126 10,664
29% interest in a trust that owns 7 commercial aircraft (see
note below) -- 8,285
33% interest in a trust that owns 6 commercial aircraft (see
note below) 5,407 --
25% interest in a trust that owns 4 commercial aircraft (see
note below) 4,206 --
-----------------------------
Net investments in unconsolidated special purpose entities $ 37,141 $ 38,689
=============================
The Partnership has beneficial interests in two USPEs that own multiple
aircraft (Trusts). These Trusts contain provisions, under certain
circumstances, for allocating specific aircraft to the beneficial owners.
During September 1996, PLM Equipment Growth Fund V, an affiliated
partnership that also has a beneficial interest in the Trusts, renegotiated
its Senior Loan Agreement and was required, for loan collateral purposes,
to withdraw the aircraft designated to it from the Trusts. The result was
to restate the percentage ownership of the remaining beneficial owners of
the Trusts beginning September 30, 1996. This change has no effect on the
income or loss recognized during 1996.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. General Partner and Transactions with Affiliates
An officer of PLM Securities Corp. (PLM Securities) contributed $100 of
the Partnership's initial capital. Under the equipment management
agreement, IMI, 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, which 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 $119,000 and $197,000 at December 31, 1996 and 1995,
respectively. The Partnership's proportional share of USPE's management
fees of $55,000 and $0 were payable as of December 31, 1996 and 1995,
respectively. The Partnership's proportional share of USPE management fees
expense during 1996 was $462,000. The Partnership reimbursed FSI $582,000,
$616,000, and $346,000 for data processing expenses and administrative
services performed on behalf of the Partnership during 1996, 1995, and
1994, respectively. The Partnership's proportional share of USPE data
processing and administrative expenses was $97,000 during 1996. The
Partnership paid $0 in 1996, $141,000 in 1995, and $82,000 in 1994, to
Transportation Equipment Indemnity Company, Ltd. (TEI), which provides
marine insurance coverage and other insurance brokerage services. The
Partnership's proportional share of USPE marine insurance coverage paid to
TEI was $240,000 during 1996. TEI is an affiliate of the General Partner. A
substantial portion of this amount was paid to third party reinsurance
underwriters or placed in risk pools managed by TEI on behalf of affiliated
partnerships and PLM International, which provide threshold coverages on
marine vessel loss-of-hire and hull and machinery damage. All pooling
arrangement funds are either paid out to cover applicable losses or
refunded pro rata by TEI. PLM Securities earned underwriting commissions
relating to the sale of Limited Partnership Units of $1,320,000 and
$5,086,000, including amounts paid relating to subscriptions in escrow (see
Note 1) in 1995 and 1994 (of which $1,160,000 and $4,414,000 were paid to
third party broker dealers in 1995 and 1994, respectively).
The Partnership and USPEs paid or accrued lease negotiation and
equipment acquisition fees of $910,000, $1,628,000, and $2,154,000 during
1996, 1995, and 1994, respectively, to TEC and WMS. PLM Securities and TEC
are wholly-owned subsidiaries of the General Partner. WMS is a wholly-owned
subsidiary of the PLM International. Also, organization and syndication
costs of $440,000 and $1,704,000, including amounts paid relating to
subscriptions in escrow (see Note 1), were paid or accrued to FSI and PLM
Securities as reimbursement for costs incurred by them related to the
formation of the Partnership in 1995 and 1994, respectively. 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, 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 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 fees with respect to such transaction to
exceed 7% of Gross Lease Revenues. In certain circumstances the General
Partner will be entitled to a debt placement fee equal to 1% of the
principal balance borrowed.
As of December 31, 1996, approximately 76% of the Partnership's trailer
equipment operated in rental yards owned and maintained by PLM Rental,
Inc., the short-term trailer rental subsidiary of PLM International.
Revenues collected under short-term rental agreements with the rental
yards' customers are credited to the owners of the related equipment as
received. Direct expenses associated with the equipment are charged
directly to the Partnership. An allocation of other direct expenses of the
rental yard operations are billed to the Partnership monthly.
PLM Equipment Growth & Income Fund VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. General Partner and Transactions with Affiliates (continued)
The Partnership owns certain equipment in conjunction with affiliated
partnerships. At December 31, 1996, this equipment included an interest in
two entities owning marine vessels, an interest in a trust owning 1
commercial aircraft, an interest in an entity owning a rig, and an interest
in four trusts comprised of 13 commercial aircraft, 2 aircraft engines, and
a portfolio of aircraft rotables. In 1995, this equipment included an
interest in two entities owning marine vessels, an interest in a trust
owning 1 commercial aircraft, and an interest in three trusts comprised of
10 commercial aircraft, 2 aircraft engines, and a portfolio of aircraft
rotables.
The balance due to affiliates at December 31, 1996 includes $0.1
million due to FSI and its affiliates and a net of $0.5 million due to
affiliated investments in USPEs. The balance due to affiliates at December
31, 1995 includes $0.2 million due to FSI and its affiliates and a net of
$0.3 million due to USPEs.
4. Equipment
The components of equipment at December 31, 1996 and 1995 are as follows
(in thousands):
Equipment held for operating leases: 1996 1995
-------------------------------------------- -------------------------------
Marine vessels $ 22,212 $ 22,211
Aircraft 15,933 10,450
Trailers 14,547 11,343
Modular buildings 4,696 4,850
Railcars 10,053 9,479
-------------------------------
67,441 58,333
Less accumulated depreciation (21,494 ) (12,796 )
-------------------------------
45,947 45,537
Equipment held for sale -- 156
-------------------------------
Net equipment $ 45,947 $ 45,693
===============================
Revenues are earned by placing the equipment under operating leases. As
of December 31, 1996, all equipment in the Partnership's portfolio was on
lease or operating in PLM-affiliated short-term trailer rental yards,
except for five railcars with a net book value of $132,000. As of December
31, 1995, all equipment in the Partnership's portfolio was on lease or
operating in PLM-affiliated short-term trailer rental yards.
During 1996, the Partnership acquired 1 commercial aircraft for $5.2
million, 209 trailers for $3.2 million, and 35 railcars for $0.5 million,
and was required to pay $0.5 million in acquisition and lease negotiation
fees to TEC.
During 1996, the Partnership sold or disposed of 7 modular buildings
and 13 trailers with an aggregate net book value of $207,000 for proceeds
of $255,000. The Partnership also sold 58 trailers, which were held for
sale as of December 31, 1995, with a net book value of $156,000 at the date
of sale for proceeds of $150,000. During 1995, 53 modular buildings and 41
trailers with an aggregate net book value of $1.2 million were sold for
$1.4 million.
Periodically, PLM International will purchase groups of assets whose
ownership may be allocated among affiliated partnerships and PLM
International. Generally in these cases, only assets that are on lease will
be purchased by the affiliated partnerships. PLM International will
generally assume the ownership and remarketing risks associated with
off-lease equipment. Allocation of the purchase price will be determined by
a combination of third party industry sources and recent transactions or
published fair market value references. During 1996, PLM International
realized $0.7 million of gains on the sale of 69 off-lease railcars
purchased by PLM International as part of a group of assets in
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
1994 that had been allocated to the Partnership, PLM Equipment Growth Funds
IV and VI, Professional Lease Management Income Fund I, L.L.C. (Fund I),
and PLM International. At December 31, 1995, PLM International included
these assets as held for sale. During 1995, PLM International realized $1.3
million in gains on sales of railcars and aircraft purchased by PLM
International in 1994 and 1995 as part of a group of assets that had been
allocated to the Partnership; PLM Equipment Growth Funds IV, V, and VI;
Fund I; and PLM International.
All leases are being accounted for as operating leases. Future minimum
rent under noncancelable operating leases at December 31, 1996, for the
owned and partially owned equipment during each of the next five years, are
approximately $15,300,000 - 1997; $8,100,000 - 1998; $6,100,000 - 1999;
$5,600,000 - 2000; $4,200,000 - 2001; and $400,000 - thereafter.
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, modular buildings,
railcars, and trailers to lessees domiciled in three geographic regions:
North America, South America, and Europe. Marine vessels are leased to
multiple lessees in different regions that operate the marine vessels
worldwide. The tables below set forth geographic information about the
Partnership's owned equipment and investments in USPEs, grouped by domicile
of the lessee as of and for the years ended December 31, 1996, 1995, and
1994 (in thousands):
Investments
in USPEs Owned equipment
----------------- ---------------------------------------
Region 1996 1996 1995 1994
-------------------------- ------------ ----------------------------------------
Lease revenue:
United States $ -- $ 7,522 $ 6,866 $ 2,789
Canada 3,189 826 883 241
South America 1,181 -- 1,181 1,181
Europe 3,530 -- 1,177 --
Rest of the world 4,004 3,879 7,974 4,795
============ =========================================
Total lease revenue $ 11,904 $ 12,227 $ 18,081 $ 9,006
============ =========================================
The following table sets forth identifiable net income (loss)
information by region for the owned equipment and investments in USPEs for
the years ended December 31, 1996, 1995, and 1994 (in thousands):
Investments
in USPEs Owned equipment
---------------- -----------------------------------------
Region 1996 1996 1995 1994
---------------------------- ----------- ---------------------------------------
Net income (loss):
United States $ -- $ (590 ) $ 669 $ (743 )
Canada (1,370 ) 89 (332 ) (84 )
South America (97 ) -- (348 ) (750 )
Europe 981 -- 25 --
Rest of the world (394 ) 431 (597 ) (1,523 )
----------- -----------------------------------------
Total identifiable loss (880 ) (70 ) (583 ) (3,100 )
Administrative and other -- (2,026 ) (609 ) (709 )
=========== =========================================
Net income (loss): $ (880 ) $ (2,096 ) $ (1,192 ) $ (3,809 )
=========== =========================================
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
The net book value of these assets at December 31, 1996, 1995, and 1994
are as follows (in thousands):
Investments
in USPEs Owned equipment
----------------------- --------------------------------------------------
Region 1996 1995 1996 1995 1994
------------------------------ ----------------------------- --------------------------------------------
United States $ -- $ -- $ 29,199 $ 26,565 $ 21,670
Canada 9,612 8,285 2,608 2,004 1,631
South America 5,798 7,001 -- -- 8,424
Europe 9,127 10,664 -- -- --
Rest of the world 12,604 12,739 14,140 16,968 36,180
----------------------------- --------------------------------------------
37,141 38,689 45,947 45,537 67,905
Equipment held for sale -- -- -- 156 --
============================= ============================================
$ 37,141 $ 38,689 $ 45,947 45,693 $ 67,905
============================= ============================================
The lessees accounting for 10% or more of total revenues during 1996,
1995, and 1994 were SWR Brazil 767, Inc. (13% in 1994), Hong Kong Mingwah
Shipping Co., Ltd. (21% in 1994, 69% in 1993), and Wah Yuen Shipping, Inc.
(21% in 1995, 19% in 1994).
5. 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 has a final
maturity in 2005. During 1995, the Partnership paid lender fees of $230,000
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 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 have been used to fund additional equipment
acquisitions and to repay any 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 $23.0 million fixed-rate note is $22.7 million.
The General Partner has entered into a joint $50.0 million credit
facility (Committed Bridge Facility) on behalf of the Partnership, PLM
Equipment Growth Fund IV, PLM Equipment Growth Fund V, PLM Equipment Growth
Fund VI, and Professional Lease Management Income Fund I (Fund I), all
affiliated investment programs; TEC Acquisub, Inc. (TECAI), an indirect
wholly-owned subsidiary of the General Partner; and American Finance Group,
Inc. (AFG), a subsidiary of PLM International Inc., which may be used to
provide interim financing of up to (i) 70% of the aggregate book value or
50% of the aggregate net fair market value of eligible equipment owned by
the Partnership or Fund I, plus (ii) 50% of unrestricted cash held by the
borrower. The Committed Bridge Facility became available on December 20,
1993, and was amended and restated on October 31, 1996 to expire on October
31, 1997 and increased the available borrowings for AFG to $50.0 million.
The Partnership, TECAI, Fund I, and the other partnerships collectively may
borrow up to $35.0 million of the Committed Bridge Facility. The Committed
Bridge Facility also provides for a $5.0 million Letter of Credit Facility
for the eligible borrowers. Outstanding borrowings by Fund I, TECAI, AFG,
or PLM Equipment Growth Funds IV through VII reduce the amount available to
each other under the Committed Bridge Facility. Individual borrowings may
be outstanding for no more
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
5. Notes Payable (continued)
than 179 days, with all advances due no later than October 31, 1997. The
Committed Bridge Facility prohibits the Partnership from incurring any
additional indebtedness. Interest accrues at either the prime rate or
adjusted LIBOR plus 2.5% at the 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, 1996, the Partnership had borrowings of
$2.0 million, PLM Equipment Growth Fund V had $2.5 million, PLM Equipment
Growth Fund VI had $1.3 million, AFG had $26.9 million, and TECAI had $4.1
million in outstanding borrowings. Neither PLM Equipment Growth Fund IV nor
Fund I had any outstanding borrowings.
The Partnership received waivers from its senior lenders related to its
maximum debt covenant at December 31, 1996. Without this waiver, the
Partnership would not have been able to borrow on the short-term warehouse
facility and remain in compliance with the loan covenant.
During January 1997, the Partnership repaid all borrowings outstanding
as of December 31, 1996 from the Committed Bridge Facility.
6. 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, 1996, there were temporary differences of
approximately $48.2 million between the financial statement carrying values
of certain assets and liabilities and the income tax basis of such assets
and liabilities, primarily due to differences in depreciation methods and
equipment reserves.
7. Subsequent Event
PLM International (PLMI), along with FSI, IMI, TEC, and PLM Securities, and
collectively with PLMI, FSI, IMI, TEC, and PLM Securities, (PLM Entities),
were named as defendants in a class-action lawsuit filed in the Circuit
Court of Mobile County, Mobile, Alabama, Case No. CV-97-251. The PLM
Entities received service of the complaint on February 10, 1997 and,
pursuant to an extension of time granted by plaintiffs' attorneys, have 60
days to respond to the complaint. PLM International is currently reviewing
the substance of the allegations with its counsel, and believes the
allegations to be completely without merit and intends to defend this
matter vigorously.
The plaintiffs, who filed the complaint on their own and on behalf of
all class members similarly situated, are six individuals who allegedly
invested in certain California limited partnerships sponsored by PLM
Securities, for which FSI acts as the General Partner, including the
Partnership, PLM Equipment Growth Fund IV, PLM Equipment Growth Fund V, and
PLM Equipment Growth Fund VI (PLM Growth Funds). The complaint purports
eight causes of action against all defendants, as follows: fraud and
deceit, suppression, negligent misrepresentation and suppression,
intentional breach of fiduciary duty, negligent breach of fiduciary duty,
unjust enrichment, conversion, and conspiracy. Additionally, plaintiffs
allege a cause of action for breach of third party beneficiary contracts
against and in violation of the National Association of Securities Dealers
(NASD) rules of fair practice by PLM Securities alone.
Plaintiffs allege that each defendant owed plaintiffs and the class
certain duties due to their status as fiduciaries, financial advisors,
agents, general partner, and control persons. Based on these duties,
plaintiffs assert liability against the PLM Entities for improper sales and
marketing practices, mismanagement of the PLM Growth Funds, and concealing
such mismanagement from investors in the PLM Growth Funds. Plaintiffs seek
unspecified compensatory and recissory damages, as well as punitive
damages, and have offered to tender their Limited Partnership Units back to
the defendants.
PLM EQUIPMENT GROWTH & INCOME FUND VII
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership. *
10.1 Management Agreement between Partnership and *
PLM Investment Management, Inc.
10.2 Note Agreement, dated as of December 1, 1995,
regarding $23,000,000
of 7.27% Senior Notes due December 21, 2005 *
10.3 Second Amended and restated Warehousing Credit Agreement,
dated as of May 31, 1996, with First Union National Bank
of North Carolina. *
10.4 Amendment No. 1 to Second Amended and restated
Warehousing Credit Agreement, dated as of November
5, 1996, with First Union National Bank of
North Carolina. *
24. Powers of Attorney.
* Incorporated by reference. See page 23 of this report.