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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission file number 33-55796
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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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Aggregate Market Value of Voting Stock: N/A
An index of exhibits filed with this Form 10-K is located at page 43.
Total number of pages in this report: 126.
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:
(1) 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. All transactions over $1.0 million must be
approved by the PLM Credit Review Committee (the Committee), which is made up of
members of PLM's senior management. In determining a lessee's creditworthiness,
the Committee will consider, among other factors, the lessee's financial
statements, internal and external credit ratings, and letters of credit;
(2) 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;
(3) 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
(4) Growth: To increase the Partnership's revenue base by reinvesting a
portion of its operating cash flow in additional equipment during the first six
years of the Partnership's operation in order to grow the size of its portfolio.
Since net income and distributions are affected by a variety of factors,
including purchase prices, lease rates, and costs and expenses, growth in the
size of the Partnership's portfolio does not 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, 1997, there were 5,370,297 units outstanding.
The General Partner contributed $100 for its 5% General Partner interest in the
Partnership.
Beginning in the Partnership's seventh year of operation, which commences
January 1, 2002, the General Partner will stop reinvesting cash flow and surplus
funds, which, if any, less reasonable reserves, will be distributed to the
partners. In the ninth year of the operation of the Partnership, which commences
January 1, 2004, the General Partner intends to begin its dissolution and
liquidation in an orderly fashion, unless it is terminated earlier upon sale of
all of the equipment or by certain other events. Under certain circumstances,
the term of the Partnership may be extended, although in no event will the
Partnership extend beyond December 31, 2013.
Table 1, below, lists the equipment and the cost of equipment in the
Partnership's portfolio as of December 31, 1997 (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 Stage II commercial aircraft Boeing 5,483
3 DC-9 Stage II commercial aircraft McDonnell Douglas 2,822
105 Refrigerated trailers Various 2,494
830 Dry trailers Trailmobile/Stoughton 11,250
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 9,019
7 Modular buildings Various 153
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Owned equipment held for operating leases 58,844
Owned equipment held for sale:
2 DHC-8 commuter aircraft DeHavilland 7,629
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Total owned equipment $ 66,473
==============
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
0.24 767-200ER Stage III commercial
aircraft Boeing 10,248
0.33 Two trusts consisting of:
Three 737-200A Stage II commercial
aircraft Boeing 9,408
Two Stage II JT8D aircraft engines Pratt & Whitney 390
Portfolio of rotable components Various 650
0.50 Trust consisting of four 737-200A
Stage II commercial aircraft Boeing 8,987
0.25 Trust comprised of four 737-200
Stage II commercial aircraft Boeing 5,862
0.10 Mobile offshore drilling unit AT & CH de France 2,090
--------------
Total investments in unconsolidated special-purpose entities $ 57,475
==============
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 FSI; 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 program.
Jointly owned: EGF VII and two affiliated programs.
Jointly owned: EGF VII and three affiliated programs.
The equipment is generally leased under operating leases for a term of one to
six years.
As of December 31, 1997, approximately 80% of the Partnership's trailer
equipment operated in rental yards owned and maintained by PLM Rental, Inc., the
short-term trailer rental subsidiary of PLM International doing business as PLM
Trailer Leasing. Revenues collected under short-term rental agreements with the
rental yards' customers are credited to the owners of the related equipment as
received. Direct expenses associated with the equipment are charged directly to
the Partnership. An allocation of other indirect expenses of the rental yard
operations is charged to the Partnership monthly.
The lessees of the equipment include but are not limited to: Hongkong Mingwah
Shipping Co. Ltd., Wah Yuen Shipping, Inc., Pacific Carriers Ltd., SWR Brazil
767, Inc., and Action Carriers, Inc. As of December 31, 1997, all of the
equipment was on lease or operating in PLM-affiliated short-term trailer rental
yards, except for two commuter aircraft, which are currently being held for
sale, and a railcar.
(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. The Partnership's management agreement with IMI is to
co-terminate with the dissolution of the Partnership, unless the partners vote
to terminate the agreement prior to that date or at the discretion of the
General Partner. IMI has agreed to perform all services necessary to manage the
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 2).
(C) Competition
(1) Operating Leases versus Full Payout Leases
Generally, the equipment owned or invested in by the Partnership is leased out
on an operating lease basis wherein 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), GATX, General Electric Railcar Services
Corporation, General Electric Aviation Services Corporation, and other limited
partnerships that may lease the same types of equipment.
(D) Demand
The Partnership has investments in transportation-related capital equipment and
relocatable environments. Types of capital equipment owned by the Partnership
include aircraft, marine vessels, railcars, and trailers. Relocatable
environments are functionally self-contained transportable equipment, such as
mobile offshore drilling units. Except for those aircraft leased to passenger
air carriers, the Partnership's transportation equipment is used to transport
materials and commodities, rather than people
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Aircraft
(a) Commercial Aircraft
The international commercial aircraft market experienced another good year in
1997, with a third consecutive year of profits by the world's airlines. Airline
managements have continued to emphasize cost reductions and a moderate increase
in capacity. However, even the limited volume of new aircraft deliveries has
caused the market to change from being in equilibrium at the end of 1996 to
having excess supply. This market imbalance is expected to continue, with the
number of surplus aircraft increasing from approximately 350 aircraft at the end
of 1996 to an estimated 600 aircraft by the end of the decade.
The changes taking place in the commercial aircraft market also reflect the
impact of noise legislation enacted in the United States and Europe. Between
1997 and the end of 2002, approximately 1,400 Stage II aircraft (aircraft that
have been shown to comply with Stage II noise levels prescribed in Federal
Aviation Regulation section C36.5) are forecast to be retired, primarily due to
noncompliance with Stage III aircraft (aircraft that have been shown to comply
with Stage III noise levels prescribed in Federal Aviation Regulation section
C36.5) noise requirements. This represents about 41% of the Stage II aircraft
now in commercial service worldwide. By 2002, about 2,000 (59%) of the current
fleet of Stage II aircraft will remain in operational service outside of Stage
III-legislated regions or as aircraft that have had hushkits installed so that
engine noise levels meet the quieter Stage III requirements. The cost to install
a hushkit is approximately $1.5 million, depending on the type of aircraft. All
aircraft currently manufactured meet Stage III requirements.
Specifically, the Partnership's fleet is positioned to provide a balance of
Stage II narrowbody, Stage III narrowbody, and Stage III widebody aircraft in
the portfolio. This strategy is intended to optimize individual aircraft and the
corresponding lease rentals with projected demand. The Stage II aircraft either
are positioned with air carriers outside Stage III-legislated areas, are
scheduled for Stage III hushkit installation in 1998-99, or are anticipated to
be sold or leased outside Stage III areas before the year 2000.
(b) Aircraft Engines and Rotables
The demand for spare engines has increased, particularly for the Pratt & Whitney
Stage II JT8D engine, which powers many of the Partnership's Stage II commercial
aircraft.
Aircraft rotables, or components, are replacement spare parts held in inventory
by an airline. These parts are components that are removed from an aircraft or
engine, undergo overhaul, and are recertified and refit to the aircraft in an
"as new" condition. Rotables carry specific identification numbers, allowing
each part to be individually tracked during its use. The types of rotables owned
and leased by the Partnership include landing gear, certain engine components,
avionics, auxiliary power units, replacement doors, control surfaces, pumps,
valves, and other comparable equipment. The Partnership expects to sell this
equipment during 1998.
(2) Marine Vessels
The Partnership owns and has investments with other affiliated programs in
medium-sized dry bulk vessels, which are traded in worldwide markets and carry
commodity cargoes. Dry bulk markets experienced flat freight rates, with supply
increases outrunning demand growth. Demand for commodity shipping closely tracks
worldwide economic growth patterns; however, economic development alters trade
patterns from time to time, causing changes in volume on trade routes.
The General Partner operates the Partnership's marine vessels under spot
charters and period charters. It is believed that this operating approach
provides the flexibility to adapt to changing demand patterns.
Freight rates for dry bulk vessels in 1997 maintained the levels experienced in
the fourth quarter of 1996. Freight rates had declined significantly in 1996
until a moderate recovery occurred late in the year due to an increase in grain
trade. The size of the overall dry bulk carrier fleet increased by 3%, as
measured by the number of vessels, and by 5%, as measured by deadweight tonnage.
Scrapping of ships was not a significant factor in 1997: 126 dry bulk ships were
scrapped while 247 were delivered. Total dry trade (as measured in deadweight
tons) grew by 3% in 1997, versus 1% in 1996. This balance of supply and demand
made market conditions soft, providing little foundation for increasing freight
rates.
Growth in 1998 is expected to be approximately 2%, with most commodity trading
flat. The majority of growth is forecast to come from grain (2%) and thermal
coal (6%). The primary variable in forecasts is Asian growth; if there is some
recovery from the economic shake-up of the second half of 1997, then there will
be prospects for improvement in 1998. Delivery of ships in 1998 is expected to
be about the same as in 1997; however, an increase in scrapping is anticipated
to strengthen the market.
Current rates do not justify any new construction of dry bulk carriers and there
should be a significant drop in orders over the next two years. If growth in
demand matches historic averages of around 3%, then the current excess supply
should be absorbed by the end of 1999, leading to the possible strengthening of
freight rates.
(3) Railcars
(a) Pressurized Tank Railcars
Pressurized tank cars are used primarily in the petrochemical and fertilizer
industries to transport liquefied petroleum gas and anhydrous ammonia. The
demand for natural gas is anticipated to grow through 1999, as the developing
world, former Communist countries, and the industrialized world all increase
their energy consumption. World demand for fertilizer is expected to increase,
based on an awareness of the necessity of fertilizing crops and improving diets,
the shortage of farm land, and population growth in developing nations. Based on
ongoing renewals with current lessees, demand for these cars continues to be
strong and is projected to remain so during 1998.
The utilization rate on the Partnership's fleet of pressurized tank cars was
over 98% during 1997.
(b) Woodchip Gondola Railcars
Woodchip cars are large-capacity (6,600 cubic foot) gondolas used to transport
woodchips from the sawmills to the pulp mills. The high-grade woodchips are used
to manufacture paper, while low-grade woodchips are used for particle board and
plywood. The demand for woodchip cars is dependent upon the demand for paper,
paper products, particle board, and plywood. Nationally, the demand for cars
carrying primary forest products decreased 4.5% in 1997.
The Partnership's woodchip cars are currently all on a renewable lease until
1999.
(4) Trailers
(a) Intermodal (Piggyback) Trailers
In all intermodal equipment areas, 1997 was a remarkably strong year. The U.S.
inventory of intermodal equipment totaled about 164,000 units in 1997, divided
between 55% intermodal trailers (piggyback) and 45% domestic containers. Trailer
loadings increased approximately 4% in 1997 due to a robust economy and a
continuing shortage of drivers in over-the-road markets. The expectation is for
flat to slightly declining utilization of intermodal trailer fleets in the near
future, with 1998 trailer loadings predicted not to exceed 1997 levels by more
than 2%.
Overall utilization in the Partnership's dry piggyback fleet was over 75% in
1997, an increase of 10% over 1996 levels. The expectation is for flat to
slightly declining utilization of the fleet in the near future.
(b) Over-the-Road Dry Trailers
The U.S. over-the-road dry trailer market began to recover in mid-1997, as an
oversupply of equipment from 1996 subsided. The strong domestic economy, a
continuing focus on integrated logistics planning by American companies, and
numerous service problems on Class I railroads contributed to the recovery in
the dry van market. In addition, federal regulations requiring antilock brake
systems on all new trailers, effective in March 1998, have helped stimulate new
trailer production, and the market is anticipated to remain strong in the near
future. There continues to be much consolidation of the trailer leasing industry
in North America, as the two largest lessors of dry vans now control over 60% of
the market. The reduced level of competition, coupled with anticipated continued
strong utilization, may lead to an increase in rates.
Utilization of the Partnership's dry van fleet increased over last year.
(c) Over-the-Road Refrigerated Trailers
The temperature-controlled over-the-road trailer market recovered in 1997;
freight levels improved and equipment oversupply was reduced as industry players
actively retired older trailers and consolidated fleets. Most refrigerated
carriers posted revenue growth of between 2% and 5% in 1997, and accordingly are
planning fleet upgrades. In addition, with refrigeration and trailer
technologies changing rapidly and industry regulations becoming tighter,
trucking companies are managing their refrigerated fleets more effectively.
As a result of these changes in the refrigerated trailer market, it is
anticipated that trucking companies will utilize short-term trailer leases more
frequently to supplement their fleets. Such a trend should benefit the
Partnership, which generally leases its equipment on a short-term basis from
rental yards owned and operated by a PLM International subsidiary. The
Partnership's utilization, especially in the second half of 1997, was higher
than 1996 levels.
(d) Flatbed Trailers
The flatbed market is a niche market that focuses on the construction and steel
industries. Production of new flatbeds has remained stable over the last few
years, so that demand has kept ahead of supply.
The Partnership has a small flatbed fleet operating in specific rental markets.
The fleet performed well in 1997, with over 80% utilization.
(5) Mobile Offshore Drilling Units (Rigs)
Worldwide demand in all sectors of the mobile offshore drilling unit industry in
1997 was a continuation of the increases experienced in 1996. This increase in
demand was spread over all the geographic regions of offshore drilling and
affected both jackup and floating rigs. Potential demand during 1997 was
difficult to estimate because of the shortage of rigs.
The tightness in the market caused significant increases in contract day rates
throughout the year. Day rates at the end of 1997 approached levels justifying
new rig construction. While continuing market improvement can be attributed to a
number of factors, the primary reason is worldwide growth 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 trend of contractor consolidation continued in 1997; three major mergers or
acquisitions initiated late in 1997 are expected to be consummated by the end of
1998. For 1998, utilization and demand are expected to remain at the levels
reached in 1997. Industry participants project that demand for both floating and
jackup rigs will continue at current high levels through 1998, with additional
rig supply absorbed by demand increases. Day rates are expected to continue to
increase; however, the rate of increase will slow, since the current high levels
have induced long-term contracting with few opportunities for increases.
The floating rig sector has experienced a strengthening in market conditions.
Technological advances 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 128 rig-years in
1996 to 131 rig-years in 1997, growth being constrained by a limited supply of
rigs. The increase in demand and utilization prompted significant increases in
contract day rates and floating rig market values. Twenty-five floating rigs
were ordered in 1996 and several conversion and upgrade projects were
contracted, none of which will be delivered until late 1998.
(6) Modular Buildings
The market for modular buildings of the type owned by the Partnership is
primarily California public and private schools and public 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 schools or school
districts to obtain. Schools and districts have used modular buildings to meet
temporary and, in some cases, permanent increases in the demand for classroom
space. The Partnership plans to dispose of its modular buildings during 1998.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign government authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require 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 and mobile
offshore drilling units that create environmental pollution.
This regulation has resulted in higher oil pollution liability
insurance. The lessee typically reimburses the Partnership for
these additional costs;
(2) the U.S. Department of Transportation's Aircraft Capacity Act
of 1990, which limits or eliminates the operation of
commercial aircraft in the United States that do not meet
certain noise, aging, and corrosion criteria. In addition,
under U.S. Federal Aviation Regulations, after December 31,
1999, no person shall operate an aircraft to or from any
airport in the contiguous United States unless that airplane
has been shown to comply with Stage III noise levels. The
Partnership has Stage II aircraft that do not meet Stage III
requirements;
(3) the Montreal Protocol on Substances that Deplete the Ozone
Layer and the U.S. Clean Air Act Amendments of 1990, which
call for the control and eventual replacement of substances
that have been found to cause or contribute significantly to
harmful effects on the stratospheric ozone layer and which are
used extensively as refrigerants in refrigerated marine cargo
containers and over-the-road refrigerated trailers;
(4) the U.S. Department of Transportation's Hazardous Materials
Regulations, which regulate the classification and packaging
requirements of hazardous materials and which apply
particularly to the Partnership's tank cars.
As of December 31, 1997, the Partnership is in compliance with the above
government regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased for leasing purposes. At December 31, 1997, the Partnership
owned a portfolio of transportation and related equipment and investments in
equipment owned by special-purpose entities, as described in Item I, Table 1.
The Partnership acquired equipment with the proceeds of the Partnership offering
through the third quarter of 1995 and through debt proceeds (see financial
statements, Note 5).
The Partnership maintains its principal office at One Market, Steuart Street
Tower, Suite 800, San Francisco, California 94105-1301. All office facilities
are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
PLM International, along with FSI, TEC, IMI, and PLM Securities (the PLM
Entities), are named as defendants in a lawsuit filed as a class action on
January 22, 1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case
No. CV-97-251 (the Koch action). The plaintiffs, who filed the complaint on
their own and on behalf of all class members similarly situated, are six
individuals who allegedly invested in certain California limited partnerships
for which FSI acts as the general partner, including the Partnership, PLM
Equipment Growth Fund IV, PLM Equipment Growth Fund V, and PLM Equipment Growth
Fund VI (the Growth Funds). The complaint asserts eight causes of action against
all defendants, as follows: fraud and deceit, suppression, negligent
misrepresentation and suppression, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, unjust enrichment, conversion, and
conspiracy. Additionally, plaintiffs allege a cause of action against PLM
Securities for breach of third party beneficiary contracts in violation of the
National Association of Securities Dealers rules of fair practice. Plaintiffs
allege that each defendant owed plaintiffs and the class certain duties due to
their status as fiduciaries, financial advisors, agents, general partner, and
control persons. Based on these duties, plaintiffs assert liability against the
defendants for improper sales and marketing practices, mismanagement of the
Growth Funds, and concealing such mismanagement from investors in the Growth
Funds. Plaintiffs seek unspecified compensatory and recissory damages, as well
as punitive damages, and have offered to tender their limited partnership units
back to the defendants.
On March 6, 1997, the defendants removed the Koch action from the state court to
the United States District Court for the Southern District of Alabama, Southern
Division (Civil Action No. 97-0177-BH-C) based on the district court's diversity
jurisdiction, following which plaintiffs filed a motion to remand the action to
the state court. On September 24, 1997, the district court denied plaintiffs'
motion and dismissed without prejudice the individual claims of the California
class representative, reasoning that he had been fraudulently joined as a
plaintiff. On October 3, 1997, plaintiffs filed a motion requesting that the
district court reconsider its ruling or, in the alternative, that the court
modify its order dismissing the California plaintiff's claims so that it is a
final appealable order, as well as certify for an immediate appeal to the
Eleventh Circuit Court of Appeals that part of its order denying plaintiffs'
motion to remand. On October 7, 1997, the district court denied each of these
motions. In responses to such denial, plaintiffs filed a petition for writ of
mandamus with the Eleventh Circuit, which was denied on November 18, 1997. On
November 24, 1997, plaintiffs filed with the Eleventh Circuit a petition for
rehearing and en banc consideration of the court's order denying the petition
for a writ of mandamus, which petition was supplemented by plaintiffs on January
27, 1998.
On October 10, 1997, defendants filed a motion to compel arbitration of
plaintiffs' claims, based on an agreement to arbitrate contained in the limited
partnership agreement of each Growth Fund, and to stay further proceedings
pending the outcome of such arbitration. Notwithstanding plaintiffs' opposition,
the district court granted the motion on December 8, 1997. On December 15, 1997,
plaintiffs filed with the Eleventh Circuit a notice of appeal from the district
court's order granting defendants' motion to compel arbitration and to stay the
proceedings, and of the district court's September 24, 1997 order denying
plaintiffs' motion to remand and dismissing the claims of the California
plaintiff. Plaintiffs filed an amended notice of appeal on December 31, 1997.
The PLM Entities believe that the allegations of the Koch action are completely
without merit and intend to continue to defend this matter vigorously.
On June 5, 1997, the PLM Entities were named as defendants in another purported
class action filed in the San Francisco Superior Court, San Francisco,
California, Case No. 987062 (the Romei action). The plaintiff is an investor in
PLM Equipment Growth Fund V, and filed the complaint on her own behalf and on
behalf of all class members similarly situated who invested in certain
California limited partnerships for which FSI acts as the general partner,
including the Growth Funds. The complaint alleges the same facts and the same
nine causes of action as in the Koch action, plus five additional causes of
action against all of the defendants, as follows: violations of California
Business and Professions Code Sections 17200, et seq. for alleged unfair and
deceptive practices, constructive fraud, unjust enrichment, violations of
California Corporations Code Section 1507, and a claim for treble damages under
California Civil Code Section 3345.
On July 31, 1997, the PLM Entities filed with the district court for the
Northern District of California (Case No. C-97-2847 WHO) a petition under the
Federal Arbitration Act seeking to compel arbitration of plaintiff's claims and
for an order staying the state court proceedings pending the outcome of the
arbitration. In connection with this motion, plaintiff agreed to a stay of the
state court action pending the district court's decision on the petition to
compel arbitration. By memorandum and order dated October 23, 1997, the district
court denied the PLM Entities' petition to compel arbitration. On November 5,
1997, the PLM Entities filed an expedited motion for leave to file a motion for
reconsideration of this order, which motion was granted on November 14, 1997.
The parties have agreed to have oral argument on the reconsideration motion set
for April 23, 1998. The state court action has been stayed pending the district
court's decision on this motion.
In connection with her opposition to the Company's petition to compel
arbitration, on August 22, 1997, the plaintiff filed an amended complaint with
the state court alleging two new causes of action for violations of the
California Securities Law of 1968 (California Corporations Code Sections 25400
and 25500) and for violation of California Civil Code Section 1709 and 1710.
Plaintiff has also served certain discovery requests on defendants. Because of
the stay, no response to the amended complaint or to the discovery is currently
required. The PLM Entities believe that the allegations of the amended complaint
in the Romei action are completely without merit and intend to defend this
matter vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1997.
(this space intentionally left blank)
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, 1997 by the 5,785 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, are generally 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 percentage or number
permitted by certain safe harbors promulgated by the Internal Revenue Service. A
transfer may be prohibited if the intended transferee is not a U.S. citizen or
if the transfer would cause any portion of the units to be treated as plan
assets. The Partnership has been obligated, subject to certain term and
conditions, to redeem a certain number of units each year under the terms of the
Partnership's limited partnership agreement, beginning October 25, 1997. As of
December 31, 1997, the Partnership had agreed to purchase approximately 46,000
units for an aggregate price of approximately $0.7 million. The General Partner
anticipates that these units will be repurchased in the first and second
quarters of 1998. In addition to these units, the General Partner may purchase
additional units on behalf of the Partnership in the future.
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the Year Ended December 31, 1997, 1996, 1995,
1994, and 1993 (In thousands, except
weighted-average unit amounts)
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------
Operating results:
Total revenues $ 14,735 $ 12,703 $ 18,638 $ 9,217 $ 695
Net gain on disposition of equipment 1,803 42 182 22 --
Equity in net income (loss) of uncon-
solidated special-purpose entities 721 (880) -- -- --
Net income (loss) 1,101 (2,976) (1,192) (3,809) (862 )
At year end:
Total assets $ 80,469 $ 87,398 $ 98,194 $ 73,635 $ 39,628
Total liabilities 29,407 27,261 24,903 2,400 7,576
Notes payable 23,000 25,000 23,000 -- 5,123
Cash distributions 10,176 $ 10,178 $ 9,627 $ 5,370 $ 366
Cash distribution representing
a return of capital 9,075 $ 9,669 $ 9,157 $ 5,133 $ 358
Per weighted-average limited partnership unit:
Net income (loss) $ 0.11 $ (0.65) Various according to interim closings
Cash distribution $ 1.80 $ 1.80 Various according to interim closings
Cash distribution representing
a return of capital $ 1.69 $ 1.80 Various according to interim closings
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth & Income
Fund VII (the Partnership). The following discussion and analysis of operations
focuses on the performance of the Partnership's equipment in various sectors of
the transportation industry and its effect on the Partnership's overall
financial condition.
(B) Results of Operations -- Factors Affecting Performance
(1) Re-leasing 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 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, and various regulations concerning the use of the equipment.
Equipment that is idle or out of service between the expiration of one lease and
the assumption of a subsequent lease can result in a reduction of contribution
to the Partnership. The Partnership experienced re-leasing or repricing activity
in 1997 primarily in its air, trailer, and marine vessel portfolios.
(a) Air: The Partnership owns two DeHavilland aircraft that were off lease
throughout 1997. As of December 31, 1997 these aircraft were being marketed for
sale or re-lease.
(b) Trailers: The Partnership's trailer portfolio operates in short-term rental
facilities or with short-line railroad systems. The relatively short duration of
most leases in these operations exposes the trailers to considerable re-leasing
activity. Contributions from the Partnership's trailers were higher than
projected due to higher utilization and lease rates.
(c) Marine Vessels: Certain of the partnership's marine vessels operated at
higher re-lease rates than had been projected. Higher operating costs and repair
and maintenance, however, offset these higher revenues.
(2) 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.
(a) Liquidations: During the year, the Partnership received proceeds of
$4.4 million from the sale of modular buildings and trailers. The sales
proceeds represent approximately 94% of the original cost of the
assets. By year end, the Partnership had reinvested or reached
agreement to reinvest approximately all of these proceeds.
(b) Nonperforming Lessees: As of December 31, 1997, various lessees of the
modular buildings had 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 lessees.
(3) Reinvestment Risk
Reinvestment risk occurs when (a) 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; (b) equipment is sold or liquidated for less than threshold amounts;
(c) proceeds from sales, losses, or surplus cash available for reinvestment
cannot be reinvested at the threshold lease rates; or (d) proceeds from sales 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.
During 1997, the Partnership purchased 248 trailers at a cost of $3.7 million.
An agreement to purchase an interest in an entity that owns a MD-82 Stage III
commercial aircraft for $6.8 million was reached in December 1997. This purchase
was completed in January 1998.
(4) 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 1997 or 1996.
As of December 31, 1997, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including equipment owned by
USPEs, to be approximately $98.7 million.
(C) Financial Condition -- Capital Resources, Liquidity, and Unit Redemption
Plan
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering and permanent debt financing of
$23.0 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 relies on operating cash flow to meet
its operating obligations, make cash distributions to limited partners, and
increase the Partnership's equipment portfolio with any remaining available
surplus cash.
For the year ended December 31, 1997, the Partnership generated sufficient
operating cash (net cash provided by operating activities plus cash
distributions from unconsolidated special-purpose entities) to meet its
operating obligations and pay distributions to the partners.
Starting in 1997, the Partnership is obligated, at the sole discretion of the
General Partner, to redeem up to 2% of the outstanding limited partnership units
each year. The purchase price to be offered for such outstanding units will be
equal to 105% of the unrecovered principal attributed to the units, where
unrecovered principal is defined as the excess of the capital contributions from
any source paid with respect to a unit. At December 31, 1997, the Partnership
agreed to purchase approximately 46,000 units for an aggregate price of
approximately $0.7 million. The General Partner anticipates that these units
will be repurchased in the first and second quarters of 1998. In addition to
these units, the General Partner may purchase additional units on behalf of the
Partnership in the future.
The General Partner has entered into a joint $50.0 million credit facility (the
Committed Bridge Facility) on behalf of the Partnership, PLM Equipment Growth
Fund V (EGF V), PLM Equipment Growth Fund VI (EGF 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 , plus (ii) 50% of unrestricted cash
held by the borrower. The Committed Bridge Facility became available on December
20, 1993, and was amended and restated on December 2, 1997 to expire on November
2, 1998. The Partnership, EGF V, EGF VI, Fund I, and TECAI may collectively may
borrow up to $35.0 million of the Committed Bridge Facility and AFG may borrow
up to $50.0 million. The Committed Bridge Facility also provides for a $5.0
million Letter of Credit Facility for the eligible borrowers. Outstanding
borrowings by one borrower reduce the amount available to each of the other
borrowers under the Committed Bridge Facility. Individual borrowings for the
Partnership may be outstanding for no more than 179 days, with all advances due
no later than November 2, 1998. Interest accrues at either the prime rate or
adjusted LIBOR plus 1.625% at the borrower's option, and is set at the time of
an advance of funds. Borrowings by the Partnership are guaranteed by the General
Partner. As of December 31, 1997, AFG had $23.0 million in outstanding
borrowings. No other eligible borrower had any outstanding borrowings. The
General Partner believes it will renew the Committed Bridge Facility upon its
expiration with similar terms as those in the current Committed Bridge Facility.
The General Partner has not planned any expenditures, nor is it aware of any
contingencies that would cause it to require any additional capital to that
mentioned above.
(D) Results of Operations -- Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1997 and 1996
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operation, and asset-specific insurance expenses) on owned equipment
increased during the year ended December 31, 1997, when compared to the same
period of 1996. The following table presents lease revenues less direct expenses
by owned equipment type (in thousands of dollars):
For the Year Ended
December 31,
1997 1996
------------------------------
Marine vessels $ 3,314 $ 3,551
Trailers 3,275 2,290
Aircraft 2,001 2,082
Rail equipment 1,994 1,926
Modular buildings 426 582
Marine Vessels: Marine vessel lease revenues and direct expenses were $3.5
million and $0.2 million, respectively, for the year ended December 31, 1997,
compared to $3.9 million and $0.3 million, respectively, during the same period
of 1996. The decrease in marine vessel contribution was due to a lower lease
rate earned on one marine vessel during 1997 when compared to 1996 partially
offset by lower repairs and maintenance expense.
Trailers: Trailer lease revenues and direct expenses were $3.8 million and $0.6
million, respectively, for the year ended December 31, 1997, compared to $2.9
million and $0.6 million, respectively, during the same period of 1996. The
increase in trailer contribution was due to the purchase of additional trailer
equipment during 1997 and 1996.
Aircraft: Aircraft lease revenues and direct expenses were $2.0 million and
$20,000, respectively, for the year ended December 31, 1997, compared to $2.1
million and $41,000, respectively, during the same period of 1996. The decrease
in aircraft contribution was due to the off-lease status of two commuter
aircraft during 1997 that were on lease during 1996, which was offset in part by
the revenues earned on a commercial aircraft that was purchased during the third
quarter of 1996.
Rail Equipment: Rail equipment lease revenues and direct expenses were $2.8
million and $0.8 million, respectively, for the year ended December 31, 1997,
compared to $2.6 million and $0.7 million, respectively, during the same period
of 1996. The increase in railcar contribution was due to the purchase of
additional equipment during 1996.
Modular Buildings: Modular building lease revenues and direct expenses were $0.4
million and $12,000, respectively, for the year ended December 31, 1997,
compared to $0.7 million and $0.1 million, respectively, during the same period
of 1996. The primary reason for the decrease in modular building contribution
was due to the sale of the majority of this equipment during the second quarter
of 1997.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $12.7 million for the year ended December 31, 1997
decreased from $13.0 million for the same period of 1996. The significant
variances are explained as follows:
(i) A $0.3 million decrease in administrative expenses was due to
lower costs associated with the transportation and inspection
of certain equipment that was purchased during 1996. Similar
costs and expenses were not required during 1997. This
decrease was offset in part by an increase in rental yard
costs incurred during 1997, due to the increase in the number
of trailers in the PLM-affiliated short-term rental yards,
when compared to the same period of 1996.
(ii) A $0.1 million increase in the allowance for bad debts was due
to an increase in the Partnership's estimate of uncollectible
amounts due from certain lessees during 1997. In addition,
during 1996, the Partnership was able to collect some of the
past due receivables that had previously been reserved for as
bad debt.
(c) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment for the year ended December 31, 1997
totaled $1.8 million, and resulted from the sale of trailers and modular
buildings, with an aggregate net book value of $2.6 million, for proceeds of
$4.4 million. Net gain on disposition of equipment for the year ended December
31, 1996 totaled $42,000, and resulted from the sale of modular buildings and
trailers, with an aggregate net book value of $0.2 million, for proceeds of $0.3
million.
(d) Interest and Other Income
Interest and other income decreased $0.1 million during the year ended December
31, 1997, due primarily to lower average cash balances available for investment
throughout most of the year when compared to the same period of 1996.
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Year Ended
December 31,
1997 1996
------------------------------
Aircraft, rotable components, and aircraft engines $ 1,721 $ (486 )
Mobile offshore drilling unit 1 (10 )
Marine vessels (1,001 ) (384 )
Aircraft, Rotable Components, and Aircraft Engines: As of December 31, 1997, the
Partnership had an interest in a trust owning a commercial aircraft and an
interest in four trusts that own 11 commercial aircraft, 2 aircraft engines, and
a portfolio of rotable components. 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 year ended December 31, 1997, revenues of $8.2
million were offset by depreciation and administrative expenses of $6.5 million.
During the same period of 1996, lease revenues of $7.9 million were offset by
depreciation and administrative expenses of $8.4 million. Revenues increased
during 1997 by $0.3 million because the interest in a trust owning aircraft was
purchased late in the first quarter of 1996. This equipment was on lease for the
full year of 1997, compared to only nine months during the same period of 1996.
The decline in expenses of $1.9 million was due to the double-declining balance
method of depreciation.
Mobile Offshore Drilling Unit: As of December 31, 1997, the Partnership owned an
interest in a mobile offshore drilling unit that was purchased during the fourth
quarter of 1996. During the year ended December 31, 1997, revenues of $0.4
million were offset by depreciation and administrative expenses of $0.4 million.
During the same period of 1996, lease revenues of $21,000 were offset by
depreciation and administrative expenses of $31,000. The year ended 1997
represents a full year of revenues and expenses, compared to one month of
revenues and expenses during the same period of 1996.
Marine Vessels: As of December 31, 1997 and 1996, the Partnership had interests
in two entities owning dry bulk carrier marine vessels. During the year ended
December 31, 1997, revenues of $3.6 million were offset by depreciation and
administrative expenses of $4.6 million. During the same period of 1996,
revenues of $4.0 million were offset by depreciation and administrative expenses
of $4.4 million. The primary reason revenues decreased during 1997 was because
of the lower day rates earned while on lease. Expenses increased $0.2 million
during 1997; a lower depreciation expense of $0.4 million due to the
double-declining balance method of depreciation was offset by an increase in
repairs and maintenance of $0.2 million due to repairs needed to one of the
marine vessels during 1997 that were not needed during 1996. In addition, there
was an increase in insurance expense of $0.3 million due to higher cost to
insure marine vessels and an increase in administrative cost of $0.1 million.
(f) Net Income (Loss)
As a result of the foregoing, the Partnership's net income for the year ended
December 31, 1997 was $1.1 million, compared to a net loss of $3.0 million
during the same period of 1996. The Partnership's ability to operate, acquire,
and liquidate assets, secure leases, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance in the year
ended December 31, 1997 is not necessarily indicative of future periods. In the
year ended December 31, 1997, the Partnership distributed $9.7 million to the
limited partners, or $1.80 per weighted-average limited partnership unit.
(2) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1996 and 1995
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operation, and asset-specific insurance expenses) on owned equipment
increased during the year ended December 31, 1996, when compared to the same
period of 1995. The following table presents lease revenues less direct expenses
by owned equipment type (in thousands of dollars):
For the Year Ended
December 31,
1996 1995
------------------------------
Marine vessels $ 3,551 $ 3,473
Trailers 2,290 2,537
Aircraft 2,082 1,381
Rail equipment 1,926 2,002
Modular buildings 582 763
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 caused by these additional trailers, was offset by the trailer fleet in
the PLM-affiliated short-term rental yards, which experienced 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.
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 latter 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.
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 declined in 1996 due to
sales and dispositions. The decrease caused by these dispositions was partially
offset by higher lease rates earned 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:
(i) A $1.4 million increase in interest expense from 1995 levels
reflects an increase in long-term debt of $23.0 million
outstanding for the year of 1996, when compared to the same
period of 1995. During 1995, the Partnership had lower average
outstanding debt when compared to 1996;
(ii) A $0.5 million increase in depreciation and amortization
expense during the year ended 1996 was 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;
(iii) A $0.3 million increase in administrative expenses from 1995
levels was due to repositioning, inspection, and storage costs
of equipment, which were not needed during the same period of
1995;
(iv) These increases were offset in part by a decrease of $0.1
million in bad debt expense, due to an increase in the
allowance for doubtful accounts in 1995 to provide for
potentially uncollectible receivables.
(c) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment for the year ended December 31, 1996
totaled $42,000, which resulted from the sale of modular buildings and trailers,
with an aggregate net book value of $0.2 million, for proceeds of $0.3 million.
The Partnership also sold trailers, which were held for sale as of December 31,
1995, with a net book value of $0.2 million at the date of sale, for proceeds of
$0.2 million. For the year ended December 31, 1995, the $0.2 million net gain on
disposition of equipment resulted from the sale of modular buildings and
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 $0.1 million 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 4 to the financial statements) (in thousands of
dollars):
For the Year Ended
December 31,
1996 1995
------------------------------
Aircraft, rotable components, and aircraft engines $ (486 ) $ (709)
Marine vessels (384 ) (489)
Mobile offshore drilling unit (10 ) --
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 owned 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 were 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.
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 a 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 were
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.
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.
(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, acquire, and
liquidate assets, secure leases, and re-lease those assets whose leases expire
during the life 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 limited partnership unit.
(E) Geographic Information
Certain of the Partnership's equipment operates in international markets.
Although these operations expose the Partnership to certain currency, political,
credit, and economic risks, the General Partner believes these risks are minimal
or has implemented strategies to control the risks. Currency risks are at a
minimum because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
by avoiding operations in countries that do not have a stable judicial system
and established commercial business laws. Credit support strategies for lessees
range from letters of credit supported by U.S. banks to cash deposits. Although
these credit support mechanisms generally allow the Partnership to maintain its
lease yield, there are risks associated with slow-to-respond judicial systems
when legal remedies are required to secure payment or repossess equipment.
Economic risks are inherent in all international markets and the General Partner
strives to minimize this risk with market analysis prior to committing equipment
to a particular geographic area. Refer to Note 3 to the financial statements for
information on the revenues, income, and net book value of equipment in various
geographic regions.
Revenues and net operating income by geographic region are impacted by the time
period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years of
ownership due to the use of the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to change significantly in the future, as assets come
off lease and decisions are made to either redeploy the assets in the most
advantageous geographic location or sell the assets.
The Partnership's owned equipment on lease to U.S.-domiciled lessees consists of
aircraft, modular buildings, trailers, and railcars. During 1997, U.S. lease
revenues accounted for 24% of the total lease revenues of wholly and partially
owned equipment and accounted for $1.9 million of the aggregate net income for
the Partnership.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to Canadian-domiciled lessees consisted of various aircraft and railcars.
During 1997, Canadian lease revenues accounted for 18% of the total lease
revenues of wholly and partially owned equipment and accounted for $0.3 million
of the total aggregate net income for the 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 owned equipment and investments in equipment owned by USPEs on
lease to South American-domiciled lessees consisted of aircraft. During 1997,
South American lease revenues accounted for 13% of the total lease revenues of
wholly and partially owned equipment and generated a net loss of $0.5 million.
The Partnership's investment in equipment owned by a USPE, on lease to a lessee
in Europe, consisted of commercial aircraft, aircraft engines, and aircraft
rotable components, and accounted for 14% of lease revenues of wholly and
partially owned equipment. This operation generated net income of $1.5 million.
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 1997, lease revenues for these operations accounted for 31% of the total
lease revenues of wholly and partially owned equipment and generated a net loss
of $0.3 million.
(F) Year 2000 Compliance
The General Partner is currently addressing the Year 2000 computer software
issue. The General Partner is creating a timetable for carrying out any program
modifications that may be required. The General Partner does not anticipate that
the cost of these modifications allocable to the Partnership will be material.
(G) Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new
statements: SFAS No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in equity
from nonowner sources; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for a public company's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Partnership's fiscal year ended December
31, 1998, with earlier application permitted. The effect of adoption of these
statements will be limited to the form and content of the Partnership's
disclosures and will not impact the Partnership's results of operations, cash
flow, or financial position.
(H) Inflation
There was no significant impact on the Partnership's operations as a result of
inflation during 1997, 1996, or 1995.
(I) Forward-Looking Information
Except for historical information contained herein, the discussion in this Form
10-K contains forward-looking statements that involve risks and uncertainties,
such as statements of the Partnership's plans, objectives, expectations, and
intentions. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.
(J) Outlook for the Future
Several factors may affect the Partnership's operating performance in 1998 and
beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
The Partnership's operation of a diversified equipment portfolio in a broad base
of markets is intended to reduce its exposure to volatility in individual
equipment sectors. In 1997, market conditions, supply and demand equilibrium,
and other factors varied in several markets. In the dry over-the-road trailer
markets, strong demand produced high utilization and returns. The rail markets
can be generally categorized by increasing rates, as the demand for equipment is
increasing faster than new additions net of retirements. The marine vessel
market generally remained soft with supply growth outpacing demand. 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 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 that these acquisitions may cause the Partnership to generate
additional earnings and cash flow for the Partnership.
(1) Repricing and Reinvestment Risk
Certain of the Partnership's aircraft, marine vessels, and trailers will be
remarketed in 1998 as existing leases expire, exposing the Partnership to some
repricing risk/opportunity. Additionally, the General Partner may elect to sell
certain underperforming equipment or equipment whose continued operation may
become prohibitively expensive. In either case, the General Partner intends to
re-lease or sell equipment at prevailing market rates; however, the General
Partner cannot predict these future rates with any certainty at this time, and
cannot accurately assess the effect of such activity on future Partnership
performance. The proceeds from the sold or liquidated equipment will be
redeployed to purchase additional equipment, as the Partnership is in its
reinvestment phase.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the General Partner has
observed rising insurance costs to operate certain vessels in U.S. ports,
resulting from implementation of the U.S. Oil Pollution Act of 1990. Ongoing
changes in the regulatory environment, both in the United States and
internationally, cannot be predicted with accuracy, and preclude the General
Partner from determining the impact of such changes on Partnership operations,
purchases, or sale of equipment.
(3) 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
$23.0 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 1998 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 in the Index to
Financial Statements included in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PLM INTERNATIONAL AND PLM
FINANCIAL SERVICES, INC.
As of the date of this annual report, the directors and executive officers of
PLM International (and key executive officers of its subsidiaries) and of PLM
Financial Services, Inc. are as follows:
Name Age Position
- -------------------------------------------------------------------------------------------------------------------------
Robert N. Tidball 59 Chairman of the Board, Director, President,
and Chief Executive Officer, PLM International, Inc.;
Director, PLM Financial Services, Inc.;
Vice President, PLM Railcar Management Services, Inc.;
President, PLM Worldwide Management Services Ltd.
Randall L.-W. Caudill 50 Director, PLM International, Inc.
Douglas P. Goodrich 51 Director and Senior Vice President, PLM International;
Director and President, PLM Financial Services, Inc.;
President, PLM Transportation Equipment Corporation;
President, PLM Railcar Management Services, Inc.
Harold R. Somerset 63 Director, PLM International, Inc.
Robert L. Witt 57 Director, PLM International, Inc.
J. Michael Allgood 49 Vice President and Chief Financial Officer,
PLM International, Inc. and PLM Financial Services, Inc.
Stephen M. Bess 51 President, PLM Investment Management, Inc.
and PLM Securities Corp.;
Vice President and Director,
PLM Financial Services, Inc.
Richard K Brock 35 Vice President and Corporate Controller,
PLM International, Inc. and PLM Financial Services, Inc.
Frank Diodati 43 President, PLM Railcar Management Services Canada Limited
Steven O. Layne 43 Vice President, PLM Transportation Equipment Corporation;
Vice President, PLM Worldwide Management Services Ltd.
Susan C. Santo 35 Vice President, Secretary, and General Counsel,
PLM International, Inc. and PLM Financial Services, Inc.
Thomas L. Wilmore 55 Vice President, PLM Transportation Equipment Corporation;
Vice President, PLM Railcar Management Services, Inc.
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment to President and Chief Executive Officer, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989. Mr. Tidball was appointed Director of PLM
Financial Services, Inc. in July 1997 and was elected President of PLM Worldwide
Management Services Limited in February 1998. He has served as an officer of PLM
Railcar Management Services, Inc. since June 1987. Mr. Tidball was Executive
Vice President of Hunter Keith, Inc., a Minneapolis-based investment banking
firm, from March 1984 to January 1986. Prior to Hunter Keith, he was Vice
President, General Manager, and Director of North American Car Corporation and a
director of the American Railcar Institute and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997.
He is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm serving emerging growth companies in the United States
and abroad, as well as a senior advisor to the investment banking firm of
Prudential Securities, where he has been employed since 1987. Mr. Caudill also
serves as a director of VaxGen, Inc. and SBE, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Senior Vice President of PLM International in March 1994, and
appointed Director and President of PLM Financial Services, Inc. in June 1996.
Mr. Goodrich has also served as Senior Vice President of PLM Transportation
Equipment Corporation since July 1989 and as President of PLM Railcar Management
Services, Inc. since September 1992, having been a senior vice president since
June 1987. Mr. Goodrich was an executive vice president of G.I.C. Financial
Services Corporation, a subsidiary of Guardian Industries Corporation of
Chicago, Illinois, from December 1980 to September 1985.
Harold R. Somerset was elected to the Board of Directors of PLM International in
July 1994. From February 1988 to December 1993, Mr. Somerset was President and
Chief Executive Officer of California & Hawaiian Sugar Corporation (C&H Sugar),
a recently acquired subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined
C&H Sugar in 1984 as Executive Vice President and Chief Operating Officer,
having served on its Board of Directors since 1978, a position in which he
continues to serve. Between 1972 and 1984, Mr. Somerset served in various
capacities with Alexander & Baldwin, Inc., a publicly held land and agriculture
company headquartered in Honolulu, Hawaii, including Executive Vice President of
Agriculture and Vice President, General Counsel, and Secretary. In addition to a
law degree from Harvard Law School, Mr. Somerset also holds degrees in civil
engineering from the Rensselaer Polytechnic Institute and in marine engineering
from the US Naval Academy. Mr. Somerset also serves on the boards of directors
for various other companies and organizations, including Longs Drug Stores,
Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993,
Mr. Witt has been a principal with WWS Associates, a consulting and investment
group specializing in start-up situations and private organizations about to go
public. Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel Corporation, an international advanced materials company with sales
primarily in the aerospace, transportation, and general industrial markets. Mr.
Witt also serves on the boards of directors for various other companies and
organizations.
J. Michael Allgood was appointed Vice President and Chief Financial Officer of
PLM International in October 1992 and Vice President and Chief Financial Officer
of PLM Financial Services, Inc. in December 1992. Between July 1991 and October
1992, Mr. Allgood was a consultant to various private and public-sector
companies and institutions specializing in financial operations systems
development. In October 1987, Mr. Allgood co-founded Electra Aviation Limited
and its holding company, Aviation Holdings Plc of London, where he served as
Chief Financial Officer until July 1991. Between June 1981 and October 1987, Mr.
Allgood served as a first vice president with American Express Bank Ltd. In
February 1978, Mr. Allgood founded and until June 1981 served as a director of
Trade Projects International/Philadelphia Overseas Finance Company, a joint
venture with Philadelphia National Bank. From March 1975 to February 1978, Mr.
Allgood served in various capacities with Citibank, N.A.
Stephen M. Bess was appointed Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Securities Corporation in June
1996 and President of PLM Investment Management, Inc. in August 1989, having
served as Senior Vice President of PLM Investment Management, Inc. beginning in
February 1984 and as Corporate Controller of PLM Financial Services, Inc.
beginning in October 1983. Mr. Bess served as Corporate Controller of PLM, Inc.
beginning in December 1982. Mr. Bess was Vice President-Controller of Trans
Ocean Leasing Corporation, a container leasing company, from November 1978 to
November 1982, and Group Finance Manager with the Field Operations Group of
Memorex Corporation, a manufacturer of computer peripheral equipment, from
October 1975 to November 1978.
Richard K Brock was appointed Vice President and Corporate Controller of PLM
International and PLM Financial Services, Inc. in June 1997, having served as an
accounting manager beginning in September 1991 and as Director of Planning and
General Accounting beginning in February 1994. Mr. Brock was a division
controller of Learning Tree International, a technical education company, from
February 1988 through July 1991.
Frank Diodati was appointed President of PLM Railcar Management Services Canada
Limited in 1986. Previously, Mr. Diodati was Manager of Marketing and Sales for
G.E. Railcar Services Canada Limited.
Steven O. Layne was appointed Vice President of PLM Transportation Equipment
Corporation's Air Group in November 1992, and was appointed Vice President and
Director of PLM Worldwide Management Services Limited in September 1995. Mr.
Layne was its Vice President, Commuter and Corporate Aircraft beginning in July
1990. Prior to joining PLM, Mr. Layne was Director of Commercial Marketing for
Bromon Aircraft Corporation, a joint venture of General Electric Corporation and
the Government Development Bank of Puerto Rico. Mr. Layne is a major in the
United States Air Force Reserves and a senior pilot with 13 years of accumulated
service.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM
International and PLM Financial Services, Inc. in November 1997. She has worked
as an attorney for PLM International since 1990 and served as its Senior
Attorney since 1994. Previously, Ms. Santo was engaged in the private practice
of law in San Francisco. Ms. Santo received her J.D. from the University of
California, Hastings College of the Law.
Thomas L. Wilmore was appointed Vice President, Rail of PLM Transportation
Equipment Corporation in March 1994, and has served as Vice President of
Marketing for PLM Railcar Management Services, Inc. since May 1988. Prior to
joining PLM, Mr. Wilmore was Assistant Vice President and Regional Manager for
MNC Leasing Corporation in Towson, Maryland from February 1987 to April 1988.
From July 1985 to February 1987, he was President and co-owner of Guardian
Industries Corporation, Chicago, and between December 1980 and July 1985, Mr.
Wilmore was an executive vice president for its subsidiary, G.I.C. Financial
Services Corporation. Mr. Wilmore also served as Vice President of Sales for
Gould Financial Services, located in Rolling Meadows, Illinois, from June 1978
to December 1980.
The directors of PLM International are elected for a three-year term and the
directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM International or PLM Financial
Services, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership had no
pension, profit sharing, retirement, or similar benefit plan in effect as of
December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 5% interest in the profits and
losses and distributions of the Partnership. As of December 31, 1997, no
investor was known by the General Partner to beneficially own more than 5% of
the units of the Partnership.
(B) Security Ownership of Management
Neither the General Partner and its affiliates nor any executive
officer or director of the General Partner and its affiliates owned any units of
the Partnership as of December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
During 1997, the Partnership paid or accrued the following fees to FSI
or its affiliates: management fees, $0.7 million; equipment acquisition
fees, $0.2 million; and lease negotiation fees, $36,000. The
Partnership reimbursed FSI or its affiliates $0.6 million for
administrative and data processing services performed on behalf of the
Partnership during 1997.
During 1997, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Partnership's proportional share of
ownership): management fees, $0.5 million, and administrative and data
processing services, $0.2 million. The USPEs also paid Transportation
Equipment Indemnity Company Ltd. (TEI), a wholly owned, Bermuda-based
subsidiary of PLM International, $0.2 million for insurance coverages
during 1997; these amounts were paid substantially to third-party
reinsurance underwriters or placed in risk pools managed by TEI on
behalf of affiliated partnerships and PLM International, which provide
threshold coverages on marine vessel loss of hire and hull and
machinery damage. All pooling arrangement funds are either paid out to
cover applicable losses or refunded pro rata by TEI.
(B) Certain Business Relationships
None.
(C) Indebtedness of Management
None.
(D) Transactions with Promoters
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on Form 10-K.
(B) Reports on Form 8-K
None.
(C) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated by
reference to the Partnership's Registration Statement on Form S-1
(Reg. No. 33-55796), 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 Note Agreement, dated as of December 1, 1995, regarding $23.0
million of 7.27% senior notes due December 21, 2005
10.3 Third Amended and Restated Warehousing Credit Agreement, dated as of
December 2, 1997, with First Union National Bank of North Carolina
and others.
24. Powers of Attorney.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on
behalf of the Partnership by duly authorized officers.
Dated: March 20, 1998 PLM EQUIPMENT GROWTH & INCOME FUND VII
PARTNERSHIP
By: PLM Financial Services, Inc.
General Partner
By: /s/ Douglas P. Goodrich
---------------------------
Douglas P. Goodrich
President and Director
By: /s/ Richard K Brock
---------------------------
Richard K Brock
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
*_______________________
Robert N. Tidball Director, FSI March 20, 1998
*_______________________
Douglas P. Goodrich Director, FSI March 20, 1998
*_______________________
Stephen M. Bess Director, FSI March 20, 1998
*Susan Santo, by signing her name hereto, does sign this document on behalf of
the persons indicated above, pursuant to powers of attorney duly executed by
such persons and filed with the Securities and Exchange Commission.
/s/ Susan Santo
- ---------------------
Susan Santo
Attorney-in-Fact
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Report of Independent Auditors 29
Balance sheets as of December 31, 1997 and 1996 30
Statements of operations for the years ended
December 31, 1997, 1996, and 1995 31
Statements of changes in partners' capital for the
years ended December 31, 1997, 1996, and 1995 32
Statements of cash flows for the years ended December 31, 1997,
1996, and 1995 33
Notes to financial statements 34 - 42
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, 1997 and 1996, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
- -----------------------------------
SAN FRANCISCO, CALIFORNIA
March 12, 1998
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
1997 1996
------------------------------------
Assets:
Equipment held for operating leases, at cost $ 58,844 $ 67,441
Less accumulated depreciation (24,650) (21,494)
------------------------------------
34,194 45,947
Equipment held for sale 4,148 --
----------------------------------
Net equipment 38,342 45,947
Cash and cash equivalents 9,327 2,468
Restricted cash 191 158
Accounts receivable, less allowance for doubtful accounts
of $522 in 1997 and $330 in 1996 887 1,214
Investments in unconsolidated special-purpose entities 31,377 37,141
Lease negotiation fees to affiliate, less accumulated
amortization of $222 in 1997 and $466 in 1996 93 184
Debt issuance costs, less accumulated amortization
of $52 in 1997 and $27 in 1996 203 228
Prepaid expenses 49 58
------------------------------------
Total assets $ 80,469 $ 87,398
====================================
Liabilities and partners' capital:
Liabilities:
Accounts payable and accrued expenses $ 367 $ 296
Due to affiliates 4,563 605
Short-term note payable -- 2,000
Lessee deposits and reserve for repairs 1,477 1,360
Notes payable 23,000 23,000
------------------------------------
Total liabilities 29,407 27,261
------------------------------------
Partners' capital:
Limited partners (5,370,297 limited partnership units
as of December 31, 1997 and 1996) 51,062 60,137
General Partner -- --
------------------------------------
Total partners' capital 51,062 60,137
------------------------------------
Total liabilities and partners' capital $ 80,469 $ 87,398
====================================
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 weighted-average unit amounts)
1997 1996 1995
---------------------------------------------------
Revenues:
Lease revenue $ 12,605 $ 12,227 $ 18,081
Interest and other income 327 434 375
Net gain on disposition of equipment 1,803 42 182
---------------------------------------------------
Total revenues 14,735 12,703 18,638
Expenses:
Depreciation and amortization 8,994 9,041 14,409
Repairs and maintenance 1,492 1,692 1,483
Interest expense 1,691 1,681 291
Management fees to affiliate 709 744 971
Equipment operating expenses 50 48 915
Insurance expense to affiliate -- -- 141
Other insurance expenses 87 88 225
General and administrative expenses to affiliates 649 582 616
Other general and administrative expenses 429 780 534
Bad debt expense 254 143 245
---------------------------------------------------
Total expenses 14,355 14,799 19,830
---------------------------------------------------
Equity in net income (loss) of unconsolidated
special-purpose entities 721 (880) --
---------------------------------------------------
Net income (loss) $ 1,101 $ (2,976) $ (1,192)
===================================================
Partners' share of net income (loss):
Limited partners $ 593 $ (3,485) $ (1,662)
General Partner 508 509 470
---------------------------------------------------
Total $ 1,101 $ (2,976) $ (1,192)
===================================================
Net income (loss) per weighted-average limited
partnership unit (5,370,297 units as of
December 31, 1997, 1996, and 1995) $ 0.11 $ (0.65) $ (0.31)
===================================================
Cash distribution $ 10,176 $ 10,178 $ 9,627
===================================================
Cash distribution per weighted-average
limited partnership unit $ 1.80 $ 1.80 $ 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, 1997, 1996, and 1995
(In thousands of dollars)
Limited General
Partners Partners Total
--------------------------------------------------------
Partners' capital as of December 31, 1994 $ 66,996 $ -- $ 66,996
Partners' capital contribution 18,874 -- 18,874
Underwriting commission to affiliate (1,320) -- (1,320 )
Syndication costs to affiliates (440) -- (440 )
--------------------------------------------------------
Partners' capital contribution, net 17,114 -- 17,114
Net income (loss) (1,662) 470 (1,192 )
Cash distribution (9,157) (470) (9,627 )
--------------------------------------------------------
Partners' capital as of December 31, 1995 73,291 -- 73,291
Net income (loss) (3,485) 509 (2,976 )
Cash distribution (9,669) (509) (10,178 )
--------------------------------------------------------
Partners' capital as of December 31, 1996 60,137 -- 60,137
Net income 593 508 1,101
Cash distribution (9,668) (508) (10,176 )
--------------------------------------------------------
Partners' capital as of December 31, 1997 $ 51,062 $ -- $ 51,062
========================================================
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 of
dollars)
1997 1996 1995
-----------------------------------------------
Operating activities:
Net income (loss) $ 1,101 $ (2,976 ) $ (1,192)
Adjustments to reconcile net income (loss)
to net cash provided by (used in ) operating activities:
Depreciation and amortization 8,994 9,041 14,409
Net gain on disposition of equipment (1,803) (42 ) (182)
Equity in net (income) loss from unconsolidated
special-purpose entities (721) 880 --
Changes in operating assets and liabilities:
Restricted cash (33) 243 --
Accounts receivable, net 324 (505 ) (1,493)
Prepaid expenses 9 (18 ) (30)
Accounts payable and accrued expenses 71 26 239
Due to affiliates 376 92 39
Lessee deposits and reserve for repairs 117 240 1,211
-------------------------------------------------
Net cash provided by operating activities 8,435 6,981 13,001
-------------------------------------------------
Investing activities:
Payments for purchase of equipment (3,700) (9,020 ) (29,737)
Investment in and equipment purchased and placed in
unconsolidated special-purpose entities (683) (8,029 ) --
Distribution from unconsolidated special-purpose entities 7,168 8,697 --
Payments of acquisition fees to affiliate (162) (402 ) (1,690)
Payments of lease negotiation fees to affiliate (36) (90 ) (375)
Proceeds from equipment disposals 4,431 569 1,210
-------------------------------------------------
Net cash provided by (used in) investing activities 7,018 (8,275 ) (30,592)
-------------------------------------------------
Financing activities:
Partners' capital contributions, net of
syndication and underwriting costs -- -- 17,114
Increase (decrease) due to affiliates 3,582 -- (262)
Cash distribution paid to limited partners (9,668) (9,669 ) (9,157)
Cash distribution paid to General Partner (508) (509 ) (470)
Decrease in subscriptions in escrow -- -- (4,239)
Decrease in restricted cash from subscriptions in escrow -- -- 4,010
Proceeds from notes payable -- -- 23,000
Proceeds from short-term note payable -- 2,000 --
Principal payments on short-term note payable (2,000) -- --
Payments of debt issuance costs -- (25 ) (230)
------------------
---------------------------------
Net cash (used in) provided by financing activities (8,594) (8,203 ) 29,766
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,859 (9,497 ) 12,175
Cash and cash equivalents at beginning of period (see Note 4) 2,468 11,965 199
-------------------------------------------------
Cash and cash equivalents at end of period $ 9,327 $ 2,468 $ 12,374
=================================================
Supplemental information:
Interest paid $ 1,664 $ 1,774 $ 188
=================================================
Supplemental disclosure of noncash investing and financing activities:
Sale proceeds included in accounts receivable $ 47 $ 50 $ 213
=================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
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 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 operations.
FSI manages the affairs of the Partnership. The net income (loss) and
distributions of the Partnership are generally allocated 95% to the limited
partners and 5% to the General Partner, subject to certain special allocations
(see Net Income (Loss) and Distribution per Limited Partnership 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,
beginning October 25, 1997, the Partnership may, at the General Partner's sole
discretion, redeem up to 2% of the outstanding units each year. The purchase
price to be offered by the Partnership for outstanding units will be equal to
105% of the amount unitholders paid for the units, less the amount of cash
distributions unitholders have received relating to such units.
As of December 31, 1997, the Partnership agreed to repurchase approximately
46,000 units for an aggregate price of approximately $0.7 million. The General
Partner anticipates that these units will be repurchased in the first and second
quarters of 1998.
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 2). FSI, in conjunction with
its subsidiaries, 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 programs.
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, 1997
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. Certain aircraft are depreciated under the
double-declining balance depreciation method over the lease term.
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 and amortized over the estimated remaining life of the
equipment.
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121). In accordance with SFAS 121, the General
Partner reviews the carrying value of the Partnership's equipment at least
annually in relation to expected future market conditions for the purpose of
assessing recoverability of the recorded amounts. If projected future lease
revenue plus residual values are less than the carrying value of the equipment,
a loss on revaluation is recorded. No reductions to the carrying value of
equipment were required during either 1997 or 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 and related 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) and PLM Worldwide Management Services
(WMS). TEC is a wholly-owned subsidiary of FSI and WMS is a wholly-owned
subsidiary of PLM International. The Partnership's equity interest in 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 or WMS.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are not
covered by the lessee, they are generally charged against operations as
incurred. To meet the maintenance requirements of certain aircraft airframes and
engines, reserve accounts are prefunded by the lessee. Estimated costs
associated with marine vessel 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.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Basis of Presentation (continued)
Net Income (Loss) and Distribution per Limited Partnership Unit
The net income (loss) and distributions of the Partnership are generally
allocated 95% to the limited partners and 5% to the General Partner. Gross
income in each year is specially allocated to the General Partner in an
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 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 began computing 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. Monthly unitholders receive a
distribution check 15 days after the close of the previous month's business and
quarterly unitholders receive a distribution check 45 days after the close of
the quarter.
Cash distributions to investors in excess of net income are considered to
represent a return of capital. Cash distributions to the limited partners of
$9.1 million in 1997 were deemed to be a return of capital. All cash
distributions to the limited partners in 1996 and 1995 were deemed to be a
return of capital.
Cash distributions relating to the fourth quarter of 1997, 1996, and 1995, of
$1.4 million for each year, were paid during the first quarter of 1998, 1997,
and 1996, respectively.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily convertible
to known amounts of cash with original maturities of three months or less as
cash equivalents.
Restricted Cash
At December 31, 1997 and 1996, restricted cash represents lessee security
deposits held by the Partnership.
2. General Partner and Transactions with Affiliates
An officer of PLM Securities Corp. (PLM Securities), a wholly-owned
subsidiary of the General Partner, contributed $100 of the Partnership's
initial capital. Under the equipment management agreement, IMI, subject to
certain reductions, receives a monthly management fee attributable to
either owned equipment or interests in equipment owned by the USPEs equal
to the lesser of (i) the fees that would be charged by an independent third
party for similar services for similar equipment or (ii) the total (A) for
that equipment for which IMI provides only basic equipment management
services, (a) 2% of the gross lease revenues, as defined in the agreement,
attributable to equipment that is subject to full payout net leases and (b)
5% of the gross lease revenues attributable to equipment that is subject to
operating leases, and (B) for that equipment for which IMI provides
supplemental equipment management services, 7% of the gross lease revenues
attributable to such equipment. Partnership management fees payable were
$0.1 million as of December 31, 1997 and 1996. The Partnership's
proportional share of USPE management fees of $0.2 million and $0.1 million
were payable as of December 31, 1997 and 1996, respectively. The
Partnership's proportional share of USPE management fees expense during
1997 and 1996 was $0.5 million and
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
2. General Partner and Transactions with Affiliates (continued)
$0.5 million, respectively. The Partnership reimbursed FSI $0.6 million
during 1997, 1996, and 1995 for data processing expenses and administrative
services performed on behalf of the Partnership. The Partnership's
proportional share of USPE data processing and administrative expenses was
$0.2 million and $0.1 million during 1997 and 1996, respectively. The
Partnership paid Transportation Equipment Indemnity Company, Ltd. (TEI),
which provides marine insurance coverage and other insurance brokerage
services, $0.1 million in 1995. No fees for owned equipment were paid to
TEI in 1997 or 1996. The Partnership's proportional share of USPE marine
insurance coverage paid to TEI was $0.2 during 1997 and 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 $1.3 million, including amounts paid relating to subscriptions in escrow
(see Note 1) in 1995 (of which $1.2 million was paid to third-party broker
dealers in 1995).
The Partnership and USPEs paid or accrued lease negotiation and equipment
acquisition fees of $0.2 million, $0.9 million, and $1.6 million during
1997, 1996, and 1995, respectively, to TEC and WMS. Also, organization and
syndication costs of $440,000, 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.
TEC will also be entitled to receive an equipment liquidation fee equal to
the lesser of (i) 3% of the sales price of equipment sold on behalf of the
Partnership or (ii) 50% of the "Competitive Equipment Sale Commission," as
defined in the agreement, if certain conditions are met. In certain
circumstances, the General Partner will be entitled to a monthly re-lease
fee for re-leasing services following the expiration of the initial lease,
charter, or other contract for certain equipment equal to the lesser of (a)
the fees that would be charged by an independent third party for comparable
services for comparable equipment or (b) 2% of gross lease revenues derived
from such re-lease, provided, however, that no re-lease fee shall be
payable if such re-lease fee would cause the combination of the equipment
management fee paid to IMI and the re-lease fee with respect to such
transaction to exceed 7% of gross lease revenues. 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, 1997, approximately 80% of the Partnership's trailer
equipment operated in rental yards owned and maintained by PLM Rental,
Inc., the short-term trailer rental subsidiary of PLM International doing
business as PLM Trailer Leasing. Revenues collected under short-term rental
agreements with the rental yards' customers are credited to the owners of
the related equipment as received. Direct expenses associated with the
equipment are charged directly to the Partnership. An allocation of other
indirect expenses of the rental yard operations is charged to the
Partnership monthly.
The Partnership owned certain equipment in conjunction with affiliated
partnerships during 1997 and 1996 (see Note 4).
The balance due to affiliates as of December 31, 1997 includes $0.1 million
due to FSI and its affiliates for management fees and $4.5 million due to
affiliated USPEs. During January 1998, $3.5 million was paid to the affiliated
USPE. The balance due to affiliates at December 31, 1996 includes $0.1 million
due to FSI and its affiliates for management fees and a net of $0.5 million due
to USPEs.
PLM Equipment Growth & Income Fund VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
3. Equipment
The components of equipment as of December 31, 1997 and 1996 are as follows
(in thousands of dollars):
Equipment Held for Operating Leases 1997 1996
- --------------------------------------------- -----------------------------------
Marine vessels $ 22,212 $ 22,212
Trailers 18,111 14,547
Railcars 10,063 10,053
Aircraft 8,305 15,933
Modular buildings 153 4,696
-----------------------------------
58,844 67,441
Less accumulated depreciation (24,650) (21,494 )
-----------------------------------
34,194 45,947
Equipment held for sale 4,148 --
------------------------------------
Net equipment $ 38,342 $ 45,947
===================================
Revenues are earned by placing the equipment under operating leases. As of
December 31, 1997, all equipment in the Partnership's portfolio was on
lease or operating in PLM-affiliated short-term trailer rental yards,
except for two commuter aircraft that are currently being held for sale,
with a net book value of $4.1 million, and a railcar with a net book value
of $17,000. 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 $0.1
million.
During 1997, the Partnership sold or disposed of modular buildings and
trailers with an aggregate net book value of $2.6 million for proceeds of $4.4
million.
During 1996, the Partnership sold or disposed of modular buildings and
trailers with an aggregate net book value of $0.2 million for proceeds of
$0.3 million. The Partnership also sold trailers, which were held for sale
as of December 31, 1995, with a net book value of $0.2 million at the date
of sale, for proceeds of $0.2 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 1994 that
had been allocated to the Partnership, PLM Equipment Growth Funds IV and
VI, Professional Lease Management Income Fund I, LLC (Fund I), and PLM
International. As of 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 as of December 31, 1997 for the owned
and partially owned equipment during each of the next five years are
approximately $8.0 million, 1998; $5.6 million, 1999; $5.0 million, 2000;
$3.6 million, 2001; $0.4 million, 2002; and $0.1 million, thereafter.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
3. Equipment (continued)
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 four geographic regions: the United
States, Canada, South America, and Europe. Marine vessels and the mobile
offshore drilling unit are leased to multiple lessees in different regions
that operate 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, 1997,
1996, and 1995 (in thousands of dollars):
Region Investments in USPEs Owned Equipment
----------------------------------------------------------- -------------------------------------------
Lease Revenues 1997 1996 1997 1996 1995
------------------------------------------------------------ --------------------------------------------
United States $ -- $ -- $ 5,985 $ 7,522 $ 6,866
Canada 3,423 3,189 1,061 826 883
South America 1,181 1,181 2,021 -- 1,181
Europe 3,530 3,530 -- -- 1,177
Rest of the world 3,999 4,004 3,538 3,879 7,974
------------------------------- ------------------------------------------------
Total lease revenues $ 12,133 $ 11,904 $ 12,605 $ 12,227 $ 18,081
=============================== ================================================
The following table sets forth identifiable net income (loss) information
by region for the owned equipment and investments in USPEs for the years ended
December 31, 1997, 1996, and 1995 (in thousands of dollars):
Region Investments in USPE Owned Equipment
------------------------------------------------------------ ------------------------------------------
Net Income (Loss) 1997 1996 1997 1996 1995
------------------------------- ----------------------------- ---------------------------------------------
United States $ -- $ -- $ 1,885 $ (590) $ 669
Canada 91 (1,370) 258 89 (332)
South America 85 (97) (544) -- (348)
Europe 1,545 981 -- -- 25
Rest of the world (1,000) (394) 720 431 (597)
----------------------------- -----------------------------------------------
Total identifiable income 721 (880) 2,319 (70) (583)
Administrative and other -- -- (1,939) (2,026) (609)
----------------------------- -----------------------------------------------
Total net income (loss) $ 721 $ (880) $ 380 $ (2,096) $ (1,192)
============================= ===============================================
The net book value of these assets as of December 31, 1997, 1996, and 1995
are as follows (in thousands of dollars):
Region Investments in USPEs Owned Equipment
------------------------------ --------------------------------------- -------------------------------------
Net Book Value 1997 1996 1995 1997 1996 1995
----------------------------------------------------------------------- ---------------------------------------
United States $ 682 $ -- $ -- $ 15,500 $ 29,199 $ 26,565
Canada 7,669 9,612 8,285 2,519 2,608 2,004
South America 4,824 5,798 7,001 4,392 -- --
Europe 8,036 9,127 10,664 -- -- --
Rest of the world 10,166 12,604 12,739 11,783 14,140 16,968
----------------------------------------- -----------------------------------------
31,377 37,141 38,689 34,194 45,947 45,537
Equipment held for sale -- -- -- 4,148 -- 156
----------------------------------------- -----------------------------------------
Total net book value $ 31,377 $ 37,141 $ 38,689 $ 38,342 $ 45,947 $ 45,693
========================================= =========================================
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
3. Equipment (continued)
There were no lessees during 1997 and 1996 whose rent was 10% or greater of
total revenues. The only lessee accounting for 10% or more of total revenues
during 1995 was Wah Yuen Shipping, Inc. (21% in 1995).
4. 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.
Prior to 1996, the Partnership accounted for operating activities
associated with joint ownership of transportation equipment as undivided
interests, including its proportionate share of each asset with similar
wholly-owned assets in its financial statements. Under generally accepted
accounting principles, the effects of such activities, if material, should
be reported using the equity method of accounting. Therefore, effective
January 1, 1996, the Partnership adopted the equity method to account for
its investment in such jointly-held assets.
The principal differences between the previous accounting method and the
equity method concern the presentation of activities relating to these
assets in the statement of operations. Whereas under the equity method of
accounting the Partnership's proportionate share is presented as a single
net amount, "equity in net income (loss) of 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 partners'
capital or on the Partnership's net income (loss) for the period of
adoption. Because the effects on previously issued financial statements of
applying the equity method of accounting to investments in jointly-owned
assets are not considered to be material to such financial statements taken
as a whole, previously issued financial statements have not been restated.
However, certain items have been reclassified in the previously issued
balance sheet to conform to the current-period presentation. The beginning
cash and cash equivalent for 1996 is different from the ending cash and
cash equivalent for 1995 on the statement of cash flows due to this
reclassification.
During the year ended December 31, 1997, the Partnership committed to
purchase a 50% interest in a entity that will own a MD-82 Stage III
commercial aircraft (the remaining interest to be held by an affiliated
program) for $6.8 million. The Partnership made a deposit of $0.7 million
toward this purchase that is included in the balance sheet as investments
in USPEs as of December 31, 1997. The purchase of equipment was completed
during January 1998. FSI was paid $0.4 million in 1998 for acquisition and
lease negotiation fees for this equipment.
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 programs) for $2.0 million, and incurred acquisition and lease
negotiation fees of $0.4 million to WMS.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
4. Investments in Unconsolidated Special-Purpose Entities (continued)
The following summarizes the financial information for the USPEs and the
Partnership's interest therein as of and for the year ended December 31, 1997
and 1996 (in thousands of dollars):
1997 1996
------------ -----------
Net Interest of Partnership Net Interest of Partnership
Total Total
USPEs USPEs
-------------------------------- --------------------------------
Net investments $ 103,497 $ 31,377 $ 115,015 $ 37,141
Lease revenues 35,974 12,133 33,850 11,904
Net income (loss) 10,130 721 (3,606 ) (880 )
The net investment in USPEs includes the following jointly-owned equipment
(and related assets and liabilities) as of December 31, 1997 and 1996 (in
thousands of dollars):
1997 1996
---------------------------------
33% interest in two trusts that own three 737-200A commercial
aircraft, two aircraft engines, and a portfolio of
aircraft rotable $ 8,036 $ 9,126
80% interest in an entity owning a bulk-carrier marine vessel 6,014 7,362
24% in a trust owning a 767-200ER commercial aircraft 4,824 5,798
50% interest in a trust that owns four 737-200A commercial aircraft 4,362 --
25% interest in a trust that owns four 737-200A commercial aircraft 3,308 4,206
44% interest in an entity owning a bulk-carrier marine vessel 2,439 3,142
10% interest in an entity owning a mobile offshore drilling unit 1,712 2,100
50% interest in an entity committed to purchase
a DC-9 commercial aircraft 682 --
33% interest in a trust that owns six 737-200A commercial aircraft -- 5,407
---------------------------------------------------- ------------
Net investments $ 31,377 $ 37,141
============= ============
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 December 1997, PLM Equipment Growth Funds IV and VI, both of which
are affiliated partnerships and also held a beneficial interest in the
Trusts, sold the commercial aircraft designated to them. During September
1996, PLM Equipment Growth Fund V, an affiliated partnership that also had
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
December 31, 1997 and September 30, 1996. This change had no effect on the
income or loss recognized during 1997 or 1996.
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 have a final
maturity in 2005. During 1995, the Partnership paid lender fees of $0.2
million in connection with this loan.
Interest on the notes is payable semiannually. The notes will be repaid in
five principal payments of $3.0 million on December 31, 1999, 2000, 2001,
2002, and 2003 and 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.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
5. Notes Payable (continued)
Proceeds from the notes were 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 $22.8 million.
The General Partner has entered into a joint $50.0 million credit facility
(the Committed Bridge Facility) on behalf of the Partnership, PLM Equipment
Growth Fund V (EGF V), PLM Equipment Growth Fund VI (EGF 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 , plus (ii) 50% of unrestricted cash held by the borrower. The
Committed Bridge Facility became available on December 20, 1993, and was
amended and restated on December 2, 1997, to expire on November 2, 1998.
The Partnership, EGF V, EGF VI, Fund I, and TECAI collectively may borrow
up to $35.0 million of the Committed Bridge Facility and AFG may borrow up
to $50.0 million. The Committed Bridge Facility also provides for a $5.0
million Letter of Credit Facility for the eligible borrowers. Outstanding
borrowings by one borrower reduce the amount available to each of the other
borrowers under the Committed Bridge Facility. Individual borrowings may be
outstanding for no more than 179 days, with all advances due no later than
November 2, 1998. Interest accrues at either the prime rate or adjusted
LIBOR plus 1.625% at the borrower's option and is set at the time of an
advance of funds. Borrowings by the Partnership are guaranteed by the
General Partner. As of December 31, 1997, AFG had $23.0 million in
outstanding borrowings. No other eligible borrower had outstanding
borrowings. The General Partner believes it will renew the Committed Bridge
Facility upon its expiration with similar terms as those in the current
Committed Bridge Facility.
The Partnership received waivers from its senior lenders related to its
maximum debt covenant as of 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, 1997, there were temporary differences of approximately
$39.5 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 and
the tax treatment of underwriting commissions and syndication costs.
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
$23.0 million of 7.27% senior notes due December 21, 2005 *
10.3 Third Amended and Restated Warehousing Credit Agreement, dated as of
December 2, 1997, with First Union National Bank of North
Carolina and others 44-123
24. Powers of Attorney 124-126
- -------* Incorporated by reference. See page 26 of this report.