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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year ended
December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 33-55796
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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 51.
Total number of pages in this report: 131.
PART I
ITEM 1. BUSINESS
(A) Background
In December 1992, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly-owned subsidiary of PLM International, Inc. (PLM International or PLMI),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 7,500,000 limited partnership
units (the units) in PLM Equipment Growth & Income Fund VII, a California
limited partnership (the Partnership, the Registrant, or EGF VII). The
Partnership's offering became effective on May 25, 1993. FSI, as General
Partner, owns a 5% interest in the Partnership. The Partnership engages in the
business of investing in a diversified equipment portfolio consisting primarily
of used, long-lived, low-obsolescence capital equipment that is easily
transportable by and among prospective users.
The Partnership's primary objectives are:
(1) to invest in a diversified portfolio of low-obsolescence equipment
having long lives and high residual values, at prices that the General Partner
believes to be below inherent values, and to place the equipment on lease or
under other contractual arrangements with creditworthy lessees and operators of
equipment. All transactions over $1.0 million must be approved by the PLMI
Credit Review Committee (the Committee), which is made up of members of PLMI's
senior management. In determining a lessee's creditworthiness, the Committee
will consider, among other factors, the lessee's financial statements, internal
and external credit ratings, and letters of credit;
(2) to generate cash distributions, which may be substantially tax-deferred
(i.e., distributions that are not subject to current taxation) during the early
years of the Partnership;
(3) to create a significant degree of safety relative to other equipment
leasing investments through the purchase of a diversified equipment portfolio.
This diversification reduces the exposure to market fluctuations in any one
sector. The purchase of used, long-lived, low-obsolescence equipment, typically
at prices that are substantially below the cost of new equipment, also reduces
the impact of economic depreciation and can create the opportunity for
appreciation in certain market situations, where supply and demand return to
balance from oversupply conditions; and
(4) to increase the Partnership's revenue base by reinvesting a portion of
its operating cash flow in additional equipment during the first six years of
the Partnership's operation in order to grow the size of its portfolio. Since
net income and distributions are affected by a variety of factors, including
purchase prices, lease rates, and costs and expenses, growth in the size of the
Partnership's portfolio does not necessarily mean that the Partnership's
aggregate net income and distributions will increase upon the reinvestment of
operating cash flow.
The offering of units of the Partnership closed on April 25, 1995. As of
December 31, 1998, there were 5,334,211 limited partnership units outstanding.
The General Partner contributed $100 for its 5% general partner interest in the
Partnership.
Beginning in the Partnership's seventh year of operation, which commences
January 1, 2002, the General Partner will stop reinvesting cash flow 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,
however, the term of the Partnership may be extended, although in no event will
the Partnership be extended beyond December 31, 2013.
Table 1, below, lists the equipment and the cost of equipment in the
Partnership's portfolio, and the cost of investments in unconsolidated
special-purpose entities as of December 31, 1998 (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
786 Dry trailers Trailmobile/Stoughton 10,836
250 Dry piggyback trailers Various 3,835
77 Refrigerated trailers Various 2,094
61 Flatbed trailers Great Dane 515
2 DHC-8 commuter aircraft DeHavilland 7,628
1 737-200 Stage II commercial aircraft Boeing 5,483
3 DC-9 Stage II commercial aircraft McDonnell Douglas 2,822
346 Pressurized tank railcars Various 9,040
68 Woodchip gondola railcars National Steel 1,044
628 Portable heaters Various 4,085
4 Modular buildings Various 88
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Total owned equipment held for operating leases $ 69,682
============
Investments in unconsolidated special-purpose entities:
0.80 Bulk-carrier marine vessel Tsuneishi Zosen $ 14,212
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 MD-82 Stage III commercial aircraft McDonnell Douglas 8,125
0.75 Marine containers Various 7,467
0.50 MD-82 Stage III commercial aircraft McDonnell Douglas 7,132
0.44 Bulk-carrier marine vessel Naikai Ship Building & Engineering Co. 5,628
0.10 Mobile offshore drilling unit AT & CH de France 2,090
------------
Total investments in unconsolidated special-purpose entities $ 65,350
============
Includes equipment and investments purchased with the proceeds from capital
contributions, undistributed cash flow from operations, and Partnership
borrowings. Includes costs capitalized, and equipment acquisition fees paid
to PLM Transportation Equipment Corporation (TEC), or PLM Worldwide
Management Services (WMS).
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, 1998, 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 related to 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., Trans World
Airlines, Aero California, SWR Brazil 767, Inc., and Action Carriers, Inc.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the Partnership's equipment. The Partnership's management
agreement with IMI is to co-terminate with the dissolution of the Partnership,
unless the limited partners vote to terminate the agreement prior to that date
or at the discretion of the General Partner. IMI has agreed to perform all
services necessary to manage the equipment on behalf of the Partnership and to
perform or contract for the performance of all obligations of the lessor under
the Partnership's leases. In consideration for its services and pursuant to the
partnership agreement, IMI is entitled to a monthly management fee (see Notes 1
and 2 to the audited financial statements).
(C) Competition
(1) Operating Leases versus Full Payout Leases
Generally, the equipment owned or invested in by the Partnership is leased out
on an operating lease basis wherein the rents received during the initial
noncancelable term of the lease are insufficient to recover the Partnership's
purchase price of the equipment. The short to mid-term nature of operating
leases generally commands a higher rental rate than longer-term full payout
leases and offers lessees relative flexibility in their equipment commitment. In
addition, the rental obligation under an operating lease need not be capitalized
on the lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize
full payout leases on new equipment, i.e., leases that have terms equal to the
expected economic life of the equipment. While some lessees prefer the
flexibility offered by a shorter-term operating lease, other lessees prefer the
rate advantages possible with a full payout lease. Competitors may write full
payout leases at considerably lower rates and for longer terms than the
Partnership offers, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers that offer operating
leases and full payout leases. Manufacturers may provide ancillary services that
the Partnership cannot offer, such as specialized maintenance services
(including possible substitution of equipment), training, warranty services, and
trade-in privileges.
The Partnership also competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), GATX Corp., General Electric
Railcar Services Corporation, General Electric Aviation Services Corporation,
Xtra Corporation, and other investment programs that may lease the same types of
equipment.
(D) Demand
The Partnership operates in the following operating segments: marine vessel
leasing, trailer leasing, aircraft leasing, railcar leasing, marine container
leasing, portable heater leasing, and mobile offshore drilling unit leasing.
Each equipment leasing segment engages in short-term to mid-term operating
leases to a variety of customers. Except for those aircraft leased to passenger
air carriers, the Partnership's transportation equipment is used to transport
materials and commodities, rather than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Marine Vessels
The Partnership owns or has investments in small to medium-sized dry bulk
vessels that trade in worldwide markets and carry commodity cargoes. Demand for
commodity shipping closely follows worldwide economic growth patterns, which can
alter demand by causing changes in volume on trade routes. The General Partner
operates the Partnership's vessels through spot and period charters, an
operating approach that provides the flexibility to adapt to changing market
situations.
Freight rates for dry bulk vessels decreased for all ship sizes in 1998, with
the largest vessels experiencing the greatest declines. After a relatively
stable year in 1997, rates declined due to a decrease in cargo tonnage moving
from the Pacific Basin and Asia to western ports. The size of the overall dry
bulk carrier fleet decreased by 3%, as measured by the number of vessels, but
increased by 1%, as measured by deadweight (dwt) tonnage. While scrapping of
ships was a significant factor in 1998 (scrapping increased by 50% over 1997)
overall there was no material change in the size of the dry bulk vessel fleet,
as deliveries and scrapings were nearly equal.
Total dry trade (as measured in deadweight tons) was flat, compared to a 3%
growth in 1997. As a result, the market had no foundation for increasing freight
rates, and charter rates declined as trade not only failed to grow, but actually
declined due to economic disruptions in Asia. Overall activity is expected to
remain flat in 1999, with trade in two of the three major commodities static or
decreasing in volume. Iron ore volume is expected to decrease, and grain trade
is anticipated to be flat, while a bright spot remains in an estimated increase
in steam coal trade.
Ship values experienced a significant decline in 1998, as expectations for trade
growth were dampened. The decline in ship values was also driven by bargain
pricing for newbuilding in Asian yards.
The uncertainty in forecasts is the Asian economic situation; if there is some
recovery from the economic shake-up that started in the second half of 1997,
then 1999 has prospects for improvement. The delivery of ships in 1999 is
expected to be less than in 1998, and high scrapping levels should continue. Dry
bulk shipping is a cyclical business - inducing capital investment during
periods of high freight rates and discouraging investment during periods of low
rates. The current environment thus discourages investment. However, the history
of the industry implies that this period will be followed by one of increasing
rates and investment in new ships, driven by growth in demand. Over time, demand
grows at an average of 3% a year, so when historic levels of growth in demand
resume, the industry is expected to experience a significant increase in freight
rates and ship values.
(2) Trailers
(a) Over-the-Road Dry Trailers
The U.S. over-the-road nonrefrigerated (dry) trailer market continued to recover
in 1998, with a strong domestic economy resulting in heavy freight volumes. The
leasing outlook continues to be positive, as equipment surpluses of recent years
are being absorbed by a buoyant market. In addition to high freight volumes,
declining fuel prices have led to a strong trucking industry and improved
equipment demand.
The Partnership's nonrefrigerated van fleet experienced strong utilization
throughout 1998, with utilization rates remaining well above 70% throughout the
year.
(b) Intermodal (Piggyback) Trailers
Intermodal (piggyback) trailers are used to ship goods either by truck or by
rail. Activity within the North American intermodal trailer market declined
slightly in 1998, with trailer shipments down 4% from 1997 levels, due primarily
to rail service problems associated with the mergers in this area. Utilization
of the intermodal per diem rental fleet, consisting of approximately 170,000
units, was 73%. Intermodal utilization in 1999 is expected to decline another 2%
from 1998 levels, due to a slight leveling off of overall economic activity in
1999, after a robust year in 1998.
The General Partner has initiated expanded marketing and asset management
efforts for its intermodal trailers, from which it expects to achieve improved
trailer utilization and operating results. During 1998, average utilization
rates for the Partnership's intermodal trailer fleet approached 80%.
(c) Over-the-Road Refrigerated Trailers
The temperature-controlled over-the-road trailer market remained strong in 1998
as freight levels improved and equipment oversupply was reduced. Many
refrigerated equipment users retired older trailers and consolidated their
fleets, making way for new, technologically improved units. Production of new
equipment is backlogged into the third quarter of 1999. In light of the current
tight supply of trailers available on the market, it is anticipated that
trucking companies and other refrigerated trailer users will look outside their
own fleets more frequently by leasing trailers on a short-term basis to meet
their equipment needs.
This leasing trend should benefit the Partnership, which makes most of its
trailers available for short-term leasing from rental yards owned and operated
by a PLM International subsidiary. The Partnership's utilization of refrigerated
trailers showed improvement in 1998, with utilization rates approaching 70%,
compared to 60% in 1997.
(d) Flatbed Trailers
Flatbed trailers are used primarily in the construction and steel industries.
Production of new flatbeds has remained stable over the last few years, and
demand has kept ahead of supply.
The Partnership has a small flatbed fleet that primarily serves the construction
industry. The fleet performed well in 1998, with over 80% utilization.
(3) Aircraft
(a) Commuter Aircraft
Major changes have occurred in the commuter market due to the 1993 introduction
of small regional jets. The original concept for regional jets was to take over
the North American hub-and-spoke routes served by the large turboprops, but they
are also finding successful niches in point-to-point routes. The introduction of
this smaller aircraft has allowed major airlines to shift the regional jets to
those marginal routes previously operated by narrowbody (single-aisle) aircraft,
allowing larger-capacity aircraft to be more efficiently employed in an
airline's route system.
The Partnership leases commuter turboprops containing from 36 to 50 seats. These
aircraft all fly in North America, which continues to be the fastest-growing
market for commuter aircraft in the world. The Partnership's aircraft possess
unique performance capabilities, compared to other turboprops, which allow them
to readily operate at maximum payloads from unimproved surfaces, hot and high
runways, and short runways. However, the growing use of regional jets in the
commuter market has resulted in an increase in demand for regional jets at the
expense of turboprops. Several major turboprop programs have been terminated and
all turboprop manufacturers are cutting back on production due to reduced
demand.
These conditions have adversely affected the market for the Partnership's two
turboprop aircraft. As a result, both of these aircraft were off lease during
1998.
(b) Commercial Aircraft
The world's major airlines experienced a fourth consecutive year of profits,
showing a combined marginal net income (net income measured as a percentage of
revenue) of 6%, compared to the industry's historical annual rate of 1%.
Airlines recorded positive marginal net annual income of 2% in 1995, 4% in 1996,
6% in 1997, and 6% in 1998. The two factors that have led to this increase in
profitability are improvements in yield management systems and reduced operating
costs, particularly lowered fuel costs. These higher levels of profitability
have allowed many airlines to re-equip their fleets with new aircraft, resulting
in a record number of orders for manufacturers.
Major airlines increased their fleets from 7,181 aircraft in 1997 to 7,323 in
1998, which has resulted in more used aircraft available on the secondary
market. Despite these increases, the number of Stage II aircraft in these fleets
(similar to those owned by the Partnership) decreased by 26% from 1997 to 1998,
and sharper decreases are expected in 1999. This trend is due to Federal
Aviation Regulation section C36.5, which requires airlines to convert 100% of
their fleets to Stage III aircraft, which have lower noise levels than Stage II
aircraft, by the year 2000 in the United States and the year 2002 in Canada and
Europe. Stage II aircraft can be modified to Stage III with the installation of
a hushkit that significantly reduces engine noise. The cost of hushkit
installation ranges from $1.0 to $2.0 million for the types of aircraft owned by
the Partnership.
Orders for new aircraft have risen rapidly worldwide in recent years: 691 in
1995, 1,182 in 1996, 1,328 in 1997, and an estimated 1,500 in 1998. As a result
of this increase in orders, manufacturers have expanded their production, and
new aircraft deliveries have increased from 482 in 1995, 493 in 1996, and 674 in
1997, to an estimated 825 in 1998.
The industry now has in place two of the three conditions that led to financial
problems in the early 1990s: potential excess orders and record deliveries. The
missing element is a worldwide recession. Should a recession occur, the industry
will experience another period of excess aircraft capacity and surplus aircraft
on the ground.
The Partnership's fleet provides a balance of Stage II narrowbody (single-aisle
aircraft), Stage III narrowbody, and Stage III widebody aircraft. The Stage II
aircraft are either positioned with air carriers outside Stage III-legislated
areas or anticipated to be sold or leased outside Stage III areas before the
year 2000.
(b) Aircraft Engines
Availability has decreased over the past two years for the Pratt & Whitney Stage
II JT8D engine, which powers many of the Partnership's Stage II commercial
aircraft. This decrease in supply is due primarily to the limited production of
spare parts to support these engines. Due to the fact that demand for this type
of aircraft currently exceeds supply, the partnership expects to sell its JT8D
engines in 1999.
(c) Rotables
Aircraft rotables, or components, are replacement spare parts held in an
airline's inventory. They are recycled parts that are first removed from an
aircraft or engine, overhauled, and then recertified, returned to an airline's
inventory, and ultimately refit to an aircraft in as-new condition. Rotables
carry identification numbers that allow them to be individually tracked during
their use.
The types of rotables owned and leased by the Partnership include landing gear,
certain engine components, avionics, auxiliary power units, replacement doors,
control surfaces, pumps, and valves. The market for the Partnership's rotables
remains stable.
The Partnership expects to sell the rotables used on its Stage II aircraft
during 1999 as part of a package to sell several aircraft, engines, and rotables
jointly owned by the Partnership and an affiliated program.
(4) Railcars
(a) Pressurized Tank Railcars
Pressurized tank cars transport primarily two chemicals: liquefied petroleum gas
(natural gas) and anhydrous ammonia (fertilizer). Natural gas is used in a
variety of ways in businesses, electric plants, factories, homes, and now even
cars. The demand for fertilizer is driven by a number of factors, including
grain prices, the status of government farm subsidy programs, the amount of
farming acreage and mix of crops planted, weather patterns, farming practices,
and the value of the U.S. dollar.
In North America, 1998 carload originations of both chemicals and petroleum
products remained relatively constant, compared to 1997. The 98% utilization
rate of the Partnership's pressurized tank cars was consistent with this
statistic.
(b) Woodchip Gondola Railcars
These 6,600-cubic-foot-capacity railcars are used to transport woodchips from
sawmills to pulp mills, where the woodchips are converted into pulp. The demand
for woodchip gondolas is directly related to demand for paper and paper
products, particleboard, and plywood. In Canada, where the Partnership's
woodchip gondolas operate, 1998 carload originations for primary forest products
remained relatively unchanged over 1997 levels.
All of the Partnership's woodchip gondolas continued to operate on long-term
leases during 1998.
(5) Marine Containers
The marine container market began 1998 with industrywide utilization in the low
80% range. This percentage eroded somewhat during the year, while per diem
rental rates remained steady. One factor affecting the market was the
availability of historically low-priced marine containers from Asian
manufacturers. This trend is expected to remain in 1999, and will continue to
put pressure on economic results fleetwide.
The trend toward industrywide consolidation continued in 1998, as the U.S.
parent company of one of the industry's top ten container lessors announced that
it would be outsourcing the management of its container fleet to a competitor.
While this announcement has yet to be finalized, over the long term, such
industrywide consolidation should bring more rationalization to the container
leasing market and result in both higher fleetwide utilization and per diem
rates.
(6) Portable Heaters
Portable heaters are transportable heaters that are powered by natural gas or
propane. This type of heater is used predominately in the construction and oil
drilling industries during the harsh weather conditions of the winter months.
The Partnership's heaters are leased on a long-term basis to a regional
manufacturer of such heaters. With construction activity remaining strong, it is
anticipated that these heaters will continue to be in high demand for the
foreseeable future.
(7) Mobile Offshore Drilling Units (Rigs)
For the first half of 1998, overall worldwide demand for mobile offshore
drilling units (rigs) continued the increases experienced in 1996 and 1997.
During the second half of the year, demand softened -- particularly in the
shallow-water U.S. Gulf markets -- due to decreases in worldwide oil prices and
U.S. gas prices. Day rates in the shallow-water sector showed significant
decreases; however, day rates for deep-water floating rigs maintained the gain
attained earlier in the year. Future prospects for offshore drilling markets are
favorable, since low oil and gas prices, along with economic growth in general,
tend to stimulate demand for oil and gas. In the short term, 1999 is expected to
be a flat year for growth in the offshore markets, with the exception of
long-term projects already planned or contracted by large international oil and
gas exploration and development companies.
The Partnership currently has an interest in one drillship, a floating drilling
rig. The floating rig market has experienced the most improvement of all rig
types since 1995. Technological advances and more efficient operations have
improved the economics of drilling and production in the deepwater locations in
which floating rigs are utilized. Overall, demand for floating rigs increased
from 128 rig-years in 1996 to 131 rig-years in 1997, and stayed at that level in
1998 (a rig-year is the equivalent of one rig employed for 12 consecutive
months). The increase in demand and utilization during this period prompted
significant increases in contract day rates and an associated increase in market
values for floating rigs. Currently 177 floating rigs (151 semisubmersibles and
26 drillships) are operating internationally and 39 floating rigs are on order
or undergoing conversion, scheduled for delivery between 1999 and 2001. All but
six of these newbuildings and conversions have already been contracted for more
than two years. This high level of commitment should prevent a significant
deterioration in the market as the rigs are delivered.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign government authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require its removal from service or extensive modification to meet these
regulations, at considerable cost to the Partnership. Such regulations include
but are not limited to:
(1) the U.S. Oil Pollution Act of 1990, which established liability for
operators and owners of vessels and mobile offshore drilling units that
create environmental pollution. This regulation has resulted in higher oil
pollution liability insurance. The lessee of the equipment typically
reimburses the Partnership for these additional costs;
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990,
which limits or eliminates the operation of commercial aircraft in the
United States that do not meet certain noise, aging, and corrosion
criteria. In addition, under U.S. Federal Aviation Regulations, after
December 31, 1999, no person 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. These Stage II aircraft
are scheduled either to be modified to meet Stage III requirements, sold,
or re-leased in countries that do not require this regulation before the
year 2000. The cost to install a hushkit to meet quieter Stage III
requirements is approximately $1.5 million, depending on the type of
aircraft;
(3) the Montreal Protocol on Substances that Deplete the Ozone Layer and
the U.S. Clean Air Act Amendments of 1990, which call for the control and
eventual replacement of substances that have been found to cause or
contribute significantly to harmful effects to the stratospheric ozone
layer and that are used extensively as refrigerants in refrigerated marine
cargo containers and over-the-road refrigerated trailers;
(4) the U.S. Department of Transportation's Hazardous Materials
Regulations, which regulate the classification and packaging requirements
of hazardous materials and which apply particularly to the Partnership's
tank railcars, issued a statement that requires the Partnership to
initially inspect approximately 23% of the tank railcars for a protective
coating to the outside of the tank, as well as the inside of the metal tank
jacket whenever a tank is insulated. If any of the inspected tank railcars
fail to meet the requirements, an additional percentage of the tank
railcars will need to be inspected. If all the tank railcars in the initial
inspection meet the issued requirements, the remaining railcars will be
eliminated from the inspection program. The Partnership owns 64 tank
railcars that may need to be inspected. Tank railcars that fail the
inspection will have to be repaired at a cost of approximately $25,000 each
before they can go back into service by August 2000. The Partnership plans
to complete the initial inspection of tank railcars by the end of March
1999.
As of December 31, 1998, the Partnership was 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 and its interest in entities that own equipment for leasing
purposes. As of December 31, 1998, the Partnership owned a portfolio of
transportation and related equipment and investments in equipment owned by
unconsolidated special-purpose entities (USPEs), as described in Item 1, Table
1. The Partnership acquired equipment with the proceeds of the Partnership
offering of $107.4 million through the third quarter of 1995, with proceeds from
the debt financing of $23.0 million, and by reinvesting a portion of its
operating cash flow in additional equipment.
The Partnership maintains its principal office at One Market, Steuart Street
Tower, Suite 800, San Francisco, California 94105-1301. All office facilities
are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
PLM International, (the Company) and various of its affiliates are named as
defendants in a lawsuit filed as a purported class action on January 22, 1997 in
the Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251 (the
Koch action). Plaintiffs, who filed the complaint on their own and on behalf of
all class members similarly situated (the class), are six individuals who
invested in certain California limited partnerships (the Partnerships) for which
the Company's wholly-owned subsidiary, PLM Financial Services, Inc. (FSI), acts
as the general partner, including the Partnership, and PLM Equipment Growth
Funds IV, V, and VI, (the Growth Funds). The state court ex parte certified the
action as a class action (i.e., solely upon plaintiffs' request and without the
Company being given the opportunity to file an opposition). The complaint
asserts eight causes of action against all defendants, as follows: fraud and
deceit, suppression, negligent misrepresentation and suppression, intentional
breach of fiduciary duty, negligent breach of fiduciary duty, unjust enrichment,
conversion, and conspiracy. Additionally, plaintiffs allege a cause of action
against PLM Securities Corp. for breach of third party beneficiary contracts in
violation of the National Association of Securities Dealers rules of fair
practice. Plaintiffs allege that each defendant owed plaintiffs and the class
certain duties due to their status as fiduciaries, financial advisors, agents,
and control persons. Based on these duties, plaintiffs assert liability against
defendants for improper sales and marketing practices, mismanagement of the
Growth Funds, and concealing such mismanagement from investors in the Growth
Funds. Plaintiffs seek unspecified compensatory and recissory damages, as well
as punitive damages, and have offered to tender their limited partnership units
back to the defendants.
In March 1997, the defendants removed the Koch action from the state court to
the United States District Court for the Southern District of Alabama, Southern
Division (Civil Action No. 97-0177-BH-C) based on the district court's diversity
jurisdiction, following which plaintiffs filed a motion to remand the action to
the state court. Removal of the action to federal court automatically nullified
the state court's ex parte certification of the class. In September 1997, the
district court denied plaintiffs' motion to remand the action to state court and
dismissed without prejudice the individual claims of the California plaintiff,
reasoning that he had been fraudulently joined as a plaintiff. In October 1997,
defendants filed a motion to compel arbitration of plaintiffs' claims, based on
an agreement to arbitrate contained in the limited partnership agreement of each
Growth Fund, and to stay further proceedings pending the outcome of such
arbitration. Notwithstanding plaintiffs' opposition, the district court granted
defendants' motion in December 1997.
Following various unsuccessful requests that the district court reverse, or
otherwise certify for appeal, its order denying plaintiffs' motion to remand the
case to state court and dismissing the California plaintiff's claims, plaintiffs
filed with the U.S. Court of Appeals for the Eleventh Circuit a petition for a
writ of mandamus seeking to reverse the district court's order. The Eleventh
Circuit denied plaintiffs' petition in November 1997, and further denied
plaintiffs subsequent motion in the Eleventh Circuit for a rehearing on this
issue. Plaintiffs also appealed the district court's order granting defendants'
motion to compel arbitration, but in June 1998 voluntarily dismissed their
appeal pending settlement of the Koch action, as discussed below.
On June 5, 1997, the Company and the affiliates who are also defendants in the
Koch action were named as defendants in another purported class action filed in
the San Francisco Superior Court, San Francisco, California, Case No. 987062
(the Romei action). The plaintiff is an investor in 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, defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition) under
the Federal Arbitration Act seeking to compel arbitration of plaintiff's claims
and for an order staying the state court proceedings pending the outcome of the
arbitration. In connection with this motion, plaintiff agreed to a stay of the
state court action pending the district court's decision on the petition to
compel arbitration. In October 1997, the district court denied the Company's
petition to compel arbitration, but in November 1997, agreed to hear the
Company's motion for reconsideration of this order. The hearing on this motion
has been taken off calendar and the district court has dismissed the petition
pending settlement of the Romei action, as discussed below. The state court
action continues to be stayed pending such resolution. In connection with her
opposition to the petition to compel arbitration, plaintiff filed an amended
complaint with the state court in August 1997 alleging two new causes of action
for violations of the California Securities Law of 1968 (California Corporations
Code Sections 25400 and 25500) and for violation of California Civil Code
Sections 1709 and 1710. Plaintiff also served certain discovery requests on
defendants. Because of the stay, no response to the amended complaint or to the
discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a memorandum
of understanding (MOU) related to the settlement of those actions (the monetary
settlement). The monetary settlement contemplated by the MOU provides for
stipulating to a class for settlement purposes, and a settlement and release of
all claims against defendants and third party brokers in exchange for payment
for the benefit of the class of up to $6.0 million. The final settlement amount
will depend on the number of claims filed by authorized claimants who are
members of the class, the amount of the administrative costs incurred in
connection with the settlement, and the amount of attorneys' fees awarded by the
Alabama district court. The Company will pay up to $0.3 million of the monetary
settlement, with the remainder being funded by an insurance policy.
The parties to the monetary settlement have also agreed in principal to an
equitable settlement (the equitable settlement) which provides, among other
things, (a) for the extension of the operating lives of the Partnership, PLM
Equipment Growth Fund V, and PLM Equipment Growth Fund VI (the Funds) by
judicial amendment to each of their partnership agreements, such that FSI, the
general partner of each such Fund, will be permitted to reinvest cash flow,
surplus partnership funds or retained proceeds in additional equipment into the
year 2004, and will liquidate the partnerships' equipment in 2006; (b) that FSI
be entitled to earn front end fees (including acquisition and lease negotiation
fees) in excess of the compensatory limitations set forth in the North American
Securities Administrators Association, Inc. Statement of Policy by judicial
amendment to the Partnership Agreements for each Fund; (c) for a one time
redemption of up to 10% of the outstanding units of each Fund at 80% of such
partnership's net asset value; and (d) for the deferral of a portion of FSI's
management fees. The equitable settlement also provides for payment of the
equitable settlement attorneys' fees from Partnership funds in the event that
distributions paid to investors in the Funds during the extension period reach a
certain internal rate of return.
Defendants will continue to deny each of the claims and contentions and admit no
liability in connection with the proposed settlements. The monetary settlement
remains subject to numerous conditions, including but not limited to: (a)
agreement and execution by the parties of a settlement agreement (the settlement
agreement), (b) notice to and certification of the monetary class for purposes
of the monetary settlement, and (c) preliminary and final approval of the
monetary settlement by the Alabama district court. The equitable settlement
remains subject to numerous conditions, including but not limited to: (a)
agreement and execution by the parties of the settlement agreement, (b) notice
to the current unitholders (the equitable class) in the Funds and certification
of the Equitable Class for purposes of the equitable settlement, (c)
preparation, review by the Securities and Exchange Commission (SEC), and
dissemination to the members of the equitable class of solicitation statements
regarding the proposed extensions, (d) disapproval by less than 50% of the
limited partners in each of the Funds of the proposed amendments to the limited
partnership agreements, (e) judicial approval of the proposed amendments to the
limited partnership agreements, and (f) preliminary and final approval of the
equitable settlement by the Alabama district court. The parties submitted the
settlement agreement to the Alabama district court on February 12, 1999, and the
court will consider whether to preliminarily certify a class for settlement
purposes. If the district court grants preliminary approval, notices to the
monetary class and equitable class will be sent following review by the SEC of
the solicitation statements to be prepared in connection with the equitable
settlement. The monetary settlement, if approved, will go forward regardless of
whether the equitable settlement is approved or not. The Company continues to
believe that the allegations of the Koch and Romei actions are completely
without merit and intends to continue to defend this matter vigorously if the
monetary settlement is not consummated.
The Partnership is involved as plaintiff or defendant in various other legal
actions incident to its business. Management does not believe that any of these
actions will be material to the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1998.
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.
Special allocations of income are made to the General Partner equal to the
deficit balance, if any, in the capital account of the General Partner. The
General Partner's annual allocation of income will generally be equal to the
General Partner's cash distributions paid during the current year. The remaining
interests in the profits and losses and cash distributions of the Partnership
are allocated to the limited partners. As of December 31, 1998, there were 5,749
limited partners holding units in the Partnership.
There are several secondary markets in which limited partnership units trade.
Secondary markets are characterized as having few buyers for limited partnership
interests and, therefore, are generally viewed as inefficient vehicles for the
sale of limited partnership units. Presently, there is no public market for the
limited partnership units and none is likely to develop. To prevent the limited
partnership units from being considered publicly traded and thereby to avoid
taxation of the Partnership as an association treated as a corporation under the
Internal Revenue Code, the limited partnership units will not be transferable
without the consent of the General Partner, which may be withheld in its
absolute discretion. The General Partner intends to monitor transfers of limited
partnership units in an effort to ensure that they do not exceed the percentage
or number permitted by certain safe harbors promulgated by the Internal Revenue
Service. A transfer may be prohibited if the intended transferee is not an U.S.
citizen or if the transfer would cause any portion of the units of a "Qualified
Plan" as defined by the Employee Retirement Income Security Act of 1974 and
Individual Retirement Accounts to exceed the allowable limit. The Partnership
may redeem a certain number of units each year under the terms of the
Partnership's limited partnership agreement, beginning October 25, 1997. As of
December 31, 1998, the Partnership had agreed to purchase approximately 60,800
limited partnership units for an aggregate price of $0.8 million. The General
Partner anticipates that these limited partnership units will be repurchased in
the first and second quarters of 1999. As of December 31, 1998, the Partnership
had repurchased a cumulative total of 36,086 limited partnership units at a cost
of $0.5 million. In addition to these limited partnership units, the General
Partner may purchase additional limited partnership units on behalf of the
Partnership in the future.
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the Year Ended December
31, (In thousands of dollars, except
weighted-average unit amounts)
1998 1997 1996 1995 1994
--------------------------------------------------------------------------
Operating results:
Total revenues $ 14,872 $ 14,735 $ 12,703 $ 18,638 $ 9,217
Net gain (loss) on disposition of
equipment (31 ) 1,803 42 182 22
Equity in net income (loss) of uncon-
solidated special-purpose entities 5,884 721 (880 ) -- --
Net income (loss) 5,824 1,101 (2,976 ) (1,192 ) (3,809 )
At year-end:
Total assets $ 72,174 $ 80,469 $ 87,398 $ 98,194 $ 73,635
Total liabilities 25,927 29,407 27,261 24,903 2,400
Notes payable 23,000 23,000 25,000 23,000 --
Cash distribution $ 10,127 $ 10,176 $ 10,178 $ 9,627 $ 5,370
Cash distribution representing
a return of capital to the limited
partners $ 4,303 $ 9,075 $ 9,669 $ 9,157 $ 5,133
Per weighted-average limited partnership unit:
Net income (loss) $ 0.99 $ 0.11 $ (0.65 ) Various according to
interim closings
Cash distribution $ 1.80 $ 1.80 $ 1.80 Various according to
interim closings
Cash distribution representing Various according to
a return of capital $ 0.81 $ 1.69 $ 1.80 interim closings
(This space intentionally left blank)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth & Income
Fund VII (the Partnership). The following discussion and analysis of operations
focuses on the performance of the Partnership's equipment in various segments in
which it operates and its effect on the Partnership's overall financial
condition.
(B) Results of Operations - Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Partnership's equipment portfolio to repricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and the
equipment must be remarketed. Major factors influencing the current market rate
for Partnership equipment include supply and demand for similar or comparable
types of transport capacity, desirability of the equipment in the leasing
market, market conditions for the particular industry segment in which the
equipment is to be leased, overall economic conditions, various regulations
concerning the use of the equipment and others. Equipment that is idle or out of
service between the expiration of one lease and the assumption of a subsequent
lease can result in a reduction of contribution to the Partnership. The
Partnership experienced re-leasing or repricing activity in 1998 primarily in
its air, trailer, and marine vessel portfolios.
(a) Aircraft: The Partnership owns two DeHavilland aircraft that were off lease
throughout 1998. As of December 31, 1998 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 than in previous years.
(c) Marine vessels: Certain of the Partnership's marine vessels operated in the
voyage charter market. Voyage charters are usually short in duration and reflect
short-term demand and pricing trends in the marine vessel market. As a result of
this, the Partnership experienced higher re-lease rates than had been projected,
however, higher operating costs and repair and maintenance offset these higher
revenues. Certain of the Partnership's marine vessels will be remarketed during
1999 exposing them to repricing and releasing risk.
(2) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment and investments in unconsolidated
special-purpose entities (USPEs), unless accompanied by an immediate replacement
of additional equipment earning similar rates (see Reinvestment Risk, below),
represents a reduction in the size of the equipment portfolio and may result in
a reduction of contribution to the Partnership. Lessees not performing under the
terms of their leases, either by not paying rent, not maintaining or operating
the equipment in accordance with the conditions of the leases, or other possible
departures from the lease terms, can result not only in reductions in
contribution, but also may require the Partnership to assume additional costs to
protect its interests under the leases, such as repossession or legal fees. The
Partnership experienced the following in 1998:
(a) Liquidations: During the year, the Partnership disposed of owned equipment
that included trailers, railcars, and modular buildings and of an interest in
two USPEs that owned an interest in eight commercial aircraft for total proceeds
of $15.1 million.
(b) Non-performing Lessees: Two Brazilian lessees are having financial
difficulties. Both lessees have contacted the General Partner and have asked to
work out a repayment schedule for the lease payment arrearage. The General
Partner is currently in negotiation with the lessees to work out a suitable
settlement for all parties to collect the lease payments that are overdue.
(3) Reinvestment Risk
Reinvestment risk occurs when; the Partnership cannot generate sufficient
surplus cash after fulfillment of operating obligations and distributions to
reinvest in additional equipment during the reinvestment phase of Partnership,
equipment is sold or liquidated for less than threshold amounts, proceeds from
dispositions, or surplus cash available for reinvestment cannot be reinvested at
the threshold lease rates, or proceeds from sales or surplus cash available for
reinvestment cannot be deployed in a timely manner.
During the first seven years of its operations, the Partnership intends to
increase its equipment portfolio by investing surplus cash in additional
equipment, after fulfilling operating requirements and paying distributions to
the partners. Subsequent to the end of the reinvestment period, the Partnership
will continue to operate for an additional three years, then begin an orderly
liquidation over an anticipated two-year period.
Other nonoperating funds for reinvestment are generated from the sale of
equipment prior to the Partnership's planned liquidation phase, the receipt of
funds realized from the payment of stipulated loss values on equipment lost or
disposed of while it was subject to lease agreements, or from the exercise of
purchase options in certain lease agreements. Equipment sales generally result
from evaluations by the General Partner that continued ownership of certain
equipment is either inadequate to meet Partnership performance goals, or that
market conditions, market values, and other considerations indicate it is the
appropriate time to sell certain equipment.
During 1998, the Partnership purchased a portfolio of portable heaters at a cost
of $3.9 million and paid acquisition and lease negotiation fees of $0.2 million
to FSI for the purchase of this equipment. The Partnership also reclassified the
two commuter aircraft that were held for sale as of December 31, 1997 to owned
equipment held for operating lease.
The Partnership completed its commitment to purchase an interest in a trust
owning an MD-82 Stage III commercial aircraft for $7.2 million, including
acquisition and lease negotiation fees of $0.4 million that were paid to FSI for
the purchase of this equipment. The Partnership made a deposit of $0.7 million
toward this purchase in 1997. The Partnership also purchased an interest in
another trust owning an MD-82 Stage III commercial aircraft for $8.2 million,
including acquisition and lease negotiation fees of $0.4 million that were paid
to FSI for the purchase of this equipment. The remaining interest in these
trusts were purchased by affiliated programs.
In addition, during 1998, the Partnership purchased an interest in an entity
owning a portfolio of marine containers for $7.5 million, including acquisition
and lease negotiation fees of $0.4 million that were paid to FSI. The remaining
interest in this entity was purchased by an affiliated program.
(4) Equipment Valuation
In accordance with Financial Accounting Standards Board's Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the General Partner reviews the carrying value of the
Partnership's equipment portfolio at least quarterly in relation to expected
future market conditions for the purpose of assessing the recoverability of the
recorded amounts. If the projected undiscounted future lease revenue plus
residual values are less than the carrying value of the equipment, a loss on
revaluation is recorded. No reductions were required to the carrying value of
the equipment during 1998, 1997, or 1996.
As of December 31, 1998, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including the Partnership's
interest in equipment owned by USPEs, to be $92.9 million. This estimate is
based on recent market transactions for equipment similar to the Partnership's
equipment portfolio and the Partnership's interest in equipment owned by USPEs.
Ultimate realization of fair market value by the Partnership may differ
substantially from the estimate due to specific market conditions, technological
obsolescence, and government regulations, among other factors, that the General
Partner cannot accurately predict.
(C) Financial Condition - Capital Resources, Liquidity, and Unit Redemption Plan
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering of $107.4 million and permanent
debt financing of $23.0 million. No further capital contributions from the
limited partners are permitted under the terms of the Partnership's limited
partnership agreement. The total outstanding debt, currently $23.0 million, can
only be increased with borrowings from the short-term Committed Bridge Facility
subject to specific covenants in existing debt agreements unless the
Partnership's senior lender will issue a waiver. The agreement requires the
Partnership to maintain certain financial covenants related to fixed-charge
coverage and maximum debt.
The Partnership relies on operating cash flow to meet its operating obligations,
make cash distributions to limited partners, and increase the Partnership's
equipment portfolio with any remaining available surplus cash.
For the year ended December 31, 1998, the Partnership generated $16.6 million in
operating cash (net cash provided by operating activities plus non-liquidating
cash distributions from USPEs) to meet its operating obligations and pay
distributions of $10.1 million to the partners.
Pursuant to the terms of the limited partnership agreement, beginning in 1997,
the Partnership is obligated, at the sole discretion of the General Partner, to
redeem up to 2% of the outstanding limited partnership units each year. The
purchase price to be offered for such outstanding units will be equal to 105% of
the unrecovered principal attributed to the units. Unrecovered principal is
defined as the excess of the capital contributions from any source paid with
respect to a unit. As of December 31, 1998, the Partnership agreed to purchase
approximately 60,800 limited partnership units for an aggregate price of $0.8
million. The General Partner anticipates that these limited partnership units
will be repurchased in the first and second quarters of 1999. In addition to
these units, the General Partner may purchase additional limited partnership
units on behalf of the Partnership in the future.
The General Partner has entered into a joint $24.5 million credit facility (the
Committed Bridge Facility) on behalf of the Partnership, PLM Equipment Growth
Fund VI (EGF VI) and Professional Lease Management Income Fund I (Fund I), both
affiliated investment programs; and TEC Acquisub, Inc. (TECAI), an indirect
wholly-owned subsidiary of the General Partner. The Committed Bridge Facility
may be used to provide interim financing of up to (i) 70% of the aggregate book
value or 50% of the aggregate net fair market value of eligible equipment owned
by the Partnership, plus (ii) 50% of unrestricted cash held by the borrower. The
Partnership, EGF VI, Fund I, and TECAI collectively may borrow up to $24.5
million of the Committed Bridge Facility. Outstanding borrowings by one borrower
reduce the amount available to each of the other borrowers under the Committed
Bridge Facility. The Committed Bridge Facility also provides for a $5.0 million
Letter of Credit Facility for the eligible borrowers. Individual borrowings may
be outstanding for no more than 179 days, with all advances due no later than
December 14, 1999. 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, 1998, no eligible borrower had any outstanding borrowings. As of
March 25, 1999, EGF VI had outstanding borrowings of $3.7 million and TECAI had
outstanding borrowings of $8.3 million; no other eligible borrower had any
outstanding borrowings. The General Partner believes it will be able to renew
the Committed Bridge Facility upon its expiration with terms similar to 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.
(This space intentionally left blank)
(D) Results of Operations - Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1998 and 1997
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
decreased during the year ended December 31, 1998, when compared to the same
period of 1997. Gains or losses from the sale of equipment and certain expenses,
such as depreciation and amortization and general and administrative expenses
relating to the operating segments (see Note 5 to the audited financial
statements), are not included in the owned equipment operation discussion
because they are indirect in nature and not a result of operations, but the
result of owning a portfolio of equipment. The following table presents lease
revenues less direct expenses by segment (in thousands of dollars):
For the Years
Ended December 31,
1998 1997
----------------------------
Trailers $ 3,819 $ 3,275
Marine vessels 2,501 3,314
Rail equipment 2,000 1,994
Aircraft 1,712 2,001
Portable heaters 764 --
Modular buildings 47 426
Trailers: Trailer lease revenues and direct expenses were $4.7 million and $0.9
million, respectively, for the year ended December 31, 1998, compared to $3.8
million and $0.6 million, respectively, during the same period of 1997. The
increase in trailer contribution was due to the purchase of additional equipment
during the fourth quarter of 1997.
Marine vessels: Marine vessel lease revenues and direct expenses were $4.3
million and $1.8 million, respectively, for the year ended December 31, 1998,
compared to $3.5 million and $0.2 million, respectively, during the same period
of 1997. Lease revenues and direct expenses increased during the year ended
December 31, 1998, when compared to the same period of 1997, due to a change in
the lease arrangement of the marine vessels. During 1997, the marine vessels
operated under a bareboat charter lease in which the lessee paid a flat lease
rate, as well as certain operating expenses. During the third quarter of 1998,
the marine vessels switched from a bareboat charter to a lease arrangement in
which the lessee pays a higher lease rate. The Partnership, however, now pays
the operating expenses. The decrease in marine vessel contribution was due to
the increase in operating expenses, which exceeded the increase in the lease
rate.
Rail equipment: Rail equipment lease revenues and direct expenses were $2.7
million and $0.7 million, respectively, for the year ended December 31, 1998,
compared to $2.8 million and $0.8 million, respectively, during the same period
of 1997. Rail equipment contribution was approximately the same as in 1997 due
to the stability of the railcar fleet.
Aircraft: Aircraft lease revenues and direct expenses were $2.0 million and $0.3
million, respectively, for the year ended December 31, 1998, compared to $2.0
million and $20,000, respectively, during the same period of 1997. The decrease
in aircraft contribution was due to required repairs to the two commuter
aircraft that were off-lease during 1998. Similar repairs were not needed during
1997.
Portable heaters: Portable heater lease revenues and direct expenses were $0.8
million and $0, respectively, for the year ended December 31, 1998. The
Partnership purchased this equipment during the first quarter of 1998.
Modular buildings: Modular building lease revenues and direct expenses were
$47,000 and $0, respectively, for the year ended December 31, 1998, compared to
$0.4 million and $12,000, respectively, during the same period of 1997. The
decrease in lease revenues and direct expenses was due to the sale of virtually
all of this equipment during the second quarter of 1997.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses were $11.2 million for the year ended December 31, 1998,
decreased from $12.7 million for the same period in 1997. Significant variances
are explained as follows:
(i) A $1.5 million decrease in depreciation and amortization expenses from
1997 levels reflects the double-declining balance method of depreciation which
results in greater depreciation in the first years an asset is owned. This
decrease was partially offset by the purchase of portable heaters during 1998.
(ii)A $0.3 million decrease in the provision for bad debts was due, in
part, to the collection of $0.1 million from past due receivables during the
year ended December 31, 1998 that had previously been reserved for as a bad debt
and the General Partner's evaluation of the collectability of receivables due
from certain lessees.
(iii) A $0.2 million increase in administrative expenses was due to higher
professional services during 1998, which were not needed during 1997, and higher
data processing costs.
(iv)A $0.1 million increase in management fees was due to higher lease
revenues earned by the Partnership during 1998, when compared to the same period
in 1997.
(c) Net Gain (Loss) on Disposition of Owned Equipment
The net loss on disposition of equipment for the year ended December 31, 1998
totaled $31,000, and resulted from the sale of trailers, modular buildings, and
a railcar, with an aggregate net book value of $0.4 million, for proceeds of
$0.3 million. The net gain on disposition of equipment for the year ended
December 31, 1997 totaled $1.8 million, and resulted from the sale of trailers
and modular buildings, with an aggregate net book value of $2.6 million, for
proceeds of $4.4 million.
(d) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
(USPEs)
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Years
Ended December 31,
1998 1997
-----------------------------
Aircraft, rotable components, and aircraft engines $ 6,390 $ 1,721
Mobile offshore drilling unit 82 1
Marine containers (61 ) --
Marine vessels (527 ) (1,001 )
=================================================================================== ============
Equity in net income of USPEs $ 5,884 $ 721
=================================================================================== ============
Aircraft, rotable components, and aircraft engines: During the year ended
December 31, 1998, lease revenues of $5.8 million and the gain from the sale of
the Partnership's interest in two trusts of $8.8 million were offset by
depreciation expense, direct expenses, and administrative expenses of $8.2
million. During the same period of 1997, lease revenues of $8.2 million were
offset by depreciation expense, direct expenses, and administrative expenses of
$6.5 million. Lease revenues decreased $2.4 million due to the sale of the
Partnership's investment in two trusts containing ten commercial aircraft and a
lower lease rate earned on certain equipment during 1998 when compared to the
same period of 1997. The decrease in lease revenues caused by these sales was
partially offset by the Partnership's investment in two additional trusts during
1998, each owning an MD-82 commercial aircraft. The increase in expenses of $1.7
million was due primarily to the double-declining balance method of depreciation
on the two additional trusts purchased during 1998, which results in greater
depreciation in the first years an asset is owned. This increase was partially
offset by the sale of the Partnership's interest in two other trusts.
Mobile offshore drilling unit: During the year ended December 31, 1998, revenues
of $0.4 million were offset by depreciation expense, direct expenses, and
administrative expenses of $0.3 million. During the same period of 1997, lease
revenues of $0.4 million were offset by depreciation expense, direct expenses,
and administrative expenses of $0.4 million. The increase in the contribution
from this equipment was due to a lower depreciation expense caused by the
double-declining balance method of depreciation, which results in greater
depreciation in the first years an asset is owned.
Marine containers: As of December 31, 1998, the Partnership owned an interest in
an entity that owns marine containers. During 1998, revenues of $0.4 million
were offset by depreciation expense, direct expenses, and administrative
expenses of $0.5 million. The Partnership purchased this interest during
September 1998.
Marine vessels: During the year ended December 31, 1998, lease revenues of $3.4
million were offset by depreciation expense, direct expenses, and administrative
expenses of $3.9 million. During the same period of 1997, lease revenues of $3.6
million were offset by depreciation expense, direct expenses, and administrative
expenses of $4.6 million. Marine vessel lease revenues decreased during the year
ended December 31 1998 due to a slightly lower lease rate earned on one of the
marine vessels. The decrease in depreciation expense, was due primarily to the
double-declining balance method of depreciation which results in greater
depreciation in the first years an asset is owned.
(e) Net Income
As a result of the foregoing, the Partnership's net income for the year ended
December 31, 1998 was $5.8 million, compared to a net income of $1.1 million
during the same period of 1997. The Partnership's ability to acquire, operate,
and liquidate assets, secure leases, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance in the year
ended December 31, 1998 is not necessarily indicative of future periods. In the
year ended December 31, 1998, the Partnership distributed $9.6 million to the
limited partners, or $1.80 per weighted-average limited partnership unit.
(2) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1997 and 1996
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
increased during the year ended December 31, 1997, when compared to the same
period of 1996. Gains or losses from the sale of equipment and certain expenses,
such as depreciation and amortization and general and administrative expenses
relating to the operating segments (see Note 5 to the audited financial
statements), are not included in the owned equipment operation discussion
because they are indirect in nature and not a result of operations, but the
result of owning a portfolio of equipment. The following table presents lease
revenues less direct expenses by segment (in thousands of dollars):
For the Years
Ended December 31,
1997 1996
----------------------------
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, which was
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. This decrease 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 USPEs
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Years
Ended December 31,
1997 1996
----------------------------
Aircraft, rotable components, and aircraft engines $ 1,721 $ (486 )
Mobile offshore drilling unit 1 (10 )
Marine vessels (1,001 ) (384 )
=================================================================================== ==========
Equity in net income (loss) of USPEs $ 721 $ (880 )
=================================================================================== ==========
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 expense, direct expenses, and administrative
expenses of $6.5 million. During the same period of 1996, lease revenues of $7.9
million were offset by depreciation expense, direct expenses, 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
a partial year 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 expense, direct expenses, and administrative
expenses of $0.4 million. During the same period of 1996, lease revenues of
$21,000 were offset by depreciation expense, direct expenses, 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 expense,
direct expenses, and administrative expenses of $4.6 million. During the same
period of 1996, revenues of $4.0 million were offset by depreciation expense,
direct expenses, 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, as well as
an increase in administrative costs 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.
(E) Geographic Information
Certain of the Partnership's equipment operates in international markets.
Although these operations expose the Partnership to certain currency, political,
credit, and economic risks, the General Partner believes these risks are minimal
or has implemented strategies to control the risks. Currency risks are at a
minimum because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
by avoiding operations in countries that do not have a stable judicial system
and established commercial business laws. Credit support strategies for lessees
range from letters of credit supported by U.S. banks to cash deposits. Although
these credit support mechanisms generally allow the Partnership to maintain its
lease yield, there are risks associated with slow-to-respond judicial systems
when legal remedies are required to secure payment or repossess equipment.
Economic risks are inherent in all international markets and the General Partner
strives to minimize this risk with market analysis prior to committing equipment
to a particular geographic area. Refer to Note 6 to the audited financial
statements for information on the lease revenues, net income (loss), and net
book value of equipment in various geographic regions.
Revenues and net operating income by geographic region are impacted by the time
period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years of
ownership due to the use of the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to change significantly in the future, as assets come
off lease and decisions are made either to redeploy the assets in the most
advantageous geographic location or sell the assets.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to U.S.-domiciled lessees consists of aircraft, modular buildings,
portable heaters, trailers, and railcars. During 1998, U.S. lease revenues
accounted for 35% of the total lease revenues of wholly- and partially-owned
equipment and accounted for a loss of $2.8 million of the total aggregate net
income of $5.8 million for the Partnership. The loss was due primarily to the
double-declining balance method of depreciation on the two additional aircraft
purchased during 1998, which results in greater depreciation in the first years
an asset is owned.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to Canadian-domiciled lessees consisted of various aircraft and railcars.
During 1998, Canadian lease revenues accounted for 11% of the total lease
revenues of wholly- and partially-owned equipment and accounted for $9.6 million
of the total aggregate net income of $5.8 million for the Partnership. The
primary reason for this is that the Partnership sold all the aircraft located in
Canada during 1998 and realized a gain from the sale of these assets of $8.8
million.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to South American-domiciled lessees consisted of aircraft. During 1998,
South American lease revenues accounted for 13% of the total lease revenues of
wholly and partially owned equipment and generated a net income of $0.9 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 6% of lease revenues of wholly and
partially owned equipment. This operation generated net income of $0.1 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, marine
containers, and a rig. During 1998, lease revenues for these operations
accounted for 35% of the total lease revenues of wholly and partially owned
equipment and generated a net loss of $0.3 million. The loss was due primarily
to the double-declining balance method of depreciation on the portfolio of
marine containers purchased during 1998, which results in greater depreciation
in the first years an asset is owned.
(F) Effects of Year 2000
It is possible that the General Partner's currently installed computer systems,
software products, and other business systems, or the Partnership's vendors,
service providers, and customers, working either alone or in conjunction with
other software or systems, may not accept input of, store, manipulate, and
output dates on or after January 1, 2000 without error or interruption (a
problem commonly known as the "Year 2000" or "Y2K" problem). Since the
Partnership relies substantially on the General Partner's software systems,
applications, and control devices in operating and monitoring significant
aspects of its business, any Year 2000 problem suffered by the General Partner
could have a material adverse effect on the Partnership's business, financial
condition, and results of operations.
The General Partner has established a special Year 2000 oversight committee to
review the impact of Year 2000 issues on its software products and other
business systems in order to determine whether such systems will retain
functionality after December 31, 1999. The General Partner (a) is currently
integrating Year 2000-compliant programming code into its existing internally
customized and internally developed transaction processing software systems and
(b) the General Partner's accounting and asset management software systems have
either already been made Year 2000-compliant or Year 2000-compliant upgrades of
such systems are planned to be implemented by the General Partner before the end
of fiscal 1999. Although the General Partner believes that its Year 2000
compliance program can be completed by the end of 1999, there can be no
assurance that the compliance program will be completed by that date. To date,
the costs incurred and allocated to the Partnership to become Year 2000
compliant have not been material. Also, the General Partner believes the future
cost allocable to the Partnership to become Year 2000 compliant will not be
material.
It is possible that certain of the Partnership's equipment lease portfolio may
not be Year 2000 compliant. The General Partner is currently contacting
equipment manufacturers of the Partnership's leased equipment portfolio to
assure Year 2000 compliance or to develop remediation strategies. The General
Partner does not expect that non-Year 2000 compliance of its leased equipment
portfolio will have an adverse material impact on its financial statements.
Some risks associated with the Year 2000 problem are beyond the ability of the
Partnership or the General Partner to control, including the extent to which
third parties can address the Year 2000 problem. The General Partner is
communicating with vendors, services providers, and customers in order to assess
the Year 2000 compliance readiness of such parties and the extent to which the
Partnership is vulnerable to any third-party Year 2000 issues. There can be no
assurance that the software systems of such parties will be converted or made
Year 2000 compliant in a timely manner. Any failure by the General Partner or
such other parties to make their respective systems Year 2000 compliant could
have a material adverse effect on the business, financial position, and results
of operations from the Partnership. The General Partner will make an ongoing
effort to recognize and evaluate potential exposure relating to third-party Year
2000 noncompliance, and will develop a contingency plan if the General Partner
determines that third-party noncompliance will have a material adverse effect on
the Partnership's business, financial position, or results of operation.
The General Partner is currently developing a contingency plan to address the
possible failure of any systems due to the Year 2000 problems. The General
Partner anticipates these plans will be completed by September 30, 1999.
(G) Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of December 31, 1998,
the General Partner is reviewing the effect this standard will have on the
Partnership's consolidated financial statements.
(H) Inflation
Inflation had no significant impact on the Partnership's operations during 1998,
1997, or 1996.
(I) Forward-Looking Information
Except for historical information contained herein, the discussion in this Form
10-K contains forward-looking statements that involve risks and uncertainties,
such as statements of the Partnership's plans, objectives, expectations, and
intentions. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.
(J) Outlook for the Future
Several factors may affect the Partnership's operating performance in 1999 and
beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
The Partnership's operation of a diversified equipment portfolio in a broad base
of markets is intended to reduce its exposure to volatility in individual
equipment sectors.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent on many factors, such
as specific market conditions and economic activity, technological obsolescence,
and government or other regulations. The unpredictability of these factors makes
it difficult for the General Partner to clearly define trends or influences that
may impact the performance of the Partnership's equipment. The General Partner
continually monitors both the equipment markets and the performance of the
Partnership's equipment in these markets. The General Partner may make an
evaluation to reduce the Partnership's exposure to those equipment markets in
which it determines that it cannot operate equipment and achieve acceptable
rates of return. Alternatively, the General Partner may make a determination to
enter those equipment markets in which it perceives opportunities to profit from
supply/demand instabilities or other market imperfections.
The Partnership intends to use excess cash flow, if any, after payment of
operating expenses, pay principal and interest on debt, and cash distributions
to the partners to acquire additional equipment during the first 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 1999 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. Under U.S. Federal Aviation Regulations, after
December 31, 1999, no person shall operate an aircraft to or from any airport in
the contiguous United States unless that airplane has been shown to comply with
Stage III noise levels. The Partnership's Stage II aircraft are scheduled to be
either modified to meet Stage III requirements, sold, or re-leased in countries
that do not require this regulation before the year 2000. The U.S. Department of
Transportation's Hazardous Materials Regulations, which regulate the
classification and packaging requirements of hazardous materials and which apply
particularly to the Partnership's tank railcars, issued a statement which
requires the owner to inspect a certain percentage of the tank railcars for a
protective coating to the outside of the tank and the inside of the metal tank
jacket whenever a tank is insulated. The Partnership owns tank railcars that
need to be inspected and, if needed, repaired before it can go back into service
by August 2000.
(3) Additional Capital Resources and Distribution Levels
The Partnership's initial contributed capital was composed of the proceeds from
its initial offering of $107.6 million, supplemented by permanent debt in the
amount of $23.0 million. The General Partner has not planned any expenditures,
nor is it aware of any contingencies that would cause it to require any
additional capital to that mentioned above. The Partnership intends to rely on
operating cash flow to meet its operating obligations, make cash distributions
to limited partners, make debt payments, and increase the Partnership's
equipment portfolio with any remaining surplus cash available.
Pursuant to the limited partnership agreement, the Partnership will cease to
reinvest surplus cash in additional equipment beginning in its seventh year of
operations, which commences on January 1, 2002. Prior to that date, the General
Partner intends to continue its strategy of selectively redeploying equipment to
achieve competitive returns. By the end of the reinvestment period, the General
Partner intends to have assembled an equipment portfolio capable of achieving a
level of operating cash flow for the remaining life of the Partnership
sufficient to meet its obligations and sustain a predictable level of
distributions to the partners.
The General Partner will evaluate the level of distributions the Partnership can
sustain over extended periods of time and, together with other considerations,
may adjust the level of distributions accordingly. In the long term, the
difficulty in predicting market conditions precludes the General Partner from
accurately determining the impact of changing market conditions on liquidity or
distribution levels.
The Partnership's permanent debt obligation begins to mature in December 1999.
The General Partner believes that sufficient cash flow will be available in the
future for repayment of debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of currency devaluation
risk. During 1998, 65% of the Partnership's total lease revenues from wholly-
and partially-owned equipment came from non-United States domiciled lessees.
Most of the Partnership's leases require payment in United States (U.S.)
currency. If these lessees currency devalues against the U.S. dollar, the
lessees could potentially encounter difficulty in making the U.S. dollar
denominated lease payments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements included in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(This space intentionally left blank)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM INTERNATIONAL AND OF PLM
FINANCIAL SERVICES, INC.
As of the date of this annual report, the directors and executive officers of
PLM International and of PLM Financial Services, Inc. (and key executive
officers of its subsidiaries) are as follows:
Name Age Position
- ---------------------------------------- ------- ------------------------------------------------------------------
Robert N. Tidball 60 Chairman of the Board, Director, President, and
Chief Executive Officer, PLM International, Inc.;
Director, PLM Financial Services, Inc.;
Vice President, PLM Railcar Management Services, Inc.;
President, PLM Worldwide Management Services Ltd.
Randall L.-W. Caudill 51 Director, PLM International, Inc.
Douglas P. Goodrich 52 Director and Senior Vice President, PLM International, Inc.;
Director and President, PLM Financial Services, Inc.; President,
PLM Transportation Equipment Corporation; President, PLM Railcar
Management Services, Inc.
Warren G. Lichtenstein 33 Director, PLM International, Inc.
Howard M. Lorber 50 Director, PLM International, Inc.
Harold R. Somerset 63 Director, PLM International, Inc.
Robert L. Witt 58 Director, PLM International, Inc.
J. Michael Allgood 50 Vice President and Chief Financial Officer, PLM International,
Inc. and PLM Financial Services, Inc.
Robin L. Austin 52 Vice President, Human Resources, PLM International, Inc. and PLM
Financial Services, Inc.
Stephen M. Bess 52 President, PLM Investment Management, Inc.; Vice President and
Director, PLM Financial Services, Inc.
Richard K Brock 36 Vice President and Corporate Controller, PLM International, Inc.
and PLM Financial Services, Inc.
James C. Chandler 50 Vice President, Planning and Development, PLM International,
Inc. and PLM Financial Services, Inc.
Susan C. Santo 36 Vice President, Secretary, and General Counsel, PLM
International, Inc. and PLM Financial Services, Inc.
Janet M. Turner 42 Vice President, Investor Relations and Corporate Communications,
PLM International, Inc. and PLM Investment Management, Inc.
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment as President and Chief Executive Officer, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989. Mr. Tidball was appointed a Director of PLM
Financial Services, Inc. in July 1997 and was elected President of PLM Worldwide
Management Services Limited in February 1998. He has served as an officer of PLM
Railcar Management Services, Inc. since June 1987. Mr. Tidball was Executive
Vice President of Hunter Keith, Inc., a Minneapolis-based investment banking
firm, from March 1984 to January 1986. Prior to Hunter Keith, he was Vice
President, General Manager, and Director of North American Car Corporation and a
director of the American Railcar Institute and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997.
He is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm serving emerging growth companies. Prior to founding
Dunsford Hill Capital Partners, Mr. Caudill held senior investment banking
positions at Prudential Securities, Morgan Grenfell Inc., and The First Boston
Corporation. Mr. Caudill also serves as a director of Northwest Biotherapeutics,
Inc., VaxGen, Inc., SBE, Inc., and RamGen, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Senior Vice President of PLM International in March 1994, and
appointed Director and President of PLM Financial Services, Inc. in June 1996.
Mr. Goodrich has also served as Senior Vice President of PLM Transportation
Equipment Corporation since July 1989 and as President of PLM Railcar Management
Services, Inc. since September 1992, having been a Senior Vice President since
June 1987. Mr. Goodrich was an executive vice president of G.I.C. Financial
Services Corporation of Chicago, Illinois, a subsidiary of Guardian Industries
Corporation, from December 1980 to September 1985.
Warren G. Lichtenstein was elected to the Board of Directors in December 1998.
Mr. Lichtenstein is the Chief Executive Officer of Steel Partners II, L.P.,
which is PLM International's largest shareholder, currently owning 16% of the
Company's common stock. Additionally, Mr. Lichtenstein is Chairman of the Board
of Aydin Corporation, a NYSE-listed defense electronics concern, as well as a
director of Gateway Industries, Rose's Holdings, Inc., and Saratoga Beverage
Group, Inc. Mr. Lichtenstein is a graduate of the University of Pennsylvania,
where he received a Bachelor of Arts degree in economics.
Howard M. Lorber was elected to the Board of Directors in January 1999. Mr.
Lorber is President and Chief Operating Officer of New Valley Corporation, an
investment banking and real estate concern. He is also Chairman of the Board and
Chief Executive Officer of Nathan's Famous, Inc., a fast food company.
Additionally, Mr. Lorber is a director of United Capital Corporation and Prime
Hospitality Corporation and serves on the boards of several community service
organizations. He is a graduate of Long Island University, where he received a
Bachelor of Arts degree and a Masters degree in taxation. Mr. Lorber also
received charter life underwriter and chartered financial consultant degrees
from the American College in Bryn Mawr, Pennsylvania. He is a trustee of Long
Island University and a member of the Corporation of Babson College.
Harold R. Somerset was elected to the Board of Directors of PLM International in
July 1994. From February 1988 to December 1993, Mr. Somerset was President and
Chief Executive Officer of California & Hawaiian Sugar Corporation (C&H Sugar),
a subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined C&H Sugar in 1984
as Executive Vice President and Chief Operating Officer, having served on its
Board of Directors since 1978. Between 1972 and 1984, Mr. Somerset served in
various capacities with Alexander & Baldwin, Inc., a publicly held land and
agriculture company headquartered in Honolulu, Hawaii, including Executive Vice
President of Agriculture and Vice President and General Counsel. Mr. Somerset
holds a law degree from Harvard Law School as well as a degree in civil
engineering from the Rensselaer Polytechnic Institute and a degree in marine
engineering from the U.S. Naval Academy. Mr. Somerset also serves on the boards
of directors for various other companies and organizations, including Longs Drug
Stores, Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993,
Mr. Witt has been a principal with WWS Associates, a consulting and investment
group specializing in start-up situations and private organizations about to go
public. Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel Corporation, an international advanced materials company with sales
primarily in the aerospace, transportation, and general industrial markets. Mr.
Witt also serves on the boards of directors for various other companies and
organizations.
J. Michael Allgood was appointed Vice President and Chief Financial Officer of
PLM International in October 1992 and Vice President and Chief Financial Officer
of PLM Financial Services, Inc. in December 1992. Between July 1991 and October
1992, Mr. Allgood was a consultant to various private and public-sector
companies and institutions specializing in financial operations systems
development. In October 1987, Mr. Allgood co-founded Electra Aviation Limited
and its holding company, Aviation Holdings Plc of London, where he served as
Chief Financial Officer until July 1991. Between June 1981 and October 1987, Mr.
Allgood served as a first vice president with American Express Bank Ltd. In
February 1978, Mr. Allgood founded and until June 1981 served as a director of
Trade Projects International/Philadelphia Overseas Finance Company, a joint
venture with Philadelphia National Bank. From March 1975 to February 1978, Mr.
Allgood served in various capacities with Citibank, N.A.
Robin L. Austin became Vice President, Human Resources of PLM Financial
Services, Inc. in 1984, having served in various capacities with PLM Investment
Management, Inc., including Director of Operations, from February 1980 to March
1984. From June 1970 to September 1978, Ms. Austin served on active duty in the
United States Marine Corps and served in the United States Marine Corp Reserves
from 1978 to 1998. She retired as a Colonel of the United States Marine Corps
Reserves in 1998. Ms. Austin has served on the Board of Directors of the
Marines' Memorial Club and is currently on the Board of Directors of the
International Diplomacy Council.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Investment Management, Inc. in
August 1989, having served as Senior Vice President of PLM Investment
Management, Inc. beginning in February 1984 and as Corporate Controller of PLM
Financial Services, Inc. beginning in October 1983. Mr. Bess served as Corporate
Controller of PLM, Inc. beginning in December 1982. Mr. Bess was Vice
President-Controller of Trans Ocean Leasing Corporation, a container leasing
company, from November 1978 to November 1982, and Group Finance Manager with the
Field Operations Group of Memorex Corporation, a manufacturer of computer
peripheral equipment, from October 1975 to November 1978.
Richard K Brock was appointed Vice President and Corporate Controller of PLM
International and PLM Financial Services, Inc. in June 1997, having served as an
accounting manager beginning in September 1991 and as Director of Planning and
General Accounting beginning in February 1994. Mr. Brock was a division
controller of Learning Tree International, a technical education company, from
February 1988 through July 1991.
James C. Chandler became Vice President, Planning and Development of PLM
International in April 1996. From 1994 to 1996 Mr. Chandler worked as a
consultant to public companies, including PLM, in the formulation of business
growth strategies. Mr. Chandler was Director of Business Development at Itel
Corporation from 1987 to 1994, serving with both the Itel Transportation Group
and Itel Rail.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM
International and PLM Financial Services, Inc. in November 1997. She has worked
as an attorney for PLM International since 1990 and served as its Senior
Attorney since 1994. Previously, Ms. Santo was engaged in the private practice
of law in San Francisco. Ms. Santo received her J.D. from the University of
California, Hastings College of the Law.
Janet M. Turner became Vice President of Investor Services of PLM International
in 1994, having previously served as Vice President of PLM Investment
Management, Inc. since 1990. Before 1990, Ms. Turner held the positions of
manager of systems development and manager of investor relations at the Company.
Prior to joining PLM in 1984, she was a financial analyst with The
Toronto-Dominion Bank in Toronto, Canada.
The directors of PLM International, Inc. are elected for a three-year term and
the directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM International Inc. or PLM
Financial Services, Inc., PLM Transportation Equipment Corp., or PLM Investment
Management, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership had no
pension, profit sharing, retirement, or similar benefit plan in effect as of
December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 5% interest in the
profits and losses (subject to certain special allocations of income),
cash available for distributions, and net disposition proceeds of the
Partnership. As of December 31, 1998, no investor was known by the
General Partner to beneficially own more than 5% of the limited
partnership units of the Partnership.
(B) Security Ownership of Management
Neither the General Partner and its affiliates nor any executive
officer or director of the General Partner and its affiliates owned any
limited partnership units of the Partnership as of December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
During 1998, the Partnership paid or accrued the following fees to FSI
or its affiliates: management fees, $0.8 million; equipment acquisition
fees, $0.2 million; and lease negotiation fees, $39,000. The
Partnership reimbursed FSI or its affiliates $0.7 million for
administrative and data processing services performed on behalf of the
Partnership during 1998.
During 1998, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Partnership's proportional share of
ownership): management fees, $0.5 million, equipment acquisition fees,
$1.0 million; lease negotiation fees, $0.2 million, and administrative
and data processing services, $0.1 million. The USPEs also paid
Transportation Equipment Indemnity Company Ltd. (TEI), a wholly-owned,
Bermuda-based subsidiary of PLM International, $35,000 for insurance
coverages during 1998; 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. The Partnership's
proportional share of a refund of $36,000 was received from TEI during
1998 due to lower loss-of-hire and hull and machinery damage claims
from a previous year.
(This space intentionally left blank)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on
Form 10-K.
(B) Reports on Form 8-K
None.
(C) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated by
reference to the Partnership's Registration Statement on Form S-1
(Reg. No. 33-55796), which became effective with the Securities and
Exchange Commission on May 25, 1993.
4.1 Amendment, dated March 25, 1999, to the Limited Partnership
Agreement of Partnership.
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 NoteAgreement, dated as of December 1, 1995, regarding $23.0
million of 7.27% senior notes due December 21, 2005. Incorporated
by reference to the Partnership's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 20, 1996.
10.3 Fourth Amended and Restated Warehousing Credit Agreement, dated as
of December 15, 1998, with First Union National Bank.
24. Powers of Attorney.
(This space intentionally left
blank.)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on
behalf of the Partnership by duly authorized officers.
Dated: March 26, 1999 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 26, 1999
*_______________________
Douglas P. Goodrich Director, FSI March 26, 1999
*_______________________
Stephen M. Bess Director, FSI March 26, 1999
*Susan Santo, by signing her name hereto, does sign this document on behalf of
the persons indicated above pursuant to powers of attorney duly executed by such
persons and filed with the Securities and Exchange Commission.
/s/ Susan C. Santo
- -------------------------
Susan C. Santo
Attorney-in-Fact
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' report 32
Balance sheets as of December 31, 1998 and 1997 33
Statements of operations for the years ended
December 31, 1998, 1997, and 1996 34
Statements of changes in partners' capital for the
years ended December 31, 1998, 1997, and 1996 35
Statements of cash flows for the years ended
December 31, 1998, 1997, and 1996 36
Notes to financial statements 37-50
All other financial statement schedules have been omitted, as the required
information is not pertinent to the Registrant or is not material, or because
the information required is included in the financial statements and notes
thereto.
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth & Income Fund VII:
We have audited the accompanying financial statements of PLM Equipment Growth &
Income Fund VII (the Partnership), as listed in the accompanying index to
financial statements. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth & Income
Fund VII as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1998 in conformity with generally accepted accounting principles.
/S/ KPMG LLP
- ----------------------------
SAN FRANCISCO, CALIFORNIA
March 12, 1999
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
1998 1997
-----------------------------------
Assets
Equipment held for operating leases, at cost $ 69,682 $ 58,844
Less accumulated depreciation (35,000 ) (24,650 )
-----------------------------------
34,682 34,194
Equipment held for sale -- 4,148
-------------------------------------------------------------------------------------------------------------------
Net equipment 34,682 38,342
Cash and cash equivalents 404 9,327
Restricted cash 219 191
Accounts receivable, less allowance for doubtful accounts of
$251 in 1998 and $522 in 1997 1,130 887
Investments in unconsolidated special-purpose entities 35,452 31,377
Lease negotiation fees to affiliate, less accumulated
amortization of $137 in 1998 and $222 in 1997 37 93
Debt issuance costs, less accumulated amortization
of $78 in 1998 and $52 in 1997 177 203
Prepaid expenses and other assets 73 49
-----------------------------------
Total assets $ 72,174 $ 80,469
===================================
Liabilities and partners' capital
Liabilities
Accounts payable and accrued expenses $ 388 $ 367
Due to affiliates 1,282 4,563
Lessee deposits and reserve for repairs 1,257 1,477
Notes payable 23,000 23,000
-----------------------------------
Total liabilities 25,927 29,407
-----------------------------------
Partners' capital
Limited partners (limited partnership units of 5,334,211 and
5,370,297 as of December 31, 1998 and 1997, respectively) 46,247 51,062
General Partner -- --
-----------------------------------
Total partners' capital 46,247 51,062
-----------------------------------
Total liabilities and partners' capital $ 72,174 $ 80,469
===================================
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)
1998 1997 1996
-----------------------------------------------
Revenues
Lease revenue $ 14,523 $ 12,605 $ 12,227
Interest and other income 380 327 434
Net gain (loss) on disposition of equipment (31 ) 1,803 42
-------------------------------------------------------------------------------------------------------------
Total revenues 14,872 14,735 12,703
-------------------------------------------------------------------------------------------------------------
Expenses
Depreciation and amortization 7,543 8,994 9,041
Repairs and maintenance 2,138 1,492 1,692
Equipment operating expenses 1,238 50 48
Insurance expense to affiliate 5 -- --
Other insurance expenses 345 87 88
Management fees to affiliate 811 709 744
Interest expense 1,668 1,691 1,681
General and administrative expenses to affiliates 725 649 582
Other general and administrative expenses 551 429 780
Provision for (recovery of) bad debts (92 ) 254 143
-----------------------------------------------
Total expenses 14,932 14,355 14,799
-----------------------------------------------
Equity in net income (loss) of unconsolidated
special-purpose entities 5,884 721 (880 )
-----------------------------------------------
Net income (loss) $ 5,824 $ 1,101 $ (2,976 )
===============================================
Partners' share of net income (loss)
Limited partners $ 5,317 $ 593 $ (3,485 )
General Partner 507 508 509
-----------------------------------------------
Total $ 5,824 $ 1,101 $ (2,976 )
===============================================
Net income (loss) per weighted-average limited
partnership unit $ 0.99 $ 0.11 $ (0.65 )
=============================================================================================================
Cash distribution $ 10,127 $ 10,176 $ 10,178
===============================================
Cash distribution per weighted-average
limited partnership unit $ 1.80 $ 1.80 $ 1.80
===============================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31,
(in thousands of dollars)
Limited General
Partners Partner Total
--------------------------------------------------
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
Net income 5,317 507 5,824
Repurchase of limited partnership units (512 ) -- (512 )
Cash distribution (9,620 ) (507 ) (10,127 )
--------------------------------------------------
Partners' capital as of December 31, 1998 $ 46,247 $ -- $ 46,247
==================================================
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)
1998 1997 1996
--------------------------------------------
Operating activities
Net income (loss) $ 5,824 $ 1,101 $ (2,976 )
Adjustments to reconcile net income (loss)
to net cash provided by (used in ) operating activities:
Depreciation and amortization 7,543 8,994 9,041
Net (gain) loss on disposition of equipment 31 (1,803 ) (42 )
Equity in net (income) loss from unconsolidated
special-purpose entities (5,884 ) (721 ) 880
Changes in operating assets and liabilities:
Restricted cash (28 ) (33 ) 243
Accounts receivable, net (276 ) 324 (505 )
Prepaid expenses and other assets (24 ) 9 (18 )
Accounts payable and accrued expenses 21 71 26
Due to affiliates 301 376 92
Lessee deposits and reserve for repairs (220 ) 117 240
--------------------------------------------
Net cash provided by operating activities 7,288 8,435 6,981
--------------------------------------------
Investing activities
Payments for purchase of equipment and capitalized repairs (3,936 ) (3,700 ) (9,020 )
Investment in and equipment purchased and placed in
unconsolidated special-purpose entities (22,261 ) (683 ) (8,029 )
Distribution from unconsolidated special-purpose entities 9,268 7,168 8,697
Payments of acquisition fees to affiliate (176 ) (162 ) (402 )
Payments of lease negotiation fees to affiliate (39 ) (36 ) (90 )
Distributions from liquidation of unconsolidated special-purpose
entities 14,802 -- --
Proceeds from disposition of equipment 352 4,431 569
--------------------------------------------
Net cash (used in) provided by investing activities (1,990 ) 7,018 (8,275 )
--------------------------------------------
Financing activities
Payments due to affiliates (5,092 ) -- --
Cash received from affiliates 1,510 3,582 --
Cash distribution paid to limited partners (9,620 ) (9,668 ) (9,669 )
Cash distribution paid to General Partner (507 ) (508 ) (509 )
Repurchase of limited partnership units (512 ) -- --
Proceeds from short-term note payable -- -- 2,000
Principal payments on short-term note payable -- (2,000 ) --
Payments of debt issuance costs -- -- (25 )
---------------
-----------------------------
Net cash used in financing activities (14,221 ) (8,594 ) (8,203 )
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (8,923 ) 6,859 (9,497 )
Cash and cash equivalents at beginning of year 9,327 2,468 11,965
--------------------------------------------
Cash and cash equivalents at end of year $ 404 $ 9,327 $ 2,468
============================================
Supplemental information
Interest paid $ 1,705 $ 1,664 $ 1,774
============================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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 and related equipment. PLM Financial Services, Inc. (FSI) is
the General Partner of the Partnership. FSI is a wholly-owned subsidiary of
PLM International, Inc. (PLM International).
Beginning in the Partnership's seventh year of operations, which commences
on January 1, 2002, the General Partner will stop reinvesting excess cash,
if any, which, less reasonable reserves, will be distributed to the
partners. Beginning in the Partnership's ninth year of operations, which
commences on January 1, 2004, the General Partner intends to begin an
orderly liquidation of the Partnership's assets. The General Partner
anticipates that the liquidation of the assets will be completed by the end
of the Partnership's tenth year of operations. The Partnership will
terminate on December 31, 2013, unless terminated earlier upon sale of all
equipment or by certain other events.
FSI manages the affairs of the Partnership. The net income (loss) and cash
distributions of the Partnership are generally allocated 95% to the limited
partners and 5% to the General Partner (see Net Income (Loss) and
Distributions Per Limited Partnership Unit, below). The General Partner is
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 unrecovered principal
attributed to the units. Unrecovered principal is defined as the excess of
the capital contributions from any source paid with respect to a unit. For
the year ended December 31, 1998, the Partnership repurchased 36,086
limited partnership units for $0.5 million.
As of December 31, 1998, the Partnership agreed to repurchase approximately
60,800 units for an aggregate price of approximately $0.8 million. The
General Partner anticipates that these units will be repurchased in the
first and second quarters of 1999. In addition to these units, the General
Partner may purchase additional limited partnership units on behalf of the
Partnership in the future.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operations
The equipment of the Partnership is managed, under a continuing management
agreement, by PLM Investment Management, Inc. (IMI), a wholly-owned
subsidiary of the FSI. IMI receives a monthly management fee from the
Partnership for managing the equipment (see Note 2). FSI, in conjunction
with its subsidiaries, sells equipment to investor programs and third
parties, manages pools of equipment under agreements with investor
programs, and is a general partner of other programs.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Accounting for Leases
The Partnership's leasing operations generally consist of operating leases.
Under the operating lease method of accounting, the leased asset is
recorded at cost and depreciated over its estimated useful life. Rental
payments are recorded as revenue over the lease term. Lease origination
costs are capitalized and amortized over the term of the lease.
Depreciation and Amortization
Depreciation of transportation equipment held for operating leases is
computed on the double- declining balance method, taking a full month's
depreciation in the month of acquisition, based upon estimated useful lives
of 15 years for railcars and, typically, 12 years for most all other types
of equipment. The depreciation method is changed to straight line when
annual depreciation expense using the straight-line method exceeds that
calculated by the double-declining balance method. Acquisition fees and
certain other acquisition costs have been capitalized as part of the cost
of the equipment. Lease negotiation fees are amortized over the initial
equipment lease term. Debt issuance costs are amortized over the term of
the related loan (see Note 7). Major expenditures that are expected to
extend the useful lives or reduce future operating expenses of equipment
are capitalized and amortized over the estimated remaining life of the
equipment.
Transportation Equipment
In accordance with the Financial Accounting Standards Board's Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the General Partner reviews the carrying value
of the Partnership's equipment at least quarterly in relation to expected
future market conditions for the purpose of assessing recoverability of the
recorded amounts. If projected undiscounted future lease revenue plus
residual values are less than the carrying value of the equipment, a loss
on revaluation is recorded. No reductions to the carrying value of
equipment were required during either 1998, 1997, or 1996.
Equipment held for operating leases is stated at cost. 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
The Partnership has interests in unconsolidated special-purpose entities
(USPEs) that own transportation equipment. These interests are accounted
for using the equity method.
The Partnership's investment in USPEs includes acquisition and lease
negotiation fees paid by the Partnership to PLM Transportation Equipment
Corporation (TEC) and PLM Worldwide Management Services (WMS). TEC is a
wholly-owned subsidiary of FSI and WMS is a wholly-owned subsidiary of PLM
International. The Partnership's interest in USPEs are managed by IMI. The
Partnership's equity interest in the net income (loss) of USPEs is
reflected net of management fees paid or payable to IMI and the
amortization of acquisition and lease negotiation fees paid to TEC or WMS.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Repairs and Maintenance
Repair and maintenance costs related to railcars, marine vessels, and
trailers, are usually the obligation of the Partnership. Maintenance costs
of most of the other equipment are the obligation of the lessee. If they
are not covered by the lessee, they are generally charged against
operations as incurred. To meet the maintenance requirements of certain
aircraft airframes and engines, reserve accounts are prefunded by the
lessee. Estimated costs associated with marine vessel dry docking are
accrued and charged to income ratably over the period prior to such
dry-docking. The reserve accounts are included in the balance sheet as
lessee deposits and reserve for repairs.
Net Income (Loss) and Distributions Per Limited Partnership Unit
The net income (loss) of the Partnership is generally allocated 95% to the
limited partners and 5% to the General Partner. Special allocations of
income are made to the General Partner equal to the deficit balance, if
any, in the capital account of the General Partner.
Cash distributions of the Partnership are generally allocated 95% to the
limited partners and 5% to the General Partner and may include amounts in
excess of net income. The limited partners' net income (loss) is allocated
among the limited partners based on the number of limited partnership units
owned by each limited partner and on the number of days of the year each
limited partner is in the Partnership.
Cash distributions are recorded when paid. Monthly unitholders receive a
distribution check 15 days after the close of the previous month's business
and quarterly unitholders receive a distribution check 45 days after the
close of the quarter.
Cash distributions to investors in excess of net income are considered a
return of capital. Cash distributions to the limited partners of $4.3
million and $9.1 million for the years ended December 31, 1998 and 1997,
respectively, were deemed to be a return of capital. All cash distributions
to the limited partners in 1996 were deemed to be a return of capital.
Cash distributions relating to the fourth quarter of 1998, 1997, and 1996,
of $1.4 million for each year, were paid during the first quarter of 1999,
1998, and 1997, respectively.
Net Income (Loss) Per Weighted-Average Partnership Unit
Net income (loss) per weighted-average Partnership unit was computed by
dividing net income (loss) attributable to limited partners by the
weighted-average number of Partnership units deemed outstanding during the
year. The weighted-average number of Partnership units deemed outstanding
during the years ended December 31, 1998, 1997, and 1996 was 5,341,360,
5,370,297, and 5,370,297, respectively.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three
months or less as cash equivalents. The carrying amount of cash equivalents
approximates fair market value due to the short-term nature of the
investments.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Comprehensive Income
During 1998, the Partnership adopted Financial Accounting Standards Board's
Statement No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in
equity from nonowner sources. The Partnership's net income (loss) is equal
to comprehensive income for the years ended December 31, 1998, 1997, and
1996.
Restricted Cash
As of December 31, 1998 and 1997, restricted cash represented lessee
security deposits held by the Partnership.
2. General Partner and Transactions with Affiliates
An officer of PLM Securities Corp., a wholly-owned subsidiary of the
General Partner, contributed $100 of the Partnership's initial capital.
Under the equipment management agreement, IMI, subject to certain
reductions, receives a monthly management fee attributable to either owned
equipment or interests in equipment owned by the USPEs equal to the lesser
of (i) the fees that would be charged by an independent third party for
similar services for similar equipment or (ii) the sum of (A) for that
equipment for which IMI provides only basic equipment management services,
(a) 2% of the gross lease revenues, as defined in the agreement,
attributable to equipment that is subject to full payout net leases and (b)
5% of the gross lease revenues attributable to equipment that is subject to
operating leases, and (B) for that equipment for which IMI provides
supplemental equipment management services, 7% of the gross lease revenues
attributable to such equipment. Partnership management fees payable were
$0.1 million as of December 31, 1998 and 1997. The Partnership's
proportional share of USPE management fees of $0.1 million and $0.2 million
were payable as of December 31, 1998 and 1997, respectively. The
Partnership's proportional share of USPE management fee expense was $0.5
million during 1998, 1997, and 1996. The Partnership reimbursed FSI $0.7
million during 1998 and $0.6 million during 1997 and 1996 for data
processing expenses and other administrative services performed on behalf
of the Partnership. The Partnership's proportional share of USPE data
processing and administrative expenses reimbursed to FSI was $0.1, $0.2
million and $0.1 million during 1998, 1997, and 1996, respectively.
The Partnership paid Transportation Equipment Indemnity Company, Ltd.
(TEI), an affiliate of the General Partner that provides marine insurance
coverage and other insurance brokerage services, $5,000 during 1998, and 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 $35,000 during 1998 and $0.2 million during 1997 and 1996. A
substantial portion of this amount was paid to third-party reinsurance
underwriters or placed in risk pools managed by TEI on behalf of affiliated
programs and PLM International, which provide threshold coverages on marine
vessel loss of hire and hull and machinery damage. All pooling arrangement
funds are either paid out to cover applicable losses or refunded pro rata
by TEI. The Partnership's proportional share of a refund of $36,000 was
received during 1998, from lower loss-of-hire insurance claims from the
insured USPEs and other insured affiliated programs. PLM International
plans to liquidate TEI in 1999. TEI did not provide the same level of
insurance coverage during 1998 as had been provided during previous years.
These services were provided by an unaffiliated third party. PLM
International plans to liquidate TEI in 1999.
The Partnership and USPEs paid or accrued lease negotiation and equipment
acquisition fees of $1.4 million, $0.2 million, and $0.9 million during
1998, 1997, and 1996, respectively, to TEC and WMS.
PLM Equipment Growth & Income Fund VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
2. General Partner and Transactions with Affiliates (continued)
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.
As of December 31, 1998, approximately 80% of the Partnership's trailer
equipment was in rental facilities operated by PLM Rental, Inc., an
affiliate of the General Partner, doing business as PLM Trailer Leasing.
Revenues collected under short-term rental agreements with the rental
yards' customers are credited to the owners of the related equipment as
received. Direct expense associated with the equipment are charged directly
to the Partnership. An allocation of indirect expenses of the rental yard
operations is charged to the Partnership monthly.
The Partnership owned certain equipment in conjunction with affiliated
partnerships during 1998, 1997, and 1996 (see Note 4).
The balance due to affiliates as of December 31, 1998 includes $0.1 million
due to FSI and its affiliates for management fees and $1.2 million due to
affiliated USPEs. The balance due to affiliates as of December 31, 1997
included $0.1 million due to FSI and its affiliates for management fees and
a net of $4.5 million due to affiliated USPEs. During January 1998, $3.5
million was paid to the affiliated USPE.
3. Equipment
The components of owned equipment as of December 31 are as follows (in
thousands of dollars):
Equipment Held for Operating Leases 1998 1997
----------------------------------------------------- -------------------------------
Marine vessels $ 22,212 $ 22,212
Trailers 17,280 18,111
Aircraft 15,933 8,305
Rail equipment 10,084 10,063
Portable heaters 4,085 --
Modular buildings 88 153
-------------------------------
69,682 58,844
Less accumulated depreciation (35,000 ) (24,650 )
-------------------------------
34,682 34,194
Equipment held for sale -- 4,148
-------------==================
Net equipment $ 34,682 $ 38,342
===============================
Revenues are earned by placing the equipment under operating leases. Rents
for railcars are based on mileage traveled or a fixed rate; rents for all
other equipment are based on fixed rates.
As of December 31, 1998, all owned equipment was on lease or operating in
PLM-affiliated short-term trailer rental facilities, except for two
commuter aircraft and three railcars. As of December 31, 1997 all owned
equipment in the Partnership's portfolio was on lease or operating in
PLM-affiliated short-term trailer rental yards, except for two commuter
aircraft that were held for sale and a railcar.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
3. Equipment (continued)
The net book value of the equipment off lease was $3.3 million and $4.1
million as of December 31, 1998 and December 31, 1997, respectively.
During 1998, the Partnership purchased a portfolio of portable heaters for
$4.1 million, including $0.2 million in acquisition fees paid to FSI. The
Partnership also reclassified the two commuter aircraft that were held for
sale as of December 31, 1997 to owned equipment held for operating lease.
During 1997, the Partnership purchased a fleet of trailers for $3.9
million, including $0.2 million in acquisition fees paid to FSI.
During 1998, the Partnership disposed of or sold modular buildings,
trailers, and a railcar with a net book value of $0.4 million for $0.3
million.
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.
Periodically, PLM International purchases groups of assets whose ownership
may be allocated among affiliated programs and PLM International.
Generally, in these cases, only assets that are on lease will be purchased
by the affiliated programs. 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, and PLM International.
All wholly- and partially-owned equipment on lease is accounted for as
operating leases. Future minimum rent under noncancelable operating leases
as of December 31, 1998 for this equipment during each of the next five
years are approximately $12.0 million in 1999, $10.7 million in 2000, $7.6
million in 2001, $3.2 million in 2002, $2.8 million in 2003, and $6.2
million thereafter.
4. Investments in Unconsolidated Special-Purpose Entities (USPEs)
The net investment in USPEs includes the following jointly-owned equipment
(and related assets and liabilities) as of December 31 (in thousands of
dollars):
1998 1997
------------------------------
75% interest in an entity owning marine containers $ 7,426 $ --
50% interest in a trust owning a MD-82 Stage III commercial aircraft 6,804 --
80% interest in an entity owning a dry bulk-carrier marine vessel 5,209 6,014
24% interest in a trust owning a 767-200ER Stage III commercial aircraft 4,341 4,824
33% interest in two trusts owning a total of three 737-200A Stage II
commercial aircraft, two stage II aircraft engines, and
a portfolio of aircraft rotables 4,102 8,036
50% interest in a trust owning a MD-82 Stage III commercial aircraft 3,546 682
44% interest in an entity owning a dry bulk-carrier marine vessel 2,211 2,439
10% interest in an entity owning a mobile offshore drilling unit 1,450 1,712
50% interest in a trust that owned four 737-200A Stage II
commercial aircraft 222 4,362
25% interest in a trust that owned four 737-200A Stage II commercial
aircraft 141 3,308
------------------------------------------------------------------------------------------- -----------
Net investments $ 35,452 $ 31,377
=========== ===========
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
4. Investments in Unconsolidated Special-Purpose Entities (USPEs) (continued)
During 1998, the Partnership completed its commitment to purchase an
interest in a trust owning a MD-82 Stage III commercial aircraft for $7.2
million, including acquisition and lease negotiation fees of $0.4 million
that were paid to FSI for the purchase of this equipment. The Partnership
made a deposit of $0.7 million toward this purchase in 1997. The
Partnership also purchased an interest in another trust owning a MD-82
Stage III commercial aircraft for $8.2 million, including acquisition and
lease negotiation fees of $0.4 million that were paid to FSI for the
purchase of this equipment. The remaining interest in this trust was
purchased by an affiliated program.
In addition, during 1998, the Partnership purchased an interest in an
entity owning a portfolio of marine containers for $7.5 million, including
acquisition and lease negotiation fees of $0.4 million that were paid to
FSI. The remaining interest in this entity was purchased by an affiliated
program.
As of December 31, 1998 and 1997, the Partnership had an interest in trusts
that owned multiple aircraft (the Trusts). As of December 31, 1997, two of
these Trusts contained provisions, under certain circumstances, for
allocating specific aircraft to the beneficial owners. During 1998, in one
of these Trusts, the Partnership sold the two commercial aircraft assigned
to it, with a net book value of $3.4 million, for proceeds of $8.8 million.
Also during the same period, in another trust, the Partnership sold the
commercial aircraft assigned to it, with a net book value of $2.7 million,
for proceeds of $6.0 million.
The following summarizes the financial information for the USPEs and the
Partnership's interest therein as of and for the year ended December 31 (in
thousands of dollars):
1998 1997 1996
Net Net Net
Total Interest Total Interest Total Interest
USPEs of USPEs of USPEs of
Partnership Partnership Partnership
--------------------------- --------------------------- ---------------------------
Net Investments $ 86,609 $ 35,452 $ 103,497 $ 31,377 $ 115,015 $ 37,141
Lease revenues 26,788 9,869 35,974 12,133 33,850 11,904
Net income (loss) 18,696 5,884 10,130 721 (3,606 ) (880 )
5. Operating Segments
The Partnership operates or operated in six primary operating segments:
aircraft leasing, modular building leasing, portable heater leasing, marine
vessel leasing, trailer leasing, and railcar leasing. Each equipment
leasing segment engages in short-term to mid-term operating leases to a
variety of customers.
The General Partner evaluates the performance of each segment based on
profit or loss from operations before allocation of general and
administrative expenses, interest expense, and certain other expenses. The
segments are managed separately due to different business strategies for
each operation.
(This space intentionally left blank)
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
5. Operating Segments (continued)
The following tables present a summary of the operating segments (in
thousands of dollars):
Portable Marine
Aircraft Heater Vessel Trailer Railcar All
For the Year Ended December 31, 1998 Leasing Leasing Leasing Leasing Leasing Other Total
--------- --------- --------- --------- --------- --------- -----------
Revenues
Lease revenue $ 2,021 $ 764 $ 4,263 $ 4,685 $ 2,742 $ 48 $ 14,523
Interest income and other -- -- -- -- 20 360 380
Gain (loss) on disposition of -- -- -- (12 ) 9 (28 ) (31 )
equipment
------------------------------------------------------------------------
Total revenues 2,021 764 4,263 4,673 2,771 380 14,872
Costs and expenses
Operations support 309 -- 1,762 866 742 47 3,726
Depreciation and amortization 2,212 525 1,964 1,935 870 37 7,543
Interest expense 4 -- -- -- -- 1,664 1,668
General and administrative expenses 171 23 297 799 267 530 2,087
Provision for (recovery of) bad 2 -- -- 45 (30 ) (109 ) (92 )
debts
------------------------------------------------------------------------
Total costs and expenses 2,698 548 4,023 3,645 1,849 2,169 14,932
------------------------------------------------------------------------
Equity in net income (loss) of USPEs 6,390 -- (527 ) -- -- 21 5,884
------------------------------------------------------------------------
========================================================================
Net income (loss) $ 5,713 $ 216 $ (287 )$ 1,028 $ 922 $ (1,768 ) $ 5,824
========================================================================
As of December 31, 1998
Total assets $ 25,510 $ 3,570 $ 17,239 $ 9,258 $ 5,645 $ 10,952 $ 72,174
========================================================================
Includes interest income and costs not identifiable to a particular
segment, such as general and administrative, interest expenese, and certain
operations support expenses. Also includes lease revenues and gain from the
sale of modular buildings and aggregate net income (loss) from an
investment in an entity owning marine containers and an investment in an
entity owning a mobile offshore drilling unit.
Modular Marine
Aircraft Building Vessel Trailer Railcar All
For the Year Ended December 31, 1997 Leasing Leasing Leasing Leasing Leasing Other Total
--------- --------- --------- --------- --------- --------- -----------
Revenues
Lease revenue $ 2,021 $ 439 $ 3,538 $ 3,843 $ 2,764 $ -- $ 12,605
Interest income and other -- 6 -- -- -- 321 327
Gain (loss) on disposition of -- 1,805 -- (2 ) -- -- 1,803
equipment
------------------------------------------------------------------------
Total revenues 2,021 2,250 3,538 3,841 2,764 321 14,735
Costs and expenses
Operations support 20 13 224 568 770 34 1,629
Depreciation and amortization 3,520 250 2,387 1,788 1,024 25 8,994
Interest expense -- -- -- -- -- 1,691 1,691
General and administrative expenses 131 11 185 686 271 503 1,787
Provision for (recovery of) bad -- 224 -- 57 (27 ) -- 254
debts
------------------------------------------------------------------------
Total costs and expenses 3,671 498 2,796 3,099 2,038 2,253 14,355
------------------------------------------------------------------------
Equity in net income (loss) of USPEs 1,721 -- (1,000 ) -- -- -- 721
------------------------------------------------------------------------
========================================================================
Net income (loss) $ 71 $ 1,752 $ (258 )$ 742 $ 726 $ (1,932 ) $ 1,101
========================================================================
As of December 31, 1997
Total assets $ 29,752 $ 77 $ 20,236 $ 11,456 $ 6,486 $ 12,462 $ 80,469
========================================================================
Includes interest income and costs not identifiable to a particular
segment, such as general and administrative, interest expense, and certain
operations support expenses.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
5. Operating Segments (continued)
Modular Marine
Aircraft Building Vessel Trailer Railcar All
For the Year Ended December 31, 1996 Leasing Leasing Leasing Leasing Leasing Other Total
--------- --------- --------- --------- --------- --------- -----------
Revenues
Lease revenue $ 2,124 $ 731 $ 3,879 $ 2,855 $ 2,638 $ -- $ 12,227
Interest income and other 3 -- -- -- -- 431 434
Gain on disposition of equipment -- 31 -- 11 -- -- 42
------------------------------------------------------------------------
Total revenues 2,127 762 3,879 2,866 2,638 431 12,703
Costs and expenses
Operations support 42 149 328 565 712 32 1,828
Depreciation and amortization 2,661 568 2,901 1,779 1,142 (10 ) 9,041
Interest expense -- -- -- -- -- 1,681 1,681
General and administrative expenses 124 184 220 585 260 733 2,106
Provision for (recovery of) bad -- (9 ) -- 95 57 -- 143
debts
------------------------------------------------------------------------
Total costs and expenses 2,827 892 3,449 3,024 2,171 2,436 14,799
------------------------------------------------------------------------
Equity in net loss of USPEs (486 ) -- (384 ) -- -- (10 ) (880 )
------------------------------------------------------------------------
========================================================================
Net income (loss) $ (1,186 )$ (130 ) $ 46 $ (158 ) $ 467 $ (2,015 ) $ (2,976 )
========================================================================
As of December 31, 1996
Total assets $ 36,545 $ 2,806 $ 24,644 $ 9,521 $ 7,473 $ 6,409 $ 87,398
========================================================================
Includes interest income and costs not identifiable to a particular
segment, such as general and administrative, interest expense, and certain
operations support expenses. Also includes the net loss from an interest in
an entity owning a mobile offshore drilling unit.
6. Geographic Information
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Partnership leases or leased its aircraft, portable heaters, modular
buildings, railcars, and trailers to lessees domiciled in four geographic
regions: the United States, Canada, South America, and Europe. Marine
vessels, marine containers, and the mobile offshore drilling unit are
leased to multiple lessees in different regions that operate worldwide.
The table below sets forth lease revenues by geographic region for the
Partnership's owned equipment and investments in USPEs, grouped by domicile
of the lessee as of and for the years ended December 31 (in thousands of
dollars):
Owned Equipment Investments in USPEs
------------------------------------- --------------------------------------
Region 1998 1997 1996 1998 1997 1996
---------------------------- ------------------------------------- -------------------------------------
United States $ 6,826 $ 5,985 $ 7,522 $ 1,783 $ -- $ --
Canada 1,413 1,061 826 1,151 3,423 3,189
South America 2,021 2,021 -- 1,231 1,181 1,181
Europe -- -- -- 1,560 3,530 3,530
Rest of the world 4,263 3,538 3,879 4,144 3,999 4,004
------------------------------------- -------------------------------------
===================================== =====================================
Lease revenues $ 14,523 $ 12,605 $ 12,227 $ 9,869 $ 12,133 $ 11,904
===================================== =====================================
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
6. Geographic Information (continued)
The following table sets forth net income (loss) information by region for
the owned equipment and investments in USPEs for the years ended December
31 (in thousands of dollars):
Owned Equipment Investments in USPEs
------------------------------------- --------------------------------------
Region 1998 1997 1996 1998 1997 1996
---------------------------- ------------------------------------- -------------------------------------
United States $ 479 $ 1,885 $ (590 ) $ (3,272 ) $ -- $ --
Canada 372 258 89 9,273 91 (1,370 )
South America 588 (544 ) -- 311 85 (97 )
Europe -- -- -- 78 1,545 981
Rest of the world 240 720 431 (506 ) (1,000 ) (394 )
------------------------------------- -------------------------------------
Regional income (loss) 1,679 2,319 (70 ) 5,884 721 (880 )
Administrative and other (1,739 ) (1,939 ) (2,026 ) -- -- --
===================================== =====================================
Net income (loss) $ (60 ) $ 380 $ (2,096 ) $ 5,884 $ 721 $ (880 )
===================================== =====================================
The net book value of these assets as of December 31, are as follows (in
thousands of dollars):
Owned Equipment Investments in USPEs
------------------------------------- --------------------------------------
Region 1998 1997 1996 1998 1997 1996
---------------------------- ------------------------------------- -------------------------------------
United States $ 19,248 $ 15,500 $ 29,199 $ 10,350 $ 682 $ --
Canada 2,554 2,519 2,608 363 7,669 9,612
South America 3,061 4,392 -- 4,341 4,824 5,798
Europe -- -- -- 4,102 8,036 9,127
Rest of the world 9,819 11,783 14,140 16,296 10,166 12,604
------------------------------------- -------------------------------------
34,682 34,194 45,947 35,452 31,377 37,141
Equipment held for sale -- 4,148 -- -- -- --
===================================== =====================================
Net book value $ 34,682 $ 38,342 $ 45,947 $ 35,452 $ 31,377 $ 37,141
===================================== =====================================
7. Debt
In December 1995, the Partnership entered into an agreement to issue
long-term notes totaling $23.0 million to five institutional investors. The
notes bear interest at a fixed rate of 7.27% per annum and have a final
maturity in 2005. During 1995, the Partnership paid lender fees of $0.2
million in connection with this loan.
Interest on the notes is payable semiannually. The notes will be repaid in
five principal payments of $3.0 million on December 31, 1999, 2000, 2001,
2002, and 2003 and in two principal payments of $4.0 million on December
31, 2004 and 2005. The agreement requires the Partnership to maintain
certain financial covenants related to fixed-charge coverage and maximum
debt. Proceeds from the notes were used to fund additional equipment
acquisitions and to repay obligations of the Partnership under the
Committed Bridge Facility (see below).
The General Partner estimates, based on recent transactions, that the fair
value of the $23.0 million fixed-rate note is $23.6 million.
The General Partner has entered into a joint $24.5 million credit facility
(the Committed Bridge Facility) on behalf of the Partnership, PLM Equipment
Growth Fund VI (EGF VI), and Professional Lease Management Income Fund I
(Fund I), both affiliated investment programs; and TEC Acquisub, Inc.
(TECAI), an indirect wholly-owned subsidiary of the General Partner, 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
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
7. Debt (continued)
held by the borrower. The Partnership, EGF VI, Fund I, and TECAI
collectively may borrow up to $24.5 million under the Committed Bridge
Facility. Outstanding borrowings by one borrower reduce the amount
available to each of the other borrowers under the Committed Bridge
Facility. The Committed Bridge Facility also provides for a $5.0 million
Letter of Credit Facility for the eligible borrowers. Individual borrowings
may be outstanding for no more than 179 days, with all advances due no
later than December 14, 1999. 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, 1998, no eligible borrower had
any outstanding borrowings under this Facility. The General Partner
believes it will be able to renew the Committed Bridge Facility upon its
expiration with similar terms as those in the current Committed Bridge
Facility.
8. Concentrations of Credit Risk
As of December 31, 1998, the Partnership's customers that accounted for 10%
or more of the total consolidated revenues for the owned equipment and
partially owned equipment during 1997 and 1996 was TAP Air Portugal (13% in
1997, and 14% in 1996) and Canadian Airlines Int'l. (13% in 1997 and in
1996). No single lessee accounted for more than 10% of the consolidated
revenues for the year ended December 31, 1998. In 1998, however, Triton
Aviation Services, Ltd. purchased three commercial aircraft from the
Partnership and the gain from the sale accounted for 26% of total
consolidated revenues during 1998.
As of December 31, 1998 and 1997, the General Partner believes the
Partnership had no other significant concentrations of credit risk that
could have a material adverse effect on the Partnership.
9. Income Taxes
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
As of December 31, 1998, there were temporary differences of approximately
$37.3 million between the financial statement carrying values of certain
assets and liabilities and the federal income tax basis of such assets and
liabilities, primarily due to differences in depreciation methods,
equipment reserves, provisions for bad debts, lessees' prepaid deposits,
and the tax treatment of underwriting commissions and syndication costs.
10. Contingencies
PLM International, (the Company) and various of its affiliates are named as
defendants in a lawsuit filed as a purported class action on January 22,
1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case No.
CV-97-251 (the Koch action). Plaintiffs, who filed the complaint on their
own and on behalf of all class members similarly situated (the class), are
six individuals who invested in certain California limited partnerships
(the Partnerships) for which the Company's wholly-owned subsidiary, PLM
Financial Services, Inc. (FSI), acts as the general partner, including the
Partnership, and PLM Equipment Growth Funds IV, V, and VI, (the Growth
Funds). The state court ex parte certified the action as a class action
(i.e., solely upon plaintiffs' request and without the Company being given
the opportunity to file an opposition). The complaint asserts eight causes
of action against all defendants, as follows: fraud and deceit,
suppression, negligent misrepresentation and suppression, intentional
breach of fiduciary duty, negligent breach of fiduciary duty, unjust
enrichment, conversion, and conspiracy. Additionally, plaintiffs allege a
cause of action against PLM Securities Corp. for breach of third party
beneficiary contracts in violation of the National Association of
Securities Dealers rules of fair practice. Plaintiffs allege that each
defendant owed plaintiffs and
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
10. Contingencies (continued)
the class certain duties due to their status as fiduciaries, financial
advisors, agents, and control persons. Based on these duties, plaintiffs
assert liability against defendants for improper sales and marketing
practices, mismanagement of the Growth Funds, and concealing such
mismanagement from investors in the Growth Funds. Plaintiffs seek
unspecified compensatory and recissory damages, as well as punitive
damages, and have offered to tender their limited partnership units back to
the defendants.
In March 1997, the defendants removed the Koch action from the state court
to the United States District Court for the Southern District of Alabama,
Southern Division (Civil Action No. 97-0177-BH-C) based on the district
court's diversity jurisdiction, following which plaintiffs filed a motion
to remand the action to the state court. Removal of the action to federal
court automatically nullified the state court's ex parte certification of
the class. In September 1997, the district court denied plaintiffs' motion
to remand the action to state court and dismissed without prejudice the
individual claims of the California plaintiff, reasoning that he had been
fraudulently joined as a plaintiff. In October 1997, defendants filed a
motion to compel arbitration of plaintiffs' claims, based on an agreement
to arbitrate contained in the limited partnership agreement of each Growth
Fund, and to stay further proceedings pending the outcome of such
arbitration. Notwithstanding plaintiffs' opposition, the district court
granted defendants' motion in December 1997.
Following various unsuccessful requests that the district court reverse, or
otherwise certify for appeal, its order denying plaintiffs' motion to
remand the case to state court and dismissing the California plaintiff's
claims, plaintiffs filed with the U.S. Court of Appeals for the Eleventh
Circuit a petition for a writ of mandamus seeking to reverse the district
court's order. The Eleventh Circuit denied plaintiffs' petition in November
1997, and further denied plaintiffs subsequent motion in the Eleventh
Circuit for a rehearing on this issue. Plaintiffs also appealed the
district court's order granting defendants' motion to compel arbitration,
but in June 1998 voluntarily dismissed their appeal pending settlement of
the Koch action, as discussed below.
On June 5, 1997, the Company and the affiliates who are also defendants in
the Koch action were named as defendants in another purported class action
filed in the San Francisco Superior Court, San Francisco, California, Case
No. 987062 (the Romei action). The plaintiff is an investor in 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, defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition)
under the Federal Arbitration Act seeking to compel arbitration of
plaintiff's claims and for an order staying the state court proceedings
pending the outcome of the arbitration. In connection with this motion,
plaintiff agreed to a stay of the state court action pending the district
court's decision on the petition to compel arbitration. In October 1997,
the district court denied the Company's petition to compel arbitration, but
in November 1997, agreed to hear the Company's motion for reconsideration
of this order. The hearing on this motion has been taken off calendar and
the district court has dismissed the petition pending settlement of the
Romei action, as discussed below. The state court action continues to be
stayed pending such resolution. In connection with her opposition to the
petition to compel arbitration, plaintiff filed an amended complaint with
the state court in August 1997 alleging two new causes of action for
violations of the California Securities Law of 1968 (California
Corporations Code Sections 25400 and 25500) and for violation of California
Civil Code Sections 1709 and 1710. Plaintiff also served certain discovery
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
10. Contingencies (continued)
requests on defendants. Because of the stay, no response to the amended
complaint or to the discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a
memorandum of understanding (MOU) related to the settlement of those
actions (the monetary settlement). The monetary settlement contemplated by
the MOU provides for stipulating to a class for settlement purposes, and a
settlement and release of all claims against defendants and third party
brokers in exchange for payment for the benefit of the class of up to $6.0
million. The final settlement amount will depend on the number of claims
filed by authorized claimants who are members of the class, the amount of
the administrative costs incurred in connection with the settlement, and
the amount of attorneys' fees awarded by the Alabama district court. The
Company will pay up to $0.3 million of the monetary settlement, with the
remainder being funded by an insurance policy.
The parties to the monetary settlement have also agreed in principal to an
equitable settlement (the equitable settlement) which provides, among other
things, (a) for the extension of the operating lives of the Partnership,
PLM Equipment Growth Fund V, and PLM Equipment Growth Fund VI (the Funds)
by judicial amendment to each of their partnership agreements, such that
FSI, the general partner of each such Fund, will be permitted to reinvest
cash flow, surplus partnership funds or retained proceeds in additional
equipment into the year 2004, and will liquidate the partnerships'
equipment in 2006; (b) that FSI be entitled to earn front end fees
(including acquisition and lease negotiation fees) in excess of the
compensatory limitations set forth in the North American Securities
Administrators Association, Inc. Statement of Policy by judicial amendment
to the Partnership Agreements for each Fund; (c) for a one time redemption
of up to 10% of the outstanding units of each Fund at 80% of such
partnership's net asset value; and (d) for the deferral of a portion of
FSI's management fees. The equitable settlement also provides for payment
of the equitable settlement attorneys' fees from Partnership funds in the
event that distributions paid to investors in the Funds during the
extension period reach a certain internal rate of return.
Defendants will continue to deny each of the claims and contentions and
admit no liability in connection with the proposed settlements. The
monetary settlement remains subject to numerous conditions, including but
not limited to: (a) agreement and execution by the parties of a settlement
agreement (the settlement agreement), (b) notice to and certification of
the monetary class for purposes of the monetary settlement, and (c)
preliminary and final approval of the monetary settlement by the Alabama
district court. The equitable settlement remains subject to numerous
conditions, including but not limited to: (a) agreement and execution by
the parties of the settlement agreement, (b) notice to the current
unitholders (the equitable class) in the Funds and certification of the
Equitable Class for purposes of the equitable settlement, (c) preparation,
review by the Securities and Exchange Commission (SEC), and dissemination
to the members of the equitable class of solicitation statements regarding
the proposed extensions, (d) disapproval by less than 50% of the limited
partners in each of the Funds of the proposed amendments to the limited
partnership agreements, (e) judicial approval of the proposed amendments to
the limited partnership agreements, and (f) preliminary and final approval
of the equitable settlement by the Alabama district court. The parties
submitted the settlement agreement to the Alabama district court on
February 12, 1999, and the court will consider whether to preliminarily
certify a class for settlement purposes. If the district court grants
preliminary approval, notices to the monetary class and equitable class
will be sent following review by the SEC of the solicitation statements to
be prepared in connection with the equitable settlement. The monetary
settlement, if approved, will go forward regardless of whether the
equitable settlement is approved or not. The Company continues to believe
that the allegations of the Koch and Romei actions are completely without
merit and intends to continue to defend this matter vigorously if the
monetary settlement is not consummated.
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
10. Contingencies (continued)
The Partnership is involved as plaintiff or defendant in various other
legal actions incident to its business. Management does not believe that
any of these actions will be material to the financial condition of the
Company.
11. Subsequent Event
During 1999, the Partnership purchased 35 portable heaters for $0.2 million
and a group of marine containers for $7.0 million. The Partnership paid or
accrued $0.4 million to FSI for acquisition and lease negotiation fees for
this equipment.
During February and March 1999, the Partnership sold part of its interest
in two trusts that owned a total of three stage II commercial aircraft with
a net book value of $3.4 million for proceeds of $6.0 million. The
Partnership expects to sell its remaining interest in the two trust that
still own two stage II aircraft engines and a portfolio of aircraft
rotables before the end of March 1999.
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PLM EQUIPMENT GROWTH & INCOME FUND VII
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership. *
4.1 Amendment to Limited Partnership Agreement of Partnership 52-53
10.1 Management Agreement between Partnership and PLM Investment *
Management, Inc.
10.2 Note Agreement, dated as of December 1, 1995, regarding
$23.0 million of 7.27% senior notes due December 21, 2005. *
10.3 Fourth Amended and Restated Warehousing Credit Agreement,
dated as of December 15, 1998, with First Union
National Bank. 54-128
24. Powers of Attorney. 129-131
* Incorporated by reference. See page 29 of this report.