ITEM 1. BUSINESS
(A) Background
PLM Transportation Equipment Partners VIIB 1985 Income Fund (TEP VIIB or the Partnership) and PLM Transportation Equipment Partners VIIC 1985 Income Fund (TEP VIIC or the Partnership) (together, the Partnerships) are California limited partnerships which were formed in October 1984, and began operations in January 1985. The Partnerships operate under their respective Limited Partnership Agreements (Partnership Agreement) for the purpose of acquiring, owning and leasing transportation equipment. PLM Financial Services, Inc. (FSI), a wholly-owned subsidiary of PLM International, Inc. (PLM International), serves as the General Partner for both TEP VIIB and TEP VIIC.
The Partnerships were formed to engage in the business of owning and managing diversified pools of transportation equipment. The primary objectives of each Partnership are to invest in equipment which will:
(i) generate cash distributions to investors on a quarterly basis;
(ii) maintain substantial residual value for continued operation and ultimate sale;
(iii) provide certain federal income tax benefits, including investment tax credits, to the extent available, in 1986 and tax deductions in excess of Partnership income during early years which investors may use to offset taxable income from other sources.
(iv)to endeavor to reduce certain of the risks of equipment ownership by acquiring a diversified portfolio of varying equipment types.
The 1986 Tax Reform Act (the Act) substantially altered some of the Partnership objectives. Specifically, the ability of investors in the Partnership to use tax deductions in excess of Partnership income to offset taxable income from other sources was not only limited in duration by the Act (no offsets were allowed after 1990), but also limited to a declining percentage that could be applied against other income beginning in 1987. The Act also eliminated the investment tax credit.
(B) Management of Partnership Equipment
The Partnerships have entered into equipment management agreements with PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the management of the equipment. IMI has agreed to perform all services necessary to manage transportation equipment on behalf of the Partnerships and to perform or contract for the performance of all obligations of the lessor under the Partnerships' leases. In consideration for its services and pursuant to the Partnership Agreements, IMI is entitled to a monthly management fee. Management fees are calculated as 10% of cash flow available for distribution and are payable monthly (see Financial Statements, Notes 1 and 2).
TEP VIIB
The offering of limited partnership units (the Units) of PLM Transportation Equipment Partners VIIB 1985 Income Fund (TEP VIIB or the Partnership) closed on August 27, 1985 having sold 22,276 Units. FSI contributed $100 for its 1% general partnership interest in TEP VIIB.
As of December 31, 1996, TEP VIIB owned the following equipment: 27 marine containers, five tank cars, and 189 trailers. All of the Partnership's trailer equipment operates in rental yards owned and maintained by an affiliate of the General Partner. Revenue collected under short-term rental agreements with the rental yards' customers are credited to the owners of the related equipment as received. Direct expenses associated with the equipment are charged directly to the Partnership. An allocation of other direct expenses of the rental yard operations are billed to the Partnership monthly. All equipment owned by TEP VIIB was on lease as of December 31, 1996.
Lessees of the equipment in the TEP VIIB portfolio include, but are not limited to: Transamerica Leasing, Dupont SA, and Pines Trailer, Ltd.
TEP VIIC
The offering of limited partnership units (the Units) of PLM Transportation Equipment Partners VIIC 1985 Income Fund (TEP VIIC or the Partnership) closed on December 6, 1985 having sold 33,727 Units. FSI contributed $100 for its 1% general partnership interest in TEP VIIC.
As of December 31, 1996, TEP VIIC owned the following equipment: 26 marine containers, 172 trailers, and an interest in an entity which owns one aircraft. The aircraft is jointly owned by TEP VIIC (80%) and PLM International (20%). All of the Partnership's trailer equipment operates in rental yards owned and maintained by an affiliate of the General Partner. Revenue collected under short-term rental agreements with the rental yards' customers are credited to the owners of the related equipment as received. Direct expenses associated with the equipment are charged directly to the Partnership. An allocation of other direct expenses of the rental yard operations are billed to the Partnership monthly. All of the equipment owned by TEP VIIC was either operating in the rental facilities or on lease as of December 31, 1996.
Lessees of the equipment in the TEP VIIC portfolio include, but are not limited to: Horizon Air Industries, Inc., and Transamerica Leasing.
(C) Competition
(1) Operating Leases vs. Full Payout Leases
Generally, the equipment owned by the Partnerships is leased out on an operating lease basis wherein the rents owed during the initial non-cancelable term of the lease are insufficient to recover the Partnerships 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 the operating lease need not be capitalized on the lessee's balance sheet.
The Partnerships encounter considerable competition from lessors utilizing full payout leases on new equipment, i.e., leases which have terms equal to the expected economic life of the equipment. Full payout leases are written for longer terms and for lower rates than the Partnerships offer. While some lessees prefer the flexibility offered by a shorter term operating lease, other lessees prefer the rate advantages possible with a full payout lease. Competitors of the Partnerships may write full payout leases at considerably lower rates, or larger competitors with a lower cost of capital may offer operating leases at lower rates, and as a result, the Partnerships may be at a competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnerships also compete with equipment manufacturers who offer operating leases and full payout leases. Manufacturers may provide ancillary services which the Partnerships cannot offer, such as specialized maintenance services (including possible substitution of equipment), training, warranty services and trade-in privileges.
The Partnerships compete with many equipment lessors, including, among others, ACF Industries, Inc. (Shippers Car Line Division), Transport International Pool, General Electric Railcar Services Corporation, Greenbrier Leasing Company, and other limited partnerships which lease the same types of equipment.
(D) Government Regulations
The use, maintenance, and ownership of equipment is regulated by federal, state, local and/or foreign governmental authorities. Such regulations which may impose restrictions and financial burdens on the Partnerships' ownership and operation of equipment, which may affect the Partnerships' liquidity. Changes in government regulations, industry standards, or deregulation, may also affect the ownership, operation and resale of the equipment. Certain of the Partnerships' equipment is subject to extensive safety and operating regulations which may require the removal from service or extensive modification, at considerable cost, of such equipment to meet the regulations. Such regulations include (but are not limited to):
(1) the U.S. Department of Transportation's Aircraft Capacity Act of 1990 (which limits or eliminates the operation of commercial aircraft in the U.S. that do not meet certain noise, aging, and corrosion criteria);
(2) 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 of and eventual replacement of substances that have been found to cause or contribute significantly to harmful effects on the stratospheric ozone layer and which are used extensively as refrigerants in refrigerated marine cargo containers, over-the-road trailers, etc.;
(3) the U.S. Department of Transportation's Hazardous Materials Regulations which regulate the classification of and packaging requirements for hazardous materials and which apply particularly to the Partnerships' tankcars.
(E) Demand
The Partnerships invested in Transportation-related capital equipment. With the exception of aircraft leased to passenger air carriers, the Partnerships' equipment is used primarily for the transport of materials. The following describes the markets for the Partnerships' equipment:
(1) Commuter Aircraft/Regional Aircraft
Independent forecasts show the regional aircraft market is growing at a rate of 5.5% per year through 2013. This is slightly higher than the comparable growth rate in commercial aircraft of 4.7% over the same period. Currently there are 4,390 regional aircraft in service in the 15 to 70 seat class. Independent forecasts show this will grow to over 5,000 aircraft during the next 17 years. The highest growth markets are the 30 to 50 seat turboprops. The emphasis on the larger aircraft in the future is a result of growing passenger numbers, airport congestion and the extension of regional airline route networks requiring longer range aircraft. These events will continue the current trend of the major airlines to hand down the operations of their marginal shorthaul routes to affiliated regional carriers.
At December 31, 1996, the Partnership had an interest in an entity which owns a commuter aircraft that is in the 19 seat category operating in North America. The Partnership expects to sell this investment in 1997.
(2) Marine Containers
At the end of 1995, the consensus of industry sources was that 1996 would see both higher container utilization and strengthening of per diem lease rates. Such was not the case, as there was no appreciable cyclical improvement in the container market following the traditional winter slowdown. Industry utilization continues to be under pressure, with per diem rates being impacted as well.
A substantial portion of the Partnership's containers are on long-term utilization leases which were entered into with Trans Ocean Leasing as lessee. The industry has seen a major consolidation, as Transamerica Leasing, late in the fourth quarter of 1996, acquired Trans Ocean Leasing. Transamerica Leasing is the second largest container leasing company in the world. Transamerica Leasing is the substitute lessee for Trans Ocean Leasing. Long term, such industry consolidation should bring more rationalization to the market and result in higher utilization and per diem rates.
(3) Railcars
General-purpose, or nonpressurized, tank cars are used to transport a wide variety of bulk liquid commodities, such as petroleum fuels, lubricating oils, vegetable oils, molten sulphur, corn syrup, asphalt, and specialty chemicals. Demand for general purpose tank cars in the Partnership fleet has remained healthy over the last two years with utilization remaining above 98%. Independent projections show the demand for petroleum growing during 1997 to 1999, as the developing world, former Communist countries, and the industrialized world all increase their demand for energy. Chemical carloadings for the first 40 weeks of 1996 were up one tenth of one percent (0.1%) as compared to the same period in 1995.
(4) Over-the-Road Dry Trailers
The over-the-road dry trailer market was weak in 1996, with utilization down 15%. The trailer industry experienced a record year in 1994 for new production and 1995 production levels were similar to 1994's. However, in 1996 , the truck freight recession, along with an overbuilding situation, contributed to 1996's poor performance. The year 1996 had too little freight and too much equipment industrywide.
(5) Over-the-Road Refrigerated Trailers
PLM experienced fairly strong demand levels in 1996 for its refrigerated trailers. With over 15% of the fleet in refrigerated trailers, PLM and the Partnerships are the largest supplier of short-term rental refrigerated trailers in the U.S..
ITEM 2.
ITEM 2. PROPERTIES
The Partnerships neither own nor lease any properties other than the equipment they have purchased for lease to others. As of December 31, 1996, each Partnership owned a portfolio of transportation equipment as described in Part I, Item 1. It is not contemplated that any more equipment will be acquired.
The Partnerships maintain their principal offices at One Market, Steuart Street Tower, Suite 800, San Francisco, California 94105-1301. All office facilities are provided by FSI without reimbursement by the Partnerships.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnerships' Limited Partners during the fourth quarter of its fiscal year ended December 31, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE PARTNERSHIPS' EQUITY AND RELATED UNITHOLDER MATTERS
Pursuant to the terms of the Partnership Agreements, the General Partner is entitled to a 1% interest in the profits, losses and distributions of the Partnerships. The General Partner also is entitled to a special allocation of any net profit or gains from sale of each Partnership's assets during the liquidation phase in an amount equal to the excess of the net losses previously allocated to the General Partner over the capital contributions made by the General Partner. FSI is the sole holder of such interests. Ownership of the remaining 99% interest in the profits and losses and distributions of the respective Partnerships is represented as follows:
TEP VIIB TEP VIIC -------------------------------
Holders of Limited Partnership Units as of December 31, 1996 835 1,226
There are several secondary exchanges which may purchase limited partnership units. Secondary markets are characterized as having few buyers for limited partnership interests and, therefore, generally are viewed as inefficient vehicles for the sale of partnership units. There is no public market for these Limited Partnership Units and none is likely to develop. Moreover, the Limited Partnership Units are subject to substantial restrictions on transferability.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Tables 1, below, lists selected financial data for the respective Partnerships.
TABLE 1
For the years ended December 31,
For the years ended December 31,
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
(A) Sources
The Partnerships' primary source of liquidity is operating cash flow. Proceeds realized from the sale or disposal of equipment are generally distributed to the partners. The Partnerships' original source of capital was proceeds from its initial public offering of limited partnership units.
(B) Asset Sales
Equipment sales and dispositions prior to the Partnerships' planned liquidation phase generally result from either the exercise by lessees of fair market value purchase options provided for in certain leases, or the payment of stipulated loss values on equipment lost or disposed during the time it is subject to lease agreements. Such disposal of equipment is unpredictable and results from the wear, tear, and general risk of normal operations. As discussed in note 6, the Partnerships have entered the portfolio liquidation phase as of the third quarter of 1995. The General Partner is actively marketing the remaining equipment portfolio with the intent of maximizing sale proceeds.
(C) Market Values
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS 121). This standard is effective for years beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995. In accordance with SFAS 121, the General Partner reviews the carrying value of its equipment portfolio at least annually in relation to expected future market conditions for the purpose of assessing recoverability of the recorded amounts. If projected future lease revenue plus residual values are less than the carrying value of the equipment, a loss on revaluation is recorded. No adjustments to reflect impairment of individual equipment carrying values were required for the year ended December 31, 1996.
As of December 31, 1996, the General Partner estimated the fair market value of each Partnerships' equipment portfolio, including equipment owned by unconsolidated special purpose entities (USPE's), to be approximately: $1.0 million and $1.8 million for TEP VIIB and TEP VIIC respectively.
(D) Government Regulations
The General Partner operates the Partnerships' equipment in accordance with current regulations (see Item 1 (D) Government Regulations). However, the continuing implementation of new or modified regulations by some of the authorities mentioned previously, or others, may adversely affect the Partnerships' ability to continue to own or operate equipment in its portfolio. These on-going changes in the regulatory environment, both in the U.S. and internationally, cannot be predicted with any certainty and thus preclude the General Partner from accurately determining the impact of such changes on Partnership operations, purchases and sales of equipment.
(E) Future outlook
Pursuant to the original operating plan, the Partnerships entered into their liquidation phase during 1995 and the General Partner is actively pursuing the sale of all of the Partnerships' equipment with the intention of winding up the Partnerships and distributing all available cash to the Partners.
(F) Result of operations - Year To Year Summary
Comparison of the Partnerships' Operating Results for the Years Ended December 31, 1996 and 1995
TEP VIIB:
(A) Owned equipment operations
Lease revenues less direct expenses (defined as repairs and maintenance and asset specific insurance expenses) on owned equipment decreased for the year ended December 31, 1996 when compared to the same period of 1995. The following table presents lease revenues less direct expenses by owned equipment type:
Trailers: Trailer lease revenues and direct expenses were $362,500 and $121,484, respectively, for the year ended December 31, 1996, compared to $525,408 and $160,267, respectively, during the same period of 1995. The decrease in net contribution was due to lower utilization of trailers in the short-term rental facilities for the twelve months ended December 31, 1996 when compared to the same period of 1995, and the disposition of eight trailers in 1995 and 19 trailers during 1996;
Railcar equipment: Railcar lease revenues and direct expenses were $30,000 and $1,028, respectively, for year ended December 31, 1996, compared to $28,049 and $6,635, respectively, during the same period of 1995. Although the railcar fleet remained the same size for both years, the increase in railcar contribution resulted from running repairs required on certain railcars in the fleet during 1995 which were not needed during 1996. In addition, early lease termination on four railcars in the third quarter of 1995 resulted in a credit given back to the lessee.
Marine containers: Marine container lease revenues and direct expenses were $18,417 and $114, respectively, for the year ended December 31, 1996, compared to $22,703 and $251, respectively, during the same period of 1995. The number of marine containers owned by the Partnership has been declining over the past twelve months due to sales and dispositions. The result of this declining fleet has been a decrease in marine container net contribution.
(B) Indirect expenses related to owned equipment operations
Total indirect expenses of $391,625 for the year ended December 31, 1996, decreased from $485,781 for the same period in 1995. The variances are explained as follows:
(a) a $36,165 decrease in bad debt expense was due to the General Partner's evaluation of the collectibility of trade receivables from trailer rental yard lessees;
(b) a $29,847 decrease in general and administrative expenses from 1995 levels was due to decreased accounting costs and administrative costs associated with the short-term rental facilities;
(c) a $24,599 decrease in depreciation expenses from 1995 levels reflecting the sale of certain assets during 1996 and 1995.
(d) a $3,545 decrease in management fee from 1995 levels due to a lower level of operating cash flow associated with lower lease revenue on trailers and lower utilization and rates on marine containers. Management fees are calculated monthly as the greater of 10% of the Partnership's operating cash flow, or 1/12 of 1/2% of the Partnership's Gross Proceeds as defined in the Limited Partnership Agreement.
(C) For the year ended December 31, 1996, the Partnership realized a gain of $62,907 on the sale or disposition of nine marine containers and 19 trailers, compared to the same period in 1995 when the Partnership realized a gain of $27,563 on the sale or disposition of eight trailers and 15 marine containers.
(D) Interest and other income decreased to $13,402 for the year ended December 31, 1996 from $32,119 for the same period of 1995. This decrease was primarily due to income earned from an early lease termination penalty on four railcars in the third quarter of 1995, and lower interest income earned due to lower cash balances available for investments when compared to the same period of 1995.
(E) Equity in net income of the unconsolidated special purpose entity
Equity in net income of unconsolidated special purpose entity was $265,108 for the year ended December 31, 1996, and represents the Partnership share of income ($28,408) generated from the partnership investment in an entity which owns an aircraft, accounted for under the equity method and the gain ($236,700) resulting from the sale by this entity of this aircraft during 1996 (see Note 4 to the financial statements).
(F) Net income
The Partnership's net income of $238,083 for the year ended December 31, 1996, increased from $29,306 for the year ended December 31, 1995. The Partnership's ability to operate or liquidate assets, secure leases, and re-lease those assets whose leases expire during the duration of the Partnership is subject to many factors, and the Partnership's performance in 1996 is not necessarily indicative of future periods. For the year ended December 31, 1996, the Partnership distributed $588,367 to the Limited Partners, or $26.41 per weighted average Limited Partnership Unit which included a special distribution from asset sales of $8.89 per unit.
All of the equipment owned by TEP VIIB was either operating in the trailer rental facilities or on lease as of December 31, 1996. The Partnership's performance during 1996 is not necessarily indicative of future periods.
TEP VIIC:
(A) Owned equipment operations
Lease revenues less direct expenses (defined as repairs and maintenance and asset specific insurance expenses) on owned equipment decreased during 1996 when compared to the same period of 1995. The following table presents lease revenues less direct expenses by owned equipment type:
Trailers: Trailer lease revenues and direct expenses were $392,542 and $108,207, respectively, for the year ended December 31, 1996, compared to $707,321 and $223,302, respectively during the same period during 1995. The decrease in net contribution was due to lower utilization of trailers in the short-term rental facilities in 1996 when compared to 1995, and the disposition of 14 trailers in 1995 and 40 trailers during 1996;
Marine containers: Marine container lease revenues and direct expenses were $14,332 and $207, respectively, for the twelve months ended 1996, compared to $29,819 and $469, respectively during the same period during 1995. The number of marine containers owned by the Partnership has been declining over the past twelve months due to sales and dispositions. The result of this declining fleet has been a decrease in marine container net contribution.
(B) Indirect expenses related to owned equipment operations
Total indirect expenses of $509,462 for the year ended December 31, 1996, decreased from $643,725 for the same period in 1995. The variances are explained as follows:
(a) a $63,135 decrease in the general and administrative expenses from 1995 levels due to decreased accounting costs and administrative costs associated with the short-term rental facilities due to decreased volume of trailers operating in these facilities;
(b) a $47,340 decrease in depreciation expenses from 1995 levels reflecting the sale of certain assets during 1996 and 1995;
(c) a $33,259 decrease in bad debt expense due to the General Partner's evaluation of the collectibility of trade receivables from trailer rental yard lessees;
(d) a $9,471 increase in management fees due to higher levels of operating cash flow during the comparable periods. Monthly management fees are calculated as the greater of 10% of the Partnership's Operating Cash Flow, or 1/12 of 1/2% of the Partnership's Capital Contributions as defined in the Limited Partnership Agreement.
(C) For the year ended December 31, 1996, the Partnership realized a gain of $133,840 on the sale or disposition of 40 trailers and 10 marine containers, compared to the same period in 1995, when the Partnership realized a gain of $84,289 on the sale or disposition of 14 trailers and 17 marine containers.
(D) Equity in net income of unconsolidated special purpose entities
Equity in net income of unconsolidated special purpose entities of $653,740 for the year ended December 31, 1996, represents the Partnership share of income ($117,919) generated from the partnership investment in entities which own aircraft, accounted for under the equity method and the gain ($535,821) resulting from the sale by this entity of the aircraft during 1996 (see Note 4 to the financial statements).
(E) Interest and other income decreased to $24,366 for the year ended December 31, 1996, from $35,376 compared to the same period of 1995. This decrease was primarily due to lower interest rate earned on cash investments in 1996.
(F) Net income
The Partnership's net income increased to $600,944 for the year ended December 31, 1996, from $175,174 in the same period in 1995. The Partnership's ability to operate or liquidate assets, secure leases, and re-lease those assets whose leases expire during the duration of the Partnership is subject to many factors, and the Partnership's performance in 1996 is not necessarily indicative of future periods. For the year ended December 31, 1996, the Partnership distributed $1,439,812 to the Limited Partners, or $42.69 per weighted average Limited Partnership Unit which included a special distribution from asset sales of $23.48 per unit.
All of the equipment owned by TEP VIIC was either operating in the trailer rental facilities or on lease as of December 31, 1996. The Partnership's performance during 1996 is not necessarily indicative of future periods.
Comparison of the Partnerships' Operating Results for the Years Ended December 31, 1995 and 1994
TEP VIIB:
(A) Revenues
Total revenues for the years ended December 31, 1995 and 1994, were $732,844 and $813,152, respectively. The decrease in 1995 revenue was attributable primarily to lower lease revenues, and lower interest and other income.
(1) Lease revenue decreased to $673,162 in 1995 from $786,981 in 1994.
The following table lists lease revenues earned by equipment type:
For the year ended December 31, 1995 1994 --------------------------------- Trailers $ 525,408 $ 631,161 Aircraft 97,002 99,081 Rail equipment 28,049 32,660 Marine containers 22,703 24,079 ================================ $ 673,162 $ 786,981 ================================
Significant revenue component changes resulted primarily from:
(a) Trailer revenues decreased due to off lease time on trailers previously operating on fixed-term leases transitioning to the PLM-affiliated short-term rental facilities during 1995, and the disposition of eight trailers during 1995;
(b) Railcar revenues decreased due to the re-lease of some railcars at lower rates than currently available in the market for the types of cars owned by the Partnership.
(2) Interest and other income increased to $32,119 in 1995 from $11,508 in 1994. The increase in 1995 was primarily attributable to income earned from an early lease termination penalty on four railcars in the second quarter of 1995, and higher average interest rates during 1995.
(B) Expenses
The Partnership's total expenses for the years ended December 31, 1995 and 1994 were $703,538 and $724,463, respectively. The decrease was attributable primarily to decreases in depreciation expense, repairs and maintenance, and general and administrative expenses, partially offset by an increase in bad debt expense.
(1) Direct operating expenses (defined as repairs and maintenance and insurance expense) decreased to $167,475 in 1995 from $183,155 in 1994. The decrease in repairs and maintenance is primarily attributed to a decrease in the number of trailers coming off term leases and requiring refurbishment prior to transitioning into the short-term rental facilities operated by an affiliate of the General Partner, and the disposition of trailers during 1995.
(2) Indirect Operating Expenses (defined as depreciation expense, management fees to affiliate, bad debt expense, and general and administrative expenses) decreased to $536,063 in 1995 from $541,308 in 1994. The decrease is due primarily to:
(a) a decrease of $15,462 in depreciation expense resulting from disposition of trailers and marine containers during 1995;
(b) a decrease of $5,692 in general and administrative expenses primarily due to the decreased overall fleet size and decreased indirect costs associated with trailers in the PLM-affiliated short-term rental facilities;
(c) an increase of $17,328 in bad debt expense due to the General Partner's evaluation of the collectability of certain of the Partnership's trade accounts receivable;
(3) Gain from disposition of equipment of $27,563 was realized from the sale or disposition of eight trailers and 15 marine containers in 1995. In 1994, the Partnership realized a gain of $14,663 from the sale or disposition of eight trailer and 24 marine containers.
(C) Net Income
As a result of all of the foregoing, net income for the year ended December 31, 1995, decreased to $29,306 from $88,689 for the year ended December 31, 1994. The Partnership's ability to operate or liquidate assets, secure leases, and re-lease those assets whose leases expire during the duration of the Partnership is subject to many factors, and the Partnership's performance in 1995 is not necessarily indicative of future periods. In 1995, TEP VIIB distributed $392,225 to the Limited Partners, or $17.61 per Unit.
TEP VIIC:
(A) Revenues
Total revenues for the years ended December 31, 1995 and 1994, were $1,254,597 and $1,712,474, respectively. The decrease in 1995 revenue was attributable primarily to a decrease in lease revenues partially offset by an increase in interest and other income, and an increase in gain on disposition of equipment.
(1) Lease revenue decreased in 1995 to $1,134,932 as compared to $1,616,995 in 1994.
The following table lists lease revenues earned by equipment type:
Significant revenue component changes resulted primarily from:
(a) Trailer revenues decreased $365,718 due to off lease time on trailers previously operating on fixed-term leases transitioning to the PLM-affiliated short-term rental facilities during 1995, a decline in utilization in the PLM-affiliated short-term rental facilities during 1995 and the disposition of 14 trailers in 1995;
(b) Aircraft revenue decreased $116,826 due to a reduced release rate for one lease.
(2) Interest and other income increased to $35,376 in 1995 from $27,256 in 1994. The increase in 1995 was primarily attributable to higher interest income in 1995 due to higher cash balance invested and higher average interest rates in 1995.
(B) Expenses
The Partnership's total expenses for the years ended December 31, 1995 and 1994 were $1,079,423 and $1,271,252, respectively. The decrease was attributable primarily to decreases in general and administrative expenses, depreciation expense, repairs and maintenance expense, bad debt expense, and management fees.
(1) Direct operating expenses (defined as repairs and maintenance expenses and insurance expense) decreased to $228,281 in 1995 from $265,498 in 1994. The decrease is primarily attributed to a decrease in the number of trailers coming off term leases and requiring refurbishment prior to transitioning into the PLM-affiliated short-term rental facilities.
(2) Indirect Operating Expenses (defined as depreciation expense, management fees to affiliate, bad debt expense, and general and administrative expenses) decreased to $851,142 in 1995 from $1,005,754 in 1994. The decrease is due primarily to:
(a) a decrease of $57,537 in general and administrative expenses primarily due to the decreased overall fleet size and decreased indirect costs associated with trailers in the PLM-affiliated short-term rental facilities.
(b) a decrease of $46,198 in depreciation expense due to the disposition of trailers and marine containers during 1995;
(c) a decrease of $25,830 in bad debt expense due to improved collectability of trade accounts receivable;
(d) a decrease of $25,047 in management fees to affiliate due to a lower level of operating cash flow associated with lower lease revenue on trailers and lower utilization and rates on marine containers. Management fees are calculated monthly as the greater of 10% of the Partnership's operating cash flow, or 1/12 of 1/2% of the Partnership's Gross Proceeds as defined in the Limited Partnership Agreement;
(3) Gain from disposition of equipment of $84,289 was realized from the sale or disposition of 17 marine containers and 14 trailers during 1995. In 1994, the Partnership realized a gain of $68,223 on the sale or disposition of 18 trailers and 21 marine containers.
(C) Net Income
As a result of all the foregoing, net income for the year ended December 31, 1995, decreased to $175,174 from $441,222 for the year ended December 31, 1994. The Partnership's ability to operate or liquidate assets, secure leases, and re-lease those assets whose leases expired during the duration of the Partnership is subject to many factors, and the Partnership's performance in 1995 is not necessarily indicative of future periods. In 1995, TEP VIIC distributed $1,037,064 to the Limited Partners, or $30.75 per Unit.
All of the equipment owned by TEP VIIC was either operating in the trailer rental facilities or on lease as of December 31, 1995. The Partnership's performance during 1995 is not necessarily indicative of future periods.
Inflation
Inflation and changing prices did not materially impact the Partnerships' revenues or net income during the reported periods.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules for the Partnerships are listed on the Index to Financial Statements included in Item 14(a) of this Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
(This space intentionally left blank)
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
As of the date of this Annual Report, the directors and executive officers of PLM International (and key executive officers of its subsidiaries) are as follows:
J. Alec Merriam was appointed Chairman of the Board of Directors of PLM International in September 1990, having served as a director since February 1988. In October 1988 he became a member of the Executive Committee of the Board of Directors of PLM International. From 1972 to 1988 Mr. Merriam was Executive Vice President and Chief Financial Officer of Crowley Maritime Corporation, a San Francisco area-based company engaged in maritime shipping and transportation services. Previously, he was Chairman of the Board and Treasurer of LOA Corporation of Omaha, Nebraska and served in various financial positions with Northern Natural Gas Company, also of Omaha.
Douglas P. Goodrich was elected to the Board of Directors in July 1996, appointed Director and President of PLM Financial Services, Inc. in June, 1996, and appointed Senior Vice President of PLM International in March 1994. Mr. Goodrich has also served as Senior Vice President of PLM Transportation Equipment Corporation since July 1989, and as President of PLM Railcar Management Services, Inc. since September 1992 having been a Senior Vice President since June 1987. Mr. Goodrich was an Executive Vice President of G.I.C. Financial Services Corporation, a subsidiary of Guardian Industries Corp. of Chicago, Illinois from December 1980 to September 1985.
Dr. Hoadley joined PLM International's Board of Directors and its Executive Committee in September, 1989. He served as a Director of PLM, Inc. from November 1982 to June 1984 and PLM Companies, Inc. from October 1985 to February 1988. Dr. Hoadley has been a Senior Research Fellow at the Hoover Institute since 1981. He was Executive Vice President and Chief Economist for the Bank of America from 1968 to 1981 and Chairman of the Federal Reserve Bank of Philadelphia from 1962 to 1966. Dr. Hoadley has served as a Director of Transcisco Industries, Inc. from February 1988 through August 1995.
Robert L. Pagel was appointed Chairman of the Executive Committee of the Board of Directors of PLM International in September 1990, having served as a director since February 1988. In October 1988 he became a member of the Executive Committee of the Board of Directors of PLM International. From June 1990 to April 1991 Mr. Pagel was President and Co-Chief Executive Officer of The Diana Corporation, a holding company traded on the New York Stock Exchange. He is the former President and Chief Executive Officer of FanFair Corporation which specializes in sports fans' gift shops. He previously served as President and Chief Executive Officer of Super Sky International, Inc., a publicly traded company, located in Mequon, Wisconsin, engaged in the manufacture of skylight systems. He was formerly Chairman and Chief Executive Officer of Blunt, Ellis & Loewi, Inc., a Milwaukee-based investment firm. Mr. Pagel retired from Blunt, Ellis & Loewi in 1985 after a career spanning 20 years in all phases of the brokerage and financial industries. Mr. Pagel has also served on the Board of Governors of the Midwest Stock Exchange.
Harold R. Somerset was elected to the Board of Directors of PLM International in 1994. From February 1988 to December 1993, Mr. Somerset was President and Chief Executive Officer of California & Hawaiian Sugar Corporation, (C&H) a recently-acquired subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined C&H in 1984 as Executive Vice President and Chief Operating Officer, having served on its Board of Directors since 1978, a position in which he continues to serve. Between 1972 and 1984, Mr. Somerset served in various capacities with Alexander & Baldwin, Inc., a publicly-held land and agriculture company headquartered in Honolulu, Hawaii, including Executive Vice President - Agricultures, Vice President, General Counsel and Secretary. In addition to a law degree from Harvard Law School, Mr. Somerset also holds degrees in civil engineering from the Rensselaer Polytechnic Institute and in marine engineering from the U.S. Naval Academy. Mr. Somerset also serves on the Boards of Directors for various other companies and organizations, including Longs Drug Stores, Inc., a publicly-held company.
Robert N. Tidball was appointed President and Chief Executive Officer of PLM International in March 1989. At the time of his appointment, he was Executive Vice President of PLM International. Mr. Tidball became a director of PLM International in April, 1989 and a member of the Executive Committee of the Board of Directors of PLM International in September 1990. Mr. Tidball was elected President of PLM Railcar Management Services, Inc. in January 1986. Mr. Tidball was Executive Vice President of Hunter Keith, Inc., a Minneapolis-based investment banking firm, from March 1984 to January 1986. Prior to Hunter Keith, Inc., he was Vice President, a General Manager and a Director of North American Car Corporation, and a Director of the American Railcar Institute and the Railway Supply Association.
J. Michael Allgood was appointed Vice President and Chief Financial Officer of PLM International in October 1992. Between July 1991 and October 1992, Mr. Allgood was a consultant to various private and public sector companies and institutions specializing in financial operational systems development. In October 1987, Mr. Allgood co-founded Electra Aviation Limited and its holding company, Aviation Holdings Plc of London where he served as Chief Financial Officer until July 1991. Between June 1981 and October 1987, Mr. Allgood served as a First Vice President with American Express Bank, Ltd. In February 1978, Mr. Allgood founded and until June 1981, served as a director of Trade Projects International/Philadelphia Overseas Finance Company, a joint venture with Philadelphia National Bank. From March 1975 to February 1978, Mr. Allgood served in various capacities with Citibank, N.A.
Stephen M. Bess was appointed President of PLM Securities, Corp. in June, 1996 and President of PLM Investment Management, Inc. in August 1989, having served as Senior Vice President of PLM Investment Management, Inc. beginning in February 1984 and as Corporate Controller of PLM Financial Services, Inc. beginning in October 1983. Mr. Bess served as Corporate Controller of PLM, Inc., beginning in December 1982. Mr. Bess was Vice President-Controller of Trans Ocean Leasing Corporation, a container leasing company, from November 1978 to November 1982, and Group Finance Manager with the Field Operations Group of Memorex Corp., a manufacturer of computer peripheral equipment, from October 1975 to November 1978.
David J. Davis was appointed Vice President and Controller of PLM International in January 1994. From March 1993 through January 1994, Mr. Davis was engaged as a consultant for various firms, including PLM. Prior to that Mr. Davis was Chief Financial Officer of LB Credit Corporation in San Francisco from July 1991 to March 1993. From April 1989 to May 1991, Mr. Davis was Vice President and Controller for ITEL Containers International Corporation which was located in San Francisco. Between May 1978 and April 1989, Mr. Davis held various positions with Transamerica Leasing Inc., in New York, including that of Assistant Controller for their rail leasing division.
Frank Diodati was appointed President of PLM Railcar Management Services Canada Limited in 1986. Previously, Mr. Diodati was Manager of Marketing and Sales for G.E. Railcar Services Canada Limited.
Steven O. Layne was appointed Vice President, PLM Transportation Equipment Corporation's Air Group in November 1992, was appointed Vice President and Director of PLM Worldwide Management Services, Ltd. in September, 1995. Mr. Layne was its Vice President, Commuter and Corporate Aircraft beginning in July 1990. Prior to joining PLM, Mr. Layne was the Director, Commercial Marketing for Bromon Aircraft Corporation, a joint venture of General Electric Corporation and the Government Development Bank of Puerto Rico. Mr. Layne is a major in the United States Air Force Reserves and senior pilot with 13 years of accumulated service.
Stephen Peary became Vice President, Secretary, and General Counsel of PLM International in February 1988 and Senior Vice President in March 1994. Mr. Peary was Assistant General Counsel of PLM Financial Services, Inc. from August 1987 through January 1988. Previously, Mr. Peary was engaged in the private practice of law in San Francisco. Mr. Peary is a graduate of the University of Illinois, Georgetown University Law Center, and Boston University (Masters of Taxation Program).
Thomas L. Wilmore was appointed Vice President - Rail, PLM Transportation Equipment Corporation, in March 1994 and has served as Vice President, Marketing for PLM Railcar Management Services, Inc. since May 1988. Prior to joining PLM, Mr. Wilmore was Assistant Vice President Regional Manager for MNC Leasing Corp. in Towson, Maryland from February 1987 to April 1988. From July 1985 to February 1987, he was President and Co-Owner of Guardian Industries Corp., Chicago, July Illinois and between December 1980 and July 1985, Mr. Wilmore was an Executive Vice President for its subsidiary, G.I.C. Financial Services Corporation. Mr. Wilmore also served as Vice President of Sales for Gould Financial Services located in Rolling Meadows, Illinois from June 1978 to December 1980.
The directors of the General Partner are elected for a one-year term or until their successors are elected and qualified. There are no family relationships between any director or any executive officer of the General Partner.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnerships have no directors, officers, or employees. The Partnerships have no pension, profit sharing, retirement, or similar benefit plan in effect as of December 31, 1996.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
At December 31, 1996, no investor is known by the General Partner to beneficially own more than 5% of the Units of either TEP VIIB or TEP VIIC.
(b) Security Ownership of Management
Neither the General Partner and its affiliates nor any officer or director of the General Partner and its affiliates beneficially own any Units of either TEP VIIB or TEP VIIC.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others.
During 1996, management fees to IMI were incurred in the amounts of $52,145 and $97,439 for TEP VIIB and TEP VIIC, respectively. During 1996, administrative services performed on behalf of the Partnerships were reimbursed to FSI and its affiliates in the amounts of $77,237 and $112,550 by TEP VIIB and TEP VIIC, respectively.
During 1996, the unconsolidated special purpose entities (USPE's) paid or accrued (based on the Partnership's proportional share of ownership): management fees to IMI in the amounts of $3,056 and $15,596 for TEP VIIB and TEP VIIC, respectively; administrative services in the amounts of $594 for TEP VIIC.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The financial statements listed in the accompanying Index to Financial Statements are filed as part of this Annual Report.
(b) Reports on Form 8-K
None.
(c) Exhibits
4.Limited Partnership Agreement of each Partnership. Incorporated by reference to the Partnership's Registration Statement on Form S-1 (Reg. No. 2-93640) which became effective with the Securities and Exchange Commission on January 7, 1985.
10. Equipment Management Agreement between each Partnership and PLM Investment Management, Inc. Incorporated by reference to the Registration Statement on Form S-1 (Reg. No. 2-93640) which became effective with the Securities and Exchange Commission on January 7, 1985.
25. Powers of Attorney.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on behalf of the Partnership by duly authorized officers.
Dated: March 14, 1997 PLM Transportation Equipment Partners VIIB 1985 Income Fund Partnership
By: PLM Financial Services, Inc. General Partner
By: /s/ Douglas P. Goodrich ------------------------------- Douglas P. Goodrich President & Director
By: /s/ David J. Davis ------------------------------- David J. Davis Vice President and Corporate Controller
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 14, 1997 PLM Transportation Equipment Partners VIIC 1985 Income Fund Partnership
By: PLM Financial Services, Inc. General Partner
By: /s/ Douglas P. Goodrich ----------------------------- Douglas P. Goodrich President and Director
By: /s/ David J. Davis ----------------------------- David J. Davis Vice President and Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following directors of the Partnerships' Managing General Partner on the dates indicated.
Name Capacity Date
*_____________________________ J. Alec Merriam Director-FSI March 14, 1997
*_____________________________ Robert L. Pagel Director-FSI March 14, 1997
* Stephen Peary, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission.
/s/ Stephen Peary - ----------------------- Stephen Peary Attorney-in-Fact
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership)
(Item 14(a))
TEP VIIB Page
Report of Independent Auditors 26
Balance sheets at December 31, 1996 and 1995 27
Statements of income for the years ended December 31, 1996, 1995, and 1994 28
Statements of changes in partners' capital for the years ended December 31, 1996, 1995, and 1994 29
Statements of cash flows for the years ended December 31, 1996, 1995, and 1994 30
Notes to financial statements 31-35
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.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership)
(Item 14(a))
TEP VIIC Page
Report of Independent Auditors 36
Balance sheets at December 31, 1996 and 1995 37
Statements of income for the years ended December 31, 1996, 1995, and 1994 38
Statements of changes in partners' capital for the years ended December 31, 1996, 1995, and 1994 39
Statements of cash flows for the years ended December 31, 1996, 1995, and 1994 40
Notes to financial statements 41-45
All other financial statement schedules have been omitted as the required information is not pertinent to the Registrant or is not material, or because the information required is included in the financial statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners PLM Transportation Equipment Partners VIIB 1985 Income Fund:
We have audited the financial statements of PLM Transportation Equipment Partners VIIB 1985 Income Fund as listed in the accompanying index. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The Partnership completed its tenth year of operations during 1995, and entered the liquidation phase of the Partnership. The General Partner is actively pursuing the sale of all of the Partnership's equipment with the intention of winding up the Partnership and distributing all available cash to the Partners. Management's plans in regard to this matter are more fully described in note 6.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PLM Transportation Equipment Partners VIIB 1985 Income Fund as of December 31, 1996, and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP - -----------------------------------
SAN FRANCISCO, CALIFORNIA March 14, 1997
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership)
BALANCE SHEETS December 31,
ASSETS
See accompanying notes to financial statements.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership)
STATEMENTS OF INCOME For the years ended December 31,
See accompanying notes to financial statements.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the years ended December 31, 1996, 1995, and 1994
See accompanying notes to financial statements.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31,
See accompanying notes to financial statements.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
1. Basis of Presentation
Organization
PLM Transportation Equipment Partners VIIB 1985 Income Fund, a California limited partnership (the Partnership) was formed on October 19, 1984. The Partnership engages in the business of owning and leasing transportation equipment. The Partnership commenced significant operations in August, 1985. PLM Financial Services, Inc. (FSI) is the General Partner. FSI is a wholly-owned subsidiary of PLM International, Inc. (PLM International) and manages the affairs of the Partnership.
The net income (loss) and distributions of the Partnership are allocated 99% to the Limited Partners and 1% to the General Partner. The General Partner is entitled to an incentive fee equal to 15% of "Surplus Distributions" as defined in the Partnership Agreement remaining after the Limited Partners have received a certain minimum rate of return.
These financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Operations
The equipment of the Partnership is managed, under a continuing Equipment Management Agreement, by PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI. IMI receives an annual management fee payable monthly from the Partnership for managing the equipment (see Note 2). FSI, in conjunction with its subsidiaries, sells transportation equipment to investor programs and third parties, manages pools of transportation equipment under agreements with the investor programs, and is a general partner of other affiliated limited partnerships.
Accounting for Leases
The Partnership's leasing operations generally consist of operating leases. Under the operating lease method of accounting, the leased asset is recorded at cost and depreciated over its estimated useful life. Rental payments are recorded as revenue over the lease term. Lease origination costs are capitalized and amortized over the term of the lease.
Depreciation
Depreciation is computed on the 200% declining balance method based upon estimated useful lives of 15 years for rail equipment, 12 years for aircraft, trailers, and marine containers, and 8 years for tractors. The depreciation method changes to straight line when annual depreciation expense using the straight line method exceeds that calculated by the 200% declining balance method. Major expenditures which are expected to extend the useful lives or reduce future operating expenses of equipment are capitalized.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
1. Basis of Presentation (continued):
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS 121). This standard is effective for years beginning after December 15, 1995. In accordance with SFAS 121, the General Partner reviews the carrying value of its equipment portfolio at least annually in relation to expected future market conditions for the purpose of assessing recoverability of the recorded amounts. If projected future lease revenue plus residual values are less than the carrying value of the equipment, a loss on revaluation is recorded. No adjustments to reflect impairment of individual equipment carrying values were required for the year ended December 31, 1996.
Investments in Unconsolidated Special Purpose Entities
Until the third quarter of 1996, the Partnership had an interest in a special purpose entity which owned transportation equipment. This interest was accounted for using the equity method.
The Partnership's investment in unconsolidated special purpose entity included acquisition and lease negotiation fees paid by the Partnership to TEC. The Partnership's equity interest in net income of unconsolidated special purpose entity is reflected net of management fees paid or payable to IMI and the amortization of acquisition and lease negotiation fees paid to TEC.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are not covered by the lessee they are charged against operations as incurred.
Net Income (Loss) and Distributions per Limited Partnership Unit
Net income (loss) per Limited Partnership Unit is computed based on the number of Limited Partnership Units outstanding during the period (22,276 for 1996, 1995, and 1994). The General Partner is allocated a 1% share of the net income (loss) and the Limited Partners are allocated a 99% share of the net income (loss).
Cash distributions are recorded when paid. Cash distributions to investors in excess of net income are considered to represent a return of capital. Cash distributions to Limited Partners of $352,665, $363,212, and $382,865 in 1996, 1995, and 1994, respectively, were deemed to be a return of capital.
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 for the purposes of this presentation.
2. Transactions with General Partner and Affiliates
An officer of FSI contributed $100 of the Partnership's initial capital. Under the Equipment Management Agreement, IMI receives an annual management fee monthly attributable to either owned equipment or interests in equipment owned by the USPE's equal to the greater of 10% of the
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
2. Transactions with General Partner and Affiliates (continued)
Partnership's "operating cash flow", or 1/12 of 1/2% of the Partnership's "gross proceeds" as defined in the Partnership Agreement. Management fees of $4,641 were payable to IMI as of December 31, 1996 and 1995. The Partnership's proportional share of USPE's management fees expense during 1996 was $3,056.
As of December 31, 1996, all of the Partnership's trailer equipment has been transferred into rental facilities operated by an affiliate of the General Partner. Revenues are earned by billing the rental facilities' customers monthly or quarterly under short-term rental agreements and are distributed as collected to the owners of the related equipment. Direct expenses associated with the equipment and an allocation of indirect expenses of rental facility operations are charged to the Partnership.
The Partnership reimbursed FSI and its affiliates $77,237, $130,286, and $127,227 for administrative and other services performed on behalf of the Partnership in 1996, 1995, and 1994, respectively. At December 31, 1996 and 1995, $4,641 was due to FSI and its affiliates.
3. Equipment
The components of owned equipment are as follows:
At December 31, 1996, the Partnership owned 27 marine containers, 189 trailers, and five tank cars.
Revenues are earned by placing the equipment under operating leases and are billed monthly or quarterly.
Rents for all equipment are based on a fixed operating lease amount with the exception of marine containers and certain trailers, which earn revenue based on utilization. The Partnership's marine containers are leased to an operator of utilization-type pools which include equipment owned by unaffiliated parties. In such instances revenues received by the Partnership consist of a specified percentage of lease revenues generated by leasing the pooled equipment to sub-lessees, after deducting certain direct operating expenses of the pooled equipment.
During 1996, the Partnership sold 19 trailers and disposed of 9 marine containers. During 1995, the Partnership sold eight trailers and disposed of 15 marine containers.
All of the equipment owned by the Partnership is either operating in PLM-affiliated short-term rental facilities or on lease as of December 31, 1996. With the exception of one trailer, all of the equipment owned by the Partnership was either operating in PLM-affiliated short-term rental facilities or on lease as of December 31, 1995. The carrying value of equipment off lease was $6,500 at December 31, 1995.
All leases are being accounted for as operating leases. Future minimum rentals receivable under non-cancelable leases at December 31, 1996 during each of the next five years are approximately $30,000 -1997; $30,000 - 1998; $10,000 - 1999; and $-0- thereafter. Contingent
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
3. Equipment (continued)
rentals based upon utilization amounted to $18,417 in 1996, $22,703 in 1995, and $24,079 in 1994. The lessees accounting for 10% or more of the total revenues during 1996, 1995, and 1994 were Kanakakee, Beaverville and Southern Railroad (40% in 1996, 18% in 1995, and 22% in 1994), and British Aerospace, Inc. (13% in 1996, 14% in 1995, and 13% in 1994).
4. Investment in Unconsolidated Special Purpose Entity
Prior to 1996, the Partnership accounted for operating activities associated with joint ownership of rental equipment as undivided interests, including its proportionate share of each asset with similar wholly-owned assets in its financial statements. Under generally accepted accounting principles, the effects of such activities, if material, should be reported using the equity method of accounting. Therefore, effective January 1, 1996, the Partnership adopted the equity method to account for its investment in such jointly-held assets.
The principle differences between the previous accounting method and the equity method relate to the presentation of activities relating to these assets in the income statement. Whereas, under the equity method of accounting the Partnership's proportionate share is presented as a single net amount, "equity in net income (loss) of unconsolidated special purpose entity", under the previous method, the Partnership's income statement reflected its proportionate share of each individual item of revenue and expense. Accordingly, the effect of adopting the equity method of accounting has no cumulative effect on previously reported partner's capital or on the Partnership's net income (loss) for the period of adoption. Because the effects on previously issued financial statements of applying the equity method of accounting to investments in jointly-owned assets are not considered to be material to such financial statements taken as a whole, previously issued financial statements have not been restated. However, certain items have been reclassified in the previously issued balance sheet to conform to the current period presentation.
The following summarizes the financial information for the special purpose entities and the Partnership's interest therein as of and for the year ended December 31, 1996:
Net Total USPE Interest of Partnership ------------------------------
Net Investments $ -- $ -- Revenues 199,477 61,120 Net Income 865,235 265,108
The "Investment in unconsolidated special purpose entity" includes a 31% interest in an entity which owns one commuter aircraft at December 31, 1995. The entity sold the aircraft in 1996.
5. 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 accounts of the Partnership.
As of December 31, 1996, there were temporary differences of approximately $1,409,857 between the financial statement carrying values of assets and liabilities and the federal income tax bases of such assets and liabilities, principally due to differences in depreciation methods.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
6. Liquidation and special distributions
During the first quarter of 1995, the Partnership completed its 10th year of operations. As originally anticipated by the General Partner, the Partnership will be liquidated in an orderly manner in its 11th and 12th years of operation. The General Partner is actively marketing the remaining equipment portfolio with the intent of maximizing sale proceeds. As sale proceeds are received the General Partner intends to periodically declare special distributions to distribute the sale proceeds to the partners. During the liquidation phase of the Partnership the equipment will continue to be leased under operating leases until sold. Operating cash flows, to the extent they exceed Partnership expenses, will continue to be distributed on a quarterly basis to partners. The amounts reflected for assets and liabilities of the Partnership have not been adjusted to reflect liquidation values. The equipment portfolio continues to be carried at the lower of depreciated cost or fair value less cost to dispose. Although the General Partner assets and liabilities, the amounts cannot be accurately determined prior to actual liquidation of the equipment. Any excess proceeds over expected Partnership obligations will be distributed to the Partners throughout the liquidation period. Upon final liquidation, the Partnership will be dissolved.
In 1996, the General Partner paid special distributions of $8.89 per weighted average Limited Partnership Unit. No special distributions were paid in 1995 and 1994. The Partnership is not permitted to reinvest proceeds from sales or liquidations of equipment. These proceeds, in excess of operational cash requirements, are periodically paid out to limited partners in the form of special distributions. The sales and liquidations occur because of equipment destructions, the determination by the General Partner that it is the appropriate time to maximize the return on an asset through sale of that asset, and, in some leases, the ability of the lessee to exercise purchase options.
REPORT OF INDEPENDENT AUDITORS
The Partners PLM Transportation Equipment Partners VIIC 1985 Income Fund:
We have audited the financial statements of PLM Transportation Equipment Partners VIIC 1985 Income Fund as listed in the accompanying index. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The Partnership completed its tenth year of operations during 1995, and entered the liquidation phase of the Partnership. The General Partner is actively pursuing the sale of all of the Partnership's equipment with the intention of winding up the Partnership and distributing all available cash to the Partners. Management's plans in regard to this matter are more fully described in note 6.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PLM Transportation Equipment Partners VIIC 1985 Income Fund as of December 31, 1996, and 1995 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1996 in conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP - ------------------------------
SAN FRANCISCO, CALIFORNIA March 14, 1997
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership)
BALANCE SHEETS December 31,
ASSETS
See accompanying notes to financial statements.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership)
STATEMENTS OF INCOME For the years ended December 31,
See accompanying notes to financial statements.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the years ended December 31, 1996, 1995, and 1994
See accompanying notes to financial statements.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31,
See accompanying notes to financial statements.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
1. Basis of Presentation
Organization
PLM Transportation Equipment Partners VIIC 1985 Income Fund, a California limited partnership (the Partnership) was formed on October 19, 1984 to engage in the business of owning and leasing transportation equipment. The Partnership commenced significant operations in May, 1985. PLM Financial Services, Inc. (FSI) is the General Partner. FSI is a wholly-owned subsidiary of PLM International, Inc. (PLM International) and manages the affairs of the Partnership.
The net income (loss) and distributions of the Partnership are allocated 99% to the Limited Partners and 1% to the General Partner. The General Partner is entitled to an incentive fee equal to 15% of "Surplus Distributions" as defined in the Partnership Agreement remaining after the Limited Partners have received a certain minimum rate of return.
These financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Operations
The equipment of the Partnership is managed, under a continuing Equipment Management Agreement, by PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI. IMI receives an annual management fee payable monthly from the Partnership for managing the equipment (see Note 2). FSI, in conjunction with its subsidiaries, sells transportation equipment to investor programs and third parties, manages pools of transportation equipment under agreements with the investor programs, and is a general partner of other affiliated limited partnerships.
Accounting for Leases
The Partnership's leasing operations generally consist of operating leases. Under the operating lease method of accounting, the leased asset is recorded at cost and depreciated over its estimated useful life. Rental payments are recorded as revenue over the lease term. Lease origination costs are capitalized and amortized over the term of the lease.
Depreciation
Depreciation is computed on the 200% declining balance method, converting to the straight-line method during the second half of the equipments' estimated useful lives, based upon estimated useful lives of 12 years for aircraft, trailers, and marine containers, and 8 years for tractors. The depreciation method changes to straight line when annual depreciation expense using the straight line method exceeds that calculated by the 200% declining balance method. Major expenditures which are expected to extend the useful lives or reduce future operating expenses of equipment are capitalized.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
1. Basis of Presentation (continued)
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS 121). This standard is effective for years beginning after December 15, 1995. In accordance with SFAS 121, the General Partner reviews the carrying value of its equipment portfolio at least annually in relation to expected future market conditions for the purpose of assessing recoverability of the recorded amounts. If projected future lease revenue plus residual values are less than the carrying value of the equipment, a loss on revaluation is recorded. No adjustments to reflect impairment of individual equipment carrying values were required for the year ended December 31, 1996.
Investments in Unconsolidated Special Purpose Entities
The Partnership has interests in special purpose entities which own transportation equipment. These interests are accounted for using the equity method.
The Partnership's investment in unconsolidated special purpose entities includes acquisition and lease negotiation fees paid by the Partnership to TEC. The Partnership's equity interest in net income of unconsolidated special purpose entities is reflected net of management fees paid or payable to IMI and the amortization of acquisition and lease negotiation fees paid to TEC.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are not covered by the lessee they are charged against operations as incurred.
Net Income (Loss) and Distributions per Limited Partnership Unit
Net income (loss) per Limited Partnership Unit is computed based on the number of Limited Partnership Units outstanding during the period (33,727 for 1996, 1995, and 1994). The General Partner is allocated a 1% share of the net income (loss).
Cash distributions are recorded when paid. Cash distributions to investors in excess of net income are considered to represent a return of capital. Cash distributions to Limited Partners of $844,877, $863,642 and $647,937 in 1996, 1995, and 1994, respectively, were deemed to be a return of capital.
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 for the purposes of this presentation. Lessee security deposits and required reserves held by the Partnership are considered restricted cash.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
2. General Partner and Transactions with Affiliates
An officer of FSI contributed $100 of the Partnership's initial net capital. Under the Equipment Management Agreement, IMI receives an annual management fee monthly attributable to either owned equipment or interests in equipment owned by the USPE's equal to the greater of 10% of the Partnership's "operating cash flow", or 1/12 of 1/2% the Partnership's "gross proceeds" as defined in the Partnership Agreement. Management fees of $7,026 were payable to IMI as of December 31, 1996 and 1995. The Partnership's proportional share of USPE's management fees expense during 1996 was $15,596.
As of December 31, 1996, all of the Partnership's trailer equipment has been transferred into rental facilities operated by an affiliate of the General Partner. Revenues collected under short-term rental agreements with the rental facilities' customers are distributed monthly to the owners of the related equipment. Direct expenses associated with the equipment and an allocation of indirect expenses of rental facility operations are billed to the Partnership.
The Partnership reimbursed FSI and its affiliates $112,550, $187,498, and $231,353 for administrative and other services performed on behalf of the Partnership in 1996, 1995, and 1994, respectively. The Partnership's proportional share of USPE's administrative and other services was $594 during 1996.
3. Equipment
The components of owned equipment are as follows:
At December 31, 1996 the Partnership owned 172 trailers, and 26 marine containers. Revenues are earned by placing the equipment under operating leases and are billed monthly or quarterly. Rents for all equipment are based on a fixed operating lease amount with the exception of marine containers. The Partnership's marine containers are leased to the operator of utilization-type pools which include equipment owned by unaffiliated parties. In such instances, revenues received by the Partnership consist of a specified percentage of lease revenues generated by leasing the pooled equipment to sub-lessees, after deducting certain direct operating expenses of the pooled equipment.
All of the equipment owned by the Partnership was either operating in the PLM-affiliated short-term rental facilities or on lease as of December 31, 1996.
During 1996, the Partnership sold 40 trailers and disposed of 10 marine containers. During 1995, the Partnership sold 14 trailers and disposed of 17 marine containers.
All leases are being accounted for as operating leases. Future minimum rentals of owned and partially owned equipment (USPE's) under non-cancelable leases at December 31, 1996 during each of the next five years are approximately $174,000 - 1997; $29,000 - 1998; $-0- -1999 and thereafter. Contingent rentals based upon utilization amounted to $14,332 in 1996, $29,819 in 1995, and $29,339 in 1994.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
3. Equipment (continued)
The lessees accounting for 10% or more of the total revenues during 1996, 1995, and 1994 were Horizon Air Industries, Inc. (24% in 1996, 15% in 1995, and 18% in 1994), and British Aerospace, Inc. (19% in 1996, 20% in 1995, and 14% in 1994).
4. Investments in Unconsolidated Special Purpose Entities
Prior to 1996, the Partnership accounted for operating activities associated with joint ownership of rental equipment as undivided interests, including its proportionate share of each asset with similar wholly-owned assets in its financial statements. Under generally accepted accounting principles, the effects of such activities, if material, should be reported using the equity method of accounting. Therefore, effective January 1, 1996, the Partnership adopted the equity method to account for its investment in such jointly-held assets.
The principle differences between the previous accounting method and the equity method relate to the presentation of activities relating to these assets in the income statement. Whereas, under the equity method of accounting the Partnership's proportionate share is presented as a single net amount, "equity in net income (loss) of unconsolidated special purpose entities", under the previous method, the Partnership's income statement reflected its proportionate share of each individual item of revenue and expense. Accordingly, the effect of adopting the equity method of accounting has no cumulative effect on previously reported partner's capital or on the Partnership's net income (loss) for the period of adoption. Because the effects on previously issued financial statements of applying the equity method of accounting to investments in jointly-owned assets are not considered to be material to such financial statements taken as a whole, previously issued financial statements have not been restated. However, certain items have been reclassified in the previously issued balance sheet to conform to the current period presentation.
The following summarizes the financial information for the special purpose entities and the Partnership's interest therein as of and for the year ended December 31, 1996:
Net Total USPE Interest of Partnership ------------------------------
Net Investments $ 124,423 $ 99,974 Revenues 415,477 311,913 Net Income 931,963 653,740
The "Investments in unconsolidated special purpose entities" included a 69% interest in an entity which owns a commuter aircraft and a 80% interest in an entity which owns another commuter aircraft. The entity sold the commuter aircraft for which the Partnership had a 69% interest in 1996.
5. 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.
At December 31, 1996, there were temporary differences of approximately $1,997,333 between the financial statement carrying values of assets and liabilities and the federal income tax bases of such assets and liabilities.
PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996
6. Liquidation and special distributions
During the first quarter of 1995, the Partnership completed its 10th year of operations. As originally anticipated by the General Partner, the Partnership will be liquidated in an orderly manner in its 11th and 12th years of operation. The General Partner is actively marketing the remaining equipment portfolio with the intent of maximizing sale proceeds. As sale proceeds are received the General Partner intends to periodically declare special distributions to distribute the sale proceeds to the partners. During the liquidation phase of the Partnership the equipment will continue to be leased under operating leases until sold. Operating cash flows, to the extent they exceed Partnership expenses, will continue to be distributed on a quarterly basis to partners. The amounts reflected for assets and liabilities of the Partnership have not been adjusted to reflect liquidation values. The equipment portfolio continues to be carried at the lower of depreciated cost or fair value less cost to dispose. Although the General Partner estimates that there will be distributions after liquidation of assets and liabilities, the amounts cannot be accurately determined prior to actual liquidation of the equipment. Any excess proceeds over expected Partnership obligations will be distributed to the Partners throughout the liquidation period. Upon final liquidation, the Partnership will be dissolved.
In 1996, 1995, and 1994, the General Partner paid special distributions of $23.48, $5.87, and $2.94 per weighted average Limited Partnership Unit. The Partnership is not permitted to reinvest proceeds from sales or liquidations of equipment. These proceeds, in excess of operational cash requirements, are periodically paid out to limited partners in the form of special distributions. The sales and liquidations occur because of equipment destructions, the determination by the General Partner that it is the appropriate time to maximize the return on an asset through sale of that asset, and, in some leases, the ability of the lessee to exercise purchase options.
PLM TRANSPORTATION EQUIPMENT PARTNERS VII 1985 INCOME FUND
(A Limited Partnership)
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of each Partnership. *
10. Management Agreement between each Partnership and * PLM Investment Management, Inc.
25. Powers of Attorney 47-49
* Incorporated by reference. See page 20 of this report.