ITEM 1. BUSINESS
(A) Background
In November 1989, 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 10,000,000 limited partnership units (the units) including 2,500,000 optional units, in PLM Equipment Growth Fund V, a California limited partnership (the Partnership, the Registrant, or EGF V). The Registration Statement also proposed offering an additional 1,250,000 Class B units through a reinvestment plan. The General Partner has determined that it will not adopt this reinvestment plan for the Partnership. The Partnership's offering became effective on April 11, 1990. 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 was formed to engage in the business of owning and managing a diversified pool of used and new transportation-related equipment and certain other items of equipment.
The Partnership's primary objectives are:
(1) to maintain a diversified portfolio of low-obsolescence equipment with long lives and high residual values which were purchased with the net proceeds of the initial Partnership offering, supplemented by debt financing, and surplus operating cash during the investment phase of the Partnership. 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 sufficient net operating cash flow from lease operations to meet liquidity requirements and to generate cash distributions to the limited partners until such time as the General Partner commences the orderly liquidation of the Partnership assets or unless the Partnership is terminated earlier upon sale of all Partnership property or by certain other events;
(3) to selectively sell equipment when the General Partner believes that, due to market conditions, market prices for equipment exceed inherent equipment values or expected future benefits from continued ownership of a particular asset. Proceeds from these sales, together with excess net operating cash flows from operations (net cash provided by operating activities plus distributions from unconsolidated special-purpose entities (USPEs)) are used to repay the Partnership's outstanding indebtedness and for distributions to the partners;
(4) to preserve and protect the value of the portfolio through quality management, maintaining diversity, and constantly monitoring equipment markets.
The offering of units of the Partnership closed on December 23, 1991. As of December 31, 1999, there were 9,067,911 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 commenced on January 1, 1999, the General Partner stopped reinvesting cash flow. Surplus funds, if any, less reasonable reserves, will be distributed to the partners. During the period between the seventh year of operation and the ninth year of operation, the Partnership will not be able to purchase any additional equipment. In the ninth year of operations of the Partnership, the General Partner intends to begin the dissolution and liquidation of the Partnership in an orderly fashion, unless the Partnership is terminated earlier upon sale of all of the equipment or by certain other events. Under certain circumstances, however, the term of the Partnership may be extended. In no event will the Partnership be extended beyond December 31, 2010.
Table 1, below, lists the equipment and the original cost of equipment in the Partnership's portfolio, and the cost of investments in unconsolidated special-purpose entities as of December 31, 1999 (in thousands of dollars):
The equipment is generally leased under operating leases with terms of one to six years. The Partnership's marine containers are leased to operators of utilization-type leasing pools, which include equipment owned by unaffiliated parties. In such instances, revenues received by the Partnership consist of a specified percentage of revenues generated by leasing the pooled equipment to sublessees, after deducting certain direct operating expenses of the pooled equipment. 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, 1999, approximately 67% of the Partnership's trailer equipment operated in rental yards owned and maintained by PLM Rental, Inc., the short-term trailer rental subsidiary of PLM International doing business as PLM Trailer Leasing. Rents are reported as revenue in accordance with Financial Accounting Standards Board Statement No. 13 "Accounting for Leases". Direct expenses associated with the equipment are charged directly to the Partnership. An allocation of other indirect expenses of the rental yard operations is charged to the Partnership monthly.
The lessees of the equipment include but are not limited to: Chevron USA, Seacore Smit, Inc., Husky Oil Operations, Coastal Chemical, Inc., Koch Sulphur, Potash Corp., Kansas City Southern, Canadian Airlines International, Varig South America, and Aero California.
(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 the 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 who offer operating leases and full payout leases. Manufacturers may provide ancillary services that the Partnership cannot offer, such as specialized maintenance service (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 Capital Aviation Services Corporation, Xtra Corporation, and other investment programs that lease the same types of equipment.
(D) Demand
The Partnership currently operates in the following operating segments: aircraft leasing, marine vessel leasing, railcar leasing, trailer leasing, and marine container 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 equipment and investments are used to transport materials and commodities, rather than people.
The following section describes the international and national markets in which the Partnership's capital equipment operates:
(1) Aircraft
(a) Commercial Aircraft
After experiencing relatively robust growth over the prior four years, demand for commercial aircraft softened somewhat in 1999. Boeing and Airbus, the two primary manufacturers of new commercial aircraft, saw a decrease in their volume of orders, which totaled 368 and 417 during 1999, compared to 656 and 556 in 1998. The slowdown in aircraft orders can be partially attributed to the full implementation of United States (U.S.) Stage III environmental restrictions, which became fully effective on December 31, 1999. Since these restrictions effectively prohibit the operation of noncompliant aircraft in the U.S. after 1999, carriers operating within or into the U.S. either replaced or modified all of their noncompliant aircraft before the end of the year. The continued weakness of the Asian economy has also served to slow the volume of new aircraft orders. However, with the Asian economy now showing signs of recovery, air carriers in this region are beginning to resume their fleet building efforts.
Demand for, and values of, used commercial aircraft have been adversely affected by the Stage III environmental restrictions and an oversupply of older aircraft as manufacturers delivered more new aircraft that the overall market required. Boeing predicts that the worldwide fleet of jet-powered commercial aircraft will increase from approximately 12,600 airplanes as of the end of 1998 to about 13,700 aircraft by the end of 2003, an average increase of 220 units per year. However, actual deliveries for the first two years of this period, 1998 and 1999, averaged 839 units annually. Although some of the resultant surplus used aircraft have been retired, the net effect has been an overall increase in the number of used aircraft available. This has resulted in a decrease in both market prices and lease rates for used aircraft. The weakness in the used commercial aircraft market may be mitigated in the future as manufacturers bring their new production more in line with demand and given the anticipated continued growth in air traffic. Worldwide, demand for air passenger services is expected to increase at about 5% annually and freight services at about 6% per year, for the foreseeable future.
This Partnership owns 100% of two Stage III-compliant aircraft and 25% of two similar aircraft. It also wholly owns four Stage II aircraft, three of which are operating outside the United States and thus not subject to Stage III environmental restrictions. All of these aircraft were on lease throughout most of 1999 and were not affected by changes in market conditions. Additionally, one Stage II aircraft, underwent a Stage III modification during the first quarter of 2000.
(b) Commuter Aircraft
The Partnership owns commuter turboprops with 36 to 50 seats. These aircraft fly in North America, which continues to be the largest market in the world for this type aircraft. However, the introduction of regional jet aircraft continues to have adverse impact on the turboprop market. Regional jets have been well received in the commuter market and their growing use has been at the expense of turboprops. Due to this trend, the turboprop market has experienced a decrease in aircraft values and lease rates.
One of the Partnership's turboprop aircraft remained on lease throughout 1999 and saw no change in rates. However, two other turboprops that came off lease during 1999 were re-leased at lower rates due to the change in market conditions noted above.
(2) Marine Vessels
The Partnership owns or has investments in product tankers that operate in international markets carrying a variety of commodity-type cargoes. Demand for commodity-based shipping is closely tied to worldwide economic growth patterns, which can affect demand by causing changes in volume on trade routes. The General Partner operates the Partnership's vessels through a combination of spot and period charters, an approach that provides the flexibility to adapt to changes in market conditions. The Partnership also owns an anchor-handling supply vessel that operates through bareboat charters.
(a) Product Tankers
During 1999, product tanker markets experienced declines in charter rates and vessel values brought about by volatile oil and oil product prices, relatively low growth in trade volumes, and high rates of new product tanker deliveries. The 1999 daily charter rates for standard-size product tankers averaged 21% lower than in 1998 and 39% lower than in 1997. This decline was primarily due to a deterioration in oil products trade in European markets.
Since crude oil is the source feedstock for oil products, the products trade is closely tied to crude oil prices. Although 1999 was a year of rising oil prices, volatility in trading appeared to depress actual shipping volumes, particularly in Europe. Although product imports to the United States and Japan increased such that the entire worldwide market grew by 2.7% during 1999, due to the lingering effects of the Asian recession, shipping volumes ended the year below the levels of 1996-1997.
Measured by deadweight tons, the product tanker fleet grew by only 3.2% during 1999, as overall supply was significantly moderated by a 150% increase in scrapping levels as compared to 1998. For 2000, the product tanker fleet is expected to expand due to a 6.5% rise in new deliveries. This increase is due to the continuing effects of high order levels in the mid-1990s, which was driven by growth in Asian trade and the anticipated effects of the U.S. Oil Pollution Act of 1990. Under this Act, tankers over 25 years old are restricted from trading to the United States if they do not have double bottoms and/or double hulls (similar, though somewhat less stringent restrictions are in place within developing nations). These regulations have the effect of inducing the retirement of older vessels that would otherwise continue trading.
Two of the Partnership's product tankers are single-bottom, single-hull tankers that are restricted from trading in the United States effective January 1, 2000. Both of these vessels have been moved to markets not affected by these regulations.
The combined effects of regulatory restrictions and low charter rates are expected to keep scrapings at relatively high levels throughout 2000. However, an anticipated high rate of new tanker deliveries will prevent much improvement in rates and ship values during 2000. Should high scrapping levels continue beyond then, this could offset increases in new deliveries and prevent further significant declines in freight rates and ship values.
(b) Anchor-handling Supply Vessels
The Partnership owns one U.S.-flagged anchor-handling supply vessel used to support rig drilling operations in the U.S. Gulf of Mexico. Although this type of vessel can be used in other regions, the U.S. Gulf of Mexico is the more desirable market due to U.S. maritime law which stipulates that only U.S.-flagged vessels be used in this region.
Demand for anchor-handling vessels depends primarily on the demand for floating drilling services by oil companies. During 1999, demand for such services remained at 1997-98 levels, however several higher-capacity vessels were delivered during 1998-99, resulting in lower utilization and rates.
The 1999 recovery in oil prices has led forecasters to expect an increase in drilling activity for 2000, as rising oil prices improve the economics of offshore oil and gas development. Oil companies are expected to increase their drilling programs during 2000, although it is uncertain by how much. Increases in capacity brought about by new building may delay a return to the higher utilization and rate levels experienced during 1997-98.
(3) Railcars
(a) Pressurized Tank Railcars
Pressurized tank cars are used to transport primarily liquefied petroleum gas (natural gas) and anhydrous ammonia (fertilizer). The major U.S. markets for natural gas are industrial applications (40% of estimated demand in 1998), residential use (21%), electrical generation (15%), and commercial applications (14%). Within the fertilizer industry, demand is a function of several factors, including the level of grain prices, the status of government farm subsidy programs, amount of farming acreage and mix of crops planted, weather patterns, farming practices, and the value of the U.S. dollar. Population growth and dietary trends also play an indirect role.
On an industrywide basis, North American carloadings of the commodity group that includes petroleum and chemicals increased 2.5% in 1999, compared to 1998. Correspondingly, demand for pressurized tank cars remained solid during 1999, with utilization of this type of railcar within the Partnership remaining above 98%. While renewals of existing leases continue at similar rates, some cars have been renewed for "winter only" terms of approximately six months. As a result, it is anticipated that there will be more pressurized tank cars than usual coming up for renewal in the spring.
(b) General Purpose (Nonpressurized) Tank Railcars
These cars, which are used to transport bulk liquid commodities and chemicals not requiring pressurization, such as certain petroleum products, liquefied asphalt, lubricating and vegetable oils, molten sulfur, and corn syrup, continued to be in high demand during 1999. The overall health of the market for these types of commodities is closely tied to both the U.S. and global economies, as reflected in movements in the Gross Domestic Product, personal consumption expenditures, retail sales, and currency exchange rates. The manufacturing, automobile, and housing sectors are the largest consumers of chemicals. Within North America, 1999 carloadings of the commodity group that includes chemicals and petroleum products rose 2.5% over 1998 levels. Utilization of the Partnership's nonpressurized tank cars was above 98% again during 1999.
(c) Covered Hopper (Grain) Railcars
Demand for covered hopper cars, which are specifically designed to service the agricultural industry, continued to experience weakness during 1999. The U.S. agribusiness industry serves a domestic market that is relatively mature, the future growth of which is expected to be consistent but modest. Most domestic grain rail traffic moves to food processors, poultry breeders, and feed lots. The more volatile export business, which accounts for approximately 30% of total grain shipments, serves emerging and developing nations. In these countries, demand for protein-rich foods is growing more rapidly than in the United States, due to higher population growth, a rapid pace of industrialization, and rising disposable income.
Within the United States, 1999 carloadings of agricultural products increased 4.3%, while Canadian carloadings of these products fell 3.4%, resulting in an overall increase within North America of only 2.8% compared to 1998. Since the combined North American shipments for 1998 had decreased 7.7% over the previous year, the 1999 volume, while representing a slight increase, is still below 1997 levels. Another factor contributing to softness in the covered hopper car market has been the large number of new cars built in the last few years. Production of new railcars of all types is estimated to have reached 57,685 cars during 1999, with covered hopper cars representing 19,845, or one-third, of this total. For those covered hopper cars whose leases expired in 1999, both industrywide and within the Partnership, the combination of a lack of strong demand and an excess supply of cars resulted in many of these expiring leases being renewed at considerably lower rates.
(d) Mill Gondola Railcars
Mill gondola railcars are used typically to transport scrap steel for recycling from steel processors to small steel mills called minimills. Demand for steel is cyclical and moves in tandem with the growth or contraction of the overall economy. Within the United States, 1999 carloadings for the commodity group that includes scrap steel increased 1.0% over 1998 volumes. The Partnership's mill gondola railcars continued to operate on a long-term lease in 1999.
(4) Trailers
(a) Refrigerated Trailers
The temperature-controlled trailer market continued to expand during 1999, although not as quickly as in 1998 when the market experienced very strong growth. The leveling off in 1999 occurred as equipment users began to absorb the increases in supply created over the prior two years. Refrigerated trailer users have been actively retiring their older units and consolidating their fleets in response to improved refrigerated trailer technology. Concurrently, there is a backlog of six to nine months on orders for new equipment.
As a result of these changes in the refrigerated trailer market, it is anticipated that trucking companies and shippers will utilize short-term trailer leases more frequently to supplement their existing fleets. Such a trend should benefit the Partnership, whose trailers are typically leased on a short-term basis.
(b) Dry Trailers
The U.S. nonrefrigerated (dry) trailer market continued its recovery during 1999, as the strong domestic economy resulted in heavy freight volumes. With unemployment low, consumer confidence high, and industrial production sound, the outlook for leasing this type of trailer remains positive, particularly as the equipment surpluses of recent years are being absorbed by the buoyant market. In addition to high freight volumes, improvements in inventory turnover and tighter turnaround times have lead to a stronger overall trucking industry and increased equipment demand.
(c) Intermodal (Piggyback) Trailers
Intermodal (piggyback) trailers are used to transport a variety of goods either by truck or by rail. Over the past decade, intermodal trailers have been gradually displaced by domestic containers as the preferred method of transport for such goods. During 1999, demand for intermodal trailers was more volatile than usual . Slow demand occurred over the first half of the year due to customer concerns over rail service problems associated with mergers in the rail industry, however, demand picked up significantly over the second half of the year due to both a resolution of these service problems and the continued strength of the U.S. economy. Due to a rise in demand which occurred over the latter half of 1999, overall, activity within the intermodal trailer market declined less than expected for the year, as total intermodal trailer shipments decreased by only approximately 1.8% compared to the prior year. Average utilization of the entire intermodal fleet rose from 73% in 1998 to 77% in 1999, primarily due to demand exceeding available supply of intermodal trailers during the second part of the year.
The General Partner stepped up its marketing and asset management program for the Partnership's intermodal trailers during 1999. These efforts resulted in average utilization for the Partnership's intermodal trailers of approximately 82% for the year, up 2% compared to 1998 levels.
Although the trend towards using domestic containers instead of intermodal trailers is expected to continue in the future, overall intermodal trailer shipments are forecast to decline by only 2% to 3% in 2000, compared to the prior year, due to the anticipated continued strength of the overall economy. As such, the nationwide supply of intermodal trailers is expected to remain essentially in balance with demand for 2000. For the Partnership's intermodal fleet, the General Partner will continue to seek to expand its customer base while minimizing trailer downtime at repair shops and terminals.
(5) Marine Containers
The marine container leasing market started 1999 with industrywide utilization in the mid 70% range, down somewhat from the beginning of 1998. The market strengthened throughout the year such that most container leasing companies reported utilization of 80% by the end of 1999. Overall, industrywide utilization for marine containers was increasing during 1999. The Partnership owns older marine containers and thus, did not contribute to the overall increase in the industrywide utilization.
Offsetting this favorable trend was a continuation of historically low acquisition prices for new containers manufactured in the Far East, predominantly China. These low prices put pressure on fleetwide per diem leasing rates.
Industry consolidation continued in 1999 as the parent of one of the world's top ten container lessors finalized the outsourcing of the management of its container fleet to a competitor. However, the General Partner believes that such consolidation is a positive trend for the overall container leasing industry, and ultimately will lead to higher industrywide utilization and increased per diem rates.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal, state, local, or foreign governmental authorities. Such regulations may impose restrictions and financial burdens on the Partnership's ownership and operation of equipment. Changes in governmental regulations, industry standards, or deregulation may also affect the ownership, operation, and resale of the equipment. Substantial portions of the Partnership's equipment portfolio are either registered or operated internationally. Such equipment may be subject to adverse political, government, or legal actions, including the risk of expropriation or loss arising from hostilities. Certain of the Partnership's equipment is subject to extensive safety and operating regulations, which may require its removal from service or extensive modification to meet these regulations, at considerable cost to the Partnership. Such regulations include but are not limited to:
(1) the United States (U.S.) Oil Pollution Act of 1990, which established liability for operators and owners of marine vessels that create environmental pollution. This regulation has resulted in higher oil pollution liability insurance. The lessee of the equipment typically reimburses the Partnership for these additional costs;
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990, which limits or eliminates the operation of commercial aircraft in the United States that do not meet certain noise, aging, and corrosion criteria. In addition, under U.S. Federal Aviation Regulations, after December 31, 1999, no person may operate an aircraft to or from any airport in the contiguous United States unless that aircraft 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 to be either modified to meet Stage III requirements, sold, or re-leased in countries that do not require this regulation. The cost to install a hushkit to meet quieter Stage III requirements is approximately $2.0 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 on the stratospheric ozone layer and which are used extensively as refrigerants in refrigerated marine cargo containers and 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. The Federal Railroad Administration has mandated that effective July 1, 2000, all jacketed and non-jacketed tank railcars must be re-qualified to insure tank shell integrity. Tank shell thickness, weld seams, and weld attachments must be inspected and repaired if necessary to re-qualify a tank railcar for service. The average cost of this inspection is $1,800 for non-jacketed tank railcars and $3,600 for jacketed tank railcars, not including any necessary repairs. This inspection is to be performed at the next scheduled tank test.
As of December 31, 1999, the Partnership was in compliance with the above governmental regulations. Typically, costs related to extensive equipment modifications to meet government regulations are passed on to the lessee of that equipment.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment it has purchased and its interests in entities that own equipment for leasing purposes. As of December 31, 1999, the Partnership owned a portfolio of transportation and related equipment and investments in equipment owned by unconsolidated special-purpose entities (USPEs) as described in Item 1, Table 1. The Partnership acquired equipment with the proceeds of the Partnership offering of $184.3 million through the first quarter of 1992, with proceeds from the debt financing of $38.0 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.
ITEM 3. LEGAL PROCEEDINGS
PLM International (the Company) and various of its wholly-owned subsidiaries are named as defendants in a lawsuit filed as a purported class action in January 1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251 (the Koch action). The named plaintiffs are six individuals who invested in PLM Equipment Growth Partnership IV (Fund IV), PLM Equipment Growth Partnership V (Fund V), PLM Equipment Growth Partnership VI (Fund VI), and PLM Equipment Growth & Income Partnership VII (Fund VII) (the Funds), each a California limited partnership for which the Company's wholly-owned subsidiary, FSI, acts as the General Partner. The complaint asserts causes of action against all defendants for fraud and deceit, suppression, negligent misrepresentation, negligent and intentional breaches of fiduciary duty, unjust enrichment, conversion, and conspiracy. Plaintiffs allege that each defendant owed plaintiffs and the class certain duties due to their status as fiduciaries, financial advisors, agents, and control persons. Based on these duties, plaintiffs assert liability against defendants for improper sales and marketing practices, mismanagement of the Funds, and concealing such mismanagement from investors in the Funds. Plaintiffs seek unspecified compensatory damages, as well as punitive damages, and have offered to tender their limited partnership units back to the defendants.
In March 1997, the defendants removed the Koch action from the state court to the United States District Court for the Southern District of Alabama, Southern Division (Civil Action No. 97-0177-BH-C) (the court) based on the court's diversity jurisdiction. In December 1997, the court granted defendants motion to compel arbitration of the named plaintiffs' claims, based on an agreement to arbitrate contained in the limited partnership agreement of each Partnership. Plaintiffs appealed this decision, but in June 1998 voluntarily dismissed their appeal pending settlement of the Koch action, as discussed below.
In June 1997, the Company and the affiliates who are also defendants in the Koch action were named as defendants in another purported class action filed in the San Francisco Superior Court, San Francisco, California, Case No. 987062 (the Romei action). The plaintiff is an investor in Fund V, and filed the complaint on her own behalf and on behalf of all class members similarly situated who invested in the Funds. The complaint alleges the same facts and the same causes of action as in the Koch action, plus additional causes of action against all of the defendants, including alleged unfair and deceptive practices and violations of state securities law. In July 1997, defendants filed a petition (the petition) in federal district court under the Federal Arbitration Act seeking to compel arbitration of plaintiff's claims. In October 1997, the district court denied the Company's petition, but in November 1997, agreed to hear the Company's motion for reconsideration. Prior to reconsidering its order, the district court dismissed the petition pending settlement of the Romei action, as discussed below. The state court action continues to be stayed pending such resolution.
In February 1999 the parties to the Koch and Romei actions agreed to settle the lawsuits, with no admission of liability by any defendant, and filed a Stipulation of Settlement with the court. The settlement is divided into two parts, a monetary settlement and an equitable settlement. The monetary settlement provides for a settlement and release of all claims against defendants in exchange for payment for the benefit of the class of up to $6.6 million. The final settlement amount will depend on the number of claims filed by class members, the amount of the administrative costs incurred in connection with the settlement, and the amount of attorneys' fees awarded by the court to plaintiffs' attorneys. The Company will pay up to $0.3 million of the monetary settlement, with the remainder being funded by an insurance policy. For settlement purposes, the monetary settlement class consists of all investors, limited partners, assignees, or unit holders who purchased or received by way of transfer or assignment any units in the Funds between May 23, 1989 and June 29, 1999. The monetary settlement, if approved, will go forward regardless of whether the equitable settlement is approved or not.
The equitable settlement provides, among other things, for: (a) the extension (until January 1, 2007) of the date by which FSI must complete liquidation of the Funds' equipment, (b) the extension (until December 31, 2004) of the period during which FSI can reinvest the Funds' funds in additional equipment, (c) an increase of up to 20% in the amount of front-end fees (including acquisition and lease negotiation fees) that FSI is entitled to earn in excess of the compensatory limitations set forth in the North American Securities Administrator's Association's Statement of Policy; (d) a one-time repurchase by each of Funds V, VI and VII of up to 10% of that partnership's outstanding units for 80% of net asset value per unit; and (e) the deferral of a portion of the management fees paid to an affiliate of FSI until, if ever, certain performance thresholds have been met by the Funds. Subject to final court approval, these proposed changes would be made as amendments to each Partnership's limited partnership agreement if less than 50% of the limited partners of each Partnership vote against such amendments. The limited partners will be provided the opportunity to vote against the amendments by following the instructions contained in solicitation statements that will be mailed to them after being filed with the Securities and Exchange Commission. The equitable settlement also provides for payment of additional attorneys' fees to the plaintiffs' attorneys from Partnership funds in the event, if ever, that certain performance thresholds have been met by the Funds. The equitable settlement class consists of all investors, limited partners, assignees or unit holders who on June 29, 1999 held any units in Funds V, VI, and VII, and their assigns and successors in interest.
The court preliminarily approved the monetary and equitable settlements in June 1999. The monetary settlement remains subject to certain conditions, including notice to the monetary class and final approval by the court following a final fairness hearing. The equitable settlement remains subject to certain conditions, including: (a) notice to the equitable class, (b) disapproval of the proposed amendments to the partnership agreements by less than 50% of the limited partners in one or more of Funds V, VI, and VII, and (c) judicial approval of the proposed amendments and final approval of the equitable settlement by the court following a final fairness hearing. No hearing date is currently scheduled for the final fairness hearing. The Company continues to believe that the allegations of the Koch and Romei actions are completely without merit and intends to continue to defend this matter vigorously if the monetary settlement is not consummated.
The Company 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 Partnership.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during the fourth quarter of its fiscal year ended December 31, 1999.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS
Pursuant to the terms of the partnership agreement, the General Partner is entitled to 5% of the cash distributions of the Partnership. The General Partner is the sole holder of such interests. Net income is allocated to the General Partner to the extent necessary to cause the General Partner's capital account to equal zero. The remaining interests in the profits, losses, and cash distributions of the Partnership are allocated to the limited partners. As of December 31, 1999, there were 9,672 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 units and none is likely to develop. To prevent the units from being considered "publicly traded" and thereby to avoid taxation of the Partnership as an association treated as a corporation under the Internal Revenue Code, the units will not be transferable without the consent of the General Partner, which may be withheld in its absolute discretion. The General Partner intends to monitor transfers of units in an effort to ensure that they do not exceed the percentage or number permitted by certain safe harbors promulgated by the Internal Revenue Service. A transfer may be prohibited if the intended transferee is not an United States 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 January 1, 1994. If the number of units made available for purchase by limited partners in any calendar year exceeds the number that can be purchased with reinvestment plan proceeds, then the Partnership may, subject to certain terms and conditions, redeem up to 2% of the outstanding units each year. The purchase price to be offered by the Partnership for these units will be equal to 110% of the unrecovered principal attributable to the units. The unrecovered principal for any unit will be equal to the excess of (i) the capital contribution attributable to the unit over (ii) the distributions from any source paid with respect to the units. As of December 31, 1999, the Partnership agreed to purchase approximately 2,300 units for an aggregate price of $12,500. The General Partner anticipates that these units will be repurchased in the first and second quarters of 2000. As of December 31, 1999, the Partnership has repurchased a cumulative total of 152,021 units at a cost of $1.6 million. In addition to these units, the General Partner may purchase additional units on behalf of the Partnership in the future.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
ITEM 7.
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 Fund V (the Partnership). The following discussion and analysis of operations focuses on the performance of the Partnership's equipment in the 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, but are not limited to, supply and demand for similar or comparable types of transport capacity, desirability of the equipment in the leasing market, market conditions for the particular industry segment in which the equipment is to be leased, overall economic conditions, and various regulations concerning the use of the equipment. Equipment that is idle or out of service between the expiration of one lease and the assumption of a subsequent lease can result in a reduction of contribution to the Partnership. The Partnership experienced re-leasing or repricing activity in 1999 primarily in its trailer, marine vessels, aircraft, and marine container portfolios.
(a) 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 lower than in previous years due to the process of moving certain dry trailers to short-term rental facilities equipped to handle only this type of trailer.
(b) Marine vessels: Certain of the Partnership's marine vessels operate in the voyage charter market. Voyage charters are usually short in duration and reflect the short-term demand and pricing trends in the vessel market. As a result of this, the Partnership experienced a decrease in lease revenues due to the weakness in the voyage charter market.
(c) Aircraft: Certain of the Partnership's aircraft leases expired during 1999. The commuter aircraft that came off lease during 1999 were re-leased at lower rates due to a decline in the demand for this type of aircraft. The commercial aircraft that came off lease during 1999 has remained off lease due to the installation of a hush kit to this aircraft. The Partnership expects to re-lease this aircraft during 2000.
(d) Marine containers: All of the Partnership's marine containers are leased to operators of utilization-type leasing pools and, as such, are highly exposed to repricing activity. The Partnership saw lower re-lease rates and lower utilization on the remaining marine containers fleet during 1999.
(e) Other: While market conditions and other factors may have had some impact on lease rates in other markets in which the Partnership owns equipment, the majority of this equipment was unaffected.
(2) Equipment Liquidations and Nonperforming Lessee
Liquidation of Partnership equipment and investments in unconsolidated special-purpose entities (USPEs) represents a reduction in the size of the equipment portfolio and may result in reductions of contributions 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 contributions, but also may require the Partnership to assume additional costs to protect its interests under the leases, such as repossession or legal fees. The Partnership experienced the following in 1999:
(a) Liquidations: During the year, the Partnership disposed of owned equipment that included marine containers, trailers, and railcars, an interest in an entity that owned a marine vessel, and an interest in two trusts that owned a total of three Boeing 737-200A Stage II commercial aircraft, two aircraft engines, and a portfolio of aircraft rotables for total proceeds of $8.2 million.
(b) Non-performing lessee: A Brazilian lessee of a commercial aircraft is having financial difficulties. The lessee has an extended repayment schedule for the lease payment arrearage of $0.3 million.
(3) Equipment Valuation
In accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the General Partner reviews the carrying value of the Partnership's equipment portfolio at least quarterly and whenever circumstances indicate that the carrying value of an asset may not be recoverable in relation to expected future market conditions for the purpose of assessing the recoverability of the recorded amounts. If the projected undiscounted future cash flow and the fair market value of the equipment are less than the carrying value of the equipment, a loss on revaluation is recorded. Reductions of $2.9 million to the carrying value of owned equipment were required during 1999. No reductions were required to the carrying value of the equipment during either 1998 or 1997.
As of December 31, 1999, the General Partner estimated the current fair market value of the Partnership's equipment portfolio, including the Partnership's interest in equipment owned by USPEs, to be $66.6 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 $184.3 million and permanent debt financing of $38.0 million. No further capital contributions from limited partners are permitted under the terms of the Partnership's limited partnership agreement. The Partnership relies on operating cash flow to meet its operating obligations and make cash distributions to limited partners.
For the year ended December 31, 1999, the Partnership generated $12.3 million in operating cash (net cash provided by operating activities plus non-liquidating cash distributions from USPEs) to meet its operating obligations, make principal debt payments, and pay distributions of $8.6 million to the partners.
Lessee deposits and reserve for repairs increased $0.3 million during the year ended December 31, 1999 when compared to December 31, 1998. Reserves for aircraft engine repair increased $0.9 million due to additional lessee deposits and security deposits increased $0.3 million due to a security deposit from a potential lessee of a DC-9-32 commercial aircraft. Lessee prepaid deposits decreased $0.2 million due to fewer lessee's prepaying future lease revenue and marine vessel drydocking decreased $0.7 million due to the drydocking of one of the Partnership's marine vessels in 1999.
Pursuant to the terms of the limited partnership agreement, beginning January 1, 1994, if the number of units made available for purchase by limited partners in any calendar year exceeds the number that can be purchased with reinvestment plan proceeds, then the Partnership may, subject to certain terms and conditions, redeem up to 2% of the outstanding limited partnership units each year. The purchase price to be offered for such units will be equal to 110% of the unrecovered principal attributed to the units. The unrecovered principal for any unit will be equal to the excess of (i) the capital contribution attributable to the unit over (ii) the distributions from any source paid with respect to the units. As of December 31, 1999, the Partnership agreed to purchase approximately 2,300 units for an aggregate price of $12,500. The General Partner anticipates that these units will be repurchased in the first and second quarters of 2000. In addition to these units, the General Partner may purchase additional units on behalf of the Partnership in the future.
The Partnership made the regularly scheduled principal payments of $7.6 million and quarterly interest payments at a rate of LIBOR plus 1.2% per annum (7.3% at December 31, 1999) to the lender of the senior loan during 1999. The Partnership also paid the lender of the senior loan an additional $0.5 million from equipment sale proceeds, as required by the loan agreement.
During 1999 the Partnership borrowed, from time to time, a total of $3.2 million from the General Partner for less than 20 days. The Partnership had fully repaid this amount during 1999. The General Partner charged the Partnership market interest rates. Total interest paid to the General Partner was $15,000.
The General Partner has not planned any expenditures, nor is it aware of any contingencies that would cause it to require any additional capital to that mentioned above.
(D) Results of Operations - Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended December 31, 1999 and 1998
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance, equipment operating, and asset-specific insurance expenses) on owned equipment decreased during the year ended December 31, 1999, when compared to the same period of 1998. Gains or losses from the sale of equipment, interest and other income, and certain expenses such as depreciation and amortization and general and administrative expenses relating to the operating segments (see Note 5 to the audited financial statements), are not included in the owned equipment operation discussion because these expenses are indirect in nature and not a result of operations, but the result of owning a portfolio of equipment. The following table presents lease revenues less direct expenses by segment (in thousands of dollars):
Aircraft: Aircraft lease revenues and direct expenses were $8.2 million and $0.2 million, respectively, for the year ended December 31, 1999, compared to $8.9 million and $0.1 million, respectively, during the same period of 1998. The decrease in aircraft lease revenues was due to the re-lease of two aircraft at a lower lease rate than had been in place during 1998. The increase in direct expenses of $0.1 was due to additional repairs required during 1999 that were not required during the same period of 1998.
Marine vessels: Marine vessel lease revenues and direct expenses were $6.2 million and $3.9 million, respectively, for the year ended December 31, 1999, compared to $7.5 million and $4.7 million, respectively, during the same period of 1998. The decrease in marine vessel lease revenues of $1.3 million was primarily due to one of the marine vessels earning $1.3 million less during the year ended December 31, 1999 due to earning a lower lease rate when compared to the lease rate that was in place during the same period of 1998 and this marine vessel being off lease in 1999 for nine weeks for required dry-docking. This drydocking resulted in a loss of lease revenues of approximately $0.5 million. The decrease in lease revenues was partially offset by an increase in lease revenues of $0.6 million caused by the purchase of an additional marine vessel during March of 1998. This marine vessel was on lease the entire year of 1999 when compared to nine months of 1998.
Direct expenses decreased $0.8 million during the year ended 1999 when compared to the same period of 1998. A decrease of $1.2 million in direct expenses was due to not having any operating costs while this marine vessel was in drydock as well as having lower repairs and maintenance due to the drydocking. The decrease in direct expenses was partially offset by an increase in insurance expense of $0.5 million. The increase in insurance was caused by a $0.3 million loss-of-hire insurance refund received during 1998 from Transportation Equipment Indemnity Company, Ltd., an affiliate of the General Partner, due to lower claims from the insured Partnership. The Partnership did not receive a refund during 1999. Additionally, the 1999 lease agreement with one marine vessel lessee requires that the Partnership is responsible for the premiums on insurance coverage when compared to 1998, during which the lessee was responsible for the premiums on certain insurance coverage.
Railcars: Railcar lease revenues and direct expenses were $2.5 million and $0.5 million, respectively, for the year ended December 31, 1999, compared to $2.5 million and $0.6 million, respectively, during the same period of 1998. Railcar lease revenues remained relatively the same for both years. Direct expenses decreased $0.1 million due to fewer required repairs to certain railcars during 1999 than were required during 1998.
Trailers: Trailer lease revenues and direct expenses were $2.7 million and $0.9 million, respectively, for the year ended December 31, 1999, compared to $2.8 million and $0.7 million, respectively, during the same period of 1998. During the year ended December 31, 1999, certain dry trailers were in the process of transitioning to a new PLM-affiliated short-term rental facility specializing in this type of trailer causing lease revenues for this group of trailers to decrease $0.1 million when compared to the same period of 1998. Trailer repairs and maintenance increased $0.2 million primarily due to required repairs during 1999 that were not needed during the same period of 1998.
Marine containers: Marine container lease revenues and direct expenses were $0.7 million and $5,000, respectively, for the year ended December 31, 1999, compared to $1.2 million and $11,000, respectively, during the same period of 1998. A decrease of approximately $0.3 million in lease revenues was caused by a worldwide increase in available marine containers which has lead to a decline in lease rates. In addition, the number of marine containers owned by the Partnership has been declining due to sales and dispositions during 1999 and 1998. This declining fleet has also resulted in a decrease of approximately $0.2 million in marine container contribution.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $16.1 million for the year ended December 31, 1999 increased from $15.9 million for the same period in 1998. Significant variances are explained as follows:
(i) Loss on revaluation increased $2.9 million during the year ended December 31, 1999 and resulted from the Partnership reducing the carrying value of a marine vessel to its estimated fair market value. No revaluation of equipment was required during 1998.
(ii)A $1.9 million decrease in depreciation and amortization expenses from 1998 levels was caused primarily by the double-declining balance method of depreciation which results in greater depreciation in the first years an asset is owned.
(iii) A $0.7 million decrease in interest expense was due to a lower average outstanding debt balance when compared to 1998.
(iv) A $0.1 million decrease in management fees to an affiliate was due to lower lease revenues.
(c) Interest and Other Income
Interest and other income decreased $0.2 million during the year ended December 31, 1999 when compared to the same period of 1998 due primarily to lower average cash balances available for investment.
(d) Net Gain on Disposition of Owned Equipment
The net gain on the disposition of equipment for the year ended December 31, 1999 totaled $0.3 million, which resulted from the sale of marine containers, railcars, and trailers with an aggregate net book value of $0.6 million, for proceeds of $0.9 million. The net gain on the disposition of equipment for the year ended December 31, 1998 totaled $0.7 million, which resulted from the sale of an aircraft, marine containers, railcars, and trailers, with an aggregate net book value of $8.0 million, for proceeds of $8.7 million.
(e) 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):
Aircraft, rotable components, and aircraft engines: As of December 31, 1999 the Partnership had an interest in an entity owning two DC-9 Stage III commercial aircraft on a direct finance lease. As of December 31, 1998, the Partnership had an interest in two trusts that owned a total of three Boeing 737-200A Stage II commercial aircraft, two aircraft engines, and a portfolio of aircraft rotables (the Two Trusts), and an interest in an entity owning two DC-9 Stage III commercial aircraft on a direct finance lease. During the year ended December 31, 1999, revenues of $0.4 million and the gain from the sale of the Partnership's interest in the Two Trusts of $1.6 million were offset by depreciation expense, direct expenses, and administrative expenses of $0.2 million. During the same period of 1998, revenues of $1.2 million were offset by depreciation expense, direct expenses, and administrative expenses of $0.8 million. Revenues decreased $0.8 million and depreciation expense, direct expenses, and administrative expenses decreased $0.6 million due to the sale of the Partnership's investment in the Two Trusts.
Marine vessels: As of December 31, 1999, the Partnership owned an interest in two entities owning a total of two marine vessels. As of December 31, 1998, the Partnership owned an interest in three entities owning a total of three marine vessels. During the year ended December 31, 1999, lease revenues of $5.2 million and the gain of $1.9 million from the sale of the Partnership's interest in an entity owning a marine vessel were offset by depreciation expense, direct expenses, and administrative expenses of $6.8 million. During the same period of 1998, lease revenues of $6.4 million were offset by depreciation expense, direct expenses, and administrative expenses of $6.6 million.
The decrease in lease revenues of $1.2 million was primarily due to lower lease rates earned on the Partnership's investments in entities that own marine vessels.
Depreciation expense, direct expenses, and administrative expenses increased $0.2 million during the year ended December 31, 1999 when compared to the same period of 1998. The following changes occurred:
(i) Marine operating expenses increased $1.2 million during 1999 when compared to 1998. An increase in marine operating expenses of $0.9 million was due to one marine vessel that switched to a voyage charter during 1999 that was on a time charter during 1998. Also, the other marine vessel that was on voyage charter during 1999 and 1998, had an increase of $0.5 million in marine operating expenses during 1999. This marine vessel was with the same charterer the entire year of 1998, when this marine vessel changed to a different charterer, the new charterer charged the Partnership higher operating expenses. Marine operating expenses for the remaining marine vessel that was sold decreased $0.1 million during the year ended December 31, 1999 when compared to the same period of 1998;
(ii)Insurance expense increased $0.3 million during 1999 when compared to 1998. During 1999, the marine vessel entities had increased insurance premiums of $0.2 million on certain insurance coverage that it was now responsible for when compared to 1998, during which the lessee was responsible for the premiums on these insurance coverage. Additionally, the marine vessel entities received a $0.1 million loss-of-hire insurance refund during 1998 from TEI, due to lower claims from the insured entities. These marine vessel entities did not receive a refund during 1999.
(iii)Repairs and maintenance decreased $0.8 million due to fewer repairs required;
(iv)Depreciation expense decreased $0.4 million resulting from the use of the double-declining balance method of depreciation which results in greater depreciation in the first years an asset is owned;
(f) Net Income
As a result of the foregoing, the Partnership's net income for the year ended December 31, 1999 was $1.3 million, compared to net income of $2.4 million during the same period in 1998. The Partnership's ability to operate assets, 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, 1999 is not necessarily indicative of future periods. In the year ended December 31, 1999, the Partnership distributed $8.1 million to the limited partners, or $0.90 per weighted-average limited partnership unit.
(2) Comparison of the Partnership's Operating Results for the Years Ended December 31, 1998 and 1997
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance, equipment operating, and asset-specific insurance expenses) on owned equipment decreased during the year ended December 31, 1998, when compared to the same period of 1997. Gains or losses from the sale of equipment, interest and other income, and certain expenses such as depreciation and amortization and general and administrative expenses relating to the operating segments (see Note 5 to the audit financial statements), are not included in the owned equipment operation discussion because these expenses are indirect in nature and not a result of operations, but the result of owning a portfolio of equipment. The following table presents lease revenues less direct expenses by segment (in thousands of dollars):
Aircraft and aircraft engines: Aircraft lease revenues and direct expenses were $8.9 million and $0.1 million, respectively, for the year ended December 31, 1998, compared to $9.4 million and $0.1 million, respectively, during the same period of 1997. The decrease in aircraft contribution of $0.5 million was due to the sale of two commuter aircraft and an aircraft engine during 1997.
Marine vessels: Marine vessel lease revenues and direct expenses were $7.5 million and $4.7 million, respectively, for the year ended December 31, 1998, compared to $12.8 million and $10.1 million, respectively, during the same period of 1997. A decrease in marine vessel lease revenues of $6.1 million was due to the sale of two marine vessels during the fourth quarter of 1997 offset in part, by an increase in lease revenues of $1.9 million from the purchase of an additional marine vessel during March 1998. Additionally, lease revenues decreased $1.0 million due to lower lease rates earned on the remaining marine vessel during 1998 when compared to the same period of 1997. Marine vessel direct operating expenses decreased $4.9 million as a direct result of the sale of two marine vessels and also decreased $0.6 million as the result of lower operating expenses on the remaining marine vessel. The decreases in marine vessel direct expenses were off set in part, by an increase of $0.1 million as the result of the purchase of an additional marine vessel during March 1998. Marine vessel contribution also increased as a result of a $0.3 million loss-of-hire insurance refund from Transportation Equipment Indemnity Company, Ltd., an affiliate of the General Partner, due to lower claims from the insured Partnership and other insured affiliated partnerships.
Trailers: Trailer lease revenues and direct expenses were $2.8 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. The trailer contribution increased during 1998 due to fewer maintenance repairs needed for trailers in the PLM affiliated rental yards, when compared to 1997.
Rail equipment: Rail equipment lease revenues and direct expenses were $2.5 million and $0.6 million, respectively, for the year ended December 31, 1998, compared to $2.5 million and $0.5 million, respectively, during the same period of 1997. The decrease in railcar contribution was due to required repairs to certain railcars during 1998 that were not needed during 1997.
Marine containers: Marine container lease revenues and direct expenses were $1.2 million and $10,000, respectively, for the year ended December 31, 1998, compared to $2.1 million and $17,000, respectively, during the same period of 1997. The number of marine containers owned by the Partnership has been declining over the past two years due to sales and dispositions. The result of this declining fleet has been a decrease in marine container contribution.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $15.9 million for the year ended December 31, 1998 decreased from $21.4 million for the same period in 1997. Significant variances are explained as follows:
(i) A $4.5 million decrease in depreciation and amortization expense from 1997 levels was caused primarily by a decrease of $1.8 million due to the sale of two marine vessels and a decrease of approximately $4.1 million due to the double-declining balance method of depreciation which results in greater depreciation in the first years an asset is owned. These decreases were partially offset by a $1.4 million increase in additional depreciation expense from the purchase of a marine vessel during the first quarter of 1998.
(ii) A $0.6 million decrease in interest expense was due to a lower average outstanding debt balance when compared to the same period of 1997.
(iii) A $0.3 million decrease in management fees to affiliate was due to lower lease revenues.
(iv) A $0.2 million decrease in administrative expenses was due to lower costs for professional services needed to collect past-due receivables due from certain nonperforming lessees and lower costs associated with the Partnership trailers at the PLM-affiliated short-term rental yards.
(v) A $0.1 million increase in bad debt expenses was due to the General Partner's evaluation of the collectibility of receivables due from certain lessees.
(c) Net Gain on Disposition of Owned Equipment
The net gain on the disposition of equipment for the year ended December 31, 1998 totaled $0.7 million, which resulted from the sale of an aircraft, marine containers, railcars, and trailers, with an aggregate net book value of $8.0 million, for proceeds of $8.7 million. The net gain on the disposition of equipment for 1997 totaled $11.0 million, which resulted from the sale of an aircraft engine, a commuter aircraft, marine containers, trailers, and a railcar, with an aggregate net book value of $4.7 million, for proceeds of $7.8 million, and the sale of two marine vessels with a net book value of $10.9 million for proceeds of $18.0 million. Included in the gain from the sale of the marine vessels is the unused portion of accrued drydocking of $0.8 million.
(d) Interest and Other Income
Interest and other income decreased $0.2 million for the year ended December 31, 1998, when compared to the same period of 1997. A decrease of $0.3 million in other income was due to the repossession of the aircraft that was on a direct finance lease during 1997. This decrease was offset, in part, by an increase of $0.1 million in interest income due to higher average cash balances available for investment in 1998 when compared to 1997.
(e) 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):
Aircraft, rotable components, and aircraft engines: As of December 31, 1998 and 1997, the Partnership had an interest in two trusts that own a total of three commercial aircraft, two aircraft engines, and a portfolio of aircraft rotables, and also had an interest in an entity owning two commercial aircraft on a direct finance lease. During the year ended December 31, 1998, revenues of $1.2 million were offset by depreciation expense, direct expenses, and administrative expenses of $0.8 million. During the same period of 1997, lease revenues of $2.3 million were offset by depreciation expense, direct expenses, and administrative expenses of $1.0 million. The decrease in lease revenues is due to the renewal of the leases for three commercial aircraft, two aircraft engines, and a portfolio of aircraft rotables at lower rates than were in place during the same period of 1997. The decrease in depreciation expense, when compared to the same period of 1997, was due to the double-declining balance method of depreciation, which results in greater depreciation in the first years an asset is owned.
Marine vessels: As of December 31, 1998 and 1997, the Partnership owned an interest in three marine vessels. During the year ended December 31, 1998, lease revenues of $6.4 million were offset by depreciation expense, direct expenses, and administrative expenses of $6.6 million. During the same period of 1997, lease revenues of $4.2 million were offset by depreciation expense, direct expenses, and administrative expenses of $5.7 million. The primary reason for the increase in lease revenues and depreciation expense, direct expenses, and administrative expenses during 1998 was the purchase of an interest in an entity that owns a marine vessel during the third quarter of 1997.
(f) Net Income
As a result of the foregoing, the Partnership's net income for the year ended December 31, 1998 was $2.4 million, compared to a net income of $7.9 million during the same period in 1997. The Partnership's ability to operate assets, liquidate assets, and re-lease those assets whose leases expire is subject to many factors, and the Partnership's performance during the year ended December 31, 1998 is not necessarily indicative of future periods. In the year ended December 31, 1998, the Partnership distributed $11.4 million to the limited partners, or $1.26 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 to either redeploy the assets in the most advantageous geographic location or sell the assets.
The Partnership's equipment on lease to U.S. domiciled lessees consists of trailers, railcars, and aircraft. During 1999, U.S. lease revenues accounted for 25% of the total lease revenues of wholly- and partially-owned equipment while net income accounted for $1.6 million of the Partnership's net income of $1.3 million.
The Partnership's owned equipment on lease to Canadian-domiciled lessees consists of railcars and aircraft. During 1999, Canadian lease revenues accounted for 16% of the total lease revenues of wholly- and partially-owned equipment, and recorded net income of $1.6 million, compared to the Partnership's net income of $1.3 million.
The Partnership's owned aircraft on lease to a South American-domiciled lessee during 1999 accounted for 12% of the total lease revenues of wholly- and partially-owned equipment, and recorded a net income of $0.9 million, compared to the Partnership's net income of $1.3 million.
The Partnership's ownership share of equipment owned by USPEs on lease to a Mexican-domiciled lessee consisted of aircraft on a direct finance lease and recorded a net income of $0.3 million of the Partnership's net income of $1.3 million.
The Partnership's ownership share of equipment that was owned by USPEs on lease to European-domiciled lessees consisted of aircraft, aircraft engines, and aircraft rotables. All of the equipment on lease to the European lessee was sold during 1999 and recorded a net income of $1.5 million of the Partnership's net income of $1.3 million. The primary reason this region recorded net income was due to the sale of the Partnership's ownership in this USPE for a gain of $1.6 million.
The Partnership's owned equipment and its ownership share in USPEs on lease to lessees in the rest of the world consisted of marine vessels and marine containers. During 1999, lease revenues for these lessees accounted for 47% of the total lease revenues of wholly- and partially-owned equipment and recorded a net loss of $2.3 million, compared to the Partnership's net income of $1.3 million. The primary reason this region recorded a net loss of $2.3 million was due to the Partnership recording a loss on the revaluation of a owned marine vessel of $2.9 million.
(F) Effects of Year 2000
As of March 20, 2000, the Partnership has not experienced any material Year 2000 (Y2K) issues with either its internally developed software or purchased software. In addition, to date, the Partnership has not been impacted by any Y2K problems that may have impacted our customers and suppliers. The amount allocated to the Partnership by the General Partner related to Y2K issues has not been material. The General Partner continues to monitor its systems for any potential Y2K issues.
(G) Inflation
Inflation had no significant impact on the Partnership's operations during 1999, 1998, or 1997.
(H) Forward-Looking Information
Except for historical information contained herein, the discussion in this Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of the Partnership's plans, objectives, expectations, and intentions. The cautionary statements made in this Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. The Partnership's actual results could differ materially from those discussed here.
(I) Outlook for the Future
Since the Partnership is in its holding or passive liquidation phase, the General Partner will be seeking to selectively re-lease or sell assets as the existing leases expire. Sale decisions will cause the operating performance of the Partnership to decline over the remainder of its life.
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 continuously 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 equipment markets in which it determines that it cannot operate equipment and achieve acceptable rates of return.
The Partnership intends to use cash flow from operations to satisfy its operating requirements, pay principal and interest on debt, and pay cash distributions to the partners.
Factors affecting the Partnership's contribution during the year 2000 and beyond include:
1. A worldwide increase in available marine containers to lease has led to declining lease rates for this equipment. In addition, some of the Partnership's refrigerated marine containers have become delaminated. This condition lowers the demand for these marine containers which has lead to declining lease rates and lower utilization.
2. Depressed economic conditions in Asia during most of 1999 has led to declining freight rates for dry bulk marine vessels. As Asia begins its economic recovery and in the absence of new additional orders, this market would be expected to stabilize and improve over the next one to two years.
3. The Partnership owns an anchor handling supply marine vessel that has a fixed lease rate due to expire in the year 2000. If the economic conditions remain the same, the General Partner would expect to re-lease this marine vessel at a rate much lower than the rate that is currently in place.
4. Railcar loading in North America has continued to be high, however a softening in the market in the last quarter of 1999, may lead to lower utilization and lower contribution to the Partnership as existing leases expire and renewal leases are negotiated.
Several other factors may affect the Partnership's operating performance in the year 2000 and beyond, including changes in the markets for the Partnership's equipment and changes in the regulatory environment in which that equipment operates.
(1) Repricing Risk
Certain portions of the Partnership's aircraft, railcar, marine container, marine vessel, and trailer portfolios will be remarketed in 2000 as existing leases expire, exposing the Partnership to considerable repricing risk/opportunity. Additionally, the General Partner may select 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.
(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 or sale of equipment. Under U.S. Federal Aviation Regulations, after December 31, 1999, no person may operate an aircraft to or from any airport in the contiguous United States unless that aircraft 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. The Federal Railroad Administration has mandated that effective July 1, 2000, all jacketed and non-jacketed tank railcars must be re-qualified to insure tank shell integrity. Tank shell thickness, weld seams, and weld attachments must be inspected and repaired if necessary to re-qualify a tank railcar for service. The average cost of this inspection is $1,800 for non-jacketed tank railcars and $3,600 for jacketed tank railcars, not including any necessary repairs. This inspection is to be performed at the next scheduled tank test.
(3) Distributions
Pursuant to the limited partnership agreement, the Partnership stopped reinvesting in additional equipment beginning in its seventh year of operation, which commenced on January 1, 1999. The General Partner intends to pursue a strategy of selectively re-leasing equipment to achieve competitive returns, or selling equipment that is underperforming or whose operation becomes prohibitively expensive, in the period prior to the final liquidation of the Partnership. During this time, the Partnership will use operating cash flow and proceeds from the sale of equipment to meet its operating obligations and make distributions to the partners. Although the General Partner intends to maintain a sustainable level of distributions prior to final liquidation of the Partnership, actual Partnership performance and other considerations may require adjustments to then-existing distribution levels. In the long term, changing market conditions and used-equipment values may preclude the General Partner from accurately determining the impact of future re-leasing activity and equipment sales on Partnership performance and liquidity. Consequently, the General Partner cannot establish future distribution levels with any certainty at this time.
The Partnership's permanent debt obligation began to mature in February 1997. The General Partner believes that sufficient cash flow from operations and equipment sales will be available in the future for repayment of debt.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of interest rate and currency risk. The Partnership's senior secured note is a variable rate debt. The Partnership estimates a one percent increase or decrease in the Partnership's variable rate debt would result in an increase or decrease, respectively, in interest expense of $0.1 million in 2000, and $38,000 in 2001. The Partnership estimates a two percent increase or decrease in the Partnership's variable rate debt would result in an increase or decrease, respectively, in interest expense of $0.2 million in 2000, and $0.1 million in 2001.
During 1999, 75% 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed on the Index to Financial Statements included in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM INTERNATIONAL AND 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:
Robert N. Tidball was appointed Chairman of the Board in August 1997 and President and Chief Executive Officer of PLM International in March 1989. At the time of his appointment as President and Chief Executive Officer, he was Executive Vice President of PLM International. Mr. Tidball became a director of PLM International in April 1989. Mr. Tidball was appointed a Director of PLM Financial Services, Inc. in July 1997 and was elected President of PLM Worldwide Management Services Limited in February 1998. He has served as an officer of PLM Railcar Management Services, Inc. since June 1987. Mr. Tidball was Executive Vice President of Hunter Keith, Inc., a Minneapolis-based investment banking firm, from March 1984 to January 1986. Prior to Hunter Keith, he was Vice President, General Manager, and Director of North American Car Corporation and a director of the American Railcar Institute and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997. He is President of Dunsford Hill Capital Partners, a San Francisco-based financial consulting firm serving emerging growth companies. Prior to founding Dunsford Hill Capital Partners, Mr. Caudill held senior investment banking positions at Prudential Securities, Morgan Grenfell Inc., and The First Boston Corporation. Mr. Caudill also serves as a director of Northwest Biotherapeutics, Inc., VaxGen, Inc., SBE, Inc., and RamGen, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996, appointed Senior Vice President of PLM International in March 1994, and appointed Director and President of PLM Financial Services, Inc. in June 1996. Mr. Goodrich has also served as Senior Vice President of PLM Transportation Equipment Corporation since July 1989 and as President of PLM Railcar Management Services, Inc. since September 1992, having been a Senior Vice President since June 1987. Mr. Goodrich was an executive vice president of G.I.C. Financial Services Corporation of Chicago, Illinois, a subsidiary of Guardian Industries Corporation, from December 1980 to September 1985.
Warren G. Lichtenstein was elected to the Board of Directors in December 1998. Mr. Lichtenstein is the Chief Executive Officer of Steel Partners II, L.P., which is PLM International's largest shareholder, currently owning 16% of the Company's common stock. Additionally, Mr. Lichtenstein is Chairman of the Board of Aydin Corporation, a NYSE-listed defense electronics concern, as well as a director of Gateway Industries, Rose's Holdings, Inc., and Saratoga Beverage Group, Inc. Mr. Lichtenstein is a graduate of the University of Pennsylvania, where he received a Bachelor of Arts degree in economics.
Howard M. Lorber was elected to the Board of Directors in January 1999. Mr. Lorber is President and Chief Operating Officer of New Valley Corporation, an investment banking and real estate concern. He is also Chairman of the Board and Chief Executive Officer of Nathan's Famous, Inc., a fast food company. Additionally, Mr. Lorber is a director of United Capital Corporation and Prime Hospitality Corporation and serves on the boards of several community service organizations. He is a graduate of Long Island University, where he received a Bachelor of Arts degree and a Masters degree in taxation. Mr. Lorber also received charter life underwriter and chartered financial consultant degrees from the American College in Bryn Mawr, Pennsylvania. He is a trustee of Long Island University and a member of the Corporation of Babson College.
Harold R. Somerset was elected to the Board of Directors of PLM International in July 1994. From February 1988 to December 1993, Mr. Somerset was President and Chief Executive Officer of California & Hawaiian Sugar Corporation (C&H Sugar), a subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined C&H Sugar in 1984 as Executive Vice President and Chief Operating Officer, having served on its Board of Directors since 1978. Between 1972 and 1984, Mr. Somerset served in various capacities with Alexander & Baldwin, Inc., a publicly held land and agriculture company headquartered in Honolulu, Hawaii, including Executive Vice President of Agriculture and Vice President and General Counsel. Mr. Somerset holds a law degree from Harvard Law School as well as a degree in civil engineering from the Rensselaer Polytechnic Institute and a degree in marine engineering from the U.S. Naval Academy. Mr. Somerset also serves on the boards of directors for various other companies and organizations, including Longs Drug Stores, Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993, Mr. Witt has been a principal with WWS Associates, a consulting and investment group specializing in start-up situations and private organizations about to go public. Prior to that, he was Chief Executive Officer and Chairman of the Board of Hexcel Corporation, an international advanced materials company with sales primarily in the aerospace, transportation, and general industrial markets. Mr. Witt also serves on the boards of directors for various other companies and organizations.
Robin L. Austin became Vice President, Human Resources of PLM Financial Services, Inc. in 1984, having served in various capacities with PLM Investment Management, Inc., including Director of Operations, from February 1980 to March 1984. From June 1970 to September 1978, Ms. Austin served on active duty in the United States Marine Corps and served in the United States Marine Corp Reserves from 1978 to 1998. She retired as a Colonel of the United States Marine Corps Reserves in 1998. Ms. Austin has served on the Board of Directors of the Marines' Memorial Club and is currently on the Board of Directors of the International Diplomacy Council.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July 1997. Mr. Bess was appointed President of PLM Investment Management, Inc. in August 1989, having served as Senior Vice President of PLM Investment Management, Inc. beginning in February 1984 and as Corporate Controller of PLM Financial Services, Inc. beginning in October 1983. Mr. Bess served as Corporate Controller of PLM, Inc. beginning in December 1982. Mr. Bess was Vice President-Controller of Trans Ocean Leasing Corporation, a container leasing company, from November 1978 to November 1982, and Group Finance Manager with the Field Operations Group of Memorex Corporation, a manufacturer of computer peripheral equipment, from October 1975 to November 1978.
Richard K Brock was appointed Vice President and Chief Financial Officer of PLM International and PLM Financial Services, Inc. in January 2000, after having served as Acting CFO since June 1999. Mr. Brock served as Corporate Controller of PLM International and PLM Financial Services, Inc. beginning in June 1997, as Director of Planning and General Accounting beginning in February 1994, and as an accounting manager beginning in September 1991. Mr. Brock was a division controller of Learning Tree International, a technical education company, from February 1988 through July 1991.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM International and PLM Financial Services, Inc. in November 1997. She has worked as an attorney for PLM International since 1990 and served as its Senior Attorney since 1994. Previously, Ms. Santo was engaged in the private practice of law in San Francisco. Ms. Santo received her J.D. from the University of California, Hastings College of the Law.
The directors of PLM International, Inc. are elected for a three-year term and the directors of PLM Financial Services, Inc. are elected for a one-year term or until their successors are elected and qualified. No family relationships exist between any director or executive officer of PLM International Inc. or PLM Financial Services, Inc., PLM Transportation Equipment Corp., or PLM Investment Management, Inc.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership had no pension, profit sharing, retirement, or similar benefit plan in effect as of December 31, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 5% interest in the profits and losses (subject to certain allocations of income), cash available for distributions, and net disposition proceeds of the Partnership. As of December 31, 1999, no investor was known by the General Partner to beneficially own more than 5% of the limited partnership units of the Partnership.
(B) Security Ownership of Management
Neither the General Partner and its affiliates nor any officer or director of the General Partner and its affiliates own any limited partnership units of the Partnership as of December 31, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
During 1999, the Partnership paid or accrued the following fees to FSI or its affiliates: management fees, $1.0 million, equipment acquisition fees, $0.1 million; lease negotiation fees, $13,000, and administrative and data processing services performed on behalf of the Partnership, $0.9 million.
During 1999, the Partnership's proportional share of ownership in USPEs paid or accrued the following fees to FSI or its affiliates: management fees, $0.3 million; and administrative and data processing services, $0.1 million.
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 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. 33-32258), which became effective with the Securities and Exchange Commission on April 11, 1990.
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. 33-32258), which became effective with the Securities and Exchange Commission on April 11, 1990.
10.2 Loan Agreement, amended and restated as of September 26, 1996 regarding Senior Notes due November 8, 1999. Incorporated by reference to the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 1997.
10.3 Amendment No. 1 to the Amended and Restated $38,000,000 Loan Agreement, dated as of December 29, 1997. Incorporated by reference to the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1998.
24. Powers of Attorney.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on behalf of the Partnership by duly authorized officers.
Dated: March 20, 2000 PLM EQUIPMENT GROWTH FUND V PARTNERSHIP
By: PLM Financial Services, Inc. General Partner
By: /s/ Douglas P. Goodrich Douglas P. Goodrich President and Director
By: /s/ Richard K Brock Richard K Brock Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following directors of the Partnership's General Partner on the dates indicated.
Name Capacity Date
* Robert N. Tidball Director, FSI March 20, 2000
* Douglas P. Goodrich Director, FSI March 20, 2000
* Stephen M. Bess Director, FSI March 20, 2000
*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 FUND V (A LIMITED PARTNERSHIP)
(Item 14(a))
Page
Independent auditors' report 30
Balance sheets as of December 31, 1999 and 1998 31
Statements of income for the years ended December 31, 1999, 1998, and 1997 32
Statements of changes in partners' capital for the years ended December 31, 1999, 1998, and 1997 33
Statements of cash flows for the years ended December 31, 1999, 1998, and 1997 34
Notes to financial statements 35-46
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 Fund V:
We have audited the accompanying financial statements of PLM Equipment Growth Fund V (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 Fund V as of December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles.
SAN FRANCISCO, CALIFORNIA March 12, 2000
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) BALANCE SHEETS DECEMBER 31, (in thousands of dollars, except unit amounts)
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, (in thousands of dollars, except weighted-average unit amounts)
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (in thousands of dollars)
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (in thousands of dollars)
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
1. BASIS OF PRESENTATION
ORGANIZATION
PLM Equipment Growth Fund V, a California limited partnership (the Partnership), was formed on November 14, 1989 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 commenced on January 1, 1999, the General Partner stopped reinvesting excess cash. Surplus cash, less reasonable reserves, will be distributed to the partners. Beginning in the Partnership's ninth year of operations which begins January 1, 2001, the General Partner intends to begin an orderly liquidation of the Partnership's assets. The Partnership will be terminated by December 31, 2010, unless terminated earlier upon the sale of all equipment or by certain other events.
FSI manages the affairs of the Partnership. Cash distributions of the Partnership are generally allocated 95% to the limited partners and 5% to the General Partner. Net income is allocated to the General Partner to the extent necessary to cause the General Partner's capital account to equal zero. The General Partner is entitled to subordinated incentive fees equal to 5% of cash available for distribution and 5% of net disposition proceeds (as defined in the partnership agreement), which are distributed by the Partnership after the limited partners have received a certain minimum rate of return.
The General Partner has determined that it will not adopt a reinvestment plan for the Partnership. If the number of units made available for purchase by limited partners in any calendar year exceeds the number that can be purchased with reinvestment plan proceeds, then the Partnership may redeem up to 2% of the outstanding units each year, subject to certain terms and conditions. The purchase price to be offered by the Partnership for these units will be equal to 110% of the unrecovered principal attributable to the units. The unrecovered principal for any unit will be equal to the excess of (i) the capital contribution attributable to the unit over (ii) the distributions from any source paid with respect to the units. For the years ended December 31, 1999, 1998, and 1997, the Partnership had purchased 13,117, 5,580 and 82,411 limited partnership units for $0.1 million, $42,000, and $0.8 million, respectively.
As of December 31, 1999, the Partnership agreed to purchase approximately 2,300 units for an aggregate price of approximately $12,500. The General Partner anticipates that these units will be purchased in the first and second quarters of 2000. In addition to these units, the General Partner may purchase additional 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 owned by the Partnership is managed, under a continuing management agreement, by PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary of 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 the investor programs, and is a general partner of other programs.
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
1. BASIS OF PRESENTATION (CONTINUED)
ACCOUNTING FOR LEASES
The Partnership's leasing operations consists primarily of operating leases. Under the operating lease method of accounting, the leased asset is recorded at cost and depreciated over its estimated useful life. Rental payments are recorded as revenue over the lease term as earned in accordance with Statement of Financial Accounting Standards No. 13, "Accounting for Leases" (SFAS 13). Lease origination costs are capitalized and amortized over the term of the lease. Periodically, the Partnership leases equipment with lease terms that qualify for direct finance lease classification, as required by SFAS 13.
DEPRECIATION AND AMORTIZATION
Depreciation of transportation equipment held for operating leases is computed on the double-declining balance method, taking a full month's depreciation in the month of acquisition, based upon estimated useful lives of 15 years for railcars and 12 years for all other equipment. The depreciation method changes 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 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 and whenever circumstances indicate that the carrying value of an asset may not be recoverable in relation to expected future market conditions for the purpose of assessing recoverability of the recorded amounts. If projected undiscounted future cash flows and the fair market value of the equipment are less than the carrying value of the equipment, a loss on revaluation is recorded. Reductions of $2.9 million to the carrying value of a marine vessel was required during 1999. No reductions to the carrying value of equipment were required during either 1998, or 1997.
Equipment held for operating leases is stated at cost less any reductions to the carrying value as required by SFAS 121
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 and WMS.
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
1. BASIS OF PRESENTATION (CONTINUED)
REPAIRS AND MAINTENANCE
Repair and maintenance costs related to marine vessels, railcars, and trailers are usually the obligation of the Partnership and are accrued as incurred. Certain costs associated with marine vessel dry-docking are estimated and accrued ratably over the period prior to such dry-docking. Maintenance costs of aircraft and marine containers are the obligation of the lessee. To meet the maintenance requirements of certain aircraft airframes and engines, reserve accounts are prefunded by the lessee over the period of the lease based on the number of hours this equipment is used times the estimated rate to repair this equipment. If repairs exceed the amount prefunded by the lessee, the Partnership has the obligation to fund and accrue the difference. In certain instances, if the aircraft is sold and there is a balance in the reserve account for repairs to that aircraft, the balance in the reserve account is reclassified as additional sales proceeds. The aircraft reserve accounts and marine vessel dry-docking reserve accounts are included in the balance sheet as lessee deposits and reserve for repairs.
NET INCOME (LOSS) AND DISTRIBUTIONS PER LIMITED PARTNERSHIP UNIT
Special allocations of income are made to the General Partner to the extent necessary to cause the capital account balance of the General Partner to be zero as of the close of such year.
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 $7.3 million, $9.6 million, and $7.4 million in 1999, 1998, and 1997, respectively, were deemed to be a return of capital.
Cash distributions related to the fourth quarter of 1999 of $1.7 million, $1.4 million in 1998, and $2.8 million in 1997, were paid during the first quarter of 2000, 1999, and 1998, respectively.
NET INCOME (LOSS) PER WEIGHTED-AVERAGE PARTNERSHIP UNIT
Net income (loss) per weighted-average Partnership unit was computed by dividing net income (loss) attributable to limited partners by the weighted-average number of Partnership units deemed outstanding during the year. The weighted-average number of Partnership units deemed outstanding during the years ended December 31, 1999, 1998, and 1997 was 9,071,929, 9,082,093, and 9,107,121, respectively.
CASH AND CASH EQUIVALENTS
The Partnership considers highly liquid investments that are readily convertible to known amounts of cash with original maturities of one year 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 FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
1. BASIS OF PRESENTATION (CONTINUED)
COMPREHENSIVE INCOME
The Partnership's net income is equal to comprehensive income for the years ended December 31, 1999, 1998, and 1997.
RESTRICTED CASH
As of December 31, 1999 and 1998, restricted cash represented lessee security deposits held by the Partnership.
2. GENERAL PARTNER AND TRANSACTIONS WITH AFFILIATES
An officer of PLM Securities Corp., a wholly-owned subsidiary of the General Partner, contributed $100 of the Partnership's initial capital. Under the equipment management agreement, IMI, subject to certain reductions, receives a monthly management fee attributable either to 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) 5% of the gross lease revenues attributable to equipment that is subject to operating leases, (b) 2% of the gross lease revenues, as defined in the agreement, that is subject to full payout net leases, or (c) 7% of the gross lease revenues attributable to equipment, if any, that is subject to per diem leasing arrangements and thus is operated by the Partnership. Partnership management fees of $0.2 million were payable as of December 31, 1999 and 1998. The Partnership's proportional share of USPE management fee expense of $0.1 million was payable as of December 31, 1999 and 1998. The Partnership's proportional share of USPE management fee expense was $0.3 million, $0.4 million and $0.3 million during 1999, 1998, and 1997, respectively. The Partnership reimbursed FSI for data processing and administrative expenses directly attributable to the Partnership in the amount of $0.9 million, $1.0 million, and $1.0 million during 1999, 1998, and 1997, respectively. The Partnership's proportional share of USPE data processing and administrative expenses reimbursed to FSI was $0.1 million during 1999, 1998, and 1997. Debt placement fees were paid to FSI in an amount equal to 1% of the Partnership's long-term borrowings during 1991.
The Partnership paid $0.1 million and $0.8 million in 1998 and 1997, respectively, to Transportation Equipment Indemnity Company Ltd. (TEI), an affiliate of the General Partner, which provided marine insurance coverage and other insurance brokerage services. The Partnership's proportional share of USPE marine insurance coverage paid to TEI was $47,000 and $0.3 million during 1998 and 1997, respectively. 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. Also, during 1998, the Partnership and the USPEs received a $0.4 million loss-of-hire insurance refund from TEI due to lower claims from the insured Partnership and other insured affiliated programs. During 1999 and 1998, TEI did not provide the same level of insurance coverage as had been provided during 1997. These services were provided by an unaffiliated third party. PLM International liquidated TEI in 2000.
The Partnership and the USPEs paid or accrued lease negotiation and equipment acquisition fees of $0.1 million, $0.6 million, and $0.5 million to TEC in 1999, 1998, and 1997, respectively.
As of December 31, 1999, approximately 67% of the Partnership's trailer equipment was in rental facilities operated by PLM Rental, Inc., an affiliate of the General Partner, doing business as PLM Trailer Leasing. Rents are reported as revenue in accordance with Financial Accounting Standards Board Statement No. 13 "Accounting for Leases". Direct expenses associated with the equipment are charged directly to the Partnership. An allocation of indirect expenses of the rental yard operations is charged to the Partnership monthly.
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
2. GENERAL PARTNER AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
The Partnership owned certain equipment in conjunction with affiliated programs during 1999, 1998, and 1997 (see Note 4).
The Partnership borrowed a total of $3.2 million, $2.0 million, and $1.6 million from the General Partner for a period of time during 1999, 1998, and 1997, respectively. The General Partner charged the Partnership market interest rates for the time the loan was outstanding. Total interest paid to the General Partner was $15,000, $3,000, and $10,000 during 1999, 1998, and 1997, respectively.
The balance due to affiliates as of December 31, 1999 and 1998 included $0.2 million due to FSI and its affiliates for management fees and $0.1 million due to affiliated USPEs.
3. EQUIPMENT
The components of owned equipment as of December 31 were as follows (in thousands of dollars):
Revenues are earned under operating leases. In most cases, lessees are invoiced for equipment leases on a monthly basis. All equipment invoiced monthly are based on a fixed rate except for a small number of railcars which are based on mileage traveled. A portion of the Partnership's marine containers are leased to operators of utilization-type leasing pools that include equipment owned by unaffiliated parties. In such instances, revenues received by the Partnership consist of a specified percentage of revenues generated by leasing the pooled equipment to sublessees, after deducting certain direct operating expenses of the pooled equipment.
As of December 31, 1999, all owned equipment was on lease or operating in PLM-affiliated short-term trailer rental yards. As of December 31, 1998, all owned equipment was on lease or operating in PLM-affiliated short-term trailer rental yards except for 10 railcars with a net book value of $0.1 million.
Equipment held for operating leases is stated at cost less any reductions to the carrying value as required by SFAS 121. During 1999, reductions to the carrying value of marine vessels of $2.9 were required.
During 1999, the Partnership purchased a hush-kit for one of the Partnership's Boeing 737-200 commercial aircraft for $1.3 million, including acquisition fees of $0.1 million paid to FSI for the purchase of this equipment. The Partnership was required to install the hush-kit per the Partnership's lease agreement. During 1998, the Partnership completed the purchase of a marine vessel for $9.6 million, including acquisition fees of $0.4 million paid to FSI. The Partnership also purchased a Boeing 737-200 hushkit which was installed on one of the Partnership's stage II aircraft during 1998 for $1.3 million, including acquisition fees of $0.1 million paid to FSI.
During 1999, the Partnership disposed of marine containers, railcars, and trailers with an aggregate net book value of $0.6 million, for $0.9 million. In addition, during 1999, the Partnership recorded a revaluation loss on two marine vessels of $2.9 million. During 1998, the Partnership disposed of an
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
3. EQUIPMENT (CONTINUED)
aircraft, marine containers, railcars, and trailers, with an aggregate net book value of $8.0 million, for $8.7 million.
All wholly- and partially-owned equipment on lease is accounted for as operating leases, except for one finance lease. Future minimum rentals under noncancelable operating leases, as of December 31, 1999, for wholly- and partially-owned equipment during each of the next five years are approximately $10.0 million in 2000, $6.8 million in 2001, $1.3 million in 2002, $0.9 million in 2003, and $0.5 million in 2004. Per diem and short-term rentals consisting of utilization rate lease payments included in lease revenues amounted to approximately $9.2 million, $12.2 million, and $14.0 million in 1999, 1998, and 1997, respectively.
4. INVESTMENTS IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITIES
The Partnership owns equipment jointly with affiliated programs.
In September 1999, the General Partner amended the corporate-by-laws of certain USPE's in which an affiliated program owns an interest greater than 50%. The amendment to the corporate-by-laws provided that all decisions regarding the disposition and other significant business decisions in regard to that investment would be permitted only upon unanimous consent of the Partnership and all the affiliated programs that have an ownership in the investment. Accordingly, as of December 31, 1999, the balance sheet reflects all investments in USPEs on an equity basis.
The net investments in USPEs include the following jointly-owned equipment (and related assets and liabilities) as of December 31 (in thousands of dollars):
As of December 31, 1999 and 1998, all jointly-owned equipment in the Partnership's USPE portfolio was on lease.
During 1999, the General Partner sold the Partnership's 17% interest in two trusts that owned a total of three Boeing 737-200A Stage II commercial aircraft, two stage II aircraft engines, and a portfolio of aircraft rotables and its 50% interest in an entity owning a marine vessel. The Partnership's interest in these trusts and entity were sold for proceeds of $7.4 million for its net investment of $3.9 million.
The following summarizes the financial information for the USPEs and the Partnership's interest therein as of and for the years ended December 31 (in thousands of dollars):
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
5. OPERATING SEGMENTS
The Partnership operates primarily in five operating segments: aircraft leasing, marine container 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 interest expense, general and administrative expenses, and certain other expenses. The segments are managed separately due to different business strategies for each operation.
The following tables present a summary of the operating segments (in thousands of dollars):
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
5. OPERATING SEGMENTS (CONTINUED)
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, railcars, mobile offshore drilling unit, and trailers to lessees domiciled in five geographic regions: United States, Canada, South America, Europe, and Mexico. Marine vessels and marine containers 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):
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
6. GEOGRAPHIC INFORMATION (CONTINUED)
The following table sets forth net income (loss) information by region for the owned equipment and investments in USPEs for the years ended December 31 (in thousands of dollars):
The net book value of these assets as of December 31 are as follows (in thousands of dollars):
7. NOTE PAYABLE
In November 1991, the Partnership borrowed $38.0 million under a nonrecourse loan agreement. The loan currently is secured by certain marine containers, two marine vessels, and six aircraft owned by the Partnership.
During 1996, the Partnership sold some of the assets in which the lender had a secured interest. On September 26, 1996, the existing senior loan agreement was amended and restated to reduce the interest rate, to grant increased flexibility in allowable collateral, to pledge additional equipment to the lenders, and to amend the loan repayment schedule from 16 consecutive equal quarterly installments to 20 consecutive quarterly installments with lower payments of principal for the first four payments. The Partnership incurred a loan amendment fee of $133,000 to the lender in connection with the restatement of this loan. Pursuant to the terms of the loan agreement, the Partnership must comply with certain financial covenants and maintain certain financial ratios. The note payable is scheduled to mature on December 12, 2001.
On December 29, 1997, the existing senior loan agreement was amended and restated to allow the Partnership to deduct the next scheduled principal payment from the equipment sales proceeds, which had previously been used to paydown the loan.
The Partnership made the regularly scheduled principal payments and quarterly interest payments at a rate of LIBOR plus 1.2% per annum (7.3% at December 31, 1999 and 6.6% at December 31, 1998) to the lender of the senior loan during 1999 and 1998. The Partnership also paid the lender of the senior loan an additional $0.5 million from equipment sale proceeds, as required by the loan agreement.
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
8. CONCENTRATIONS OF CREDIT RISK
For the years ended December 31, 1999 and 1998, the Partnership's customers that accounted for 10% or more of the total consolidated revenues for the owned equipment and partially owned equipment were Varig South America (10% in 1999) and Canadian Airlines International (10% in 1998). No single lessee accounted for more than 10% of the consolidated revenues for the year ended December 31, 1997.
As of December 31, 1999 and 1998, 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, 1999, the financial statement carrying amount of assets and liabilities was approximately $41.6 million lower than the federal income tax basis of such assets and liabilities, primarily due to differences in depreciation methods, equipment reserves, provisions for bad debts, lessees' prepaid deposits, and the tax treatment of underwriting commissions and syndication costs.
10. CONTINGENCIES
PLM International (the Company) and various of its wholly-owned subsidiaries are named as defendants in a lawsuit filed as a purported class action in January 1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251 (the Koch action). The named plaintiffs are six individuals who invested in PLM Equipment Growth Fund IV (Fund IV), PLM Equipment Growth Fund V (Fund V), PLM Equipment Growth Fund VI (Fund VI), and PLM Equipment Growth & Income Fund VII (Fund VII) (the Funds), each a California limited partnership for which the Company's wholly-owned subsidiary, FSI, acts as the General Partner. The complaint asserts causes of action against all defendants for fraud and deceit, suppression, negligent misrepresentation, negligent and intentional breaches of fiduciary duty, unjust enrichment, conversion, and conspiracy. Plaintiffs allege that each defendant owed plaintiffs and the class certain duties due to their status as fiduciaries, financial advisors, agents, and control persons. Based on these duties, plaintiffs assert liability against defendants for improper sales and marketing practices, mismanagement of the Funds, and concealing such mismanagement from investors in the Funds. Plaintiffs seek unspecified compensatory damages, as well as punitive damages, and have offered to tender their limited partnership units back to the defendants.
In March 1997, the defendants removed the Koch action from the state court to the United States District Court for the Southern District of Alabama, Southern Division (Civil Action No. 97-0177-BH-C) (the court) based on the court's diversity jurisdiction. In December 1997, the court granted defendants motion to compel arbitration of the named plaintiffs' claims, based on an agreement to arbitrate contained in the limited partnership agreement of each Partnership. Plaintiffs appealed this decision, but in June 1998 voluntarily dismissed their appeal pending settlement of the Koch action, as discussed below.
In June 1997, the Company and the affiliates who are also defendants in the Koch action were named as defendants in another purported class action filed in the San Francisco Superior Court, San Francisco, California, Case No. 987062 (the Romei action). The plaintiff is an investor in Fund V, and filed the complaint on her own behalf and on behalf of all class members similarly situated who invested in the Funds. The complaint alleges the same facts and the same causes of action as in the Koch action, plus additional causes of action against all of the defendants, including alleged unfair and deceptive practices and violations of state securities law. In July 1997, defendants filed a petition (the petition) in federal district court under the Federal Arbitration Act seeking to compel arbitration of plaintiff's claims. In October 1997, the district court denied the Company's petition, but in November 1997, agreed to hear the Company's motion for reconsideration. Prior to reconsidering its order, the
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
10. CONTINGENCIES (CONTINUED)
district court dismissedthe petition pending settlement of the Romei action, as discussed below. The state court action continues to be stayed pending such resolution.
In February 1999 the parties to the Koch and Romei actions agreed to settle the lawsuits, with no admission of liability by any defendant, and filed a Stipulation of Settlement with the court. The settlement is divided into two parts, a monetary settlement and an equitable settlement. The monetary settlement provides for a settlement and release of all claims against defendants in exchange for payment for the benefit of the class of up to $6.6 million. The final settlement amount will depend on the number of claims filed by class members, the amount of the administrative costs incurred in connection with the settlement, and the amount of attorneys' fees awarded by the court to plaintiffs' attorneys. The Company will pay up to $0.3 million of the monetary settlement, with the remainder being funded by an insurance policy. For settlement purposes, the monetary settlement class consists of all investors, limited partners, assignees, or unit holders who purchased or received by way of transfer or assignment any units in the Funds between May 23, 1989 and June 29, 1999. The monetary settlement, if approved, will go forward regardless of whether the equitable settlement is approved or not.
The equitable settlement provides, among other things, for: (a) the extension (until January 1, 2007) of the date by which FSI must complete liquidation of the Funds' equipment, (b) the extension (until December 31, 2004) of the period during which FSI can reinvest the Funds' funds in additional equipment, (c) an increase of up to 20% in the amount of front-end fees (including acquisition and lease negotiation fees) that FSI is entitled to earn in excess of the compensatory limitations set forth in the North American Securities Administrator's Association's Statement of Policy; (d) a one-time repurchase by each of Funds V, VI and VII of up to 10% of that partnership's outstanding units for 80% of net asset value per unit; and (e) the deferral of a portion of the management fees paid to an affiliate of FSI until, if ever, certain performance thresholds have been met by the Funds. Subject to final court approval, these proposed changes would be made as amendments to each Partnership's limited partnership agreement if less than 50% of the limited partners of each Partnership vote against such amendments. The limited partners will be provided the opportunity to vote against the amendments by following the instructions contained in solicitation statements that will be mailed to them after being filed with the Securities and Exchange Commission. The equitable settlement also provides for payment of additional attorneys' fees to the plaintiffs' attorneys from Partnership funds in the event, if ever, that certain performance thresholds have been met by the Funds. The equitable settlement class consists of all investors, limited partners, assignees or unit holders who on June 29, 1999 held any units in Funds V, VI, and VII, and their assigns and successors in interest.
The court preliminarily approved the monetary and equitable settlements in June 1999. The monetary settlement remains subject to certain conditions, including notice to the monetary class and final approval by the court following a final fairness hearing. The equitable settlement remains subject to certain conditions, including: (a) notice to the equitable class, (b) disapproval of the proposed amendments to the partnership agreements by less than 50% of the limited partners in one or more of Funds V, VI, and VII, and (c) judicial approval of the proposed amendments and final approval of the equitable settlement by the court following a final fairness hearing. No hearing date is currently scheduled for the final fairness hearing. The Company continues to believe that the allegations of the Koch and Romei actions are completely without merit and intends to continue to defend this matter vigorously if the monetary settlement is not consummated.
The Partnership has initiated litigation in various official forums in India against the defaulting Indian airline lessees to repossess Partnership property and to recover damages for failure to pay rent and failure to maintain such property in accordance with relevant lease contracts. The Partnership has repossessed its property previously leased to such airline, and the airline has ceased operations. In response to the Partnership's collection efforts, the airline filed counter-claims against the Partnership in excess of the Partnership's claims against the airline. The General Partner believes that the airlines'
PLM EQUIPMENT GROWTH FUND V (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
10. CONTINGENCIES (CONTINUED)
counterclaims are completely without merit, and the General Partner will vigorously defend against such counterclaims. The General Partner believes an unfavorable outcome from the counterclaims is remote.
The Company is involved as plaintiff or defendant in various other legal actions incidental to its business. The General Partner does not believe that any of these actions will be material to the financial condition of the Partnership.
11. SUBSEQUENT EVENT
During February 2000, the Partnership made its regularly scheduled principal payment of $1.9 million and an additional $0.3 million from equipment sale proceeds, as required by the loan agreement, to the lender of the senior loan.
The Partnership borrowed $1.9 million from the General Partner during February 2000 and subsequently paid the General Partner $0.3 million during February 2000. The General Partner will charge the Partnership market interest rates during the time the loan will be outstanding.
PLM EQUIPMENT GROWTH FUND V
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership. *
10.1 Management Agreement between the Partnership and * PLM Investment Management, Inc.
10.2 Amended and Restated $38,000,000 Loan Agreement, dated as of September 26, 1996. *
10.3 Amendment No. 1 to the Amended and Restated $38,000,000 Loan Agreement, dated as of December 29, 1997. *
24. Powers of Attorney.
* Incorporated by reference. See page 27 of this report.