UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the fiscal quarter ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the transition period from to
Commission file number 1-9670
-------------------------------
PLM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3041257
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Market, Steuart Street Tower,
Suite 800, San Francisco, CA 94105-1301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 974-1399
----------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: common stock - $.01 par
value; outstanding as of October 27, 1998 - 8,223,219 shares.
<PAGE>
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Operating lease income $ 5,390 $ 4,429 $ 14,734 $ 12,087
Finance lease income 3,535 2,638 9,229 6,436
Management fees 2,550 2,792 7,649 8,450
Partnership interests and other fees 61 162 742 1,155
Acquisition and lease negotiation fees 872 986 3,083 1,749
Aircraft brokerage and services 204 479 1,090 1,814
Gain on the sale or disposition of assets, net 1,308 649 3,603 3,250
Other 1,003 794 2,645 2,329
--------------------------------------------------------------------
Total revenues 14,923 12,929 42,775 37,270
--------------------------------------------------------------------
Costs and expenses
Operations support 4,559 3,901 13,313 12,123
Depreciation and amortization 2,844 2,315 8,891 6,661
General and administrative 1,895 2,709 5,778 7,435
--------------------------------------------------------------------
Total costs and expenses 9,298 8,925 27,982 26,219
--------------------------------------------------------------------
Operating income 5,625 4,004 14,793 11,051
Interest expense (3,989) (2,466) (10,663) (7,460 )
Interest income 518 390 1,212 1,228
Other income (expense), net 15 15 478 (9 )
----------------------------------------------------------------------
Income before income taxes 2,169 1,943 5,820 4,810
Provision for income taxes 807 624 2,274 1,562
--------------------------------------------------------------------
Net income to common shares $ 1,362 $ 1,319 $ 3,546 $ 3,248
======================================================================
Basic earnings per weighted-average common
share outstanding $ 0.16 $ 0.14 $ 0.42 $ 0.35
====================================================================
Diluted earnings per weighted-average common
share outstanding $ 0.16 $ 0.14 $ 0.41 $ 0.34
====================================================================
</TABLE>
See accompanying notes to these consolidated financial
statements.
<PAGE>
PLM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share amounts)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 6,377 $ 5,224
Receivables 5,939 4,969
Receivables from affiliates 2,700 5,007
Investment in direct finance leases, net 173,387 119,613
Loans receivable 22,009 5,861
Equity interest in affiliates 23,323 26,442
Transportation equipment held for operating leases 49,318 50,252
Less accumulated depreciation (14,555) (26,981 )
-----------------------------------------------
34,763 23,271
Commercial and industrial equipment held for operating leases 21,742 23,268
Less accumulated depreciation (8,187) (4,816 )
-----------------------------------------------
13,555 18,452
Restricted cash and cash equivalents 10,095 18,278
Other, net 6,965 9,166
-----------------------------------------------
Total assets $ 299,113 $ 236,283
===============================================
LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY
Liabilities
Warehouse credit facility $ 44,500 $ 23,040
Senior secured loan 16,176 20,588
Senior secured notes 25,078 23,843
Other secured debt -- 413
Nonrecourse securitized debt 124,097 81,302
Payables and other liabilities 21,825 25,366
Deferred income taxes 17,527 14,860
-----------------------------------------------
Total liabilities 249,203 189,412
Minority interest -- 323
Shareholders' equity
Common stock ($.01 par value, 50.0 million shares
authorized, 8,329,881 issued and outstanding as of
September 30, 1998 and 8,393,362 as of December 31, 1997) 112 112
Paid-in capital, in excess of par 74,929 74,650
Treasury stock (3,705,874 and 3,641,485 shares at
respective dates) (14,030) (13,435 )
Accumulated deficit (11,101) (14,647 )
Accumulated other comprehensive loss -- (132 )
Total shareholders' equity 49,910 46,548
-----------------------------------------------
Total liabilities, minority interest, and shareholders' equity $ 299,113 $ 236,283
===============================================
</TABLE>
See accompanying notes to these consolidated financial
statements.
<PAGE>
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Year Ended December 31,
1997 and the Nine Months Ended
September 30, 1998 (in
thousands of dollars)
<TABLE>
<CAPTION>
Common Stock Accumulated
--------------------------------------------- Deficit &
Paid-in Accumulated
Capital in Other Total
At Excess Treasury Comprehensive Comprehensive Shareholders'
Par of Par Stock Loss Income Equity
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 $ 117 $ 77,778 $ (12,382) $ (19,193 ) $ 46,320
Comprehensive income:
Net income 4,667 $ 4,667 4,667
Other comprehensive loss:
Foreign currency translation loss (123 ) (123) (123)
Total comprehensive income 4,544
==================
Common stock repurchases (5 ) (3,128) (1,268) (4,401)
Reissuance of treasury stock, net 215 (38 ) 177
Redemption of shareholder rights (92 ) (92)
Balances, December 31, 1997 112 74,650 (13,435) (14,779 ) 46,548
Comprehensive income:
Net income 3,546 3,546 3,546
Other comprehensive income:
Foreign currency translation
income 132 132 132
Total comprehensive income $ 3,678
==================
Exercise of stock options 200 211 411
Common stock repurchases (1,017) (1,017)
Reissuance of treasury stock 79 211 290
----------------------------------------------------------------- ------------
Balances, September 30, 1998 $ 112 $ 74,929 $ (14,030) $ (11,101 ) $ 49,910
================================================================= ============
</TABLE>
See accompanying notes to these consolidated financial
statements.
<PAGE>
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
-----------------------------------
<S> <C> <C>
Operating activities
Net income $ 3,546 $ 3,248
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,891 6,661
Foreign currency translation (80) (23 )
Deferred income tax expense 2,576 1,401
Gain on sale or disposition of assets, net (3,603) (3,250 )
Loss on sale of investment in subsidiary 245 --
Undistributed residual value interests 1,032 508
Minority interest in net loss of subsidiaries (100) (13 )
Decrease in payables and other liabilities (3,351) (662 )
Decrease in receivables and receivables from affiliates 1,555 391
Amortization of organization and offering costs 2,129 2,183
Decrease in other assets 438 757
---------------------------------------
Net cash provided by operating activities 13,278 11,201
---------------------------------------
Investing activities
Principal payments received on finance leases 23,115 12,627
Principal payments received on loans 3,511 1,493
Investment in direct finance leases (108,522) (60,996 )
Investment in loans receivable (19,659) (777 )
Purchase of property, plant, and equipment (199) (760 )
Purchase of transportation equipment and capital improvements (41,849) (30,834 )
Purchase of commercial and industrial equipment held for operating lease (22,543) (8,865 )
Proceeds from the sale of transportation equipment for lease 6,150 10,761
Proceeds from the sale of assets held for sale 22,366 24,710
Proceeds from the sale of commercial and industrial equipment on finance lease 30,756 37,504
Proceeds from the sale of commercial and industrial equipment on operating lease 25,859 7,484
Sale of investment in subsidiary 176 --
Decrease (increase) in restricted cash and cash equivalents 8,183 (336 )
---------------------------------------
Net cash used in investing activities (72,656) (7,989 )
</TABLE>
(continued)
See accompanying notes to these consolidated financial
statements.
<PAGE>
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
-----------------------------------
<S> <C> <C>
Financing activities
Borrowings of warehouse credit facility $ 122,945 $ 76,427
Repayment of warehouse credit facility (101,485) (107,393 )
Repayment of senior secured loan (4,412) (2,941 )
Borrowings of senior secured notes 5,000 9,000
Repayment of senior secured notes (3,765) (1,902 )
Borrowings of other secured debt 173 --
Repayment of other secured debt (114) (144 )
Borrowings of nonrecourse securitized debt 64,578 36,055
Repayment of nonrecourse securitized debt (21,783) (12,940 )
Redemption of shareholder rights -- (92 )
Exercise of stock options 411 --
Purchase of stock (1,017) (775 )
---------------------------------------
Net cash provided by (used in) financing activities 60,531 (4,705 )
---------------------------------------
Net increase (decrease) in cash and cash equivalents 1,153 (1,493 )
Cash and cash equivalents at beginning of period 5,224 7,638
---------------------------------------
Cash and cash equivalents at end of period $ 6,377 $ 6,145
=======================================
Supplemental information
Net cash paid for interest $ 10,171 $ 7,088
=======================================
Net cash paid for income taxes $ 1,529 $ 759
=======================================
Reissuance of treasury stock $ 290 $ 201
=======================================
Commercial and industrial purchases included in accounts payable $ 10,711 $ 1,967
=======================================
</TABLE>
See accompanying notes to these consolidated financial
statements.
<PAGE>
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary, consisting primarily of normal
recurring accruals, to present fairly PLM International, Inc. and its wholly-
and majority-owned subsidiaries (the Company's) financial position as of
September 30, 1998 and December 31, 1997, statements of income for the three and
nine months ended September 30, 1998 and 1997, statements of changes in
shareholders' equity for the year ended December 31, 1997 and the nine months
ended September 30, 1998, and statements of cash flows for the nine months ended
September 30, 1998 and 1997. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
consolidated financial statements. For further information, reference should be
made to the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, on file with
the Securities and Exchange Commission.
2. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires enterprises to report, by major
component and in total, all changes in equity from nonowner sources; and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for a public company's
operating segments and related disclosures about its products, services,
geographic areas, and major customers. Both statements are effective for the
Company's fiscal year ended December 31, 1998, with earlier application
permitted. The effect of adoption of these statements will be limited to the
form and content of the Company's disclosures and will not affect the Company's
results of operations, cash flow, or financial position. As of the first quarter
of 1998, the Company adopted SFAS No. 130, disclosing the foreign currency
translation gain (loss) as a component of comprehensive income on a gross basis,
because it relates to a foreign investment permanently reinvested outside of the
United States.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits,"
which revises employers' disclosure obligations about pension and other
post-retirement benefit plans. The statement is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. Since the
Company currently has no pension or other post-retirement benefit plans, the
statement has no impact on the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of September 30,
1998, the Company is reviewing the effect this standard will have on the
Company's consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
which requires start-up activities and organization costs to be expensed as
incurred. The statement requires that initial application be reported as a
cumulative effect of a change in accounting principle. This statement is
effective for the Company's fiscal year ended December 31, 1999, with earlier
application permitted. Upon adoption of this statement, the Company will take a
pre-tax charge related to start-up costs of one of its subsidiary's of
approximately $0.4 million. The Company is continuing to review this statement
for any other impact it may have on the Company's consolidated financial
statements.
<PAGE>
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
3. RECLASSIFICATIONS
Certain prior-period amounts have been reclassified to conform to the current
period's presentation.
4. FINANCING TRANSACTION ACTIVITIES
The Company's wholly-owned subsidiary, American Finance Group, Inc. (AFG),
originates and manages lease and loan transactions on primarily new commercial
and industrial equipment that is financed by nonrecourse securitized debt, for
the Company's own account or for sale to institutional investment programs or
other unaffiliated investors. The Company generally uses its warehouse credit
facility to finance the acquisition of the assets, subject to these leases,
prior to sale or permanent financing by nonrecourse securitized debt. The
majority of these transactions are accounted for as finance leases, while some
qualify as operating leases or loans.
Prior to 1998, the Company expensed initial direct lease origination costs,
which were not material, as incurred. Under generally accepted accounting
principles, the effects of such activities, if material, should be capitalized.
Because the Company anticipates its portfolio of equipment on lease to continue
to grow during the next few years, and for the resulting initial direct lease
origination costs to become material, effective January 1, 1998, the Company now
capitalizes these costs, which totaled $0.5 million for the nine months ended
September 30, 1998. Initial direct lease origination costs are amortized over
the life of the related lease.
During the nine months ended September 30, 1998, the Company purchased $108.5
million in equipment that was placed on finance lease. Also during the nine
months ended September 30, 1998, the Company sold equipment on finance lease
with an original equipment cost of $30.2 million, resulting in a net gain of
$0.9 million.
5. EQUIPMENT
Equipment held for operating lease includes transportation equipment, which is
depreciated over its estimated useful life, and commercial and industrial
equipment, which is depreciated over the lease term.
During the nine months ended September 30, 1998, the Company purchased $22.5
million in commercial and industrial equipment, which was placed on operating
lease. During the nine months ended September 30, 1998, the Company sold
commercial and industrial equipment that was on operating lease, with a net book
value of $24.7 million, for a net gain of $1.2 million.
During the first nine months of 1998, the Company purchased trailers for $19.9
million and sold trailers with a net book value of $4.7 million for $5.0
million. In addition, the Company sold an aircraft engine and its 20% interest
in a commuter aircraft, with a combined net book value of $0.4 million, for $1.1
million.
The Company classifies equipment as held for sale if the particular asset is
subject to a pending contract for sale or is held for sale to an affiliated
program. Equipment held for sale is valued at the lower of the depreciated cost
or the fair value less the costs to sell. During the first nine months of 1998,
the Company purchased railcars for $1.9 million, portable heaters for $3.0
million, and an entity that owns a marine vessel for $17.0 million. The railcars
were sold during the first quarter to an unaffiliated third party for a net gain
of $0.5 million. The portable heaters and the entity that owns a marine vessel
were sold during the nine months ended September 30, 1998 to affiliated programs
at cost. As of September 30, 1998 and December 31, 1997, the Company had no
equipment held for sale.
<PAGE>
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
6. DEBT
Assets acquired and held on an interim basis for placement with affiliated
programs, for placement in the Company's nonrecourse securitization facility, or
for sale to unaffiliated third parties have, from time to time, been partially
funded by a $50.0 million warehouse credit facility that expires November 2,
1998. This facility was amended on June 1, 1998 to temporarily increase the
Company's AFG subsidiary's borrowing capacity on the facility from $50.0 million
to $55.0 million until September 1, 1998. On June 8, 1998, this facility was
amended again to temporarily increase the Company's AFG subsidiary's borrowing
capacity on the facility from $55.0 million to $60.0 million until July 8, 1998.
The facility, which is shared with PLM Equipment Growth Funds (EGFs) V and VI,
PLM Equipment Growth & Income Fund VII (EGF VII), and Professional Lease
Management Income Fund I, LLC (Fund I), allows the Company to purchase equipment
prior to its designation to a specific program. Borrowings under this facility
by the other eligible borrowers reduce the amount available to be borrowed by
the Company. As of September 30, 1998, the Company had $44.5 million in
borrowings under this facility. There were no other borrowings under this
facility as of September 30, 1998. All borrowings under this facility are
guaranteed by the Company. The Company is currently in negotiations to extend or
replace this facility. Management believes it will be able to extend this
facility prior to its expiration on similar terms.
The Company has available a securitization facility to be used to acquire assets
on a nonrecourse basis, which is secured by direct finance leases, operating
leases, and loans on commercial and industrial equipment that generally have
terms from one to seven years. This facility allows the Company to borrow up to
$125.0 million. In October 1998, the Company received a commitment letter from
First Union National Bank extending the availability of borrowing under the
facility through October 12, 1999. As of September 30, 1998, borrowings under
this facility were $105.0 million. The Company believes it will be able to
extend this facility on similar terms prior to its expiration and increase its
borrowing capacity as needed.
In addition, during the first nine months of 1998, the Company assumed $12.4
million in additional nonrecourse notes payable, resulting in total nonrecourse
notes payable, net of principal payments received, of $19.1 million as of
September 30, 1998. Principal and interest on these notes are due monthly
beginning November 1997 and ending May 2005. The notes bear interest from 8.32%
to 9.5% per annum and are secured by direct finance leases for commercial and
industrial equipment that have terms corresponding to the repayment of the
notes.
On September 22, 1998, the Company's senior secured note agreement was amended
allowing the Company to borrow an additional $10.0 million under the facility
during the period from September 22, 1998 through October 15, 1998. During the
nine months ended September 30, 1998, the Company borrowed $5.0 million and
repaid $3.8 million on the senior secured notes, in accordance with the debt
repayment schedule. As of September 30,1998, the Company had $25.1 in borrowings
on these notes. Principal payments are payable quarterly through termination of
the loan on August 15, 2002.
During the nine months ended September 30, 1998, the Company repaid $4.4 million
of the senior secured loan, in accordance with the debt repayment schedule.
On July 15, 1998, the Company entered into a revolving line of credit agreement
in the form of a promissory note that allowed the Company to borrow up to $5.0
million until October 13, 1998, bearing interest at the prime rate, with
interest due monthly in arrears. As of September 30, 1998, the Company had no
borrowings under this note.
7. SHAREHOLDERS' EQUITY
During the first quarter of 1998, the Company completed the $5.0 million common
stock repurchase plan authorized by the Company's Board of Directors in February
1997 and amended in July 1997. The Company repurchased 921,940 shares under this
plan, for a total of $5.0 million.
<PAGE>
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
7. SHAREHOLDERS' EQUITY (continued)
On August 31, 1998, the Company announced that its Board of Directors had
authorized the repurchase of up to $1.0 million of the Company's common stock.
As of September 30, 1998, 64,300 shares, for a total of $0.4 million had been
repurchased under this plan. The Company repurchased an additional 106,000
shares for $0.6 million in October 1998, completing the repurchase plan.
During the nine months ended September 30, 1998, 56,588 shares of common stock
were issued from treasury stock as part of the senior management bonus program,
and 56,500 shares were issued under a stock option plan. During the nine months
ended September 30, 1998, 176,569 shares were repurchased by the Company.
Consequently, the total common shares outstanding decreased to 8,329,881 as of
September 30, 1998 from the 8,393,362 outstanding as of December 31, 1997.
In May 1998, the Company's Board of Directors adopted the 1998 Management Stock
Compensation Plan (the Plan), which reserves 800,000 shares of the Company's
common stock for issuance to certain management and key employees of the Company
upon exercise of stock options. Vesting of these options occurs in three equal
installments of 33 1/3% per year, initiating from the date of grant. During the
nine months ended September 30, 1998, 500,000 nonqualified options were granted
under this plan at $6.81 per share, which equaled 110% of the average daily
closing price of such shares on the American Stock Exchange for the 10 trading
days immediately preceding the grant (as required by the Plan).
Net income per basic weighted-average common share outstanding was computed by
dividing net income to common shares by the weighted-average number of shares
deemed outstanding during the period. The weighted-average number of shares
deemed outstanding for the basic earnings per share calculation during the three
months ended September 30, 1998 and 1997 was 8,385,549 and 9,148,483,
respectively. The weighted-average number of shares deemed outstanding for the
basic earnings per share calculation during the nine months ended September 30,
1998 and 1997 was 8,367,907 and 9,173,779, respectively. The weighted-average
number of shares deemed outstanding, including potentially dilutive common
shares, for the diluted earnings per weighted-average share calculation during
the three months ended September 30, 1998 and 1997 was 8,579,197 and 9,331,260,
respectively. The weighted-average number of shares deemed outstanding,
including potentially dilutive common shares, for the diluted earnings per
weighted-average share calculation during the nine months ended September 30,
1998 and 1997 was 8,578,209 and 9,415,434, respectively.
8. LEGAL MATTERS
In November 1995, a former employee of PLM International filed and served a
first amended complaint (the complaint) in the United States District Court for
the Northern District of California (Case No. C-95-2957 MMC) against the
Company, the PLM International, Inc. Employee Stock Ownership Plan (ESOP), the
ESOP's trustee, and certain individual employees, officers, and directors of the
Company. The complaint contains claims for relief alleging breaches of fiduciary
duties and various violations of the Employee Retirement Income Security Act of
1974 (ERISA) arising principally from purported defects in the structure,
financing, and termination of the ESOP, and for defendants' allegedly engaging
in prohibited transactions and interfering with plaintiff's rights under ERISA.
Plaintiff seeks monetary damages, rescission of the preferred stock transactions
with the ESOP and/or restitution of ESOP assets, and attorneys' fees and costs
under ERISA. In January 1996, the Company and other defendants filed a motion to
dismiss the complaint for lack of subject matter jurisdiction, arguing the
plaintiff lacked standing under ERISA. The motion was granted and in May 1996,
the district court entered a judgment dismissing the complaint for lack of
subject matter jurisdiction. Plaintiff appealed to the U.S. Court of Appeals for
the Ninth Circuit seeking a reversal of the district court's dismissal of his
ERISA claims, and in an opinion filed in October 1997, the Ninth Circuit
reversed the decision of the district court and remanded the case to the
district court for further proceedings. The Company filed a petition for
rehearing, which was denied in November 1997. The Ninth Circuit mandate was
filed in the district court in December 1997.
<PAGE>
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
8. LEGAL MATTERS (continued)
In February 1998, plaintiff was permitted by the district court to file a second
amended complaint in order to bring the fourth, fifth, and sixth claims for
relief as a class action on behalf of himself and all similarly situated people.
These claims allege that the Company and the other defendants breached their
fiduciary duties and entered into prohibited transactions in connection with the
termination of the ESOP and by causing the ESOP to sell or exchange the
preferred shares held for the benefit of the ESOP participants for less than
their fair market value. Also in February 1998, the defendants filed a motion to
dismiss the fourth, fifth, and sixth claims relating to the termination of the
ESOP, and the seventh claim relating to defendants' alleged interference with
plaintiff's rights under ERISA, all for failure to state claims for relief. The
district court, in an order dated July 14, 1998, granted this motion and
dismissed the fourth through seventh claims for relief.
In June 1998 the defendants filed a motion for summary judgment seeking a ruling
that the first two claims for relief, which allege breaches arising out of the
purchase and sale of stock at the inception of the ESOP, are barred by the
applicable statute of limitations. In an order dated July 14, 1998, the district
court granted in part and denied in part this motion and ruled that these claims
for relief are barred by the statute of limitations to the extent that they rely
on a theory that the automatic conversion feature and other terms and conditions
of the purchase and sale of the preferred stock violated ERISA, but are not so
barred to the extent that they rely on a theory that the purchase and sale of
the preferred stock at the inception of the ESOP was for more than adequate
consideration.
On September 30, 1998 plaintiff filed a motion to certify as final, and enter
judgment on, the two July 14, 1998 orders. If granted, plaintiff will be
permitted to file with the Ninth Circuit an immediate appeal of the district
court's dismissal of the fourth through seventh claims for relief and the grant
of summary judgment as to portions of the first and second claims for relief.
Defendants have opposed this motion, and a hearing is scheduled for November 6,
1998. Defendants filed their answer to the second amended complaint on September
18, 1998, denying the allegations contained in the first, second and third
claims for relief. The trial regarding these remaining claims is set for May 3,
1999. The Company does not believe these claims have any merit and plans to
continue to defend this matter vigorously.
The Company and various of its affiliates are named as defendants in a lawsuit
filed as a class action on January 22, 1997 in the Circuit Court of Mobile
County, Mobile, Alabama, Case No. CV-97-251 (the Koch action). The plaintiffs,
who filed the complaint on their own and on behalf of all class members
similarly situated, are six individuals who allegedly invested in certain
California limited partnerships (the Partnerships) for which the Company's
wholly-owned subsidiary, PLM Financial Services, Inc. (FSI), acts as the general
partner, including PLM Equipment Growth Funds IV, V, and VI, and PLM Equipment
Growth & Income Fund VII. The complaint asserts eight causes of action against
all defendants, as follows: fraud and deceit, suppression, negligent
misrepresentation and suppression, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, unjust enrichment, conversion, and
conspiracy. Additionally, plaintiffs allege a cause of action against PLM
Securities Corp. for breach of third party beneficiary contracts in violation of
the National Association of Securities Dealers rules of fair practice.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, and
control persons. Based on these duties, plaintiffs assert liability against the
defendants for improper sales and marketing practices, mismanagement of the
Partnerships, and concealing such mismanagement from investors in the
Partnerships. Plaintiffs seek unspecified compensatory and recissory damages, as
well as punitive damages, and have offered to tender their limited partnership
units back to the defendants.
In March 1997, the defendants removed the Koch action from the state court to
the United States District Court for the Southern District of Alabama, Southern
Division (Civil Action No. 97-0177-BH-C) based on the district court's diversity
jurisdiction, following which plaintiffs filed a motion to remand the action to
the state court. In September 1997, the district court denied plaintiffs' motion
and dismissed without prejudice the individual claims of the California class
representative, reasoning that he had been fraudulently joined as a plaintiff.
In October 1997, defendants filed a motion to compel arbitration of
<PAGE>
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
8. LEGAL MATTERS (continued)
plaintiffs' claims, based on an agreement to arbitrate contained in the limited
partnership agreement of each Partnership, and to stay further proceedings
pending the outcome of such arbitration. Notwithstanding plaintiffs' opposition,
the district court granted the motion in December 1997.
Following various unsuccessful requests that the district court reverse or
otherwise amend its decisions, plaintiffs filed with the U.S. Court of Appeals
for the Eleventh Circuit a notice of appeal from the district court's order
granting defendants' motion to compel arbitration and to stay the proceedings,
and of the district court's order denying plaintiffs' motion to remand and
dismissing the claims of the California plaintiff. This appeal was voluntarily
dismissed by plaintiffs in June 1998 pending settlement of the Koch action, as
discussed below.
On June 5, 1997, the Company and the affiliates who are also defendants in the
Koch action were named as defendants in another purported class action filed in
the San Francisco Superior Court, San Francisco, California, Case No. 987062
(the Romei action). The plaintiff is an investor in PLM Equipment Growth Fund V,
and filed the complaint on her own behalf and on behalf of all class members
similarly situated who invested in certain California limited partnerships for
which FSI acts as the general partner, including the Partnerships. The complaint
alleges the same facts and the same nine causes of action as in the Koch action,
plus five additional causes of action against all of the defendants, as follows:
violations of California Business and Professions Code Sections 17200, et seq.
for alleged unfair and deceptive practices, constructive fraud, unjust
enrichment, violations of California Corporations Code Section 1507, and a claim
for treble damages under California Civil Code Section 3345.
On July 31, 1997, the defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition) under
the Federal Arbitration Act seeking to compel arbitration of plaintiff's claims
and for an order staying the state court proceedings pending the outcome of the
arbitration. In connection with this motion, plaintiff agreed to a stay of the
state court action pending the district court's decision on the petition to
compel arbitration. In October 1997, the district court denied the Company's
petition to compel arbitration and in November 1997, agreed to hear the
Company's motion for reconsideration of this order. The hearing on this motion
has been taken off calendar and the district court has dismissed the petition
pending settlement of the Romei action, as discussed below. The state court
action continues to be stayed pending such resolution. In connection with her
opposition to the petition to compel arbitration, the plaintiff filed an amended
complaint with the state court in August 1997 alleging two new causes of action
for violations of the California Securities Law of 1968 (California Corporations
Code Sections 25400 and 25500) and for violation of California Civil Code
Sections 1709 and 1710. Plaintiff also served certain discovery requests on
defendants. Because of the stay, no response to the amended complaint or to the
discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a memorandum
of understanding (MOU) related to the settlement of those actions. The MOU
contemplates a settlement and release of all claims in exchange for payment of
up to $6.0 million. The final settlement amount will depend on the number of
authorized claims filed by authorized claimants, the amount of the
administrative costs incurred in connection with the settlement, and the amount
of attorneys' fees awarded by the Alabama district court. The Company will pay
up to $0.3 million of the settlement, with the remainder being funded by an
insurance policy. The defendants will continue to deny each of the claims and
contentions and admit no liability in connection with the proposed settlement.
The settlement remains subject to numerous conditions, including but not limited
to (a) agreement and execution by the parties of a settlement agreement, (b)
notice to and certification of the class for settlement purposes and (c)
preliminary and final approval of the settlement by the Alabama district court.
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 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 Company.
9. PURCHASE COMMITMENTS
As of September 30, 1998, the Company, through its AFG subsidiary, had committed
to purchase $81.6 million of equipment for its commercial and industrial lease
and finance receivables portfolio.
From October 1, 1998 to October 27, 1998, the Company, through its AFG
subsidiary, funded $2.3 million of the commitments outstanding as of September
30, 1998 for its commercial and industrial lease and finance receivables
portfolio.
As of October 27, 1998, the Company had committed to purchase $73.8 million of
equipment for its commercial and industrial lease and finance receivables
portfolio.
10. INITIAL PUBLIC OFFERING
In March 1998, the Company announced that its Board of Directors had authorized
management to engage investment bankers for the purpose of undertaking an
initial public offering of common stock for AFG. On May 7, 1998, AFG filed a
registration statement with the Securities and Exchange Commission (SEC) for the
initial public offering. On October 15, 1998, AFG filed an amended registration
statement with the SEC for the initial public offering. The actual timing of the
offering is subject to market conditions and other factors. The Company will
continue to own a majority interest in AFG after the initial public offering.
11. SALE OF INVESTMENT IN SUBSIDIARY
In August 1998, the Company sold its aircraft leasing and spare parts brokerage
subsidiary located in Australia for a loss of $0.2 million. The Company had
written-down the spare parts inventory of the subsidiary by $0.5 million in the
second quarter of 1998.
12. SUBSEQUENT EVENT
On October 15, 1998, the Company borrowed an additional $5.0 million under the
senior secured notes agreement.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMMERCIAL AND INDUSTRIAL EQUIPMENT LEASING
A major activity of the Company is the funding and management of long-term
direct finance leases, operating leases, and loans through its American Finance
Group, Inc. (AFG) subsidiary. Master lease agreements are entered into with
predominantly investment-grade lessees and serve as the basis for marketing
efforts. The underlying assets represent a broad range of commercial and
industrial equipment, such as materials-handling, computer, point-of-sale,
general plant and warehouse, mining and construction, and communications
equipment. Through AFG, the Company also engages in the servicing of
institutional investment programs for which it originates leases and receives
acquisition and management fees. The Company also earns syndication fees for
arranging purchases and sales of equipment to other unaffiliated third parties.
In March 1998, the Company announced that its Board of Directors had authorized
management to engage investment bankers for the purpose of undertaking an
initial public offering of common stock for AFG. On May 7, 1998, AFG filed a
registration statement with the Securities and Exchange Commission (SEC) for the
initial public offering. On October 15, 1998, AFG filed an amended registration
statement with the SEC for the initial public offering. The actual timing of the
offering is subject to market conditions and other factors. The Company will
continue to own a majority interest in AFG after the initial public offering.
TRAILER LEASING
The Company operates 16 trailer rental facilities that engage in short-term and
mid-term operating leases. Equipment operated in these facilities consists of
refrigerated trailers used to transport temperature-sensitive food products and
dry van trailers leased to a variety of customers. The Company opened 6 of these
rental yards in the nine months ended September 30, 1998 and intends to open
additional rental yard facilities in the future. The Company is selling certain
of its older trailers and is replacing them with new or late-model refrigerated
trailers. The new trailers will be placed in existing rental facilities or in
new yards.
MANAGEMENT OF INVESTMENT PROGRAMS
The Company syndicated investment programs from which it earns various fees and
equity interests. Professional Lease Management Income Fund I, LLC (Fund I) was
structured as a limited liability company with a no front-end fee structure. The
previously syndicated limited partnership programs allow the Company to receive
fees for the acquisition and initial leasing of the equipment. The Fund I
program does not provide for acquisition and lease negotiation fees. The Company
invested the equity raised through syndication in transportation equipment and
related assets, which it then manages on behalf of the investors. The equipment
management activities for these types of programs generate equipment management
fees for the Company over the life of a program. The limited partnership
agreements generally entitle the Company to receive a 1% or 5% interest in the
cash distributions and earnings of a program, subject to certain allocation
provisions. The Fund I agreement entitles the Company to a 15% interest in the
cash distributions and earnings of the program, subject to certain allocation
provisions, which will increase to 25% after the investors have received
distributions equal to their original invested capital.
In 1996, the Company announced the suspension of public syndication of equipment
leasing programs with the close of Fund I. As a result of this decision,
revenues earned from managed programs, which include management fees,
partnership interests and other fees, and acquisition and lease negotiation
fees, will be reduced in the future as the older programs begin liquidation and
the managed equipment portfolio for these programs becomes permanently reduced.
<PAGE>
COMPARISON OF THE COMPANY'S OPERATING RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
The following analysis reviews the operating results of the Company:
REVENUES
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Operating lease income $ 5,390 $ 4,429
Finance lease income 3,535 2,638
Management fees 2,550 2,792
Partnership interests and other fees 61 162
Acquisition and lease negotiation fees 872 986
Aircraft brokerage and services 204 479
Gain on the sale or disposition of assets, net 1,308 649
Other 1,003 794
---------------------------------------------------
Total revenues $ 14,923 $ 12,929
</TABLE>
The fluctuations in revenues for the three months ended September 30, 1998,
compared to the same quarter in 1997, are summarized and explained below.
OPERATING LEASE INCOME BY EQUIPMENT TYPE:
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1998 1997
-----------------------------------------
(in thousands of dollars)
<S> <C> <C>
Refrigerated and dry van over-the-road trailers $ 2,721 $ 1,425
Commercial and industrial equipment 2,094 1,510
Intermodal trailers 451 762
Marine vessels 128 501
Other (4) 231
-----------------------------------------
Total operating lease income $ 5,390 $ 4,429
</TABLE>
Operating lease income includes revenues generated from assets held for
operating lease and assets held for sale that are on lease. Operating lease
income increased $1.0 million during the third quarter of 1998, compared to the
same quarter of 1997. Operating lease income increased due to the following:
(a) A $1.3 million increase in operating lease income was generated from
refrigerated and dry van trailer equipment, due to an increase in the amount of
these types of equipment owned and on operating lease.
(b) A $0.6 million increase in operating lease income was generated from
commercial and industrial equipment. During the quarter ended September 30,
1998, the average original cost of commercial and industrial equipment on
operating lease was $23.0 million, compared to $15.9 million during the quarter
ended September 30, 1997.
<PAGE>
These increases in operating lease income were partially offset by the
following:
(a) A $0.5 million decrease in intermodal trailer, marine container, and
aircraft operating lease income, due to the Company's strategic decision to
dispose certain transportation assets and exit certain equipment markets.
Intermodal trailer lease revenues also decreased due to lower utilization,
compared to the same quarter of the prior year.
(b) A $0.4 million decrease in marine vessel lease revenue. During the second
quarter of 1998, the Company purchased an entity owning a marine vessel that
generated $0.1 million in lease revenues during the third quarter of 1998. The
Company sold the entity that owned a marine vessel, at the Company's cost, to an
affiliated program during the third quarter of 1998. During the third quarter of
1997, the Company owned a 47.5% interest in an entity owning a marine vessel,
which generated $0.5 million in lease revenue during that quarter. The Company
sold the 47.5% interest in the entity that owned the marine vessel, at the
Company's cost, to an affiliated program during the third quarter of 1997.
FINANCE LEASE INCOME:
The Company earns finance lease income for certain leases originated by AFG that
are either retained for long-term investment or sold to third parties. Finance
lease income increased $0.9 million in the three months ended September 30,
1998, compared to the same quarter in 1997, reflecting an increase in commercial
and industrial assets that were on finance lease.
MANAGEMENT FEES:
Management fees are, for the most part, based on the gross revenues generated by
equipment under management. Management fees decreased $0.2 million for the
quarter ended September 30, 1998, compared to the same quarter of the prior
year. The decrease in management fees resulted from a net decrease in managed
equipment from the PLM Equipment Growth Fund (EGF) programs. With the
termination of syndication activities in 1996, management fees from the older
programs are decreasing as the programs liquidate their equipment portfolios.
PARTNERSHIP INTEREST AND OTHER FEES:
The Company records as revenues its equity interest in the earnings of the
Company's affiliated programs. The net earnings and distribution levels from the
affiliated programs were $0.5 million for both the quarters ended September 30,
1998 and 1997. In addition, a decrease of $0.4 million and $0.3 million in the
Company's residual interests in the programs was recorded during the quarters
ended September 30, 1998 and 1997, respectively. The decrease in residual
interests in the quarter ended September 30, 1998, compared to the same quarter
of 1997, resulted mainly from the disposition of equipment in certain of the EGF
programs. Residual income is based on the general partner's share of the present
value of the estimated disposition proceeds of the equipment portfolios of the
affiliated programs when the equipment is purchased. Net decreases in the
recorded residual values result when partnership assets are sold and the
reinvestment proceeds are less than the original investment in the sold
equipment.
ACQUISITION AND LEASE NEGOTIATION FEES:
During the quarter ended September 30, 1998, the Company, on behalf of the EGF
programs, purchased a beneficial interest in an entity that owns marine
containers for $10.0 million, compared to $12.7 million of trailer equipment and
an entity that owned a 47.5% interest in a marine vessel purchased on behalf of
the EGFs during the same quarter of 1997, resulting in a $0.1 million decrease
in acquisition and lease negotiation fees. Also during the quarter ended
September 30, 1998, equipment purchased by AFG for the institutional investment
programs was $11.9 million, compared to $10.2 million for the same period in
1997. These purchases resulted in $0.2 million in acquisition and lease
negotiation fees during both the quarters ended September 30, 1998 and 1997.
Because of the Company's decision to halt syndication of equipment leasing
programs with the close of Fund I in 1996, and because Fund I has a no front-end
fee structure, acquisition and lease negotiation fees will be substantially
reduced in the future.
<PAGE>
AIRCRAFT BROKERAGE AND SERVICES:
Aircraft brokerage and services revenue, which represents revenue earned by
Aeromil Holdings, Inc., the Company's spare part sales and brokerage subsidiary,
decreased $0.3 million during the quarter ended September 30, 1998, compared to
the same quarter in 1997, due to the sale of the Company's aircraft leasing and
spare parts brokerage subsidiary located in Australia in August 1998.
GAIN ON THE SALE OF DISPOSITION OF ASSETS, NET:
During the quarter ended September 30, 1998, the Company recorded $1.3 million
in gain on the sale or disposition of assets. Of this gain, $0.3 million
resulted from the sale or disposition of trailers, and $1.0 million related to
the sale of commercial and industrial equipment. During the quarter ended
September 30, 1997, the Company recorded a $0.6 million net gain on the sale of
commercial and industrial equipment.
OTHER:
Other revenues increased $0.2 million for the quarter ended September 30, 1998,
compared to the quarter ended September 30, 1997, due to a $0.2 million increase
in financing income earned on loans at AFG.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Operations support $ 4,559 $ 3,901
Depreciation and amortization 2,844 2,315
General and administrative 1,895 2,709
---------------------------------------------------
Total costs and expenses $ 9,298 $ 8,925
</TABLE>
OPERATIONS SUPPORT:
Operations support expense, including salary and office-related expenses for
operational activities, equipment insurance, repair and maintenance costs,
equipment remarketing costs, costs of goods sold, and provision for doubtful
accounts, increased $0.7 million (17%) for the quarter ended September 30, 1998,
compared to the same quarter in 1997. The increase resulted from a $0.6 million
increase in costs primarily due to the expansion of PLM Rental due to the
addition of six rental yards and the addition of new trailers to existing yards,
and a $0.2 million loss related to the sale of the Company's aircraft leasing
and spare parts brokerage subsidiary located in Australia in August 1998. These
increases were partially offset by a $0.1 million decrease in costs of goods
sold associated mainly with the sale of the Company's aircraft leasing and spare
parts brokerage subsidiary.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expenses increased $0.5 million (23%) for the
quarter ended September 30, 1998, compared to the quarter ended September 30,
1997. The increase resulted from an increase in commercial and industrial
equipment and refrigerated trailer equipment owned and on operating lease, which
was partially offset by the reduction in aircraft, marine containers, and
intermodal trailers (discussed in the operating lease income section).
GENERAL AND ADMINISTRATIVE:
General and administrative expenses decreased $0.8 million (30%) during the
quarter ended September 30, 1998, compared to the same quarter in 1997,
primarily due to a $0.3 million decrease in expenses related to the redemption
of stock options, a $0.3 million decrease in legal expenses related to the Koch
and Romei actions (refer to Note 8), and a $0.2 million decrease in
office-related expenses due to a decrease in staffing and office space
requirements.
<PAGE>
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1998 1997
-------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Interest expense $ (3,989) $ (2,466)
Interest income 518 390
Other income, net 15 15
</TABLE>
INTEREST EXPENSE:
Interest expense increased $1.5 million (62%) during the quarter ended September
30, 1998, compared to the same quarter in 1997, due to an increase in borrowings
of nonrecourse securitized debt and due to an increase in borrowings on the
warehouse credit facility. The increase in interest expense caused by these
increased borrowings was partially offset by lower interest expense resulting
from reductions in the amounts outstanding on the senior secured loan and the
senior secured notes.
INTEREST INCOME:
Interest income increased $0.1 million (33%) during the quarter ended September
30, 1998, compared to the same quarter in 1997. During the quarter ended
September 30, 1998, the Company recorded $0.3 million in interest income for a
tax refund receivable which had not previously been recognized. This increase in
interest was partially offset by a $0.2 million decrease in interest income
related to a decrease in average cash balances.
PROVISION FOR INCOME TAXES:
For the three months ended September 30, 1998, the provision for income taxes
was $0.8 million, representing an effective rate of 37%. For the three months
ended September 30,1997, the provision for income taxes was $0.6 million,
representing an effective rate of 32%. In 1997, the Company's income tax rate
included the benefit of certain income earned from foreign activities that has
been permanently invested outside the United States. The Company did not earn
any income of this type in the third quarter of 1998.
NET INCOME
As a result of the foregoing, for the three months ended September 30, 1998, net
income was $1.4 million, resulting in basic and diluted earnings per
weighted-average common share outstanding of $0.16. For the same quarter in
1997, net income was $1.3 million, resulting in basic and diluted earnings per
weighted-average common share outstanding of $0.14.
<PAGE>
COMPARISON OF THE COMPANY'S OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
The following analysis reviews the operating results of the Company:
REVENUES
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Operating lease income $ 14,734 $ 12,087
Finance lease income 9,229 6,436
Management fees 7,649 8,450
Partnership interests and other fees 742 1,155
Acquisition and lease negotiation fees 3,083 1,749
Aircraft brokerage and services 1,090 1,814
Gain on the sale or disposition of assets, net 3,603 3,250
Other 2,645 2,329
---------------------------------------------------
Total revenues $ 42,775 $ 37,270
</TABLE>
The fluctuations in revenues for the nine months ended September 30, 1998,
compared to the same period in 1997, are summarized and explained below.
OPERATING LEASE INCOME BY EQUIPMENT TYPE:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Commercial and industrial equipment $ 6,393 $ 3,933
Refrigerated and dry van over-the-road trailers 6,153 3,832
Intermodal trailers 1,630 2,215
Marine vessels 412 501
Aircraft 74 521
Mobile offshore drilling units -- 603
Other 72 482
---------------------------------------------------
Total operating lease income $ 14,734 $ 12,087
</TABLE>
Operating lease income includes revenues generated from assets held for
operating lease and assets held for sale that are on lease. Operating lease
income increased $2.6 million during the nine months ended September 30, 1998,
compared to the same period in 1997. Operating lease income increased due to the
following:
(a) A $2.5 million increase in operating lease income was generated from
commercial and industrial equipment due to an increase in the amount of this
type of equipment on operating lease.
(b) A $2.3 million increase in operating lease income was generated from
refrigerated and dry van trailer equipment, due to an increase in the amount of
these types of equipment owned and on operating lease.
<PAGE>
These increases in operating lease income were partially offset by the
following:
(a) During the nine months ended September 30, 1998, the Company purchased an
entity owning a marine vessel that generated $0.4 million in lease revenues
during that period. The Company sold the entity that owned the marine vessel, at
the Company's cost, to an affiliated program during the third quarter of 1998.
During the nine months ended September 30, 1997, the Company owned a 47.5%
interest in an entity that owned a marine vessel, which generated $0.5 million
in lease revenue during that period. The Company sold the 47.5% interest in the
entity that owned the marine vessel, at the Company's cost, to an affiliated
program during the third quarter of 1997.
(b) During the nine months ended September 30, 1997, the Company owned one
mobile offshore drilling unit, as well as a 25.5% interest in an entity that
owned another mobile offshore drilling unit, which generated $0.6 million in
lease revenues. Both of these drilling units were sold at the Company's cost to
an affiliated program during the first quarter of 1997. No similar asset was
owned by the Company during the nine months ended September 30, 1998.
(c) A $1.4 million decrease in marine container, aircraft and intermodal trailer
operating lease income was due to the Company's strategic decision to dispose
certain transportation assets and exit certain equipment markets. Intermodal
trailer lease revenues also decreased due to lower utilization, compared to the
same period of the prior year.
FINANCE LEASE INCOME:
The Company earns finance lease income for certain leases originated by AFG that
are either retained for long-term investment or sold to third parties. Finance
lease income increased $2.8 million in the nine months ended September 30, 1998,
compared to the same period in 1997, reflecting an increase in commercial and
industrial assets that were on finance lease.
MANAGEMENT FEES:
Management fees are, for the most part, based on the gross revenues generated by
equipment under management. Management fees decreased $0.8 million for the nine
months ended September 30, 1998, compared to the same period of the prior year.
The decrease in management fees resulted from a net decrease in managed
equipment from the EGF programs. With the termination of syndication activities
in 1996, management fees from the older programs are decreasing as the programs
liquidate their equipment portfolios.
PARTNERSHIP INTERESTS AND OTHER FEES:
The Company records as revenues its equity interest in the earnings of the
Company's affiliated programs. The net earnings and distribution levels from the
affiliated programs were $1.5 million and $1.7 million for the nine months ended
September 30, 1998 and 1997, respectively. In addition, a decrease of $0.8
million and $0.5 million in the Company's residual interests in the programs was
recorded during the nine months ended September 30, 1998 and 1997, respectively.
The decrease in net earnings and distribution levels and residual interests in
the nine months ended September 30, 1998, compared to the same period of 1997,
resulted mainly from the disposition of equipment in certain of the EGF
programs. Residual income is based on the general partner's share of the present
value of the estimated disposition proceeds of the equipment portfolios of the
affiliated programs when the equipment is purchased. Net decreases in the
recorded residual values result when partnership assets are sold and the
reinvestment proceeds are less than the original investment in the sold
equipment.
<PAGE>
ACQUISITION AND LEASE NEGOTIATION FEES:
During the nine months ended September 30, 1998, the Company, on behalf of the
EGF programs, purchased transportation and other equipment for $25.6 million and
beneficial interests in entities that own marine containers and a commercial
aircraft for $17.3 million, compared to $22.7 million in trailer equipment and
an entity that owned a marine vessel purchased on behalf of the EGFs during the
same period of 1997, resulting in a $1.1 million increase in acquisition and
lease negotiation fees. Also during the nine months ended September 30, 1998,
equipment purchased by AFG for the institutional investment programs was $26.0
million, compared to $17.9 million for the same period in 1997, resulting in a
$0.2 million increase in acquisition and lease negotiation fees for the nine
months ended September 30, 1998, compared to the same period of the prior year.
Because of the Company's decision to halt syndication of equipment leasing
programs with the close of Fund I in 1996, and because Fund I has a no front-end
fee structure, acquisition and lease negotiation fees will be substantially
reduced in the future.
AIRCRAFT BROKERAGE AND SERVICES:
Aircraft brokerage and services revenue, which represents revenue earned by
Aeromil Holdings, Inc., the Company's spare part sales and brokerage subsidiary,
decreased $0.7 million during the nine months ended September 30, 1998, compared
to the same period in 1997, due to a decrease in spare parts sales and due to
the sale of the Company's aircraft leasing and spare parts brokerage subsidiary
located in Australia in August 1998.
GAIN ON THE SALE OR DISPOSITION OF ASSETS, NET:
During the nine months ended September 30, 1998, the Company recorded $3.6
million in gain on the sale or disposition of assets. Of this gain, $1.0 million
resulted from the sale or disposition of an aircraft engine, a 20% interest in a
commuter aircraft, and trailers, and $2.1 million related to the sale of
commercial and industrial equipment. Also during the nine months ended September
30, 1998, the Company purchased and subsequently sold railcars to an
unaffiliated third party for a net gain of $0.5 million. During the nine months
ended September 30, 1997, the Company recorded $3.3 million in net gains on the
sale or disposition of assets. Of this gain, $0.6 million resulted from the sale
or disposition of trailers, marine containers, commuter aircraft, storage units,
and railcars, and $1.9 million related to the sale of commercial and industrial
equipment. Also during the nine months ended September 30, 1997, the Company
purchased and subsequently sold two commercial aircraft to an unaffiliated third
party for a net gain of $0.8 million.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Operations support $ 13,313 $ 12,123
Depreciation and amortization 8,891 6,661
General and administrative 5,778 7,435
---------------------------------------------------
Total costs and expenses $ 27,982 $ 26,219
</TABLE>
<PAGE>
OPERATIONS SUPPORT:
Operations support expense, including salary and office-related expenses for
operational activities, equipment insurance, repair and maintenance costs,
equipment remarketing costs, costs of goods sold, and provision for doubtful
accounts, increased $1.2 million (10%) for the nine months ended September 30,
1998, compared to the same period of 1997. The increase resulted from a $1.1
million increase in costs due to the expansion of PLM Rental due to the addition
of six rental yards and the addition of new trailers to existing yards, a $0.2
million loss related to the sale of the Company's aircraft leasing and spare
parts brokerage subsidiary located in Australia in August 1998, and a $0.5
million write-down of its spare parts inventory. These increases were partially
offset by a $0.4 million decrease in costs of goods sold associated with the
decrease in aircraft spare parts cost of sales due to reduced spare parts sales
and the sale of the Company's spare parts brokerage subsidiary, and a $0.3
million decrease in bad debt expense.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expenses increased $2.2 million (33%) for the nine
months ended September 30, 1998, compared to the nine months ended September 30,
1997. The increase resulted from an increase in commercial and industrial
equipment and refrigerated trailer equipment owned and on operating lease, which
was partially offset by the reduction in aircraft, marine containers, and
intermodal trailers (discussed in the operating lease income section).
GENERAL AND ADMINISTRATIVE:
General and administrative expenses decreased $1.7 million (22%) during the nine
months ended September 30, 1998, compared to the same period of the prior year,
primarily due to a $0.5 million decrease in expenses related to the Company's
response to shareholder-sponsored initiatives in the nine months ended September
30, 1997, a $0.5 million decrease in legal fees related to the Koch and Romei
actions, a $0.3 million decrease in expenses related to the redemption of stock
options, a $0.3 million decrease in rent expense, and a $0.1 million decrease in
compensation and benefits expenses, (after allocations to the managed programs),
as a result of a decrease in staffing requirements.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
-------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Interest expense $ (10,663) $ (7,460)
Interest income 1,212 1,228
Other income (expense), net 478 (9)
</TABLE>
INTEREST EXPENSE:
Interest expense increased $3.2 million (43%) during the nine months ended
September 30, 1998, compared to the same period in 1997, due to an increase in
borrowings of nonrecourse securitized debt and due to an increase in borrowings
on the warehouse credit facility. The increase in interest expense caused by
these increased borrowings was partially offset by lower interest expense
resulting from reductions in the amounts outstanding on the senior secured loan.
INTEREST INCOME:
Interest income remained at $1.2 million for both the nine months ended
September 30, 1998 and 1997. Although the Company recorded $0.3 million in
interest income for a tax refund receivable which had not previously been
recognized during the nine months ended September 30, 1998, this increase was
offset by a $0.3 million decrease in interest income related to a decrease in
average cash balances.
<PAGE>
OTHER INCOME (EXPENSE), NET:
Other income (expense), net increased $0.5 million. During the nine months ended
September 30, 1998, the Company recorded income of $0.7 million related to the
settlement of a lawsuit against Tera Power Corporation and others, and recorded
expense of $0.3 million related to a legal settlement for the Koch and Romei
actions (refer to Note 8).
PROVISION FOR INCOME TAXES:
For the nine months ended September 30, 1998, the provision for income taxes was
$2.3 million, representing an effective rate of 39%. For the nine months ended
September 30,1997, the provision for income taxes was $1.6 million, representing
an effective rate of 32%. In 1997, the Company's income tax rate included the
benefit of certain income earned from foreign activities that has been
permanently invested outside the United States. The Company did not earn any
income of this type in the nine months ended September 30, 1998.
NET INCOME
As a result of the foregoing, for the nine months ended September 30, 1998, net
income was $3.5 million, resulting in basic and diluted earnings per
weighted-average common share outstanding of $0.42 and $0.41, respectively. For
the same period in 1997, net income was $3.2 million, resulting in basic and
diluted earnings per weighted-average common share outstanding of $0.35 and
$0.34, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements have historically been satisfied through cash flow from
operations, borrowings, and the sale of equipment.
Liquidity in 1998 and beyond will depend, in part, on the continued remarketing
of the equipment portfolio at similar lease rates, the management of existing
sponsored programs, the effectiveness of cost control programs, the purchase and
sale of equipment, the volume of commercial and industrial equipment leasing
transactions for which the Company earns fees and a spread, additional
borrowings, and the potential proceeds from the initial public offering of AFG.
Management believes that the Company can accomplish the preceding and that it
will have sufficient liquidity and capital resources for the future. Future
liquidity is influenced by the factors summarized below.
DEBT FINANCING:
SENIOR SECURED LOAN: The Company's senior loan with a syndicate of insurance
companies, which had an outstanding balance of $16.2 million as of September 30,
1998 and October 27, 1998, provides that equipment sale proceeds from pledged
equipment or cash deposits be placed into collateral accounts or used to
purchase additional equipment to the extent required to meet certain debt
covenants. As of September 30, 1998, the cash collateral balance for this loan
was $1.4 million and is included in restricted cash and cash equivalents on the
Company's balance sheet. During the nine months ended September 30, 1998, the
Company repaid $4.4 million on this facility. The facility required quarterly
interest payments through June 30, 1997, with quarterly principal payments of
$1.5 million plus interest charges beginning June 30, 1997 through termination
of the loan in June 2001.
SENIOR SECURED NOTES: On June 28, 1996, the Company closed a floating-rate
senior secured note agreement that allowed the Company to borrow up to $27.0
million within a one-year period. On September 22, 1998, the Company amended the
note agreement to allow the Company to borrow an additional $10.0 million under
the facility during the period from September 22, 1998 through October 15, 1998.
During the nine months ended September 30, 1998, the Company borrowed $5.0
million, and repaid $3.8 million on this facility. As of September 30, 1998, the
Company had $25.1 million outstanding under this agreement. As of October 27,
1998, the Company had $30.1 million outstanding under this agreement. Principal
payments of $1.9 million are payable quarterly through termination of the loan
on August 15, 2002.
<PAGE>
PROMISSORY NOTE: On July 15, 1998, the Company entered into a $5.0 million
revolving line of credit agreement in the form of a promissory note that allowed
the Company to borrow up to $5.0 million until October 13, 1998, bearing
interest at the prime rate, with interest due monthly in arrears. As of
September 30, 1998, the Company had no borrowings on this note.
WAREHOUSE CREDIT FACILITY: Assets acquired and held on an interim basis for
placement with affiliated programs or sale to third parties or purchased for
placement in the Company's nonrecourse securitization facility have, from time
to time, been partially funded by a $50.0 million warehouse credit facility that
expires November 2, 1998.
This facility, which is shared with PLM Equipment Growth Funds (EGFs) V and VI,
PLM Equipment Growth & Income Fund VII (EGF VII), and Professional Lease
Management Fund I, LLC (Fund I), allows the Company to purchase equipment prior
to its designation to a specific program. Borrowings under this facility by the
other eligible borrowers reduce the amount available to be borrowed by the
Company. As of September 30, 1998, the Company had $44.5 million in borrowings
under this facility. There were no other borrowings under this facility as of
September 30, 1998. As of October 27, 1998, the Company had $40.7 million in
borrowings under this facility. There were no other borrowings under this
facility as of October 27, 1998. The Company is currently in negotiations to
extend or replace this facility. Management believes it will be able to extend
this facility prior to its expiration on similar terms.
NONRECOURSE SECURITIZED DEBT: The Company has available a nonrecourse
securitization facility for up to $125.0 million, secured by direct finance
leases, operating leases, and loans on commercial and industrial equipment that
generally have terms of one to seven years. In October 1998, the Company
received a commitment letter from First Union National Bank extending the
availability of borrowings under the facility through October 12, 1999.
Repayment of the facility matches the terms of the underlying leases. The
Company believes that it will be able to renew this facility on substantially
the same terms upon its expiration and increase its borrowing capacity as
needed. As of September 30, 1998, $105.0 million in borrowings was outstanding
under this facility. As of October 27, 1998, $105.3 million in borrowings was
outstanding under this facility.
In addition to the $125.0 million nonrecourse securitization facility
discussed above, as of September 30, 1998 and October 27, 1998, the Company had
$19.1 million in nonrecourse notes payable secured by direct finance leases on
commercial and industrial equipment that have terms corresponding to the note
repayment schedules beginning November 1997 and ending May 2005. The notes bear
interest from 8.32% to 9.5% per annum.
INTEREST-RATE SWAP CONTRACTS: The Company has entered into interest-rate swap
agreements in order to manage the interest-rate exposure associated with its
nonrecourse securitized debt. As of September 30, 1998, the swap agreements had
a weighted-average duration of 1.41 years, corresponding to the terms of the
related debt. As of September 30, 1998, a notional amount of $104.5 million of
interest-rate swap agreements effectively fixed interest rates at an average of
6.61% on such obligations. For the nine months ended September 30, 1998,
interest expense increased by $0.3 million due to these arrangements.
COMMERCIAL AND INDUSTRIAL EQUIPMENT LEASING:
The Company earns finance lease or operating lease income for leases originated
and retained by AFG. The funding of leases requires the Company to retain an
equity interest in all leases financed through the nonrecourse securitization
facility. AFG also originates loans in which it takes a security interest in the
assets. From January 1, 1998 through October 27, 1998, the Company funded
commercial and industrial leases and finance receivables with an original
equipment cost of $150.5 million. A portion of these transactions was financed,
on an interim basis, through the Company's warehouse credit facility. The
Company believes that this lease origination operation is a growth area for the
future.
Some equipment subject to leases is sold to institutional investment programs
for which the Company is the servicer. Acquisition and management fees are
received for the sale and subsequent servicing of these leases.
In March 1998, the Company announced that its Board of Directors had authorized
management to engage investment bankers for the purpose of undertaking an
initial public offering of common stock for AFG. On May 7, 1998, AFG filed a
registration statement with the SEC for the initial public offering. On October
15, 1998, AFG filed an amended registration statement with the SEC for the
initial public offering. The actual timing of the offering is subject to market
conditions and other factors. The Company will continue to own a majority
interest in AFG after the initial public offering.
As of September 30, 1998, the Company had committed to purchase $81.6 million of
equipment for its commercial and industrial lease and finance receivables
portfolio, to be held by the Company or sold to the institutional investment
programs or to other third parties.
From October 1, 1998 through October 27, 1998, the Company funded $2.3 million
of commitments outstanding as of September 30, 1998 for its commercial and
industrial lease and finance receivables portfolio.
As of October 27, 1998, the Company had committed to purchase $73.8 million of
equipment for its commercial and industrial lease and finance receivables
portfolio.
TRAILER LEASING:
The Company operates 16 trailer rental facilities that engage in short-term and
mid-term operating leases. Equipment operated in these facilities consists of
refrigerated trailers used to transport temperature-sensitive food products and
dry van trailers leased to a variety of customers. The Company opened 6 of these
rental yards in the nine months ended September 30, 1998 and intends to open
additional rental yard facilities in the future. The Company is selling certain
of its older trailers and is replacing them with new or late-model refrigerated
trailers. The new trailers will be placed in existing rental facilities or in
new yards.
OTHER TRANSPORTATION EQUIPMENT LEASING AND OTHER:
During the nine months ended September 30, 1998, the Company generated proceeds
of $28.5 million from the sale of transportation and other related equipment.
The net proceeds from the sale of assets that were collateralized as part of the
senior secured loan facility were placed in a collateral account.
The Company also had an 80% interest in a company owning 100% of a company
located in Australia involved in aircraft brokerage and aircraft spare parts
sales. This company was sold during August 1998 at a loss of $0.2 million. The
Company had written-down the spare parts inventory of the subsidiary by $0.5
million in the second quarter of 1998.
Management believes that, through debt and equity financing, possible sales of
equipment, proceeds from the initial public offering of AFG, and cash flows from
operations, the Company will have sufficient liquidity and capital resources to
meet its projected future operating needs.
EFFECTS OF YEAR 2000:
It is possible that the Company's currently installed computer systems, software
products and other business systems, or those of the Company's vendors, service
providers and customers, working either alone or in conjunction with other
software or systems, may not accept input of, store, manipulate and output dates
on or after January 1, 2000 without error or interruption (a problem commonly
known as the "Year 2000" problem).
The Company has established a special Year 2000 oversight committee to review
the impact of Year 2000 issues on its software products and other business
systems in order to determine whether such systems will retain functionality
after December 31, 1999. The Company (a) is currently integrating Year 2000
compliant programming code into its existing internally customized and
internally developed transaction processing software systems and (b) the
Company's accounting and asset management software systems have either already
been made Year 2000 compliant or Year 2000 compliant upgrades of such systems
are planned to be implemented by PLMI before the end of fiscal 1999. Although
the Company believes that its Year 2000 compliance program can be completed by
the beginning of 1999, there can be no assurance that the compliance program
will be completed by that date. As of September 30, 1998, the Company has spent
approximately $35,000 to become Year 2000 compliant. The Company expects to
spend an additional $0.2 million in order to become Year 2000 compliant.
Some risks associated with the Year 2000 problem are beyond the ability of the
Company to control, including the extent to which third parties can address the
Year 2000 problem. The Company has begun to communicate with vendors, services
providers and customers in order to assess the Year 2000 compliance readiness of
such parties and the extent to which the Company is vulnerable to any
third-party Year 2000 issues. There can be no assurance that the software
systems of such parties will be converted or made Year 2000 compliant in a
timely manner. Any failure by such other parties to make their respective
systems Year 2000 compliant could have a material adverse effect on the
business, financial position and results of operations of the Company. The
Company will make an ongoing effort to recognize and evaluate potential exposure
relating to third-party Year 2000 non-compliance and will develop a contingency
plan if the Company determines, or is unable to determine, that third-party
non-compliance would have a material adverse effect on the Company's business,
financial position or results of operation.
FORWARD-LOOKING INFORMATION:
Except for historical information contained herein, the discussion in this Form
10-Q contains forward-looking statements that contain risks and uncertainties,
such as statements of the Company's plans, objectives, expectations, and
intentions. The cautionary statements made in this Form 10-Q should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-Q. The Company's actual results could differ materially from
those discussed here.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to the consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
10.1 Amendment No. 4 to Pooling and Servicing Agreement and Indenture of Trust,
dated April 14, 1998.
10.2 Master Amendment to Floating Rate Senior Secured Notes Agreement, dated
September 22, 1998.
10.3 Commitment letter from First Union National Bank extending the $125.0
million nonrecourse securitization facility through October 12, 1999, dated
October 13, 1998.
(B) Reports on Form 8-K
None.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLM INTERNATIONAL, INC.
/s/ Richard K Brock
----------------------------------
Richard K Brock
Vice President and
Corporate Controller
Date: October 27, 1998
AMENDMENT NO. 4 TO
POOLING AND SERVICING AGREEMENT AND INDENTURE OF TRUST
FOURTH AMENDMENT, dated as of April 14, 1998 (this "Amendment") to the
Pooling and Servicing Agreement and Indenture of Trust, dated as of July 1,
1995, as amended by Amendment No. 1 thereto dated as of September 1, 1995,
Amendment No. 2 thereto dated as of December 5, 1995, and Amendment No. 3
thereto dated as of October 14, 1997 (the "Agreement"), among AFG CREDIT
CORPORATION, a Delaware corporation, as Transferor (the "Transferor"), AMERICAN
FINANCE GROUP, INC., a Delaware corporation ("AFG"), as Servicer, and BANKERS
TRUST COMPANY, a banking corporation organized and existing under the laws of
the State of New York, as Trustee (in such capacity, the "Trustee") and as
Collateral Trustee (in such capacity, the "Collateral Trustee").
WHEREAS, the Transferor, AFG, the Trustee and the Collateral Trustee
wish to amend the Agreement in the manner provided for in this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. The definition of "Servicing Fee Percentage" in Section 1.1 of the
Agreement is amended by deleting the definition in its entirety and replacing it
with the following text:
"Servicing Fee Percentage" shall mean .40%.
2. Paragraph 1(d) of Schedule 3 to the Agreement is amended by deleting
the text in its entirety and substituting in its place the following text:
The sum of the Discounted Lease Balances of Included Leases
with respect to which the Lessees thereunder are rated internally by AFG, on a
cumulative basis, is not more than 40% of the Aggregate Pool Balance.
3. Paragraph 2(a) of Schedule 3 to the Agreement is hereby amended by
replacing the chart therein with the chart attached hereto as Exhibit I.
4. Except as expressly amended, modified and supplemented hereby, the
provisions of the Agreement are and shall remain in full force and effect.
5. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES
HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, PROVIDED, HOWEVER,
THAT THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE TRUSTEE AND THE COLLATERAL
TRUSTEE SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
6. Capitalized terms used in this Amendment without definition shall
have the meanings assigned to them in the Agreement.
7. This Amendment may be executed in two or more counterparts (and by
different parties on separate counterparts), each of which shall be an original,
but all of which together shall constitute one and the same instrument.
[THE REST OF THIS PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed by their respective officers as of the day and year first above
written.
AFG CREDIT CORPORATION,
as Transferor
By: /s/ J. Michael Allgood
-----------------------------------
Title: Vice President
AMERICAN FINANCE GROUP, INC.
as Servicer
By: /s/ J. Michael Allgood
-------------------------------------
Title: Vice President
BANKERS TRUST COMPANY,
as Trustee
By: /s/ Kevin Weeks
------------------------------------
Title: Assistant Vice Prsident
BANKERS TRUST COMPANY,
as Collateral Trustee
By: /s/ Kevin Weeks
-------------------------------------
Title: Assistant Vice President
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT I
- --------------------------------------------------------------------------------------------------------------
Percentage of Aggregate
Category Pool Balance
- --------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Included Leases of any individual Based on External Based on Internal
Lessee that are rated AA- or higher Ratings Ratings
by Standard & Poor's and Aa3 or
higher by Moody's
20% 7%
- -------------------------------------------------------------------------------------------------------------------
2. Included Leases of any individual Based on External Based on Internal
Lessee that are rated between Ratings Ratings
investment grade and (i) AA- by
Standard & Poor's and (ii) Aa3 by
Moody's
9% 7%
- -------------------------------------------------------------------------------------------------------------------
3. Included Leases of any individual Based on External Based on Internal
Lessee that are not rated investment Ratings Ratings
grade by Moody's and Standard & Poors
3% 3%
- -------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
4. Included Leases of all Lessees that
operate in the same industry*
40%
- ----------------------------------------------------------------------------------------------------------------
5. Included Leases that relate to the same
type of Equipment**
40%
- ----------------------------------------------------------------------------------------------------------------
6. Included Leases for which the Scheduled
Payments are payable semi-annually
10%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*Based upon Primary Standard Industrial Classification Code Number.
**As determined by AFG Credit Corporation in accordance with its
customary procedures.
<PAGE>
MASTER AMENDMENT
(September, 1998)
This Master Amendment (this "Amendment") is entered into as of
September 22, 1998 between PLM International, Inc., PLM Financial Services,
Inc., PLM Investment Management, Inc., and SunAmerica Life Insurance Company.
Recitals
PLM International, Inc. PLM Financial Services, Inc., PLM Investment
Management, Inc., and SunAmerica Life Insurance Company are the parties to a
certain Note Agreement dated June 28, 1996 (the "Note Agreement") and a certain
Note Purchase Agreement dated June 28, 1996 ("Note Purchase Agreement"). Any
capitalized term used but not defined in this Amendment shall have the meaning
described to such term in the Note Agreement. In connection with the Note
Agreement the following agreements were additionally executed: (i) Security
Agreement (PLM Financial Services, Inc. -- Master) (the "FSI Security
Agreement") between SunAmerica, as Collateral Agent, and FSI (the "FSI Security
Agreement"), (ii) Security Agreement (Lock Box) between SunAmerica, as
Collateral Agent, FSI and IMI, and acknowledged by First Union National Bank of
North Carolina (the "Security Agreement (Lock Box)"), (iii) Guaranty Agreement
executed by FSI in favor of the holders of the Notes ("FSI Guaranty"), and (iv)
Guaranty Agreement executed by PLM in favor of the holders of the Notes (the
"PLM Guaranty").
NOW THEREFORE, the parties agree to amend various of the Note Documents
in accordance with the terms of this Amendment.
I.
NOTE AGREEMENT AMENDMENTS
A. The cover page to the Note Agreement and Sections 1.1(a) and 1.1(b)
thereof are amended by deleting reference therein to "$27,000,000" and
substituting in lieu thereof "37,000,000".
B. Section 1.3 of the Note Agreement is amended by deleting the
definition of "General Partner Amount" as set forth therein as
substituting in lieu thereof the following:
"GENERAL PARTNER AMOUNT" means, as of any date of determination, the
sum of (a) the product resulting from the multiplication of (i) the
Appraised Value of all Equipment then owned by Growth Fund I provided
FSI owns an Eligible General Partnership Interest in Growth Fund I,
excluding Equipment that has suffered a Casualty Loss, less all Debt of
Growth Fund I, times (ii) 1% percent, (b) the product resulting from
the multiplication of (i) the Appraised Value of all Equipment then
owned by Growth Fund II provided FSI owns an Eligible General
Partnership Interest in Growth Fund II, excluding Equipment that has
suffered a Casualty Loss, less all Debt of Growth Fund II, times (ii)
5% percent, (c) the product resulting fromthe multiplication of (i) the
Appraised Value of all Equipment then owned by Growth Fund III provided
FSI owns an Eligible General Partnership Interest in Growth Fund III,
excluding Equipment that has suffered a Casualty Loss, less all Debt of
Growth Fund III, times (ii) 5% percent, (d) the product resulting from
the multiplication of (i) the Appraised Value of all Equipment then
owned by Growth Fund IV provided FSI owns an Eligible General
Partnership Interest in Growth Fund IV, excluding Equipment that has
suffered a Casualty Loss, less all Debt of Growth Fund IV, times (ii)
5% percent, (e) the product resulting from the multiplication of (i)
the Appraised Value of all Equipment then owned by Growth Fund V
provided FSI owns an Eligible General Partnership Interest in Growth
Fund V, excluding Equipment that has suffered a Casualty Loss, less all
Debt of Growth Fund V, times (ii) 5% percent, (f) the product resulting
from the multiplication of (i) the Appraised Value of all Equipment
then owned by Growth Fund VI provided FSI owns an Eligible General
Partnership Interest in Growth Fund VI, excluding Equipment that has
suffered a Casualty Loss, less all Debt of Growth Fund VI, times (ii)
5% percent, (g) the product resulting from the multiplication of (i)
the Appraised Value of all Equipment then owned by Growth Fund VII
provided FSI owns an Eligible General Partnership Interest in Growth
Fund VII, excluding Equipment that has suffered a Casualty Loss, less
all Debt of Growth Fund VII, times (ii) 5% percent, and (h) the product
resulting from the multiplication of (i) the Appraised Value of all
Equipment then owned by No Load Growth Fund provided FSI owns an
Eligible General Partnership Interest in No Load Growth Fund, excluding
Equipment that has suffered a Casualty Loss, less all Debt of No Load
Growth Fund, times (ii) 15 percent.
C. Section 1.3 of the Note Agreement is amended by adding the following
definitions:
"GROWTH FUND I" means PLM Equipment Growth Fund, a California limited
partnership.
"GROWTH FUND II" means PLM Equipment Growth Fund II, a California
limited partnership.
"GROWTH FUND III" means PLM Equipment Growth Fund III, a California
limited partnership.
"GROWTH FUND IV" means PLM Equipment Growth Fund IV, a California
limited partnership.
"GROWTH FUND V" means PLM Equipment Growth Fund V, a California limited
partnership.
"GROWTH FUND VI" means PLM Equipment Growth Fund VI, a California
limited partnership.
D. Section 1.3 of the Note Agreement is amended by deleting the
definition of "Eligible General Partnership Interest" set forth therein
and substituting in lieu thereof the following:
"ELIGIBLE GENERAL PARTNER INTEREST" means the ownership interest held
by FSI in each Growth Fund as the general partner or manager and (a) in which
there is an Acceptable Security Interest and such interest shall be subject to
no other Liens and (b) as to which there is not pending against FSI any action
or proceeding asserting any reduction, abatement, set-off or other diminution of
any material part of the distributions and other payments due and to become due
in respect of such interest.
E. The definition of "Consolidated Total Assets" set forth in Section
1.3 of the Note Agreement is generally amended to reflect that the net book
value of all "Intangibles" shall be excluded from the calculation of
Consolidated Total Assets (with "Intangibles" being all assets which would be
treated as intangible under GAAP including, without limitation except as set
forth in the following proviso, goodwill, trademarks, tradenames, service marks,
brand names, copyrights, and patents; provided, the term "Intangibles" shall not
include unamortized debt discount and expense or organizational expenses in
excess of the equity in any Subsidiary over the cost of the investment in such
Subsidiary).
F. The definition of "Debt" set forth in Section 1.3 of the Note
Agreement is amended by deleting clause (iv) thereof.
G. Section 3.10(a) of the Note Agreement is amended by deleting the
parenthetical "(excluding partnership distributions applicable to FSI's
partnership interest in each of the Growth Funds, other than Growth Fund VII and
No Load Growth Fund)" contained in the first sentence thereof.
H. Section 3.10(a) of the Note Agreement is amended by deleting the
reference to "Growth Fund VII" and to "No Load Growth Fund" and substituting in
lieu thereof "Growth Fund".
I. Section 5.1(i) of the Note Agreement is amended by deleting the
reference to "the" set forth immediately following the term "Growth Fund" when
first used therein and substituting in lieu thereof the word "a".
J. Section 5.1(s) of the Note Agreement is amended by deleting the
reference to the phrase "either of Growth Fund VII and No Load Growth Fund" in
the first sentence thereof and substituting in lieu thereof the term "any Growth
Fund".
K. Section 6.1 of the Note Agreement is amended by deleting the
reference to the phrase "Growth Fund VII and No Load Growth Fund" contained in
the second sentence thereof and substituting in lieu thereof the term "Growth
Fund".
L. Exhibit B to the Note Agreement is amended by changing the heading
to Section (3) set forth therein to read as follows:
"FSI General Partner/Manager Interest in each Growth Fund" and by
adding before the term "Growth Fund VII" in each subsection of such section the
following:
"Growth Fund I
Growth Fund II
Growth Fund III
Growth Fund IV
Growth Fund V
Growth Fund VI".
M. The Note Agreement and Note Purchase Agreement are generally amended
to reflect that any reference therein (or in any exhibit, certificate, annex,
schedule or other document attached to or delivered pursuant to either such
agreement) to a particular Note Document shall be deemed to refer to such Note
Document as amended from time to time. The Note Agreement is generally amended
by incorporating into each form of Note Document attached to the Note Agreement
those amendments that are actually made to the executed version of such Note
Document.
II.
NOTE PURCHASE AGREEMENT AMENDMENTS
A. The cover page to the Note Purchase Agreement and Sections 1.1 and
1.3(d) and (e) thereof are amended by deleting each reference therein to
"27,000,000" and substituting in lieu thereof "$37,000,000."
B. Section 1.3(b) of the Note Purchase Agreement is amended by deleting
the first sentence thereof and substituting in lieu thereof the following:
"From time to time commencing as of September 22, 1998 and
ending on October 15, 1998 (the "Commitment Period"), FSI may notify you in
writing of FSI's desire to issue and sell to you a Note."
In addition, the second sentence of such Section 1.3(b) is generally amended to
reflect that only two issuances of Notes shall be permitted during the
Commitment Period.
C. Section 4.4 of the Note Purchase Agreement is amended by deleting
the reference therein to "Exhibit B" and substituting in lieu thereof "Exhibit
C."
III.
FSI SECURITY AGREEMENT AMENDMENTS
A. Section 1.02(a) of the FSI Security Agreement is amended by deleting
the phrase "but excluding the "Excluded Assets" set forth at the end of such
section.
B. Section 2.02 of the FSI Security Agreement is amended by deleting
the definition of "Excluded Assets".
C. Exhibit A to the FSI Security Agreement is deleted and the Exhibit A
attached as Annex I hereto is substituted in lieu thereof.
D. Exhibit B to the FSI Security Agreement is deleted.
IV.
SECURITY AGREEMENT (LOCK BOX) AMENDMENTS
A. Section 2.02 of the Security Agreement (Lock Box) is amended by
deleting the first sentence thereof and substituting in lieu thereof the
following:
"All Partnership distributions of FSI in respect of each
Growth Fund and all fees or other amounts payable to IMI by each Growth Fund
shall be deposited into the Account to be held as collateral pursuant to the
provisions hereof."
V.
GUARANTY AGREEMENT AMENDMENTS
A. Paragraph A of the Recitals to the PLM Guaranty Agreement and to the
FSI Guaranty Agreement is amended by deleting the reference therein to "$27
million" and substituting in lieu thereof "$37,000,000".
VI.
GENERAL
This Amendment may be executed in any number of original counterparts,
all of which will constitute but one and the same instrument. The parties agree
to take such further actions as may be reasonably necessary to carry out the
intent of this Amendment including, without limitation, amending existing
financing statements (where needed) to reflect any of these amendments and
providing an updated UCC lien search reflecting the matters addressed in Section
3.2(c)(v) of the Note Purchase Agreement. Contemporaneously with the execution
of this Amendment PLM shall cause its counsel to deliver to SunAmerica an
opinion reasonably satisfactory to SunAmerica. Each of PLM, FSI and IMI ratifies
and confirms and agrees to perform all of its obligations under each Note
Document to which it is a party, as such Note Document may be amended pursuant
to the terms of this Amendment.
EXECUTED as of the date first above written.
PLM INTERNATIONAL, INC.
By: /s/ J. Michael Allgood
---------------------------------------------
Name: J. Michael Allgood
Title: Vice President and Chief Financial
Officer
PLM FINANCIAL SERVICES, INC.
By: /s/ Richard K Brock
---------------------------------------------
Name: Richard K Brock
Title: Vice President and Controller
PLM INVESTMENT MANAGEMENT, INC.
By: /s/ Stephen M. Bess
---------------------------------------------
Name: Stephen M. Bess
Title: President
SUNAMERICA LIFE INSURANCE
COMPANY
By: /s/ Tom Denkler
---------------------------------------------
Tom Denkler
Authorized Agent
Consented to by all existing Noteholders:
ANCHOR NATIONAL LIFE INSURANCE CO.
By: /s/ Thomas N. Denkler
- --------------------------------------------------
Thomas N. Denkler
Authorized Agent
CALAMERICA LIFE INSURANCE CO.
By: /s/ Thomas N. Denkler
- --------------------------------------------------
Thomas N. Denkler
Authorized Agent
Attachment
Annex 1 - New Exhibit A to FSI Security Agreement
<PAGE>
EXHIBIT "A"
--------------------------
Property Covered
I.
Definitions
------------------------
As used herein, capitalized terms defined on the first page of this
Financing Statement shall have the meanings set forth therein, and the following
terms shall have the following meanings:
"ACCOUNT" means any right to payment for Goods sold or leased or for
services rendered that is not evidenced by an Instrument or Chattel Paper and
that is at any time included in the Collateral, whether or not it has been
earned by performance.
"CASH COLLATERAL ACCOUNT" shall mean that certain non-interest bearing
account to be established with First Union National Bank of North Carolina, with
such account being named "SUN/PLM Lock Box Account." The Cash Collateral Account
shall also include any Permitted Investments purchased from time to time with
funds on deposit in the Cash Collateral Account.
"CHATTEL PAPER" means a writing or writings that evidence both a
monetary obligation and a security interest in or a lease of specific Good and
that are at any time included in the Collateral. When a transaction is evidenced
both by such a security agreement or a lease and by an instrument or a series of
instruments, the group of writings taken together constitute chattel paper.
"CODE" means the Uniform Commercial Code as presently in effect in the
State of Texas, Business and Commerce Code, Chapters 1 through 9.
"COLLATERAL" means all of the property described in Part II of this
Exhibit "A".
"DOCUMENT" means any document of title as defined in Section 1.201 of
the Code and a receipt of the kind described in Subsection (b) of Section 7.201
of the Code, to the extent that the same is at any time included in the
Collateral.
"EQUIPMENT" means Goods used or brought for use primarily in business
if such Goods are not included in the definition of Inventory, to the extent
that the same is at any time included in the Collateral.
"GENERAL INTANGIBLE" means any personal property (including things in
action) other than Goods, Accounts, Chattel Paper, Documents, Instruments,
Investment Property, and money, to the extent that the same is at any time
included in the Collateral. General Intangibles shall include, without
limitation, all letters of credit, bonds, guarantees, purchase or sales
agreements and other contractual rights, rights to performance, and claims for
damages, refunds (including tax refunds) or other monies due or to become due,
orders, franchises, permits, certificates, licenses, consents, exemptions,
variances, authorizations or other approvals by any governmental agency or
court, consulting, engineering and technological information and specifications,
design data, patent rights, trade secrets, literary rights, copyrights,
trademarks, labels, trade names and other intellectual property, business
records, computer tapes and computer software, and goodwill.
"GOODS" includes all things that are movable at the time a security
interest attaches or that are fixtures, but does not include money, Documents,
Instruments, Investment Property, Accounts, Chattel Paper, or General
Intangibles.
"INSTRUMENT" means a negotiable instrument or any other writing that
evidences a right to the payment of money and is not itself a security agreement
or lease and is of a type that is in the ordinary course of business transferred
by delivery with any necessary endorsement or assignment, to the extent that the
same is at any time included in the Collateral, provided that such term does not
include Investment Property.
"INVENTORY" means Goods that are held by a person who holds them for
sale or lease or to be furnished under contracts or service or if such person
has so furnished them, or if they are raw materials, work in progress or
materials used or consumed in a business, to the extent that the same is
included in the Collateral.
"INVESTMENT PROPERTY" means all of the following, as such terms are
defined in the Code: (a) a security, whether certificate or uncertificated; (b)
a security entitlement; (c) a securities account; (d) a commodity contract; or
(e) a commodity account, to the extent that the same is at any time included in
the Collateral.
"PARTNERSHIP AGREEMENTS" means the limited partnership agreements or
operating agreements for the Partnerships.
"PARTNERSHIP INTERESTS" means the general partnership interests or
other interests owned by the Debtor in the Partnerships.
"PARTNERSHIPS" means those partnerships and the limited liability
company referred to on Schedule I hereto.
"PERMITTED INVESTMENTS" shall mean (a) investments in direct
obligations of the United States of America; (b) investments in certificates of
deposit of maturities less than one year issued by commercial banks in the
United States having capital and surplus in excess of $200,000,000; and (c)
investments in commercial paper of maturities of less than one year if at the
time of purchase such paper is rated in either of the two highest rating
categories of Standard & Poor's Ratings Group, Moody's Investor Service, Inc.,
or any other rating agency satisfactory to Required Noteholders and all
earnings, proceeds, and products thereof; and (d) investments in money market
funds having a rating from Standard & Poor's Rating Group or Moody's Investors
Service, Inc. in the highest investment category granted thereby.
"PLEDGED SECURITIES" means any Pledged Stock and any other securities
(as such term is defined in Chapter 8 of the Code) at any time constituting part
of the Collateral.
"PLEDGED STOCK" means the securities described on Schedule II hereto.
II.
DESCRIPTION OF PROPERTY.
The Financing Statement of which this Exhibit "A" is a part covers all
of the Debtor's right, title and interest in and to the following types or items
of property, whether now owned or existing or hereafter acquired or arising:
(a) all of Debtor's Accounts, General Intangibles, Chattel
Paper, Instruments, Inventory, Equipment, Documents, and Investment
Property, including, without limitation, (i) Debtor's Partnership
Interests and other interests in the Partnership Agreements; (ii)
Debtor's distributive share of any profits, income, distributions,
surplus and cash proceeds of the Partnerships; (iii) Debtor's
distributive share of specific properties and assets of the
Partnerships upon dissolution or otherwise; (iv) any and all other
rights of every kind and character of Debtor in and to the Partnerships
and under the Partnership Agreements; (v) all of the Pledged Stock,
together with the certificates, if any, representing the same; and (vi)
all shares, securities, monies or property representing a dividend on,
or a distribution or return of capital in respect of the Pledged Stock,
resulting from a split-up, revision, reclassification or other like
change of any of the Pledged Stock or otherwise received in exchange
for or in connection with the Pledged Stock and any and other rights
issued to the holders of, or otherwise in respect of, any of the
Pledged Stock;
(b) (i) all certificates of title or other documents
evidencing ownership or possession of or otherwise relating to any
property referred to in paragraph (a) above; (ii) all policies of
insurance (whether or not required by Secured Party) covering any
property referred to in paragraph (a) above; (iii) all Goods that were
at any time included in the property described in paragraph (a) above
and that are returned to or for the account of Debtor following their
sale, lease or other disposition; (iv) all proceeds, products,
replacements, additions to, substitutions for, accessions of, and
property necessary for the operation of any of the property referred to
in paragraph (a) above, including, without limitation, insurance
payable as a result of loss or damage to any of the property referred
to in paragraph (a) above, refunds of unearned premiums on any such
insurance policy and claims against third parties; and (v) all books
and records related to any of the property referred to in paragraph (a)
above, including, without limitation, any and all books of account,
customer lists and other records relating in any way to the property
referred to in paragraph (a) above; and
(c) (i) the Cash Collateral Account, all funds and securities,
if any, held from time to time therein and all certificates and
instruments, if any, from time to time representing or evidencing the
Cash Collateral Account; (ii) all Permitted Investments from time to
time held by the Secured Party in the Cash Collateral Account, and all
certificates and instruments, if any, from time to time representing or
evidencing the Permitted Investments; (iii) all notes, certificates of
deposit, deposit accounts, checks and other instruments from time to
time hereafter delivered to or otherwise possessed by the Secured Party
for or on behalf of the Debtor in substitution for or in addition to
any of the property described in the immediately preceding clauses (i)
and (ii); (iv) all interest, dividends, cash, instruments and other
property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the property
described in the immediately preceding clauses (i) and (ii); and (v)
all proceeds and products of any and all of the foregoing property
described in this paragraph (c).
<PAGE>
SCHEDULE I
1. PLM Equipment Growth Fund, a California limited partnership.
2. PLM Equipment Growth Fund II, a California limited partnership.
3. PLM Equipment Growth Fund III, a California limited partnership.
4. PLM Equipment Growth Fund IV, a California limited partnership.
5. PLM Equipment Growth Fund V, a California limited partnership.
6. PLM Equipment Growth Fund VI, a California limited partnership.
7. PLM Equipment Growth Fund VII, a California limited partnership.
8. Professional Lease Management Income Fund I, a California limited
liability company.
<PAGE>
SCHEDULE II
2,500 shares of the common stock of PLM Investment Management, Inc., a
California corporation, evidenced by a stock certificate a copy of which is
attached.
<PAGE>
October 13, 1998
Mr. Michael Allgood
PLM International, Inc.
Dear Mr. Allgood,
This letter is to confirm that First Union National Bank has renewed
its liquidity purchase commitment for the AFG Master Trust commercial paper
program in the amount of $125,000,000 through the expiration date of October 12,
1999.
/s/ Bill A. Shirley
- --------------------------------
Bill A. Shirley
Senior Vice President
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,472
<SECURITIES> 0
<RECEIVABLES> 204,035
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 71,060
<DEPRECIATION> (22,742)
<TOTAL-ASSETS> 299,113
<CURRENT-LIABILITIES> 0
<BONDS> 209,581
0
0
<COMMON> 61,011
<OTHER-SE> (11,101)
<TOTAL-LIABILITY-AND-EQUITY> 299,113
<SALES> 0
<TOTAL-REVENUES> 42,775
<CGS> 0
<TOTAL-COSTS> 27,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,663
<INCOME-PRETAX> 5,820
<INCOME-TAX> 2,274
<INCOME-CONTINUING> 3,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,546
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.41
</TABLE>
