SOLICITATION STATEMENT
PLM FINANCIAL SERVICES, INC.
This solicitation statement is being provided to the limited partners
of PLM Equipment Growth and Income Fund V, a California limited partnership
(referred to as either "Fund V" or the "Partnership") pursuant to a preliminary
order, dated June 29, 1999, of the United States District Court for the Southern
District of Alabama issued in connection with the proposed equitable settlement
of the class action litigation captioned Koch, et al. v. PLM International,
Inc., et al. brought on behalf of the limited partners, unitholders who are not
limited partners, and former investors in the Partnership. The litigation named
as defendants PLM International, Inc., a Delaware corporation; PLM Financial
Services, Inc., a Delaware corporation and the general partner of the
Partnership (the "General Partner"); PLM Investment Management, Inc., a Delaware
corporation ("IMI") and a subsidiary of the General Partner; and two other
subsidiaries of the General Partner (collectively, the defendants). Plaintiffs
filed the litigation on behalf of investors in this and other equipment
partnerships managed by the General Partner and described in the documents that
you are receiving along with this solicitation statement. Limited partners in
two of such other partnerships are also receiving a solicitation statement
virtually identical to this one.
The proposed equitable settlement of the litigation is part of a larger
settlement, including a monetary settlement, that would resolve and settle all
claims brought against the defendants. To implement the equitable settlement
described below and in the accompanying documents, the Amended and Restated
Limited Partnership Agreement of the Partnership (the "Partnership Agreement")
will be amended (the "Amendments") to:
(a) extend the period during which the General Partner will reinvest cash
flow, surplus funds and retained proceeds in equipment (the "Reinvestment
Period") for approximately 5 years;
(b) extend until approximately January 1, 2007, the date when the General
Partner anticipates that all of the Partnership's equipment will be liquidated
(the "Extension");
(c) allow the Partnership to repurchase up to ten percent 10% of the
outstanding units (the "Repurchase");
(d) require IMI to defer 25% of its equipment management fee (the
"Management Fee") for a period of 2 1/2 years pending the attainment of certain
financial performance goals by the Partnership; and
(e) by 20% the limitations on the category of fees known as front-end fees
(the "Front-End Fees") that the General Partner can receive from the
Partnership, although as of January 1, 1999 the only Front-End Fees the General
Partner expects the Partnership to incur will be for equipment acquisition and
lease negotiation services.
The Amendments are also being proposed to the limited partnership
agreements of two other partnerships for which the General Partner acts as
general partner, PLM Equipment Growth Fund VI ("Fund VI"), and PLM Equipment
Growth and Income Fund VII ("Fund VII"), each a California limited partnership.
The Partnership, Fund VI and Fund VII are collectively referred to as the
"Partnerships", and the limited partnership agreements of the Partnerships are
collectively referred to as the "Partnership Agreements". Identical amendments
to the Partnership Agreements of Funds VI and VII are also referred to as the
"Amendments."
CERTAIN FACETS OF THE AMENDMENTS INVOLVE RISKS AND CONFLICTS OF INTEREST
THAT SHOULD BE CONSIDERED BY THE LIMITED PARTNERS. SEE "RISK FACTORS" BEGINNING
ON PAGE 6 OF THIS SOLICITATION STATEMENT AND "CONFLICTS OF INTERESTS" BEGINNING
ON PAGE 28. IN PARTICULAR, LIMITED PARTNERS SHOULD CONSIDER THE FOLLOWING:
o The Amendments will extend to approximately January 1, 2007 the date
by which the General Partner anticipates all of the Partnership's
equipment will be sold, which date is 6 years beyond what is
contemplated by the Partnership Agreement and 5 years beyond what is
contemplated by the General Partner's business model;
o Cash which the Partnership would otherwise have available for
distributions to the limited partners or for reinvestment in equipment
may have to be used to fund the Repurchase or to pay equipment
acquisition and lease negotiation fees;
o The limitation on Front-End Fees payable to the General Partner will
be increased by 20% so that the General Partner may earn additional
equipment acquisition and lease negotiation fees;
o The aggregate amount payable to the General Partner from the Front-End
Fee increase could offset benefits to the Partnership from the 2 1/2
year deferral (or even the non-payment) of 25% of the Management Fee;
o The Amendments involve potential conflicts of interest from the
General Partner receiving economic benefits with respect to the
Front-End Fee increase and having the opportunity to earn Management
Fees through approximately January 1, 2007;
o Without the ability to reinvest in equipment from the date of approval
of the Amendments through December 31, 2004, Management Fees payable
to IMI (an affiliate of the General Partner) would likely decrease at
a greater rate than they will as a result of reinvestment in those
years;
o Pursuant to the court's order preliminarily approving the equitable
settlement, and subject to final court approval, the Amendments will
be implemented unless limited partners holding 50% or more of the
units vote against one or more of the Amendments; and
o The deferred portion of the Management Fee, as well as fees to
plaintiff's counsel, will become payable in the event of a roll-up
transaction or a successful tender offer provided that the Partnership
has attained stipulated performance targets, which could deter such
transactions.
The court's order:
(a) certified for purposes of the settlement two classes:
(1) an equitable settlement class consisting of all persons who
were unitholders in the Partnerships as of the time of the Equitable Class
Preliminary Approval Order, and their assigns and successors in interest; and
(2) a monetary settlement class consisting generally of all
persons that during the period between May 23, 1989 and June 29, 1999 purchased,
or received by transfer or assignment, units in any of the Partnerships and in
PLM Equipment Growth Fund IV, a California limited partnership ("Fund IV"),
regardless of whether they currently hold units; and
(b) preliminarily approved the settlement pursuant to the stipulation
of settlement entered into by the General Partner and the other defendants. The
settlement stipulation generally provides for the settlement, discharge and
release of all claims against defendants in exchange for the benefits described
in this solicitation statement. The settlement, consisting of the monetary
settlement and the equitable settlement, is described in greater detail in the
accompanying Notice of Proposed Monetary Settlement of Class Action, Settlement
Hearing and Right to Appear ("monetary notice") and the Notice of Proposed
Equitable Settlement of Class Action, Settlement Hearing and Right to Appear
("equitable notice").
This solicitation statement provides information with respect to the
Amendments, the predominant component of the equitable settlement.
Pursuant to the court's order preliminarily approving the settlement
stipulation and subject to final court approval, unless limited partners holding
50% or more of the units vote against one or more of the Amendments, the
Partnership Agreement will be amended in accordance with the Amendments and the
Partnership will participate in the equitable settlement. However, even if
limited partners holding 50% or more of the units do not vote against
Amendments, the court may still not approve the Amendments for this Partnership,
in which case the Amendments will not be given effect and the Partnership will
not participate in the equitable settlement.
[Prior to issuing the order,] the court reviewed the [proposed]
equitable notice and [a draft of] this solicitation statement including the
manner in which the Amendments are voted on by the limited partners. See "VOTING
PROCEDURES." The court asked that certain changes be made, and after reviewing
such changes, approved the form and content of both this solicitation statement
and the equitable notice.
LIMITED PARTNERS WHO DO NOT WISH TO VOTE AGAINST THE AMENDMENTS
SHOULD DO NOTHING; LIMITED PARTNERS WHO WISH TO VOTE AGAINST THE AMENDMENTS MUST
DO SO BY FOLLOWING THE PROCEDURES DESCRIBED HEREIN. LIMITED PARTNERS WHO FAIL TO
RETURN THE FORM FOR VOTING AGAINST THE AMENDMENTS WILL BE TREATED AS IF THEY HAD
VOTED IN FAVOR OF THE AMENDMENTS.
Approval of the Amendments for the Partnership is conditioned upon:
(a) limited partners holding less than one-half of the units voting against any
or all of the Amendments; and (b) final court approval of the settlement after a
fairness hearing that is scheduled for 10:30 a.m. on November 16, 1999
[tentative] at the United States Courthouse in Mobile, Alabama.
This solicitation statement is being mailed to limited partners on or
about ________________, 1999.
THE GENERAL PARTNER RECOMMENDS THAT LIMITED PARTNERS NOT VOTE AGAINST THE
AMENDMENTS. PLAINTIFFS' CLASS COUNSEL SUPPORTS THE PROPOSED EQUITABLE SETTLEMENT
OF WHICH THE AMENDMENTS FORM AN INTEGRAL PART.
ALL QUESTIONS AND INQUIRIES SHOULD BE
DIRECTED TO:
Investor Services
PLM Investment Management, Inc.
One Market Street, Steuart Tower, Suite 800
San Francisco, California 94105-1301
Telephone: (800) 626-7549 or (415) 974-1399
CAUTIONARY STATEMENT
CERTAIN STATEMENTS IN THIS SOLICITATION STATEMENT RELATE TO FUTURE
EVENTS AND EXPECTATIONS, AND AS SUCH, CONSTITUTE WHAT ARE CALLED
"FORWARD-LOOKING STATEMENTS." FOR PURPOSES OF THIS SOLICITATION STATEMENT AND
LIMITED PARTNERS' RIGHT TO BE HEARD IN COURT REGARDING THE SETTLEMENT, ANY
STATEMENTS CONTAINED IN THIS SOLICITATION STATEMENT THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT
LIMITATION BY THE FOREGOING DESCRIPTION, THE WORDS "BELIEVES," ANTICIPATES,"
"EXPECTS," "PROJECTS," "DETERMINED" AND SIMILAR EXPRESSIONS USED IN THIS
SOLICITATION STATEMENT ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS
OF THE PARTNERSHIP TO BE MATERIALLY DIFFERENT FROM HISTORICAL ACHIEVEMENTS OF
THE PARTNERSHIP.
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TABLE OF CONTENTS
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SUMMARY..........................................................................................................1
The Amendments............................................................................................1
Risk Factors..............................................................................................2
Extending the Life of the Partnership Will Delay Payment of Distributions
to the Limited Partners Resulting from the Liquidation of the Partnership's Equipment..........2
Cash Used to Fund the Repurchase Could Limit Distributions to Limited Partners.....................2
Cash Used to Fund the Front-End Fee Increase Could Limit Distributions to Limited Partners.........2
Conflicts of Interest of General Partner...........................................................2
The Affirmative Vote of a Majority in Interest is Not Required to Bind all Limited Partners........2
The Potential Acceleration in Paying Either the Deferred Portion of the
Management Fee and Some of Class Counsel's Fees Could Deter a Change of Control................3
Continuing Risk Factors............................................................................3
Alternatives to the Amendments............................................................................3
General Partner's Reasons for Recommending the Amendments.................................................3
Voting Procedures.........................................................................................4
No Appraisal Rights.......................................................................................5
Conflicts of Interest.....................................................................................5
General Partner....................................................................................5
Class Counsel......................................................................................5
RISK FACTORS.....................................................................................................6
Risks Relating to the Amendments..........................................................................6
Extending the Life of the Partnership Will Delay Payment of Distributions
to the Limited Partners Resulting from the Liquidation of the Partnership's Equipment..........6
Cash Used to Fund the Repurchase Could Limit Distributions to Limited Partners.....................6
Cash Used to Fund the Front-End Fees Could Limit Distributions to Limited Partners.................6
The Affirmative Vote of Majority in Interest is Not Required to Bind all Limited Partners..........6
The Potential Acceleration in Paying Either the Deferred Portion of the
Management Fee and Some of Class Counsel's Fees Could Deter a Change of Control................7
Ongoing Risks Relating to the Partnerships................................................................7
Equipment Leasing Business.........................................................................7
Equipment Operations...............................................................................7
Equipment Leases...................................................................................8
Consequences of Government Regulation..............................................................9
Residual Value of Equipment........................................................................9
Risk of Loss of Equipment Registration.............................................................9
Investment Risks..........................................................................................9
Liability of Limited Partners......................................................................9
Return of Distributions...........................................................................10
Limited Transferability of Units..................................................................10
Risks of Joint Investments........................................................................10
Reliance on General Partner and Conflicts of Interest.............................................11
Tax Risks................................................................................................11
Federal Tax Considerations in General.............................................................11
Partnership Status................................................................................11
Partnership Allocations...........................................................................11
Passive Activity Loss Limitations.................................................................11
Sale or Other Disposition of Equipment or Units-- Tax Liability.................................. 12
Reliance on Existing Law..........................................................................12
Conflicts of Interest....................................................................................12
Conflict of Interest of General Partner...........................................................12
Class Counsel.....................................................................................13
BACKGROUND, BENEFITS OF, AND REASONS FOR, THE AMENDMENTS........................................................14
Description of the Litigation............................................................................14
The Settlement...........................................................................................15
Summary of Settlement.............................................................................16
Effect on Rights of Limited Partners..............................................................16
Right to Terminate................................................................................16
Approval Procedure for the Equitable Settlement...................................................16
Class Counsel............................................................................................17
Provisions of the Amendments.............................................................................17
The Extension of the Reinvestment Period.................................................................18
The Liquidation Extension................................................................................18
The Management Fee Deferral..............................................................................18
The Repurchase...........................................................................................19
The Front-End Fee Increase...............................................................................19
Comparison of Extending the Reinvestment Period and the Extension (and the Benefits
thereof) to Liquidation and Termination of Reinvestment as Scheduled..............................20
COMPENSATION TO THE GENERAL PARTNER AND ITS AFFILIATES..........................................................23
COMPARISON OF PARTNERSHIP OPERATIONS WITH AND WITHOUT THE AMENDMENTS............................................25
CONFLICTS OF INTEREST...........................................................................................28
General...........................................................................................28
Conflict of Interest of General Partner...........................................................28
Conflict of Interest of Class Counsel.............................................................28
IRR PROTOCOL....................................................................................................30
TEXT OF THE AMENDMENTS..........................................................................................31
Amendment I - The Extension..............................................................................31
Amendment II - Front-End Fee Increase....................................................................31
Amendment III - Extension of the Reinvestment Period.....................................................31
Amendment IV - The Repurchase............................................................................31
Amendment V - Enabling Amendments........................................................................33
Amendment VI - Actions by Limited Partners...............................................................33
Amendment VII - Disputes and Resolutions.................................................................33
VOTING PROCEDURES...............................................................................................35
Time of Voting and Record Date...........................................................................35
No Vote..................................................................................................35
Revocability of No Vote..................................................................................36
No Appraisal Rights......................................................................................36
Information Services.....................................................................................36
APPENDIX A......................................................................................................37
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SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this solicitation statement.
THE AMENDMENTS
The Amendments are being proposed by the General Partner and supported by
counsel for plaintiffs in the litigation (the "Class Counsel") as an integral
part of the proposed equitable settlement. Pursuant to the court's order
preliminarily approving the settlement Stipulation and subject to final court
approval, unless limited partners holding 50% or more of the units vote against
one or more of the Amendments by timely delivering a vote against the Amendments
in the form attached as Appendix A ( No Vote"), the Partnership Agreement will
be so amended.
In addition, the court has scheduled the fairness hearing at which time:
o members of the equitable class who follow the procedures described in
the equitable notice may appear before the court and object to any
aspect of the settlement, including the Amendments, notwithstanding
their failure to deliver a No Vote by ___________________, 1999 (the
"No Vote Deadline");
o the General Partner will provide the court with a tabulation of the
number of units held by limited partners in each Partnership that have
voted against one or more of the Amendments; and
o the court may: (1) not approve the equitable settlement in the event
that limited partners of any of the Partnerships holding 50% or more
of the units vote against the Amendments (2) approve the equitable
settlement as to one, two or all of the Partnerships so long as
limited partners holding less than 50% of the units of any such
Partnership vote against the Amendments, or (3) notwithstanding votes
against the Amendments by limited partners holding less than 50% of
the units in each Partnership, still not approve the equitable
settlement.
The Amendments will extend the period during which the Partnership will
be able to reinvest in equipment by approximately 5 years, from the date of
approval of the Amendments until December 31, 2004. During that time, the
General Partner will continue to reinvest cash flow, surplus Partnership funds
and retained proceeds in additional equipment, which the General Partner will
endeavor to lease, and ultimately sell, consistent with the objectives of the
Partnerships.
The date by which the General Partner anticipates that the Partnership's
equipment will be liquidated will also be extended to approximately January 1,
2007, which is 6 years beyond what is contemplated by the Partnership Agreement
and 5 years beyond what is contemplated by the General Partner's business model.
From January 1, 2002 until June 30, 2004, IMI will defer receipt of 25%
of the Management Fee it would otherwise be entitled to receive. IMI will be
entitled to be paid the deferred portion of the Management Fee by the
Partnership only if the internal rate of return ("IRR") for the Partnership, as
computed in accordance with the IRR Protocol (agreed to by the parties to the
litigation and attached as an exhibit to the settlement stipulation), after
January 1, 1999 equals or exceeds the stipulated performance target described in
the IRR Protocol for this purpose. See "IRR PROTOCOL," discussed below.
The current limitation on the Front-End Fees that can be paid by the
Partnership to the General Partner will be increased by 20% so that the General
Partner can earn more than currently permitted for equipment acquisition and
lease negotiation services to be provided during the extended Reinvestment
Period. Finally, the Partnership will offer to repurchase up to 10% of its units
at the price of 80% of the net asset value per Unit determined at the end of the
fiscal quarter immediately preceding the deadline for submitting a repurchase
request.
RISK FACTORS
Limited partners should carefully consider the matters disclosed under
"RISK FACTORS" beginning on page 6 and "CONFLICTS OF INTEREST" beginning on page
28 before deciding whether or not to vote against the Amendments. The following
is a summary of the material risks and other effects of the Amendments.
Extending the Life of the Partnership Will Delay Payment of Distributions
to the Limited Partners Resulting from the Liquidation of the Partnership's
Equipment. Each limited partner's investment will change from an ownership
interest in a partnership whose Partnership Agreement contemplates that it will
liquidate its equipment assets and distribute the sales proceeds before
approximately January 1, 2001 (and whose General Partner's business model
contemplates doing so by approximately January 1, 2002) to one that will,
consistent with the General Partner's fiduciary duties, liquidate its equipment
assets and distribute the sales proceeds before approximately January 1, 2007.
Cash Used to Fund the Repurchase Could Limit Distributions to Limited
Partners. In order to fund the Repurchase, the Partnership may have to use cash
which would otherwise be available for distributions to the limited partners or
for reinvestment in equipment.
Cash Used to Fund the Front-End Fee Increase Could Limit Distributions to
Limited Partners. Part of the equitable settlement includes increasing by 20%
the current limitation on Front-End Fees which can be paid by the Partnership to
the General Partner. Any amounts paid to the General Partner as a result of the
Front-End Fee increase will be unavailable for distributions to the limited
partners or for reinvestment in equipment.
Conflicts of Interest of General Partner. The General Partner initiated
and participated in structuring the Amendments and has conflicts of interest
with respect to their effect, including the facts that: (a) the General Partner
will earn Front-End Fees for approximately 5 additional years; (b) the General
Partner's affiliate, IMI, will earn Management Fees for five additional year;
and (c) the limitation on the Front-End Fees the General Partner could receive
will be increased by 20% over current limits. See "CONFLICTS OF INTEREST -
Conflict of Interest of the General Partner."
The Affirmative Vote of a Majority in Interest is Not Required to Bind
all Limited Partners. Pursuant to the court's order preliminarily approving the
settlement stipulation and subject to final court approval, the Amendments will
be effective unless limited partners holding 50% or more of the units vote
against one or more of the Amendments. Under the Partnership Agreement in its
current form, if the Amendments were not subject to a judicial determination and
court order following the fairness hearing, the Amendments could be effected
only by obtaining the affirmative approval of limited partners holding not less
than a majority of the units. See "VOTING PROCEDURES."
The Potential Acceleration in Paying Either the Deferred Portion of the
Management Fee and Some of Class Counsel's Fees Could Deter a Change of Control.
The IRR Protocol provides that, to the extent the applicable conditions have
been met, the portion of the Management Fee which will be deferred, as well as
the Equitable Class Fee and Expense Award (defined below), will be payable in a
lump sum in the event the limited partners approve a roll-up transaction or more
than 50% of the units in the Partnership are tendered in response to a
registered tender offer but only if the stipulated performance target described
in the IRR Protocol has been attained. Absent a roll-up or tender, such fees
would be paid over time subject to the conditions described in the IRR Protocol
being met with funds available for distribution to the unitholders. These
provisions could have the effect of deterring a roll-up transaction or a tender
offer. See "IRR PROTOCOL" and "CONFLICTS OF INTEREST - Conflict of Interest of
Class Counsel."
Continuing Risk Factors. See "RISK FACTORS - Ongoing Risks Relating to
the Partnership" for a discussion of risks which are similar to those that were
present at the time limited partners invested in the Partnership.
ALTERNATIVES TO THE AMENDMENTS
In the event the Amendments are not approved by the court, or limited
partners holding 50% or more of the units vote against the Amendments, the
General Partner will continue to operate the Partnership according to its
current business plan. Under this business plan, the Partnership stopped
reinvesting available cash in additional equipment in 1998 (except for certain
contractually mandated capital modifications completed in 1999), and has now
entered a holding phase during which equipment may be re-leased or sold, but no
new equipment can be purchased. The General Partner currently anticipates that
the equipment will be fully sold by January 1, 2002, after which the General
Partner will proceed to wind up the affairs of the Partnership and distribute
all remaining funds, after providing for Partnership obligations, to the limited
partners.
GENERAL PARTNER'S REASONS FOR RECOMMENDING THE AMENDMENTS
The Amendments were proposed by the General Partner in connection with
the settlement and pursuant to the settlement stipulation. The General Partner
believes that the Extension (of the anticipated liquidation date) and extending
the Reinvestment Period are likely to provide the General Partner with greater
flexibility both to generate additional revenue from continuing to lease an
asset and to determine when to sell an asset based on market conditions. In
other words, the General Partner believes that much of the Partnership's
equipment will have future cash flow generating potential from continued rentals
and eventual sales proceeds and that the present value thereof will exceed the
present value of continued rentals and the sales proceeds of that same equipment
based upon the expected liquidation date. Additionally, capital improvements
could profitably be made to some types of equipment which improvements would not
be made if the equipment was to be liquidated as scheduled. Finally, the
Partnership has invested in significant infrastructure (trailer rental yards and
railcar rental offices) which could allow the Partnership to employ assets that
could continue to earn an attractive return during an additional period of time.
There can be no assurance, however, that the performance of the Partnership
through the Extension will achieve the anticipated benefits described herein and
in the equitable notice, or that the equipment markets, looking forward, will
support such results when the General Partner determines to sell assets. See
"RISK FACTORS - Ongoing Risks Relating to the Partnership."
The General Partner believes its recommendation in favor of the
Amendments is also supported by: (a) the process of arm's length negotiation of
the structure, terms and conditions of the Amendments with Class Counsel acting
on behalf of the equitable class; (ii) the General Partner's knowledge that any
amendments to the Partnership Agreement would necessarily entail obtaining
preliminary and final approval by the court of the equitable settlement,
including the Amendments; and (iii) the opportunity for each limited partner
both to vote against the Amendments and/or to object to the settlement in court
as part of the fairness hearing. In addition, those holders of units who are not
limited partners will also have the opportunity to object to the settlement as
part of the fairness hearing. The General Partner's judgment, however, may be
affected by the fact that it will derive financial benefits from the Amendments,
and is thus subject to conflicts of interest. See "CONFLICTS OF INTEREST -
Conflict of Interest of the General Partner."
VOTING PROCEDURES
Pursuant to the court's order preliminarily approving the settlement
stipulation and subject to final court approval, the Partnership Agreement will
be amended in accordance with the Amendments unless limited partners holding 50%
or more of the units vote against any or all of the Amendments. Limited partners
may vote against the Amendments by delivering a No Vote to the General Partner.
Limited partners may also object to any aspect of the equitable settlement,
including the Amendments, at the fairness hearing by following the procedures
set forth in the equitable notice which accompanies this solicitation statement.
However, even if limited partners holding 50% or more of the units do not vote
against the Amendments, the court may not approve the settlement as to a
particular Partnership, and then the Amendments will not be given effect and
that Partnership will not participate in the equitable settlement.
LIMITED PARTNERS WHO WISH TO VOTE AGAINST THE AMENDMENTS MUST RETURN A
SIGNED NO VOTE (THE FORM OF WHICH IS ATTACHED AS APPENDIX A) TO GILARDI & CO.,
1115 MAGNOLIA AVENUE, LARKSPUR, CALIFORNIA 94977, AS SOON AS POSSIBLE, BUT IN
ANY EVENT, NO LATER THAN _____________, 1999, FOR THIS AND ANY OTHER PARTNERSHIP
IN WHICH THEY HOLD UNITS. THE NO VOTE MUST CONTAIN THE NAME AND ADDRESS OF THE
LIMITED PARTNER, AND THE NUMBER OF UNITS HELD BY THE LIMITED PARTNER.
Limited partners holding units as of June 29, 1999 (the "Record Date"),
have until 5:00 p.m. Pacific Time, on ____________, 1999, unless extended, to
submit their Notice of Vote Against the Amendments (the "Voting Deadline").
Limited partners may withdraw or revoke their No Vote at any time prior
to the Voting Deadline. See "VOTING PROCEDURES - Revocability of No Vote."
THE GENERAL PARTNER RECOMMENDS THAT LIMITED PARTNERS NOT VOTE AGAINST THE
AMENDMENTS. CLASS COUNSEL SUPPORTS THE PROPOSED EQUITABLE SETTLEMENT OF WHICH
THE AMENDMENTS FORM AN INTEGRAL PART. The General Partner and Class Counsel are
subject to conflicts of interest with respect to the Amendments. See "CONFLICTS
OF INTEREST."
NO APPRAISAL RIGHTS
Neither the Partnership Agreement nor state law provides for dissenters'
or appraisal rights to limited partners who object to the Amendments. Such
rights, when they exist, give the holders of securities the right to surrender
such securities for an appraised value in cash, if they oppose a merger or
similar reorganization. No such right will be provided by the Partnership in
connection with the Amendments.
CONFLICTS OF INTEREST
General Partner. The General Partner initiated and participated in
structuring the Amendments and has conflicts of interest with respect to their
effect. For a discussion of the conflicts of interest of the General Partner
with respect to the Amendments, see "CONFLICTS OF INTEREST - Conflict of
Interest of the General Partner."
Class Counsel. Limited partners should consider that Class Counsel may be
deemed to have a conflict of interest with respect to their support of the
equitable settlement, of which the proposed Amendments form an integral part.
The fees and expenses of Class Counsel, if approved by the court, will be paid
in part from the cash settlement pool provided by the defendants pursuant to the
monetary settlement. In addition, as part of the equitable settlement, Class
Counsel will apply for an additional fee and expenses award (the "Equitable
Class Fee and Expense Award") from any Partnership participating in the
settlement, which will be paid by the equitable settlement class members.
Defendants shall have no separate liability for the payment of the Equitable
Class Fee and Expense Award, and it will be paid to Class Counsel only if the
Partnership's IRR after January 1, 1999 exceeds the stipulated performance
target described in the IRR Protocol for this purpose. See "CONFLICTS OF
INTEREST - Conflict of Interest of Class Counsel" and "IRR PROTOCOL."
<PAGE>
RISK FACTORS
The Amendments involve certain risks and other adverse factors. Limited
partners are urged to read this solicitation statement in its entirety,
including all appendices and supplements hereto, and should consider carefully
the following factors in determining whether to vote against one or more of the
Amendments, as well as whether to object to the settlement in court as part of
the fairness hearing scheduled for November 16, 1999.[tentative] The Amendments
involve certain risks and other adverse factors. Limited partners are urged to
read this solicitation statement in its entirety, including all appendices and
supplements hereto, and should consider carefully the following factors in
determining whether to vote against one or more of the Amendments, as well as
whether to object to the settlement in court as part of the fairness hearing
scheduled for November 16, 1999.[tentative]
RISKS RELATING TO THE AMENDMENTS
Extending the Life of the Partnership Will Delay Payment of Distributions
to the Limited Partners Resulting from the Liquidation of the Partnership's
Equipment. Each limited partner's investment will change from an ownership
interest in a partnership whose Partnership Agreement contemplates that it
liquidate its assets before approximately January 1, 2001 (and whose General
Partner's business model contemplates doing so by approximately January 1, 2002)
and shortly thereafter to wind up the affairs of the Partnership and distribute
all remaining funds, after providing for Partnership obligations, to the limited
partners, to one that will, consistent with the General Partner's fiduciary
duties, liquidate its equipment before January 1, 2007 and shortly thereafter
wind up the affairs of the Partnership and after providing for Partnership
obligations, distribute all remaining funds to the limited partners. Therefore,
as a result of the Amendments it is anticipated that limited partners will not
receive final distributions from the liquidation and dissolution of the
Partnership until approximately 6 years later than contemplated by the
Partnership Agreement and 5 years later than contemplated by the General
Partner's business model.
Cash Used to Fund the Repurchase Could Limit Distributions to Limited
Partners. In order to fund the Repurchase, the Partnership may have to use cash
which would otherwise be available for distributions to the limited partners or
for reinvestment in equipment.
Cash Used to Fund the Front-End Fees Could Limit Distributions to Limited
Partners. Part of the equitable settlement includes increasing by 20% the
current limitation on the Front-End Fees which can be paid by the Partnership to
the General Partner. Any amounts paid to the General Partner for equipment
acquisition and lease negotiation services as a result of the Front-End Fee
increase will be unavailable for distributions to limited partners or for
reinvestment in equipment. Furthermore, the aggregate amount paid to the General
Partner as a result of the Front-End Fee increase could offset any benefits to
the Partnership resulting from IMI deferring (or even not receiving) 25% of the
Management Fee. During the time frame when IMI defers receiving 25% of the
Management Fee, the Partnership will retain the deferred fees and may reinvest
them in equipment, deposit them in interest bearing accounts, or do both. The
Partnership's return on those investments, or even the Partnership's savings if
it does not pay IMI any of the deferred portion of the Management Fee (if IMI
does not achieve the stipulated performance target) may be less than the amount
of Front-End Fees payable to the General Partner as a result of the increase in
the limitation on those fees.
The Affirmative Vote of Majority in Interest is Not Required to Bind all
Limited Partners. Pursuant to the court's order preliminarily approving the
settlement stipulation and subject to the final court approval, the Amendments
will be effective unless limited partners holding 50% or more of the units vote
against one or more of the Amendments. If the Amendments were not subject to a
judicial determination and court order following the fairness hearing, the
Amendment could be effected only by obtaining the affirmative approval of
limited partners holding not less than a majority of the units. See " VOTING
PROCEDURES."
The Potential Acceleration in Paying Either the Deferred Portion of the
Management Fee and Some of Class Counsel's Fees Could Deter a Change of Control.
The IRR Protocol provides that the portion of the Management Fee (25%) which
will be deferred, as well as the Equitable Class Fee and Expense Award, will be
payable in a lump sum in the event the limited partners approve a roll-up
transaction or more than 50% of the units in the Partnership are tendered in
response to a registered tender offer (both a "Change of Control"), but only if
the General Partner and Class Counsel agree that the stipulated performance
targets described in the IRR Protocol would have been attained absent the Change
of Control. Without a Change of Control, such fees would be paid over time,
subject to the conditions described in the IRR Protocol being met with funds
available for distribution to the unitholders. These provisions could have the
effect of deterring a roll-up transaction or a tender offer. See "IRR PROTOCOL,"
"CONFLICTS OF INTEREST - Conflict of Interest of Class Counsel," and "- Conflict
of Interest of General Partner."
ONGOING RISKS RELATING TO THE PARTNERSHIPS
Throughout the Extension, the operation of the Partnership will continue
to be subject to risks similar to those that were present at the time limited
partners purchased their units, the most important of which are discussed below.
Others are set forth in the Prospectus for the Partnership, copies of which are
available from the General Partner.
Equipment Leasing Business. The success of the Partnership during the
Extension will depend, in part, upon the availability of equipment that fits
within the investment objectives of the Partnership, the quality of the
equipment, the timing of equipment purchases, the terms of any leases to which
the equipment will be subject and the credit quality of the lessees. Equipment
leasing is subject to the risk of technological and economic obsolescence and
the risks associated with the inability to lease the equipment and the defaults
of lessees. A Partnership may acquire items of equipment for which it does not
have a lease commitment. There can be no assurance that there will be a demand
for each item of equipment from a commercially acceptable lessee. Therefore, it
is possible that items of equipment may be acquired which do not generate any
rental revenues for a Partnership. Moreover, while the General Partner will
investigate prospective lessees to ascertain whether they will be able to meet
their obligations under proposed leases, there is no assurance that a lessee
will actually meet its obligations under a lease.
Equipment Operations. Equipment ownership and operation is a business
and, like any business, is dependent upon maintaining acceptable levels of
income and operating expense. The principal business risk associated with
equipment ownership and operation is the possible inability to keep all the
equipment under leases yielding revenues which, after payment of operating
expenses, provide, together with any anticipated sale proceeds, a return
acceptable to the equipment owner. The ability to achieve this result may be
adversely affected by the economic and business factors to which the
transportation industry in general, and the equipment leasing industry in
particular, are subject. Most of these factors are beyond the control of the
General Partner, IMI and the lessees of the equipment, and include:
o general economic conditions such as inflation, fluctuations in general
business conditions and availability of financing;
o fluctuations in supply and demand for various types of equipment
resulting from, among other things, obsolescence, changes in the methods
or economics of a particular mode of transportation or changes in
governmental regulations or safety standards;
o increases in maintenance expenses, taxes, insurance costs and management
fees attributable to the equipment, which cannot be offset by increased
revenues from the equipment;
o the risk of an uninsured loss with respect to the equipment or an insured
loss for which insurance proceeds are inadequate, resulting in a possible
loss of invested capital in and any profits anticipated from such
equipment;
o the effects of strikes and other labor disputes on a Partnership's
acquisition of equipment, the lessees of equipment and the transportation
industry generally;
o bankruptcies, contract disputes or defaults in payment by lessees of the
equipment resulting in uncollectible accounts;
o the risk of foreign expropriation of, or damage to, equipment used on the
high seas and in foreign countries, such as certain marine vessels, cargo
containers, and aircraft; and
o loss of revenues during periods when the equipment is not being utilized.
Equipment Leases. Equipment leases may be categorized into two general
types: (1) short- and mid-term leases under which the lessor normally will
receive aggregate rental payments in an amount that is less than the lessor's
purchase price of the equipment (referred to as operating leases) and (2)
long-term leases under which the noncancellable rental payments due during the
initial term of the lease are sufficient to recover the investment in such
equipment and to provide a return on such investment (commonly known as full
payout net leases). It is presently contemplated that each Partnership will
continue to invest primarily in equipment which will be subject to operating
leases. Because operating leases are for terms insufficient to recover the
purchase price of the subject equipment, in order to recover a Partnership's
investment in such equipment, the Partnership will, on termination of an
operating lease, either have to obtain a renewal from the original lessee, find
a new lessee or sell the equipment. There can be no assurance that there will be
either demand for the equipment from commercially acceptable lessees on
commercially acceptable terms, or purchasers for the equipment at the
termination of an operating lease. Failure to renew leases, to enter into
subsequent leases or to sell the equipment after the expiration of the initial
term of an operating lease may result in the loss of anticipated revenues and
the inability to recover the Partnership's investment in the equipment. The
risks associated with operating leases are magnified with respect to short-term
operating leases. In connection with operating leases, the Partnership may
encounter considerable competition from other lessors offering full payout net
leases. While some lessees prefer the flexibility offered by a shorter term
operating lease, other lessees prefer the longer term and lower rate possible
with a full payout net lease. Competitors of the Partnership may write full
payout net leases at lower rates, or larger competitors with a lower cost of
capital may offer operating leases at lower rates, and as a result, assuming the
same acquisition costs of equipment, a Partnership may be at a competitive
disadvantage.
Consequences of Government Regulation. The use, maintenance and ownership
of certain types of equipment are regulated by federal, state and/or local
authorities which may impose restrictions and financial burdens on the
Partnership's ownership and operation of equipment and, accordingly, affect the
profitability of the Partnership. Changes in government regulations or industry
standards, or deregulation, may also affect the ownership, operation and resale
of equipment. In addition, certain types of equipment (such as railcars,
aircraft and vessels) are subject to extensive safety and operating regulations
by governmental agencies and/or industry organizations. Such agencies or
organizations may require modifications or capital improvements to items of
equipment which may result in the removal of such equipment from service for a
period of time. If the Partnership, due to insufficient funds, was unable to
make a required improvement or modification, it might be required to sell the
affected item of equipment or to sell other items of equipment owned by it in
order to obtain the necessary funds; in either event, the Partnership might
sustain a loss on its investment in the items sold and might lose future
revenues, and the limited partners might experience adverse tax consequences.
Residual Value of Equipment. The ultimate cash return from an investment
in units (without giving effect to any tax savings) will depend in part upon the
continuing value (either for sale or continued operation) of the equipment,
which in turn depends on, among other factors, the condition of the equipment,
the cost of comparable new equipment, the technological obsolescence of the
equipment and supply and demand regarding the equipment. Some of these factors
are not within the control of the General Partner.
Risk of Loss of Equipment Registration. Aircraft and marine vessels which
may be acquired by the Partnership are subject to certain registration
requirements. Registration with the Federal Aviation Association or its foreign
equivalent may be required for the operation of aircraft within the United
States or foreign countries. Similarly, certain types of marine vessels must be
registered with the appropriate governmental bodies prior to operation and
rolling stock and over-the-road vehicles may be subject to registration
requirements. Failure to register or loss of such registration for these types
of equipment could result in substantial penalties, the premature sale of such
equipment and the inability to operate and lease such equipment.
INVESTMENT RISKS
Liability of Limited Partners. The principles of law governing the
limitation of liability of limited partners in a limited partnership have not
been authoritatively established as to partnerships organized under the laws of
one jurisdiction but operating or owning property, incurring obligations, or
having partners resident in other jurisdictions. The Partnership is governed by
the California Revised Limited Partnership Act (the "Revised Act"), which
provides that the exercise by limited partners of certain rights relating to the
internal affairs or organization of a partnership (such as, for example, a right
to vote on the removal of a general partner or on the dissolution of the
partnership) does not have the effect of subjecting the limited partners to
liability as general partners.
A substantial number of states have adopted legislation which includes a
section comparable to that provision of the Revised Act which provides that the
laws of the state under which a foreign limited partnership is organized govern
its organization and internal affairs and the liability of its partners.
Accordingly, in such states, the limitation of liability of limited partners
provided by the Revised Act should be respected. In those jurisdictions which
have not adopted similar legislative provisions, the General Partner believes
that strong arguments may be made in support of the conclusion that California
law should govern as to the liability of limited partners and that neither the
possession nor the exercise of such rights should affect the limited liability
of limited partners; however, since there is no authoritative precedent on this
issue, a question exists as to whether the exercise (or perhaps even the
existence) of such rights might provide a basis for a court in such a
jurisdiction to hold that the limited partners are not entitled to the
limitation of liability provided by the Partnership Agreement and California
law.
Return of Distributions. In accordance with the Revised Act, limited
partners will be obligated to return any distribution from the Partnership to
the extent that, after giving effect to the distribution, all liabilities of the
Partnership (other than nonrecourse liabilities and liabilities to limited
partners on account of their interest in the Partnership) exceed the fair value
of their assets (including, as to assets serving as security for nonrecourse
liabilities, that portion of the fair value of such assets which exceeds the
amount of such nonrecourse liabilities).
Limited Transferability of Units. The units cannot be transferred without
the consent of the General Partner which may be withheld in its absolute
discretion. The General Partner intends to limit transfers so that they do not
exceed the number of transfers permitted by one of the safe harbors available
under IRS Notice 88-75 for the period prior to January 1, 2006, and the Treasury
Regulations under Section 7704, thereafter, which were issued to furnish
guidance regarding the publicly traded partnership rules of Section 7704 of the
Internal Revenue Code. Generally, this safe harbor requires all nonexempt
transfers and redemptions of units in any calendar year not to exceed 5% (2%
after December 31, 2005) of the outstanding interest in the capital or profits
of a Partnership. Therefore, unitholders may not be able to liquidate their
investments in the event of an emergency. Moreover, the units may not be readily
acceptable as collateral for a loan.
Risks of Joint Investments. The Partnership may participate on a
co-tenancy or partnership basis in investments in certain types of equipment,
the purchase prices of which are substantial. The investment by a Partnership in
a venture which owns equipment may, under certain circumstances, involve risks
not otherwise present if the Partnership were the sole owner of the equipment,
including, for example, risks associated with the possibility that the
Partnership's co-investors might become bankrupt, that such co-investors may at
any time have economic or business interests or goals which are inconsistent
with those of the Partnership, or that such co-investor may be in a position to
take action contrary to the instructions or the requests of the Partnership or
contrary to the Partnership's policies or objectives. Among other things,
actions by such a co-investor might have the result of subjecting equipment
owned by the venture to liabilities in excess of those contemplated by the
Partnership or might have other adverse consequences for the Partnership.
Inasmuch as no one of the co-investors may control the venture, there will be a
potential risk of impasse on decisions, including a proposed sale of the
equipment, and, although it is anticipated that each co-investor (including the
Partnership) will have a right of first refusal should one or more of the other
co-investors desire to sell equipment owned by the venture, the Partnership may
not have the resources to purchase such equipment.
Reliance on General Partner and Conflicts of Interest. All decisions with
respect to management of the Partnership, including the determination as to
which equipment to acquire, will continue to be made exclusively by the General
Partner and its affiliates. The future success of the Partnership, to a large
extent, will depend on the quality of its management, particularly as it relates
to equipment acquisition, releasing and disposition. Limited partners are not
permitted to take part in the management of the Partnership. The interests of
limited partners may be inconsistent in some respects with the interest of the
General Partner and its affiliates.
TAX RISKS
Federal Tax Considerations in General. A ruling from the IRS has not been
obtained, and the General Partner does not presently intend to apply for a
ruling, with respect to any of the tax considerations associated with an
investment in units. It should be noted that the determination of items of
Partnership income, gain, loss, deduction and credit will be made at the
Partnership level rather than in separate proceedings with unitholders, and
unitholders generally will be required to report Partnership items consistent
with the Partnership's tax returns. Any adjustment to a tax return of the
Partnership as a result of an audit by the Service would also result in
adjustment to the tax returns of the unitholders, and may result in an
examination of other items in such returns unrelated to the Partnership, or an
examination of prior years' tax returns. Unitholders could incur substantial
legal and accounting costs in contesting any challenge by the IRS, regardless of
the outcome. For any year in which the Partnership has income in excess of
deductions, each unitholder will be required to report his, her or its share of
such income on his federal and state tax returns and will be responsible for the
payment of taxes thereon. Such taxes might in some cases be greater than cash
distributions received by the unitholder from a Partnership for the year.
Partnership Status. The General Partner has not requested, and does no
intend to request, a ruling from the Service that the Partnership will be
treated as a partnership and not as an "association" taxable as a corporation.
In the absence of a ruling, there can be no assurance that a Partnership will
not constitute an association taxable as a corporation. In this regard, the IRS
may successfully contend that the Partnership should be deemed a publicly traded
partnership that is treated as a corporation for federal income tax purposes
rather than as a partnership. In such event, substantially all of the possible
tax benefits (primarily non-taxation of the Partnership and a passthrough to
investors of all income and losses) of an investment in the Partnership could be
eliminated. If the Partnership were treated as a publicly treated partnership,
the following results would occur: (a) the Partnership would be taxed at income
tax rates applicable to corporations; (b) distributions to the unitholders would
be taxable to them as dividend income to the extent of current and accumulated
earnings and profits. In order to minimize the possibility of PTP treatment for
the Partnership, the Partnership Agreement provides for restrictions on
transfers of units by incorporating certain "safe harbor" tests specified in the
applicable tax authorities.
Partnership Allocations. If the allocations of Partnership profit and
loss to the unitholders made pursuant to the Partnership Agreement are
successfully challenged by the IRS, unitholders may be required to recognize
additional taxable income without any corresponding increase in distributions of
cash from the Partnership.
Passive Activity Loss Limitations. Unitholders may not be able currently
to deduct Partnership tax losses as a result of limitations on the current
utilization of passive activity losses.
Sale or Other Disposition of Equipment or Units -- Tax Liability. A sale
or other disposition of equipment or the disposition of a unitholder's interest
in the Partnership may result in a tax liability to the unitholder in excess of
any cash proceeds received by such unitholder. To the extent a unitholder's
federal tax liabilities exceed cash proceeds, such excess would be a
nondeductible cost to such unitholder.
Reliance on Existing Law. Tax benefits associated with an investment in
units could be lost and/or substantial tax liabilities incurred by reason of
changes in the tax laws. There is no assurance that changes in the
interpretation of applicable tax laws will not be made by administrative or
judicial action which will adversely affect the tax consequences of an
investment in units. Administrative or judicial changes may or may not be
retroactive with respect to transactions entered into prior to the date on which
they occur. Periodic consultations with an investor's professional advisor may
be necessary given the possibility of such changes.
CONFLICTS OF INTEREST
Conflict of Interest of General Partner. The General Partner initiated
and participated in the structuring of the Amendments and has the following
conflicts of interest with respect to their effect:
(A) As part of the Amendments, the limitation on Front-End Fees that can
be paid to the General Partner by the Partnership will be increased by 20%, so
that the General Partner can earn such fees up to 20% in excess of the amount
proscribed in the Statement of Policy of the North American Securities
Administrators Association, Inc. effective as of January 1, 1999.
(B) The General Partner will earn Front-End Fees for approximately 5
additional years as a result of the extension of the Reinvestment Period. The
only Front-End Fees that will be earned by the General Partner during the
Reinvestment Period, except for reimbursable expenses relating to equipment
acquisition and leasing, are equipment acquisition and lease negotiation fees;
during the period 1996 through 1998 the Partnership paid the General Partner on
average equipment acquisition and lease negotiation fees of $894,450 per year.
(C) IMI, an affiliate of the General Partner, will earn Management Fees
for approximately 6 additional years than is contemplated by the Partnership
Agreement and approximately 5 additional years than is contemplated by the
General Partner's business model. Additionally, the ability to reinvest from the
date of approval of the Amendments through December 31, 2004 will result in the
level of Management Fees not decreasing at as great a rate as they likely would
otherwise, since Management Fees are based upon gross lease revenues which
likely would decrease more quickly during those years in the absence of
reinvestment in equipment. During the period 1996 through 1998 the Partnership
paid IMI on average Management Fees of $1,683,200 per year.
(D) If any portion of the Management Fee has been deferred at the time a
Change of Control occurs, the deferred portion may be payable in a lump sum if
the General Partner and Class Counsel agree that the stipulated performance
target described in the IRR Protocol would have been attained absent the Change
of Control.
See "CONFLICTS OF INTEREST - Conflict of Interest of General Partner,"
"COMPENSATION TO THE GENERAL PARTNER AND ITS AFFILIATES" and "IRR PROTOCOL," for
a fuller discussion.
Class Counsel. In assessing Class Counsel's support of the equitable
settlement of which the proposed Amendments form an integral part, limited
partners should consider that Class Counsel may be deemed to have a conflict of
interest with respect to such support. In particular, the fees and expenses of
Class Counsel, if approved by the court, will be paid in part from the cash
settlement fund provided by the defendants pursuant to the monetary settlement.
In addition, as part of the equitable settlement, Class Counsel will apply for
the Equitable Class Fee and Expense Award which will be paid by the equitable
settlement class Members and not by the defendants. The Equitable Class Fee and
Expense Award will be payable in a lump sum in the event of a Change of Control
if the General Partner and Class Counsel agree that the stipulated performance
target described in the IRR Protocol would have been attained absent the Change
of Control. See "CONFLICTS OF INTEREST - Conflict of Interest of Class Counsel"
and "IRR PROTOCOL."
<PAGE>
BACKGROUND, BENEFITS OF, AND REASONS FOR, THE AMENDMENTS
DESCRIPTION OF THE LITIGATION
PLM International, Inc., IMI, the General Partner and two subsidiaries
of the General Partner are named as defendants in the litigation, a lawsuit
filed as a purported class action on January 22, 1997 in the Circuit Court of
Mobile County, Mobile, Alabama, Case No. CV-97-251). Plaintiffs, who filed the
complaint on their own and on behalf of all class members similarly situated,
are six individuals who invested in the Partnerships, for which the General
Partner acts as the general partner. The complaint asserts eight causes of
action against all defendants, as follows: fraud and deceit, suppression,
negligent misrepresentation and suppression, intentional breach of fiduciary
duty, negligent breach of fiduciary duty, unjust enrichment, conversion, and
conspiracy. Additionally, plaintiffs allege a cause of action against PLM
Securities Corp. for breach of third party beneficiary contracts in violation of
the National Association of Securities Dealers rules of fair practice.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, and
control persons. Based on these duties, plaintiffs assert liability against
defendants for improper sales and marketing practices, mismanagement of the
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 litigation from the Alabama
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 United
States District Court's diversity jurisdiction, following which plaintiffs filed
a motion to remand the action back to the Alabama state court. Removal of the
action to federal court automatically nullified the Alabama state court's ex
parte certification of the class. In September 1997, the court denied
plaintiffs' motion to remand the action to Alabama state court and dismissed
without prejudice the individual claims of the California plaintiff, reasoning
that he had been fraudulently joined as a plaintiff. In October 1997, defendants
filed a motion to compel arbitration of plaintiffs' claims, based on an
agreement to arbitrate contained in the Partnership Agreement of each
Partnership, and to stay further proceedings pending the outcome of such
arbitration. Notwithstanding plaintiffs' opposition, the court granted
defendants' motion in December 1997.
On June 5, 1997, the defendants were sued in another purported class
action filed in the San Francisco Superior Court, San Francisco, California,
Case No. 987062 (the "Romei Action"). The plaintiff in the Romei Action (the
"Romei Plaintiff") is an investor in Fund V, and filed the complaint on her own
behalf and on behalf of all class members similarly situated who invested in
certain California limited partnerships for which the General Partner acts as
the general partner, including the Partnerships. That complaint alleges the same
facts and the same nine causes of action as in the litigation, plus five
additional causes of action against all of the defendants, as follows:
violations of California Business and Professions Code Section 17200, et seq.
for alleged unfair and deceptive practices, constructive fraud, unjust
enrichment, violations of California Corporations Code Section 1507, and a claim
for treble damages under California Civil Code Section 3345.
On July 31, 1997, defendants filed with the United States District
Court for the Northern District of California (the "California federal court")
(Case No. C-97-2847 WHO) a petition under the Federal Arbitration Act seeking to
compel arbitration of the Romei Plaintiff's claims and for an order staying the
California state court proceedings pending the outcome of the arbitration. In
connection with this motion, the Romei Plaintiff agreed to a stay of the
California state court action pending the California federal court's decision on
the petition. In October 1997, the California federal court denied the petition,
but in November 1997, agreed to hear the General Partner's motion for
reconsideration of this order. The hearing on this motion has been taken off
calendar and the California federal court has dismissed the petition pending
settlement of the Romei Action. The California state court action continues to
be stayed pending such resolution. In connection with her opposition to the
petition, the Romei Plaintiff filed an amended complaint with the California
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 litigation and Romei Action entered into
a memorandum of understanding related to the settlement of those actions (the
monetary settlement). The monetary settlement provides for the certification of
a class for settlement purposes, and the settlement and release of all claims
against defendants and third party brokers in exchange for payment for the
benefit of the monetary class of up to $6,000,000. The final settlement amount
will depend on the number of claims filed by authorized claimants who are
members of the monetary class, the amount of the administrative costs incurred
in connection with the settlement, and the amount of attorneys' fees awarded by
the court. The General Partner will pay up to $300,000 of the monetary
settlement, with the remainder being funded by an insurance policy.
The parties to the monetary settlement have also agreed to an equitable
settlement described herein. Defendants continue to deny each of the claims and
contentions and admit no liability in connection with the proposed settlement.
The General Partner continues to believe that the allegations contained in the
litigation and Romei Action are completely without merit, and intends to
continue to defend this matter vigorously if the monetary settlement is not
consummated.
THE SETTLEMENT
On February 9, 1999, Class Counsel and the defendants entered into the
settlement stipulation, which was preliminarily approved by order of the court
dated June 29, 1999.
The order:
(a) certified two classes for settlement purposes - one pursuant to Rule
23(b)(3) of the Federal Rules of Civil Procedure for monetary relief and the
other pursuant to Rule 23(b)(1) and (2) for equitable relief;
(b) approved the form of equitable notice and directed that it be sent,
along with this solicitation statement, to the applicable equitable class
members subsequent to the filing and clearance of the solicitation statement
with the Securities and Exchange Commission; and
(c) scheduled a date for the fairness hearing at which all class members
will have an opportunity to be heard.
The monetary class members consist of, among others, all persons who
between May 23, 1989 and June 29, 1999 purchased units in the Partnerships and
Fund IV, regardless of whether they currently hold units. The equitable class
members consist of, among others, all unitholders in the Partnerships as of June
29, 1999. There is substantial overlap between the two classes and they are not
mutually exclusive. Accordingly, everyone who is a member of the equitable class
will also be a member of the monetary class. However, not all monetary class
members will be equitable class members because they were not unitholders of a
Partnership as of June 29, 1999. If a person who is a member of both the
equitable class and monetary class opts out of the monetary class, he or she may
still be permitted to pursue a claim for money damages notwithstanding the fact
that he or she remains a member of the equitable class. Conversely, a person who
is a member of both the equitable class and the monetary class will be able to
object to the equitable settlement in court and, if he or she is also a limited
partner, to vote against the equitable settlement by voting against one or more
of the Amendments in response to this solicitation statement, while still
participating in the monetary settlement by not opting out. However, equitable
class members whose Partnership participates in the equitable settlement --
i.e., where less than 50% of the units held by limited partners of such
Partnership vote against the Amendments -- may not opt out of the equitable
class. They may, however, object to the equitable settlement in court at the
fairness hearing.
Summary of Settlement. The settlement is comprised of two parts, the
monetary settlement, which involves the Partnerships and Fund IV, and the
equitable settlement in which only the Partnerships (but not Fund IV) may
participate, as more fully set forth in the accompanying two separate notices of
the equitable and monetary settlements. The monetary settlement in part requires
defendants to pay up to $6,000,000 in settlement of the monetary class claims.
The $6,000,000 was deposited into a settlement account on July 21, 1999.
Monetary class members who properly file claims with the settlement
administrator will be paid in accordance with a plan of allocation that was
formulated by Class Counsel and is to be considered for final approval by the
court. The equitable settlement in part extends the Reinvestment Period,
permitting the General Partner to reinvest cash flow, surplus Partnership funds
or retained proceeds of the Partnership in equipment into the year 2004, and
then the General Partner will liquidate the equipment assets of the Partnership
by approximately January 1, 2007.
Effect on Rights of Limited Partners. The settlement will result in the
full and complete settlement, discharge and release of the claims by class
members against the General Partner and the other defendants and others in
connection with or which arise out of the allegations made in the litigation.
Each Class Member who does not opt out of the monetary settlement will be
restrained from commencing or prosecuting any claims settled and released as
part of the monetary settlement.
Right to Terminate. The defendants may, at their sole discretion,
terminate either the monetary or equitable settlements if requests for exclusion
from the monetary class, or the percentage of limited partner votes against the
Amendments (in the equitable settlement), reach certain pre-determined levels.
Approval Procedure for the Equitable Settlement. Approval of the
equitable settlement, including the Amendments, is in the sole discretion of the
court. The equitable settlement provides that, assuming certain other conditions
are met, the Partnership Agreement will be amended to give effect to the
Amendments unless limited partners holding 50% or more of the units in such
Partnership vote against one or more of the Amendments. Limited partners have
until _________________, 1999 to vote against one or more of the Amendments.
Thus, this Partnership will participate in the equitable settlement if:
1. limited partners holding less than 50% of the units of a given
Partnership vote against the Amendments;
2. the court approves of the Partnership being included in the equitable
settlement; and
3.the other terms and conditions of the settlement stipulation are
satisfied or waived.
Under the Partnership Agreement, if the Amendments were not subject to a
judicial determination and court order following the fairness hearing (as
provided for in the settlement stipulation), the Amendments could only be
effected by obtaining the approval of the limited partners holding not less than
a majority of the units.
In addition to a limited partner's right in the equitable settlement to
vote against the Amendments by delivery of a No Vote pursuant to this
solicitation statement, a limited partner may object in court to the monetary or
equitable settlements by following the procedures set forth in the monetary or
equitable notices which accompany this solicitation statement.
CLASS COUNSEL
Class Counsel consists of law firms located throughout the United States,
each of which is unaffiliated with the General Partner. Such firms were selected
by the individual plaintiffs who commenced or intervened in the litigation, all
of whom are limited partners, to represent and act on behalf of other limited
partners and unitholders in the litigation, including settlement of the
litigation. Class Counsel are coordinated by Michael E. Criden of the law firm
of Hanzman, Criden, Chaykin, Ponce and Heise in Miami, Florida.
Each of plaintiffs' law firms is experienced in representing investors in
securities and limited partnership class action litigation, and each has
represented investors in complex settlement negotiations resulting in a variety
of settlement transactions. Class Counsel investigated the claims asserted
against the defendants in the litigation, conducted discovery, including the
review of numerous documents, and conducted extensive negotiations with the
General Partner resulting in the settlement.
Class Counsel may be deemed to have a conflict of interest in their
support of the equitable settlement, of which the proposed Amendments form an
integral part, because Class Counsel intends to apply to the court for an award
of fees and reimbursement of expenses. See "CONFLICTS OF INTEREST - Conflict of
Interest of Class Counsel." Class Counsel's fee application are subject to the
approval of the court.
PROVISIONS OF THE AMENDMENTS
The Amendments, if approved by the court and the limited partners, will
consist of five material components, each described below:
o The extension of the Reinvestment Period by approximately 5 years;
o The extension, until approximately January 1, 2007, of the date by which
the General Partner anticipates that all of the Partnership's equipment
will be liquidated, which is 6 years beyond what is contemplated by the
Partnership Agreement and 5 years beyond what is contemplated by the
General Partner's business model;
o The 2 1/2year deferral of 25% of IMI's receipt of the Management Fee
pending the achievement of certain performance levels by the Partnership;
o The offer of the Partnership to repurchase up to ten percent of its
units; and
o An increase by 20% in the limitation on Front-End Fees that the General
Partner can earn for providing services to the Partnership.
THE EXTENSION OF THE REINVESTMENT PERIOD
The Reinvestment Period will be extended, permitting the General Partner
to reinvest cash flow, surplus funds or retained proceeds in equipment into the
year 2004.
THE EXTENSION
The Partnership Agreement contemplates that the Partnership's equipment
will be liquidated by approximately January 1, 2001 and the General Partner's
business model contemplates it will be liquidated by approximately January 1,
2002. The Amendments will extend that date until January 1, 2007.
THE MANAGEMENT FEE DEFERRAL
Commencing January 1, 2002 and continuing for 2 1/2 years, IMI, a
subsidiary of the General Partner, will defer receipt of 25% of the Management
Fee it would otherwise be entitled to receive from the Partnership pursuant to
the Partnership Agreement. For 1998, IMI was paid a Management Fee of
$1,499,800.
The time period over which IMI agrees to defer receipt of 25% of the
Management Fee will end June 30, 2004. The deferred portion of the Management
Fee will be accrued by IMI during the that period, and will not be earned or
paid to IMI unless the IRR for the Partnership after January 1, 1999 equals or
exceeds the stipulated performance target described in the IRR Protocol.
IMI's right to be paid the deferred portion of the Management Fee will be
determined by the General Partner pursuant to the IRR Protocol, and payment
shall commence immediately upon the General Partner's determination that the
Partnership has reached the stipulated performance target described in the IRR
Protocol, subject to review by Class Counsel. The deferred portion of the
Management Fee will be paid to IMI from any additional cash flow of the
Partnership until the deferred portion of the Management Fee is paid in full. If
the stipulated performance target is not attained, the deferred portion of the
Management Fee will not be paid to IMI. See "IRR PROTOCOL."
THE REPURCHASE
The equitable settlement provides that the Partnership will offer to
repurchase from unitholders up to 10% of the total outstanding units as of June
29, 1999. Any equitable class member intending to submit for repurchase some or
all of his, her or its units shall indicate this intention on the repurchase
request that they receive along with the equitable notice and this solicitation
statement. The repurchase price for each unit shall be determined as follows:
the net asset value of the Partnership (the value of all equipment owned by the
Partnership as determined by the General Partner as of the fiscal quarter
immediately preceding the repurchase date, plus any cash, uncollected
receivables and any other assets, less accounts payable, debts and other
liabilities of the Partnership as of the same date) will be divided by the
number of outstanding units to determine the net asset value per unit. The net
asset value per unit will be multiplied by 80% to determine the repurchase price
per unit. The repurchase of units will be completed not later than the end of
the first fiscal quarter after final court approval of the settlement.
If the eligible class members request that the Partnership repurchase
more than 10% of its outstanding units, the Partnership will repurchase up to
10% of the outstanding units pro rata within certain groups of established
priorities based on the number of units offered for repurchase in each such
group, or as close to a pro rata basis as is reasonably possible. Any such pro
rata allocation adjustment will be determined by the claims administrator,
giving first priority to units owned by estates, IRAs and qualified plans, in
that order, and which were purchased in the initial offering. In the event that
the total number of units requested by eligible class members to be repurchased
exceed 10% of that Partnership's outstanding units, the General Partner will
have the option, but not the obligation, to purchase these excess units with its
own monies and on its own behalf.
THE FRONT-END FEE INCREASE
The Partnership Agreement sets limitations on the Front-End Fees that
can be paid to the General Partner. These limitations are consistent with the
compensatory limits set forth in the Statement of Policy of the North American
Security Administrators Association, Inc. ("NASAA"). As part of the Amendments,
the limitations on the Front-End Fee payments will be increased by 20%,
effective January 1, 1999, to allow the General Partner to earn fees in excess
of those currently available. Front-End Fees include equipment acquisition fees
and lease negotiation fees, which, except for reimbursable expenses relating to
equipment acquisition and leasing, are the only two categories of Front-End Fees
that the General Partner will earn after January 1, 1999. The Front-End Fee
increase is intended to compensate the General Partner for supervising the
acquisition of Partnership equipment and arranging deliveries of equipment, and
for negotiating arrangements for the initial use of the equipment on behalf of
the Partnership during the Reinvestment Period. During 1996-1998, the
Partnership paid the General Partner equipment acquisition and lease negotiation
fees averaging $894,450 per year. The General Partner will earn the equipment
acquisition and lease negotiation fees pursuant to the formulas already in place
in the Partnership Agreement, except that, to the extent such fees otherwise
would have been capped due to the NASAA limitations, the General Partner will be
entitled to earn fees up to 20% in excess of such limitations. The General
Partner will not be entitled to any Front-End Fees within such increased
limitation which are not earned, and it is likely that the General Partner will
not earn the full 20% increase in the limitation on the Front-End Fees.
COMPARISON OF EXTENDING THE REINVESTMENT PERIOD AND THE EXTENSION (AND THE
BENEFITS THEREOF) TO TERMINATION OF REINVESTMENT AND LIQUIDATION AS SCHEDULED
The Amendments are being proposed by the General Partner in connection
with the equitable settlement and pursuant to the settlement stipulation. The
structure, terms and conditions of the Amendments have been negotiated at arm's
length with Class Counsel acting on behalf of the equitable class. The General
Partner is recommending that the limited partners not vote against the
Amendments because it believes, for the reasons set forth below, that extending
the Reinvestment Period is in the best interests of the limited partners.
To date, the Partnership has acquired and operated transportation
equipment to generate cash flow to pay the expenses and obligations of the
Partnership and to make distributions to the limited partners with any remaining
cash flow. The General Partner stopped reinvesting proceeds from the sale of
equipment in 1998 (except for certain contractually mandated capital
modifications), and the Partnership has entered the holding phase of its life.
During the holding phase, the General Partner is permitted to continue leasing
equipment under existing leases, to enter into new leases, or to sell equipment.
Once equipment is sold during the holding phase, the proceeds may be used to
repay Partnership debt, to maintain an appropriate level of working capital
reserves, and to make distributions to limited partners. The proceeds cannot be
reinvested in additional equipment, however. The holding phase will be followed
by the liquidation phase, when the General Partner will undertake the orderly
and businesslike liquidation of the equipment and will begin to wind up the
affairs of, and liquidate, the Partnership. The General Partner's business model
contemplates that the Partnership's equipment will be liquidated by
approximately January 1, 2002 and the Partnership Agreement contemplates that it
will be liquidated by approximately January 1, 2001.
In reviewing the Partnership's portfolio and in connection with the
litigation, the General Partner analyzed the continued operation and liquidation
of the Partnership substantially in accordance with the timetable described
above. As a result of the review, the General Partner concluded that much of the
equipment will have future cash flow generating potential from continued rentals
and eventual sales proceeds and that the present value thereof will exceed the
present value of continued rentals and the sales proceeds of that same equipment
based upon the expected liquidation date. Much of this equipment, because of its
age and/or operating characteristics, is not expected to experience significant
reductions in its estimated fair market value through the Extension, yet this
same equipment can be leased to third-party users at rental rates only slightly
lower than those commanded by similar equipment (notwithstanding higher
maintenance and repair costs on older equipment, which is taken into account
when setting lease rates) that is newer and has a higher fair market value. The
General Partner believes that this equipment is ideally positioned to continue
to earn excellent returns for limited partners over the next five to seven years
when compared to its current fair market value, and that the fair market value
of the equipment will not materially decline either during the Reinvestment
Period (during which time it is anticipated to remain on lease or be re-leased),
or the Extension. The General Partner further believes that certain
underperforming assets can be sold and replaced with assets which it believes
can generate attractive returns over the next five to seven years. It should be
noted that the General Partner will be entitled to equipment acquisition and
lease negotiation fees when additional equipment is acquired and initially
leased out. See "CONFLICTS OF INTEREST - Conflict of Interest of the General
Partner."
It is important that the General Partner also have the ability to
continue to reinvest the proceeds from asset sales that occur during the
extended Reinvestment Period. Consistent with past practices, the General
Partner will from time to time identify for sale Partnership assets which are
underperforming, either because they are generating returns which are
unsatisfactory when compared with their fair market value, or because the
General Partner believes the cyclical market for that type of equipment is
expected to remain weak for an extended period of time.
The General Partner believes there are three primary reasons why such
reinvestment is advantageous to the Partnership:
1. The General Partner would be able to use its discretion to decide
whether to make capital improvements to Partnership equipment as a result of
regulatory requirements or otherwise. For example, there are instances where a
regulatory agency will require that certain capital improvements be made to a
type of equipment in order to keep the equipment operating in its intended
service, such as a government mandated capital improvement to modify railroad
cars to meet safety requirements or improvements to aircraft to comply with
noise restrictions. Capital improvements are treated as an investment in
equipment because they either add value to or extend the useful life of
equipment, as opposed to an expense item like equipment repair and maintenance
costs. The General Partner is generally not entitled to equipment acquisition
fees on the cost of capital improvements, other than on capital improvements
contemplated at the time equipment is purchased.
There are also instances where the General Partner needs to have
discretion to determine whether it should make nonregulatory capital
improvements to the Partnership's equipment in order to improve such equipment
when there is a clear economic benefit to do so. Examples include the
installation of roll up doors in certain trailers to enhance their utilization
and garner higher rental rates in the grocery and storage markets, and
converting certain tankcars from cars that can only carry anhydrous ammonia to
cars that can carry commodities earning a higher monthly rent, including
liquefied petroleum gases. It is important that the General Partner have the
ability to use its discretion to determine whether future similar capital
improvements should be made to enhance the economic value of the Partnership
equipment.
2. The General Partner has developed significant infrastructure (trailer
rental yards and railcar rental offices, both described below), and/or
relationships in equipment markets where the Partnership's older assets continue
to earn attractive returns. These markets include the short-term trailer rental
market, the railcar market and the maritime container market. Allowing the
Partnership to continue to invest in additional equipment in these markets will
allow the Partnership to benefit from this infrastructure and these
relationships.
For example, in the short term trailer rental market, the General Partner
has pursued a strategy designed to maximize value from the Partnership's aging
fleet of trailer equipment originally leased for terms of 3 to 5 years. The
General Partner has developed and controls twenty short-term rental yards
throughout the U.S. From these yards Partnership trailers can be leased to a
variety of customers taking advantage of both the lessee's willingness to pay a
materially higher short-term rate (which also compensates the Partnership for
off-lease time) versus the rate the same customer would have to pay for a
longer-term commitment, and the General Partner's belief that, at some point the
fair market value of a standard over-the-road trailer is not expected to
materially decrease while that same trailer can continue to be leased at
attractive rates. The General Partner believes that, given its trailer rental
infrastructure, the purchase of trailers during the extended Reinvestment Period
will enable the Partnership to take advantage of its infrastructure to generate
attractive yields for the limited partners.
Similarly, the General Partner has developed a substantial market
presence and name recognition in leasing railcars and maritime containers. The
General Partner believes that additional investments in these types of equipment
can benefit the Partnership because of their cash flow generating potential and
the General Partner's relationships with lessees. Furthermore, the General
Partner believes that these equipment types will not materially decrease in
value through the Extension. For example, railcars are initially leased out to
lessees under master lease agreements which establish the general terms and
conditions under which a lessee will subsequently enter into lease schedules
relating to particular railcars. Master leases are frequently the subject of
extensive negotiations between a lessor and a lessee, and, once in place,
facilitate the leasing of additional railcars from time to time by a lessee. The
General Partner believes that, if the Partnership can acquire additional
railcars, the Partnership will be able to benefit from both its market presence
and from the significant number of master leases it already has in place to rent
these additional railcars at favorable rates. Likewise, the Partnership's
containers are leased under utilization leases to third parties who then
sublease the containers to users under master lease agreements. The General
Partner believes that, if the Partnership can acquire additional containers, it
will be able to lease them under similar utilization leases offering attractive
returns to the Partnership.
3. During the extended Reinvestment Period some of the Partnership
equipment will be liquidated in the normal course of business, either due to
casualty losses or because the General Partner determines it is in the best
interests of the Partnership to do so. A portion of the Partnership's costs are
fixed and, if the sales proceeds from the sale of these assets are not
reinvested, the Partnership will have lower revenues while certain of its costs
remain static. In order to maximize the returns to the Partnership, it is
important that the Partnership maintain an optimal level of equipment and
revenue production to efficiently absorb these costs.
There is no assurance that the General Partner will be able to
successfully implement the actions described above as the equipment markets in
which it operates are subject to known and unknown risks, uncertainties and
other factors that may cause performance to be materially different from that
described above and also from historical achievements of the Partnership. See
"RISK FACTORS" AND "CONFLICTS OF INTEREST."
<PAGE>
COMPENSATION TO THE GENERAL PARTNER AND ITS AFFILIATES
Under the Partnership Agreement, the General Partner and its affiliates
are entitled to receive compensation in connection with managing the affairs of
the Partnership. Types of compensation include the Management Fee, equipment
acquisition fees, lease negotiation fees, certain other fees and reimbursement
of expenses.
The following table sets forth the historical compensation and
distributions paid by the Partnership to the General Partner and its affiliates
for the Partnership's last three fiscal years and for the six-month period ended
June 30, 1999 (historical) and the compensation and distributions that would
have been paid in the last three fiscal years and for the six-month period ended
June 30, 1999 if the Amendments had been in effect (pro forma). If the
Amendments are approved, the increased limitation on Front-End Fees will be
effective as of January 1, 1999. More complete financial information regarding
the Partnership is contained in its Form 10-K for the year ended December 31,
1998 and which is included along with this solicitation statement.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
-----------------------
June 30, 1999 1998 1997 1996
------------- ---- ---- ----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Historical:
Equipment Acquisition Fees and
Acquisition Expenses $ 73 $ 513 $ 471 $1,420
Lease Negotiation Fees 13 104 90 293
Other Front-End Fees -- -- -- --
Equipment Management Fees 647 1,500 1,788 1,767
Subordinated Incentive Fee -- -- -- --
Equipment Liquidation Fee -- -- -- --
Reimbursement of Expenses 510 781 2,210 1,910
General Partner Distributions 239 574 767 917
------ -----
Total Historical $1,482 $3,472 $5,326 $6,307
Pro Forma (Assuming Increase in
Equipment Acquisition Fees):
Equipment Acquisition Fees and
Acquisition Expenses $ 73 $ 513 $ 471 $1,420
Lease Negotiation Fees 13 104 90 293
Other Front-End Fees -- -- -- --
Equipment Management Fees 647 1,500 1,788 1,767
Subordinated Incentive Fee -- -- -- --
Equipment Liquidation Fee -- -- -- --
Reimbursement of Expenses 510 781 2,210 1,910
General Partner Distributions 239 574 767 917
------ -----
Total Pro Forma $1,482 $3,472 $5,326 $6,307
</TABLE>
Because the Partnership stopped reinvesting cash flow in 1998 (except
for certain contractually mandated capital modifications), the Front-End Fees
for the six month period ended June 30, 1999 and the year ended December 31,
1998 were less than they are expected to be in the forthcoming years because the
General Partner will reinvest in equipment during the extended Reinvestment
Period. If the General Partner were to earn the full amount of the 20% increase
in the limit on Front-End Fees, additional aggregate Front-End Fees of up to
$7,830,200 would be paid. It is expected, however, that additional aggregate
Front-End Fees of between approximately $165,000 and $3,969,900 will be earned
and paid because the General Partner does not expect there will be the level of
reinvestment necessary for it to earn fees of 20% in excess of the current
limitation. Additionally, the Management Fee, notwithstanding the potential
deferral or nonpayment of 25% thereof for a one and one-half year period, will
be paid for approximately 6 years beyond what is contemplated by the Partnership
Agreement and 5 years beyond what is contemplated by the General Partner's
business model. The General Partner has not identified any particular assets for
purchase during the extended Reinvestment Period.
<PAGE>
COMPARISON OF PARTNERSHIP OPERATIONS WITH
AND WITHOUT THE AMENDMENTS
DURATION OF THE REINVESTMENT PERIOD
WITHOUT THE AMENDMENTS
Pursuant to Section 2.02(r) of the Partnership Agreement, except for certain
contractually mandated capital modifications, the Partnership stopped
reinvesting in equipment as of December 31, 1999.
WITH THE AMENDMENTS
The Partnership will be permitted to reinvest in equipment through December 31,
2004
EQUIPMENT LIQUIDATION DATE
WITHOUT THE AMENDMENTS
The General Partner's business model anticipates that the Partnership's
Equipment will be liquidated by approximately January 1, 2002, which is 1 year
beyond what is contemplated by the Partnership Agreement in Section 10.01.
WITH THE AMENDMENTS
The General Partner anticipates that the Partnership's Equipment will be
liquidated by approximately January 1, 2007.
REPURCHASE OF UNITS
WITHOUT THE AMENDMENTS
Pursuant to Section 6.11 of the Partnership Agreement, the Partnership may be
obligated to repurchase up to 2% of the outstanding units in any year, unless
the General Partner determines that such repurchase would either: (a) cause the
Partnership to be taxed as a corporation; or (b) impair the capital or
operations of the Partnership. The repurchase price is equal to 110% of the
selling limited partner's unrecovered principal (i.e., the amount paid to the
Partnership for units less any distributions received from the Partnership with
respect to the units), with priority going to units owned by estates, followed
by IRA's and qualified plans.
WITH THE AMENDMENTS
The Partnership will be obligated to repurchase up to 10% of the outstanding
units as of June 29, 1999 at 80% of their net asset value. The existing annual
repurchase obligation will cease.
<PAGE>
CLASS COUNSEL FEES TO BE PAID FROM CASH FLOW
WITHOUT THE AMENDMENTS
There is no provision for the payment of Class Counsel fees. If the IRR of the
Partnership after January 1, 1999 equals or exceeds the stipulated performance
target, Class Counsel will be entitled to receive a graduated percentage of the
excess, paid out of the Partnership's cash flow.
WITH THE AMENDMENTS
If the IRR of the Partnership after January 1, 1999 equals or exceeds the
stipulated performance target, Class counsel will be entitled to receive a
graduated percentage of the excess, paid out of the Partnership's cash flow.
MANAGEMENT FEES
WITHOUT THE AMENDMENTS
Pursuant to Section 2.05(f) of the Partnership Agreement, the Partnership will
continue to pay Management Fees each month to IMI, an affiliate of the General
Partner. Management Fees are calculated based on a percentage of Gross Lease
Revenues, which percentage depends on the types of leases the Partnership
equipment is subject to and the level of services that are provided by an
affiliate of the General Partner. The Partnership Agreement does not contain any
performance goals as a condition to the payment of Management Fees.
WITH THE AMENDMENTS
Payment of 25% of the Management Fee will be deferred for 2 1/2years commencing
January 1, 2002 pending the Partnership's attainment of certain performance
goals; except for the deferred Management Fees which will only be paid if the
performance goals are met, these fees will be paid for approximately 6 years
beyond what is contemplated by the Partnership Agreement and 5 years beyond what
is contemplated by the General Partner's business model. Additionally, as a
result of the extension of the Reinvestment Period, the Management Fees from the
date of approval of the Amendments through December 31, 2004 will not decrease
at as great a rate as they likely would otherwise, since Management Fees are
based upon gross lease revenues which likely would decrease more quickly during
those years in the absence of reinvestment in equipment.
FRONT-END FEES
WITHOUT THE AMENDMENTS
Pursuant to Section 2.05(h) of the Partnership Agreement, Front-End Fees paid to
the General Partner are subject to the compensation limits set forth in the
Statement of Policy of the North America Security Administrators Association,
Inc. If earned, the General Partner is entitled to be paid a total of
approximately $18,261,000 over the life of the Partnership for equipment
acquisition and lease negotiation services, including fees and reimbursement of
expenses. Through December 31, 1998, the General Partner has been paid
approximately, $16,142,550 for such services.
WITH THE AMENDMENTS
As of January 1, 1999 the limitation on Front-End Fees payable to the General
Partner will be increased by 20%, so that the General Partner would be entitled
to be paid, if earned, approximately, an additional $7,830,200 for a total of
approximately $26,091,200 over the life of the Partnership for equipment
acquisition and lease negotiation services; however the General Partner expects
that, from January 1, 1999 through the end of the extended Reinvestment Period,
additional aggregate Front-End Fees, comprised of equipment acquisition fees and
lease negotiation fees, of between approximately $165,000 and $3,970,000 will be
paid because the General Partner does not expect there will be the level of
reinvestment necessary for it to earn fees 20% in excess over the current
limitation. Over the life of the Partnership the General Partner anticipates
that fees and expenses related to equipment acquisition and lease negotiation
services of between approximately $16,307,550 and $20,112,550 will be paid.
CONFLICTS OF INTEREST
General. The General Partner has fiduciary duties to the Partnerships, in
addition to the specific duties and obligations imposed upon it under the
Partnership Agreement. Subject to the terms of the Partnership Agreement, the
General Partner, in managing the affairs of the Partnership, is expected to
exercise good faith, to use care and prudence and to act with an undivided duty
of loyalty to the limited partners. Under these fiduciary duties, the General
Partner is obligated to ensure that the Partnership is treated fairly and
equitably in transactions with third parties, especially where consummation of
such transactions may result in the interests of the General Partner being
opposed to, or not aligned with, the interests of the limited partners.
Accordingly, the General Partner has assessed the potential benefits to be
derived by limited partners from the Amendments. Notwithstanding any conflict of
interest, after consideration of the terms and conditions of the Amendments, the
General Partner recommends that limited partners do not submit a No Vote and do
not object to the settlement.
Conflict of Interest of General Partner. The General Partner initiated
and participated in structuring the Amendments and has conflicts of interest
with respect to their effect. As part of the Amendments, the limitation on
Front-End Fees that can be paid to the General Partner by the Partnership will
be increased by 20% so that the General Partner can earn such fees in excess of
the amount proscribed in the Statement of Policy of the North American
Securities Administrators Association, Inc. effective January 1, 1999. As a
result of extending the Reinvestment Period, the General Partner will earn
Front-End Fees, comprised of equipment acquisition and lease negotiation
fees, from the Partnership for approximately 5 additional years; during 1996
through 1998 the Partnership paid the General Partner equipment acquisition and
lease negotiation fees averaging $894,450 per year.
IMI, an affiliate of the General Partner, will earn Management Fees for 3
years beyond what the Partnership Agreement contemplates and 1 year beyond what
the General Partner's business model contemplates. During 1996 through 1998 IMI
was paid Management Fees averaging $1,683,200 per year. Additionally, the
ability to reinvest from the date of approval of the Amendments through December
31, 2004 will result in the level of Management Fees not decreasing at as great
a rate as they likely otherwise would, since Management Fees are based upon
gross lease revenues which likely would decrease more quickly during those years
in the absence of reinvestment in equipment. Although the payment of 25% of the
Management Fee will be deferred for 2 1/2 years commencing January 1, 2002 until
certain performance goals are attained, the payment of any accrued deferred fees
will be accelerated (and paid in a lump sum) upon a Change of Control occurring
after January 1, 2002 if the General Partner and Class Counsel agree that the
stipulated performance target described in the IRR Protocol would have been
attained absent the Change of Control.
Conflict of Interest of Class Counsel. In assessing Class Counsel's
support of the equitable settlement of which the proposed Amendments form an
integral part, limited partners should consider that Class Counsel may be deemed
to have a conflict of interest with respect to such support. The fees and
expenses of Class Counsel, if approved by the court, will be paid in part from
the settlement fund provided by the Defendant pursuant to the monetary
settlement. Also, as part of the equitable settlement, Class Counsel will apply
for an additional fee and expense award. With respect to the Equitable Class Fee
and Expense Award, commencing January 1, 1999, the General Partner will
calculate the IRR on any distributions made to the limited partners. At the
time, if ever, that the IRR for the Partnership after January 1, 1999 equals or
exceeds 12% (the stipulated performance target described in the IRR Protocol for
this purpose, and defined as the "over 12% class distributions"), Class Counsel
will be entitled to receive from each future distribution to the unitholders, a
percentage of the over 12% class distributions, such percentage to be
established by the court in connection with Class Counsel's application for an
Equitable Class Fee and Expense Award in an amount not to exceed 27.5% of the
first $10 million of the over 12% class distributions for each Fund, 22.5% of
such distributions between $10 million and $20 million, 15% of such
distributions between $20 million and $30 million, and 10% of such distributions
exceeding $30 million, plus court costs and other expenses of Class Counsel, to
the extent not previously recovered from the defendants. See also "RISK FACTORS
- - Conflicts of Interest" which describes the circumstances under which the
payment of the Equitable Class Fee and Expense Award will be accelerated.
<PAGE>
IRR PROTOCOL
For IMI to begin to receive the deferred portion of its Management Fee,
the IRR calculation in substance requires an annualized increase of at least 10%
in the actual cash flow relative to the cash flow which is assumed would have
been received by the unitholders (beginning with January 1, 1999) if the
Partnership were to be liquidated on its current schedule ("Assumed Cash Flow").
Similarly, for Class Counsel to begin to receive the Equitable Class Fee and
Expense Award, the IRR calculation requires an annualized increase of at least
12% in actual cash flows relative to Assumed Cash Flows.
THE IRR PERCENTAGE PERTAINING TO THE GENERAL PARTNER'S DEFERRED PORTION
OF THE EQUIPMENT MANAGEMENT FEE AND CLASS COUNSEL'S EQUITABLE CLASS FEE AND
EXPENSE AWARD EARNED AFTER JANUARY 1, 1999 DOES NOT REPRESENT A PERCENTAGE
RETURN ON EITHER A UNITHOLDER'S ORIGINAL OR REMAINING INVESTMENT IN A
PARTNERSHIP. Rather, these IRR percentages are calculated as the difference
between the actual cash distributed to the unitholders in each Fund after
January 1, 1999 and the Assumed Cash Flow. The IRR calculation will determine
the annualized rate of return after January 1, 1999 taking into account when the
cash flows are realized, and in effect, represents a return with respect to the
Assumed Cash Flow as if such Assumed Cash Flow were an investment of the
unitholders in the Partnership. As an example, an IRR of 10% could result if the
IRR after January 1, 1999 is positive every year from 1999 to 2006 or if the IRR
after January 1, 1999 is zero for several years (as an example, from 1999 to
2002) and then positive for several years (as an example, from 2003 to 2006).
The IRR Protocol also provides that the Deferred Managed Fee and the Equitable
Class Fee and Expense Award will become payable in a lump sum as a result of a
Change of Control if the General Partner and Class Counsel agree that the
stipulated performance target(s) in the IRR Protocol would have been attained
absent the Change of Control. Such fees will be an obligation of the Partnership
to be paid from moneys that will be distributed to the equitable class members
or would have otherwise been distributed absent the rollup or tender
transaction.
<PAGE>
TEXT OF THE AMENDMENTS
AMENDMENT I - THE EXTENSION
Section 10.01(e) of the Partnership Agreement for Fund V will be amended
to provide that an event of dissolution of the Fund shall occur when the General
Partner determines that it is necessary to commence the liquidation of the
Equipment (as defined in the Partnership Agreement) to complete the liquidation
by January 1, 2007. Section 10.01(e) will be deleted and replaced in its
entirety so that the introductory sentence (which will not change) and amended
subsection (e) will read as follows:
"Events of Dissolution. The Partnership shall be dissolved and shall
commence the orderly liquidation of its assets upon the first to occur of
any of the following:
* * *
(e) The determination by the General Partner that it is necessary to
commence the liquidation of the Equipment in order for the liquidation of
all the Equipment to be completed in an orderly and businesslike fashion
prior to January 1, 2007."
AMENDMENT II - FRONT-END FEE INCREASE
Section 2.05(h) of the Partnership Agreement for Fund V will be amended
to increase the limitations on the General Partner's Fees by 20% of the
limitations presently stated in the Partnership Agreement so as to allow the
General Partner to earn fees in excess of the compensatory limitations set forth
in the Statement of Policy of the North American Securities Administrators
Association, Inc. during the extended Reinvestment Period. Specifically, the
first clause of the first sentence of section 2.05(h) will be deleted and
replaced in its entirety as follows:
"Limitation of Fees. The General Partner shall not receive fees in excess
of 120% of the following limitations which shall apply to the amount of
Capital Contributions which must be committed to Investment in
Equipment:"
AMENDMENT III - EXTENSION OF THE REINVESTMENT PERIOD
Section 2.02(r) of the Partnership Agreement for Fund V will be amended
to allow the General Partner to reinvest such amounts through 2004.
Specifically, Section 2.02(r) will be amended by deleting only the language that
states "for six years after the year which includes the Funding Date" and
replacing such language with "until December 31, 2004".
AMENDMENT IV - THE REPURCHASE
Section 6.11 of the Partnership Agreement for Fund V is amended to allow
repurchase by the Partnership of up to 10% of its outstanding units at 80% of
net asset value in accordance with the terms of the settlement stipulation and
the Repurchase Protocol which is Exhibit C to the stipulation. Section 6.11 will
be amended by adding the following language at the end of the section:
"Notwithstanding any terms of the preceding paragraph, from June
29, 1999 forward the following terms of Section 6.11 will govern
and control all Limited Partners' and the General Partner's rights
and obligations regarding repurchase of outstanding Units. The
Partnership will repurchase up to 10% of the then total
outstanding Units as of June 29, 1999 ("Outstanding Units"). Any
Unitholder that intends to submit for repurchase some or all of
his, her or its Units must indicate this intention on the Request
to Repurchase Form that has been mailed to the Limited Partners
along with the Equitable Settlement Hearing Notice and
Solicitation Statement. The repurchase price for each Unit shall
be determined as follows: the Net Asset Value of the Partnership
(defined below) as of the fiscal quarter immediately preceding
[ADD THE LAST DATE TO FILE THE REPURCHASE REQUEST] will be divided
by the number of Outstanding Units to determine the Net Asset
Value per Unit. The Net Asset Value per Unit will be multiplied by
80% to determine the repurchase price per Unit (the "Repurchase
Price"). The repurchase of Units will be completed no later than
the end of the fiscal quarter following the fiscal quarter during
which the United States District Court for the Southern District
of Alabama enters an order granting final approval of the
Equitable Class Action Settlement. If the Unitholders request the
Partnership to repurchase more than 10% of its Units, the
Partnership will repurchase up to 10% of the Units, pro-rata based
on the number of Units offered for repurchase, or as close to a
pro-rata basis as is reasonably possible. Any such pro-rata
allocation adjustments will be determined by the Claims
Administrator who will give priority according to the order of
preference for each category set forth below in this paragraph. To
the extent that the demand in any category would exhaust the 10%
number then all Unitholders in that category will have their Units
repurchased on a pro rata basis, rounded up to the nearest whole
Unit, and the Unitholders in the remaining categories will not
have the option of having their Units repurchased. The order of
preferences is: (1) Units owned by estates, IRAs and Qualified
Plans which were purchased as part of the initial offering; (2)
Units owned by Limited Partners which were purchased as part of
the initial offering; (3) Units owned by Limited Partners which
were purchased after the initial offering; (4) Units owned by
Unitholders which were purchased after the initial offering. In
the event that the total number of Units requested to be
repurchased exceeds 10% of the Partnership's Units, the General
Partner will have the option, but not the obligation, to purchase
these excess Units with its own monies and on its own behalf."
"Net Asset Value" of the Partnership means the value of all
Equipment owned by the Partnership and as determined by the
General Partner (and subject to consultation with Class Counsel's
valuation expert) plus any cash, uncollected receivables and any
other assets, less accounts payable, debts and other liabilities
of the Fund as of the fiscal quarter immediately preceding the
repurchase date."
AMENDMENT V - ENABLING AMENDMENTS
Article XVIII of the Partnership Agreement for Fund V will be amended
to provide: (a) that the limited partners may amend the Partnership Agreement to
make all amendments necessary to this equitable settlement, including amendments
to Section 10.01 thereof; and (b) that any such amendment may be made by
approval of a Majority in Interest as provided for in amended Article XV, below.
Article XVIII shall remain the same except that the first provision of the
second paragraph will be deleted and replaced in its entirety as follows:
"[P]rovided, however that the Limited Partners may not amend this
Agreement to extend the Partnership term or to change the
provisions of Section 10.03;"
Additionally, a new paragraph will be added at the end of Article XVIII as
follows:
"Approval of a Majority in Interest to all amendments of this
Agreement necessary to effectuating the Equitable Class Settlement
shall be deemed to have been given if less than half of the Units
held by Limited Partners vote against any such amendment proposed
by the _____, 1999 Solicitation Statement, as provided for in
amended Article XV of this Agreement."
AMENDMENT VI - ACTIONS BY LIMITED PARTNERS
Article XV of the Partnership Agreement for Fund V will be amended to
provide that written consent of the limited partners respecting any matters in
connection with the equitable settlement shall be deemed to have been given
unless limited partners holding more than one half of the units vote against any
such matter. Article XV will be amended to add the following language to the end
of the fourth paragraph of Article XV:
"Provided, however, that effective written consent by a Majority
in Interest of the Limited Partners to any proposed action set
forth in the ______, 1999 Solicitation Statement and in connection
with the Equitable Class Settlement, shall be deemed to have been
given, unless Limited Partners holding more than half of the
outstanding Units in such Limited Partnership vote against any
such action."
AMENDMENT VII - DISPUTES AND RESOLUTIONS
Article XIV of the Partnership Agreement for Fund V will be amended to
provide that all disputes relating to, or arising out of this settlement, shall
be subject to the court's continuing jurisdiction over the interpretation and
administration of this settlement and all the settlement documents incorporated
herein. Article XIV will be amended by adding the following language to the end
of the paragraph:
"Provided, however, that any and all disputes relating to or
arising out of the Equitable Class Action Settlement approved by
the Federal District Court for the Southern District of Alabama by
final order, including all issues pertaining to the interpretation
and administration of the Stipulation of Settlement and all its
exhibits, shall be subject to the continuing and exclusive
jurisdiction of the Federal District Court for the Southern
District of Alabama."
<PAGE>
VOTING PROCEDURES
TIME OF VOTING AND RECORD DATE
Limited partners holding units as of the Record Date (i.e., June 29,
1999) have until the Voting Deadline (i.e., , 1999) to vote against the
Amendments. If you approve of the Amendments, you need not do anything.
As of the Record Date, the following number of units were held of record
by the number of limited partners indicated below:
NUMBER OF NUMBER OF UNITS NUMBER OF UNITS VOTING NO REQUIRED FOR THE
LIMITED HELD OF RECORD PARTNERSHIP
PARTNERS NOT TO PARTICIPATE IN EQUITABLE SETTLEMENT
- ---------- ----------- --------------
LIMITED PARTNERS WHO FAIL TO RETURN THE FORM FOR VOTING AGAINST THE
AMENDMENTS WILL BE TREATED AS IF THEY HAD VOTED IN FAVOR OF THE AMENDMENTS. DO
NOT RETURN THE FORM IF YOU APPROVE OF THE AMENDMENTS.
The number of units entitled to vote against the Amendments is equal to
the number of units held by limited partners of record at the Record Date. The
Partnership Agreement gives the limited partners the power, by a majority vote,
to approve each individual Amendment. However, as structured in the settlement,
unless a majority of units held by limited partners vote against one or more of
the Amendments, in which event the Partnership will not participate in the
settlement, approval of the Amendments is in the sole discretion of the court.
NO VOTE
Limited partners that wish to vote against the Amendments must send their
No Vote (attached as Exhibit A), indicating to which Amendment(s) they object,
Gilardi & Co., 1115 Magnolia Avenue, Larkspur, CA 94977, as soon as possible but
in no event later than the expiration of the Voting Deadline (_______________,
1999). The notice must contain the name and address of the limited partner and
the number of units so held, and the Amendment(s) to which they object. Limited
partners also have the right to object to the settlement at or before the
fairness hearing, whether or not they have submitted a Notice of Vote Against
the Amendments in connection with this solicitation statement.
The General Partner recommends that limited partners not vote against the
Amendments.
REVOCABILITY OF NO VOTE
Limited partners may revoke their No Vote at any time prior to
________________, 1999, by mailing a revocation to the address above (which
revocation must be received by the General Partner on or prior to such date).
NO APPRAISAL RIGHTS
Neither the Partnership Agreement nor state law provides for dissenters'
or appraisal rights to limited partners who object to the Amendments. Such
rights, when they exist, give the holders of securities the right to surrender
such securities for an appraised value in cash, if they oppose a merger or
similar reorganization. No such right will be provided by the Partnership in
connection with the Amendments.
INFORMATION SERVICES
The General Partner and its officers, directors and employees may assist
in providing information to limited partners in connection with any questions
they may have with respect to this solicitation statement and the procedures to
vote against the Amendments.
<PAGE>
APPENDIX A
FORM FOR VOTING AGAINST THE AMENDMENTS
FUND V
IF YOU APPROVE OF THE AMENDMENTS TO THE PARTNERSHIP AGREEMENT, DO NOT
COMPLETE AND SUBMIT THIS FORM. YOU NEED DO NOTHING TO INDICATE YOUR APPROVAL.
THIS FORM SHOULD BE USED ONLY BY PERSONS WHO WISH TO VOTE AGAINST ONE OR MORE OF
THE AMENDMENTS TO THE PARTNERSHIP AGREEMENT.
The undersigned limited partner hereby votes against the following
amendment(s) of the Partnership Agreement, as more fully described in the
solicitation statement dated __________________, 1999.
Number of units held by voting limited partner: _______________________________
Amendments Voted Against:
No. I: ___ No. III: ___ No. V: ___ No. VII: ___
No. II:___ No. IV: ___ No. VI: ___
Address of Limited Partner:
Social Security or Taxpayer Identification No.:_______________________
I/we hereby certify that the foregoing information is complete and accurate.
- -------------------------------------------------------------------------------
Print or type name of limited partner(s) as it appears on the most recent
account statement.
- ---------------------------------------------------
Signature of Limited Partner Date
- ---------------------------------------------------
Signature of Co-Owner Date
YOU MUST PROVIDE ALL OF THE INFORMATION REQUESTED ABOVE IN ORDER TO
SUBMIT A VALID VOTE AGAINST ANY OF THE AMENDMENTS TO THE PARTNERSHIP AGREEMENT.
The deadline for submission of this No Vote is ____________________,
1999.
VOTING NOTICES SHOULD BE SENT TO:
Gilardi & Co.
1115 Magnolia Avenue
Larkspur, CA 94977
<PAGE>
