UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 33-40093
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PLM EQUIPMENT GROWTH FUND VI
(Exact name of registrant as specified in its charter)
California 94-3135515
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Market, Steuart Street Tower
Suite 800, San Francisco, CA 94105-1301
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (415) 974-1399
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Aggregate market value of voting stock: N/A
An index of exhibits filed with this Form 10-K is located at page 53.
Total number of pages in this report: 131.
<PAGE>
PART I
ITEM 1. BUSINESS
(A) Background
In April 1991, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly-owned subsidiary of PLM International, Inc. (PLM International or PLMI),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 8,750,000 limited partnership
units (the units) in PLM Equipment Growth Fund VI, a California limited
partnership (the Partnership, the Registrant, or EGF VI). The Partnership's
offering became effective on December 23, 1991. FSI, as General Partner, owns a
5% interest in the Partnership. The Partnership engages in the business of
investing in a diversified equipment portfolio consisting primarily of used,
long-lived, low-obsolescence capital equipment that is easily transportable by
and among prospective users.
The Partnership's primary objectives are:
(1) to invest in a diversified portfolio of low obsolescence equipment with
long lives and high residual values, at prices that the General Partner believes
to be below inherent values and to place the equipment on lease or under other
contractual arrangements with creditworthy lessees and operators of equipment.
All transactions over $1.0 million must be approved by PLM International's
Credit Review Committee (the Committee), which is made up of members of PLM
International's senior management. In determining a lessee's creditworthiness,
the Committee considers, among other factors, the lessee's financial statements,
internal and external credit ratings, and letters of credit;
(2) to generate sufficient net operating cash flow from lease operations to
meet liquidity requirements and to generate cash distributions to the limited
partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(3) to create a significant degree of safety relative to other equipment
leasing investments through the purchase of a diversified equipment portfolio.
This diversification reduces the exposure to market fluctuations in any one
sector. The purchase of used, long-lived, low-obsolescence equipment, typically
at prices that are substantially below the cost of new equipment, also reduces
the impact of economic depreciation and can create the opportunity for
appreciation in certain market situations, where supply and demand return to
balance from oversupply conditions; and
(4) to increase the Partnership's revenue base by reinvesting a portion of
its operating cash flow in additional equipment during the first six years of
the Partnership's operation in order to grow the size of its portfolio. Since
net income and distributions are affected by a variety of factors, including
purchase prices, lease rates, and costs and expenses, growth in the size of the
Partnership's portfolio does not necessarily mean that in all cases the
Partnership's aggregate net income and distributions will increase upon the
reinvestment of operating cash flow.
The offering of units of the Partnership closed on May 24, 1993. As of December
31, 1998, there were 8,206,339 units outstanding. The General Partner
contributed $100 for its 5% general partner interest in the Partnership.
Beginning in the Partnership's seventh year of operation, which commences
January 1, 2000, the General Partner will stop reinvesting cash flow and surplus
funds, which, if any, less reasonable reserves, will be distributed to the
partners. In the ninth year of operations of the Partnership, which commences
January 1, 2002, the General Partner intends to begin the dissolution and
liquidation of the Partnership in an orderly fashion, unless the Partnership is
terminated earlier upon sale of all of the equipment or by certain other events.
Under certain circumstances, however, the term of the Partnership may be
extended. In no event will the Partnership be extended beyond December 31, 2011.
(This space intentionally left
blank.)
<PAGE>
Table 1, below, lists the equipment and the cost of equipment in the
Partnership's portfolio, and the cost of investments in unconsolidated
special-purpose entities as of December 31, 1998 (in thousands of dollars):
TABLE 1
<TABLE>
<CAPTION>
Units Type Manufacturer Cost
- -------------------------------------------------------------------------------------------------------------------
Owned equipment held for operating leases:
<S> <C> <C> <C>
2 Container cargo carrier vessels O. C. Staalskibsvaerft A/F $ 16,036
1 Brown water vessel Moss Point Marine 10,058
1 DC-9-82 Stage III commercial aircraft McDonnell Douglas 13,951
1 737-200 Stage II commercial aircraft Boeing 5,406
1 Portfolio of aircraft rotables Various 2,273
422 Pressurized tank railcars Various 11,970
203 Nonpressurized tank railcars Various 3,582
139 Covered hopper railcars Various 3,086
189 Over-the-road refrigerated trailers Various 5,702
345 Dry piggyback trailers Stoughton 5,304
287 Over-the-road dry trailers Various 2,198
3,026 Various marine containers Various 8,301
186 Refrigerated marine containers Various 2,888
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Total owned equipment held for operating leases $ 90,755<F1>
=============
Investments in unconsolidated special-purpose entities:
0.64 Trust comprised of a 767-200ER
Stage III commercial aircraft Boeing $ 27,329<F3>
0.40 Equipment on direct finance lease:
Two DC-9 Stage III commercial aircraft McDonnell Douglas 4,505<F3>
0.53 Product tanker Boelwerf-Temse 10,476<F2>
0.50 Container cargo feeder vessel O. C. Staalskibsvaerft A/F 4,004<F2>
0.20 Handymax dry bulk carrier marine vessel Tsuneishi Shipbuilding Co., Ltd 3,553<F2>
0.30 Mobile offshore drilling unit AT & CH de France 6,166<F3>
0.25 Marine containers Various 2,489<F2>
-----------
Total investments in unconsolidated special-purpose entities $ 58,522<F1>
=============
<FN>
<F1> Includes equipment and investments purchased with the proceeds from capital
contributions, undistributed cash flow from operations, and Partnership
borrowings invested in equipment. Includes costs capitalized, subsequent to
the date of purchase, and equipment acquisition fees paid to PLM
Transportation Equipment Corporation (TEC), or PLM Worldwide Management
Services (WMS).
<F2> Jointly owned: EGF VI and an affiliated program.
<F3> Jointly owned: EGF VI and two affiliated programs.
</FN>
</TABLE>
The equipment is generally leased under operating leases with terms of one to
six years. Some of the Partnership's marine containers are leased to operators
of utilization-type leasing pools, which include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees after deducting certain direct operating expenses of the pooled
equipment.
As of December 31, 1998, approximately 58% of the Partnership's trailer
equipment operated in rental yards owned and maintained by PLM Rental, Inc., the
short-term trailer rental subsidiary of PLM International doing business as PLM
Trailer Leasing. Revenues collected under short-term rental agreements with the
rental yards' customers are credited to the owners of the related equipment as
received. Direct expenses associated with the equipment are charged directly to
the Partnership. An allocation of other indirect expenses of the rental yard
operations is charged to the Partnership monthly.
The lessees of the equipment include but are not limited to: Transamerica
Leasing, Burlington Northern Railroad Company, Northern Navigation Services,
Inc., Malaysian Air Systems Berhad, CSX Transportation, Inc., Union Pacific
Railroad Company, Trans World Airlines. Aero California, Westway Express
Incorporated, and Pacific Carriers Ltd.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the Partnership's equipment. The Partnership's management
agreement with IMI is to co-terminate with the dissolution of the Partnership,
unless the limited partners vote to terminate the agreement prior to that date
or at the discretion of the General Partner. IMI has agreed to perform all
services necessary to manage the equipment on behalf of the Partnership and to
perform or contract for the performance of all obligations of the lessor under
the Partnership's leases. In consideration for its services and pursuant to the
partnership agreement, IMI is entitled to a monthly management fee (see Notes 1
and 2 to the audited financial statements).
(C) Competition
(1) Operating Leases versus Full Payout Leases
Generally, the equipment owned or invested in by the Partnership is leased out
on an operating lease basis wherein the rents received during the initial
noncancelable term of the lease are insufficient to recover the Partnership's
purchase price of the equipment. The short to mid-term nature of operating
leases generally commands a higher rental rate than the longer-term full payout
leases and offers lessees relative flexibility in their equipment commitment. In
addition, the rental obligation under an operating lease need not be capitalized
on the lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize
full payout leases on new equipment, i.e., leases that have terms equal to the
expected economic life of the equipment. While some lessees prefer the
flexibility offered by a shorter-term operating lease, other lessees prefer the
rate advantages possible with a full payout lease. Competitors may write full
payout leases at considerably lower rates and for longer terms than the
Partnership offers, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers who offer operating leases
and full payout leases. Manufacturers may provide ancillary services that the
Partnership cannot offer, such as specialized maintenance service (including
possible substitution of equipment), training, warranty services, and trade-in
privileges.
The Partnership also competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), GATX Corp., General Electric
Railcar Services Corporation, General Electric Capital Aviation Services
Corporation, Xtra Corporation, and other programs that lease the same types of
equipment.
(D) Demand
The Partnership operates in the following operating segments: aircraft leasing,
marine vessel leasing, marine container leasing, railcar leasing, trailer
leasing, and mobile offshore drilling unit leasing. Each equipment leasing
segment engage in short-term to mid-term operating leases to a variety of
customers. Except for those aircraft leased to passenger air carriers, the
Partnership's equipment and investments are used to transport materials and
commodities, rather than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Marine Vessels
The Partnership owns or has investments in small to medium-sized dry bulk
vessels, product tankers, and container vessels that trade in worldwide markets
and carry commodity cargoes. Demand for commodity shipping closely follows
worldwide economic growth patterns, which can alter demand by causing changes in
volume on trade routes. The General Partner operates the Partnership's vessels
through spot and period charters, an operating approach that provides the
flexibility to adapt to changing market situations.
The markets for both dry bulk vessels and product tankers weakened in 1998. Dry
bulk vessels experienced a decline in freight rates, as demand for commodity
shipments remained flat and fleet capacity increased marginally. Freight rates
for product tankers weakened during the course of the year, after a very strong
1997. Demand for product shipments decreased, while the fleet grew moderately.
The Asian recession has had significant effects on world shipping markets, and
demand is unlikely to improve until Pacific Rim economies experience a sustained
recovery.
(a) Dry Bulk Vessels
Freight rates for dry bulk vessels decreased for all ship sizes in 1998, with
the largest vessels experiencing the greatest declines. After a relatively
stable year in 1997, rates declined due to a decrease in cargo tonnage moving
from the Pacific Basin and Asia to western ports. The size of the overall dry
bulk carrier fleet decreased by 3%, as measured by the number of vessels, but
increased by 1%, as measured by deadweight (dwt) tonnage. While scrapping of
ships was a significant factor in 1998 (scrapping increased by 50% over 1997)
overall there was no material change in the size of the dry bulk vessel fleet,
as deliveries and scrapings were nearly equal.
Total dry trade (as measured in deadweight tons) was flat, compared to a 3%
growth in 1997. As a result, the market had no foundation for increasing freight
rates, and charter rates declined as trade not only failed to grow, but actually
declined due to economic disruptions in Asia. Overall activity is expected to
remain flat in 1999, with trade in two of the three major commodities static or
decreasing in volume. Iron ore volume is expected to decrease, and grain trade
is anticipated to be flat, while a bright spot remains in an estimated increase
in steam coal trade.
Ship values experienced a significant decline in 1998, as expectations for trade
growth were dampened. The decline in ship values was also driven by bargain
pricing for newbuilding in Asian yards.
The uncertainty in forecasts is the Asian economic situation; if there is some
recovery from the economic shake-up that started in the second half of 1997,
then 1999 has prospects for improvement. The delivery of ships in 1999 is
expected to be less than in 1998, and high scrapping levels should continue. Dry
bulk shipping is a cyclical business -- inducing capital investment during
periods of high freight rates and discouraging investment during periods of low
rates. The current environment thus discourages investment. However, the history
of the industry implies that this period will be followed by one of increasing
rates and investment in new ships, driven by growth in demand. Over time, demand
grows at an average of 3% a year, so when historic levels of growth in demand
resume, the industry is expected to experience a significant increase in freight
rates and ship values.
(b) Product Tankers
Product tanker markets experienced a year in which a fall in product trade
volume and an increase in total fleet size induced a decline in freight rates.
Charter rates for standard-sized product tankers averaged $10,139 per day in
1998, compared to $13,277 per day in 1997. The weakening in rates resulted
primarily from a decrease in product import levels to the United States and
Japan. Significantly lower crude oil prices worldwide induced higher volumes of
imports of crude oil to the United States, thereby lessening domestic demand for
refined products. Product trade in 1998 fell by an estimated 5% worldwide. The
crude oil trade, which is closely related to product trades, especially in
larger vessels, remained stable in 1998. Crude trade grew 1% in volume, led by
imports to Europe, which grew 6%.
Overall, the entire product tanker fleet grew only 1% in 1998. Supply growth in
1998 was moderated by high scrapping levels, especially of larger ships. In
1999, the fleet is expected to receive an additional 9% in capacity from newly
built deliveries, most of which will be in large tankers (above 80,000 dwt tons)
carrying crude products. Smaller tankers (below 80,000 dwt tons) are expected to
receive 7% in new deliveries over current fleet levels.
While these new deliveries represent a high percentage of the existing fleet,
the tanker markets are now beginning to feel the effects of the United States
Oil Pollution Act of 1990. Under the act, older tankers are restricted from
trading to the United States once they exceed 25 years old if they do not have
double bottoms and/or double hulls. Similar though somewhat less stringent
restrictions are in place in other countries with developed economies. The
retirement of older, noncomplying tankers may allow the fleet to absorb what
would otherwise be an excessive number of new orders in relation to current
demand prospects. Given that a large proportion of the current tanker fleet does
not meet these regulatory requirements, coupled with anticipated flat demand yet
continuing high delivery levels, charter rates for 1999 are not anticipated to
increase significantly from 1998 levels.
(c) Container and Container Feeder Vessels
Container vessels transport containerized cargo. They are called feeder vessels
when they move containers from small, outlying ports to main transportation hub
ports, from which containers are moved by regularly scheduled liner services.
Container vessels typically carry up to about 1,000 20-foot-equivalent unit
containers (TEUs). This trade has been characterized by growth in both supply
and demand for the past several years; however, in 1998, patterns changed. All
containerized trade, as measured by TEU movement, grew 8% in shipments from
Asia, but declined 14% in shipments to Asia, for a composite decline of 1% over
1997 levels. This flattening of trade represents a significant change in the
container shipping markets, which have shown robust growth ever since containers
were introduced as a shipping medium.
As with other shipping markets, the lack of growth in demand has occurred at the
same time that the capacity to meet previously projected growth has been
underway, and charter rates have decreased accordingly. The total fleet of
containerized vessels has increased in capacity by over 60% since 1988. While
some of this growth has come from very large vessels, which have created
container shipping demand due to lower unit costs, the expansion of the fleet
has eroded charter rates, since demand has not grown as quickly. For the larger
container vessels (above 1,000 TEU per ship), rate erosion may continue, because
ships on order could add as much as 16% to existing capacity through 2001. For
feeder ships (less than 1,000 TEU), only 9% of existing capacity is on order,
and most remaining orders will be delivered in 1999. While these deliveries will
suppress prospects for improving feeder vessel charter rates in 1999, the lack
of planned deliveries beyond then provides some potential for rate and value
increases.
(2) Aircraft
(a) Commercial Aircraft
The world's major airlines experienced a fourth consecutive year of profits,
showing a combined marginal net income (net income measured as a percentage of
revenue) of 6%, compared to the industry's historical annual rate of 1%.
Airlines recorded positive marginal net annual income of 2% in 1995, 4% in 1996,
6% in 1997, and 6% in 1998. The two factors that have led to this increase in
profitability are improvements in yield management systems and reduced operating
costs, particularly lowered fuel costs. These higher levels of profitability
have allowed many airlines to re-equip their fleets with new aircraft, resulting
in a record number of orders for manufacturers.
Major airlines increased their fleets from 7,181 aircraft in 1997 to 7,323 in
1998, which has resulted in more used aircraft available on the secondary
market. Despite these increases, the number of Stage II aircraft in these fleets
(similar to those owned by the Partnership) decreased by 26% from 1997 to 1998,
and sharper decreases are expected in 1999. This trend is due to Federal
Aviation Regulation section C36.5, which requires airlines to convert 100% of
their fleets to Stage III aircraft, which have lower noise levels than Stage II
aircraft, by the year 2000 in the United States and the year 2002 in Canada and
Europe. Stage II aircraft can be modified to Stage III with the installation of
a hushkit that significantly reduces engine noise. The cost of hushkit
installation ranges from $1.0 to $2.0 million for the types of aircraft owned by
the Partnership.
Orders for new aircraft have risen rapidly worldwide in recent years: 691 in
1995, 1,182 in 1996, 1,328 in 1997, and an estimated 1,500 in 1998. As a result
of this increase in orders, manufacturers have expanded their production, and
new aircraft deliveries have increased from 482 in 1995, 493 in 1996, and 674 in
1997, to an estimated 825 in 1998.
The industry now has in place two of the three conditions that led to financial
problems in the early 1990s: potential excess orders and record deliveries. The
missing element is a worldwide recession. Should a recession occur, the industry
will experience another period of excess aircraft capacity and surplus aircraft
on the ground.
The Partnership's fleet consists of several Stage II narrowbody (single-aisle
aircraft), one Stage III widebody aircraft, and one Stage III narrowbody
aircraft. The Stage II aircraft are scheduled to be leased or sold outside Stage
III-legislated areas before the year 2000. It is anticipated that the Stage III
widebody aircraft now on lease will also be sold during 1999.
(b) Rotables
Aircraft rotables, or components, are replacement spare parts held in an
airline's inventory. They are recycled parts that are first removed from an
aircraft or engine, overhauled, and then recertified, returned to an airline's
inventory, and ultimately refit to an aircraft in as-new condition. Rotables
carry identification numbers that allow them to be individually tracked during
their use.
The types of rotables owned and leased by the Partnership include landing gear,
certain engine components, avionics, auxiliary power units, replacement doors,
control surfaces, pumps, and valves. The market for the Partnership's rotables
remains stable.
In 1998, the Partnership acquired rotable spare parts that are used on Stage III
narrowbody (single-aisle) aircraft in Europe. This purchase reflects the
Partnership's strategy to acquire quality used Stage III narrowbody aircraft,
engines, and spare parts.
(3) Railcars
(a) Pressurized Tank Cars
Pressurized tank cars transport primarily two chemicals: liquefied petroleum gas
(natural gas) and anhydrous ammonia (fertilizer). Natural gas is used in a
variety of ways in businesses, electric plants, factories, homes, and now even
cars. The demand for fertilizer is driven by a number of factors, including
grain prices, the status of government farm subsidy programs, the amount of
farming acreage and mix of crops planted, weather patterns, farming practices,
and the value of the U.S. dollar.
In North America, 1998 carload originations of both chemicals and petroleum
products remained relatively constant, compared to 1997. The 98% utilization
rate of the Partnership's pressurized tank cars was consistent with this
statistic.
(b) General-Purpose (Nonpressurized) Tank Cars
Tank cars that do not require pressurization are used to transport a variety of
bulk liquid commodities and chemicals, including certain petroleum fuels and
products, liquified asphalt, lubricating and vegetable oils, molten sulfur, and
corn syrup. The largest consumers of chemical products are the manufacturing,
automobile, and housing sectors. Because the bulk liquid industry is so diverse,
its overall health is reflected by such general indicators as changes in the
Gross Domestic Product, personal consumption expenditures, retail sales,
currency exchange rates, and national and international economic forecasts.
In North America, railcar loadings for the commodity group that includes
chemicals and petroleum products remained essentially unchanged, compared to
1997. The Partnership's general purpose cars continue to be in high demand, with
utilization over 98% in 1998.
(c) Covered Hopper (Grain) Cars
Covered hopper railcars are used to transport grain to domestic food processors,
poultry breeders, cattle feed lots, and for export. Demand for covered hopper
cars softened In 1998, as total North American grain shipments declined 8%,
compared to 1997, with grain shipments within Canada contributing to most of
this decrease. This has put downward pressure on lease rates, which has been
exacerbated by a significant increase in the number of covered hopper cars built
in the last few years. Since 1988, there has been a nearly 20% increase in rail
transportation capacity assigned to agricultural service. In 1996, just over
one-half of all new railcars built were covered hopper cars; in 1997, this
percentage dropped somewhat, to 38% of all cars built.
The Partnership's covered hopper cars were not impacted by the decrease in lease
rates during 1998, as all of the cars continued to operate on long-term leases.
(5) Trailers
(a) Intermodal (Piggyback) Trailers
Intermodal (piggyback) trailers are used to ship goods either by truck or by
rail. Activity within the North American intermodal trailer market declined
slightly in 1998, with trailer shipments down 4% from 1997 levels, due primarily
to rail service problems associated with the mergers in this area. Utilization
of the intermodal per diem rental fleet, consisting of approximately 170,000
units, was 73%. Intermodal utilization in 1999 is expected to decline another 2%
from 1998 levels, due to a slight leveling off of overall economic activity in
1999, after a robust year in 1998.
The General Partner has initiated expanded marketing and asset management
efforts for its intermodal trailers, from which it expects to achieve improved
trailer utilization and operating results. During 1998, average utilization
rates for the Partnership's intermodal trailer fleet approached 80%.
(b) Over-the-Road Dry Trailers
The U.S. over-the-road nonrefrigerated (dry) trailer market continued to recover
in 1998, with a strong domestic economy resulting in heavy freight volumes. The
leasing outlook continues to be positive, as equipment surpluses of recent years
are being absorbed by a buoyant market. In addition to high freight volumes,
declining fuel prices have led to a strong trucking industry and improved
equipment demand.
The Partnership's nonrefrigerated van fleet experienced strong utilization
throughout 1998, with utilization rates remaining well above 70% throughout the
year.
(c) Over-the-Road Refrigerated Trailers
The temperature-controlled over-the-road trailer market remained strong in 1998
as freight levels improved and equipment oversupply was reduced. Many
refrigerated equipment users retired older trailers and consolidated their
fleets, making way for new, technologically improved units. Production of new
equipment is backlogged into the third quarter of 1999. In light of the current
tight supply of trailers available on the market, it is anticipated that
trucking companies and other refrigerated trailer users will look outside their
own fleets more frequently by leasing trailers on a short-term basis to meet
their equipment needs.
This leasing trend should benefit the Partnership, which makes most of its
trailers available for short-term leasing from rental yards owned and operated
by a PLM International subsidiary. The Partnership's utilization of refrigerated
trailers showed improvement in 1998, with utilization rates approaching 70%,
compared to 60% in 1997.
(6) Marine Containers
The marine container market began 1998 with industrywide utilization in the low
80% range. This percentage eroded somewhat during the year, while per diem
rental rates remained steady. One factor affecting the market was the
availability of historically low-priced marine containers from Asian
manufacturers. This trend is expected to remain in 1999, and will continue to
put pressure on economic results fleetwide.
The trend toward industrywide consolidation continued in 1998, as the U.S.
parent company of one of the industry's top ten container lessors announced that
it would be outsourcing the management of its container fleet to a competitor.
While this announcement has yet to be finalized, over the long term, such
industrywide consolidation should bring more rationalization to the container
leasing market and result in both higher fleetwide utilization and per diem
rates.
<PAGE>
(7) Mobile Offshore Drilling Unit (Rig)
For the first half of 1998, overall worldwide demand for mobile offshore
drilling units (rigs) continued the increases experienced in 1996 and 1997.
During the second half of the year, demand softened -- particularly in the
shallow-water U.S. Gulf markets -- due to decreases in worldwide oil prices and
U.S. gas prices. Day rates in the shallow-water sector showed significant
decreases; however, day rates for deep-water floating rigs maintained the gain
attained earlier in the year. Future prospects for offshore drilling markets are
favorable, since low oil and gas prices, along with economic growth in general,
tend to stimulate demand for oil and gas. In the short term, 1999 is expected to
be a flat year for growth in the offshore markets, with the exception of
long-term projects already planned or contracted by large international oil and
gas exploration and development companies.
The Partnership currently has an interest in one drillship, a floating drilling
rig. The floating rig market has experienced the most improvement of all rig
types since 1995. Technological advances and more efficient operations have
improved the economics of drilling and production in the deepwater locations in
which floating rigs are utilized. Overall, demand for floating rigs increased
from 128 rig-years in 1996 to 131 rig-years in 1997, and stayed at that level in
1998 (a rig-year is the equivalent of one rig employed for 12 consecutive
months). The increase in demand and utilization during this period prompted
significant increases in contract day rates and an associated increase in market
values for floating rigs. Currently 177 floating rigs (151 semisubmersibles and
26 drillships) are operating internationally and 39 floating rigs are on order
or undergoing conversion, scheduled for delivery between 1999 and 2001. All but
six of these newbuildings and conversions have already been contracted for more
than two years. This high level of commitment should prevent a significant
deterioration in the market as the rigs are delivered.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign government authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require it's removal from service or extensive modification to meet these
regulations at considerable cost to the Partnership. Such regulations include
but are not limited to:
(1) the U.S. Oil Pollution Act of 1990, which established liability for
operators and owners of vessels and mobile offshore drilling units that
create environmental pollution. This regulation has resulted in higher oil
pollution liability insurance. The lessee of the equipment typically
reimburses the Partnership for these additional costs;
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990,
which limits or eliminates the operation of commercial aircraft in the U.S.
that do not meet certain noise, aging, and corrosion criteria. In addition,
under U.S. Federal Aviation Regulations, after December 31, 1999, no person
may operate an aircraft to or from any airport in the contiguous United
States unless that aircraft has been shown to comply with Stage III noise
levels. The Partnership has a Stage II aircraft that does not meet Stage
III requirements. This Stage II aircraft is scheduled to be either modified
to meet Stage III requirements, sold, or re-leased in a country that does
not require this regulation before the year 2000. The cost to install a
hushkit to meet quieter Stage III requirements is approximately $1.5
million, depending on the type of aircraft;
(3) the Montreal Protocol on Substances that Deplete the Ozone Layer and
the U.S. Clean Air Act Amendments of 1990, which call for the control and
eventual replacement of substances that have been found to cause or
contribute significantly to harmful effects on the stratospheric ozone
layer and which are used extensively as refrigerants in refrigerated marine
cargo containers and over-the-road refrigerated trailers;
(4) the U.S. Department of Transportation's Hazardous Materials
Regulations, which regulate the classification and packaging requirements
of hazardous materials and which apply particularly to the Partnership's
tank railcars, issued a statement that requires the Partnership to
initially inspect approximately 23% of the tank railcars for a protective
coating to the outside of the tank, as well as the inside of the metal tank
jacket whenever a tank is insulated. If any of the inspected tank railcars
fail to meet the requirements, an additional percentage of the tank
railcars will need to be inspected. If all the tank railcars in the initial
inspection meet the issued requirements, the remaining railcars will be
eliminated from the inspection program. The Partnership owns 73 tank
railcars that need to be inspected. Tank railcars that fail the inspection,
will have to be repaired at a cost of approximately $25,000 each before it
can go back into service by August 2000. The Partnership plans to complete
the initial inspection of the tank railcars by the end of March 1999.
As of December 31, 1998, the Partnership is in compliance with the above
governmental regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased and its interest in entities that own equipment for leasing
purposes. As of December 31, 1998, the Partnership owned a portfolio of
transportation and related equipment and investments in equipment owned by
unconsolidated special-purpose entities (USPE's) as described in Item 1, Table
1. The Partnership acquired equipment with the proceeds of the Partnership
offering of $166.1 million through the third quarter of 1993, with proceeds from
the debt financing of $30.0 million, and by reinvesting a portion of its
operating cash flow in additional equipment.
The Partnership maintains its principal office at One Market, Steuart Street
Tower, Suite 800, San Francisco, California 94105-1301. All office facilities
are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
PLM International, (the Company) and various of its affiliates are named as
defendants in a lawsuit filed as a purported class action on January 22, 1997 in
the Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251 (the
Koch action). Plaintiffs, who filed the complaint on their own and on behalf of
all class members similarly situated (the class), are six individuals who
invested in certain California limited partnerships (the Partnerships) for which
the Company's wholly-owned subsidiary, PLM Financial Services, Inc. (FSI), acts
as the general partner, including the Partnership, PLM Equipment Growth Funds V,
and IV, and PLM Equipment Growth & Income Fund VII (the Growth Funds). The state
court ex parte certified the action as a class action (i.e., solely upon
plaintiffs' request and without the Company being given the opportunity to file
an opposition). The complaint asserts eight causes of action against all
defendants, as follows: fraud and deceit, suppression, negligent
misrepresentation and suppression, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, unjust enrichment, conversion, and
conspiracy. Additionally, plaintiffs allege a cause of action against PLM
Securities Corp. for breach of third party beneficiary contracts in violation of
the National Association of Securities Dealers rules of fair practice.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, and
control persons. Based on these duties, plaintiffs assert liability against
defendants for improper sales and marketing practices, mismanagement of the
Growth Funds, and concealing such mismanagement from investors in the Growth
Funds. Plaintiffs seek unspecified compensatory and recissory damages, as well
as punitive damages, and have offered to tender their limited partnership units
back to the defendants.
In March 1997, the defendants removed the Koch action from the state court to
the United States District Court for the Southern District of Alabama, Southern
Division (Civil Action No. 97-0177-BH-C) based on the district court's diversity
jurisdiction, following which plaintiffs filed a motion to remand the action to
the state court. Removal of the action to federal court automatically nullified
the state court's ex parte certification of the class. In September 1997, the
district court denied plaintiffs' motion to remand the action to state court and
dismissed without prejudice the individual claims of the California plaintiff,
reasoning that he had been fraudulently joined as a plaintiff. In October 1997,
defendants filed a motion to compel arbitration of plaintiffs' claims, based on
an agreement to arbitrate contained in the limited partnership agreement of each
Growth Fund, and to stay further proceedings pending the outcome of such
arbitration. Notwithstanding plaintiffs' opposition, the district court granted
defendants' motion in December 1997.
Following various unsuccessful requests that the district court reverse, or
otherwise certify for appeal, its order denying plaintiffs' motion to remand the
case to state court and dismissing the California plaintiff's claims, plaintiffs
filed with the U.S. Court of Appeals for the Eleventh Circuit a petition for a
writ of mandamus seeking to reverse the district court's order. The Eleventh
Circuit denied plaintiffs' petition in November 1997, and further denied
plaintiffs subsequent motion in the Eleventh Circuit for a rehearing on this
issue. Plaintiffs also appealed the district court's order granting defendants'
motion to compel arbitration, but in June 1998 voluntarily dismissed their
appeal pending settlement of the Koch action, as discussed below.
On June 5, 1997, the Company and the affiliates who are also defendants in the
Koch action were named as defendants in another purported class action filed in
the San Francisco Superior Court, San Francisco, California, Case No. 987062
(the Romei action). The plaintiff is an investor in PLM Equipment Growth Fund V,
and filed the complaint on her own behalf and on behalf of all class members
similarly situated who invested in certain California limited partnerships for
which FSI acts as the general partner, including the Growth Funds. The complaint
alleges the same facts and the same nine causes of action as in the Koch action,
plus five additional causes of action against all of the defendants, as follows:
violations of California Business and Professions Code Sections 17200, et seq.
for alleged unfair and deceptive practices, constructive fraud, unjust
enrichment, violations of California Corporations Code Section 1507, and a claim
for treble damages under California Civil Code Section 3345.
On July 31, 1997, defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition) under
the Federal Arbitration Act seeking to compel arbitration of plaintiff's claims
and for an order staying the state court proceedings pending the outcome of the
arbitration. In connection with this motion, plaintiff agreed to a stay of the
state court action pending the district court's decision on the petition to
compel arbitration. In October 1997, the district court denied the Company's
petition to compel arbitration, but in November 1997, agreed to hear the
Company's motion for reconsideration of this order. The hearing on this motion
has been taken off calendar and the district court has dismissed the petition
pending settlement of the Romei action, as discussed below. The state court
action continues to be stayed pending such resolution. In connection with her
opposition to the petition to compel arbitration, plaintiff filed an amended
complaint with the state court in August 1997 alleging two new causes of action
for violations of the California Securities Law of 1968 (California Corporations
Code Sections 25400 and 25500) and for violation of California Civil Code
Sections 1709 and 1710. Plaintiff also served certain discovery requests on
defendants. Because of the stay, no response to the amended complaint or to the
discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a memorandum
of understanding (MOU) related to the settlement of those actions (the monetary
settlement). The monetary settlement contemplated by the MOU provides for
stipulating to a class for settlement purposes, and a settlement and release of
all claims against defendants and third party brokers in exchange for payment
for the benefit of the class of up to $6.0 million. The final settlement amount
will depend on the number of claims filed by authorized claimants who are
members of the class, the amount of the administrative costs incurred in
connection with the settlement, and the amount of attorneys' fees awarded by the
Alabama district court. The Company will pay up to $0.3 million of the monetary
settlement, with the remainder being funded by an insurance policy.
The parties to the monetary settlement have also agreed in principal to an
equitable settlement (the equitable settlement) which provides, among other
things, (a) for the extension of the operating lives of the Partnership, PLM
Equipment Growth Fund V, and PLM Equipment Growth & Income Fund VII (the Funds)
by judicial amendment to each of their partnership agreements, such that FSI,
the general partner of each such Fund, will be permitted to reinvest cash flow,
surplus partnership funds or retained proceeds in additional equipment into the
year 2004, and will liquidate the partnerships' equipment in 2006; (b) that FSI
will be entitled to earn front end fees (including acquisition and lease
negotiation fees) in excess of the compensatory limitations set forth in the
North American Securities Administrators Association, Inc. Statement of Policy
by judicial amendment to the Partnership Agreements for each Fund; (c) for a one
time redemption of up to 10% of the outstanding units of each Fund at 80% of
such partnership's net asset value; and (d) for the deferral of a portion of
FSI's management fees. The equitable settlement also provides for payment of the
equitable settlement attorneys' fees from Partnership funds in the event that
distributions paid to investors in the Funds during the extension period reach a
certain internal rate of return.
Defendants will continue to deny each of the claims and contentions and admit no
liability in connection with the proposed settlements. The monetary settlement
remains subject to numerous conditions, including but not limited to: (a)
agreement and execution by the parties of a settlement agreement (the settlement
agreement), (b) notice to and certification of the monetary class for purposes
of the monetary settlement, and (c) preliminary and final approval of the
monetary settlement by the Alabama district court. The equitable settlement
remains subject to numerous conditions, including but not limited to: (a)
agreement and execution by the parties of the settlement agreement, (b) notice
to the current unitholders in the Funds (the equitable class) and certification
of the equitable class for purposes of the equitable settlement, (c)
preparation, review by the Securities and Exchange Commission (SEC), and
dissemination to the members of the equitable class of solicitation statements
regarding the proposed extensions, (d) disapproval by less than 50% of the
limited partners in each of the Funds of the proposed amendments to the limited
partnership agreements, (e) judicial approval of the proposed amendments to the
limited partnership agreements, and (f) preliminary and final approval of the
equitable settlement by the Alabama district court. The parties submitted the
settlement agreement to the Alabama district court on February 12, 1999, and the
preliminary class certification hearing is scheduled for March 24, 1999. If the
district court grants preliminary approval, notices to the monetary class and
equitable class will be sent following review by the SEC of the solicitation
statements to be prepared in connection with the equitable settlement. The
monetary settlement, if approved, will go forward regardless of whether the
equitable settlement is approved or not. The Company continues to believe that
the allegations of the Koch and Romei actions are completely without merit and
intends to continue to defend this matter vigorously if the monetary settlement
is not consummated.
The Partnership, together with affiliates, initiated litigation in various
official forums in India against a defaulting Indian airline lessee to repossess
Partnership property and to recover damages for failure to pay rent and failure
to maintain the aircraft in accordance with the relevant lease contract. The
Partnership has repossessed all of the property previously leased to the
airline, and the airline has ceased operations. In response to the Partnership's
collection efforts, the airline filed counter-claims against the Partnership in
excess of the Partnership's claims against the airline. The General Partner
believes that the airline's counterclaims are completely without merit, and the
General Partner will vigorously defend against such counterclaims.
The Partnership is involved as plaintiff or defendant in various other legal
actions incident to its business. Management does not believe that any of these
actions will be material to the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS
Pursuant to the terms of the partnership agreement, the General Partner is
generally entitled to a 5% interest in the profits and losses and cash
distributions of the Partnership. The General Partner is the sole holder of such
interests. Special allocations of income are made to the General Partner equal
to the deficit balance, if any, in the capital account of the General Partner.
The General Partner's annual allocation of net income will generally be equal to
the General Partner's cash distributions paid during the current year. The
remaining interests in the profits and losses and cash distributions of the
Partnership are allocated to the limited partners. As of December 31, 1998,
there were 8,037 limited partners holding units in the Partnership.
There are several secondary markets in which limited partnership units trade.
Secondary markets are characterized as having few buyers for limited partnership
interests and therefore are generally viewed as being inefficient vehicles for
the sale of limited partnership units. Presently, there is no public market for
the limited partnership units and none is likely to develop. To prevent the
units from being considered publicly traded and thereby to avoid taxation of the
Partnership as an association treated as a corporation under the Internal
Revenue Code, the limited partnership units will not be transferable without the
consent of the General Partner, which may be withheld in its absolute
discretion. The General Partner intends to monitor transfers of units in an
effort to ensure that they do not exceed the percentage or number permitted by
certain safe harbors promulgated by the Internal Revenue Service. A transfer may
be prohibited if the intended transferee is not an U.S. citizen or if the
transfer would cause any portion of the units of a "Qualified Plan" as defined
by the Employee Retirement Income Security Act of 1974 and Individual Retirement
Accounts to exceed the allowable limit. The Partnership may redeem a certain
number of units each year under the terms of the Partnership's Limited
Partnership Agreement, beginning November 24, 1995. If the number of units made
available for purchase by limited partners in any calendar year exceeds the
number that can be purchased with reinvestment plan proceeds, then the
Partnership may, subject to certain terms and conditions, redeem up to 2% of the
outstanding units each year. The purchase price to be offered by the Partnership
for these units will be equal to 110% of the unrecovered principal attributable
to the units. The unrecovered principal for any unit will be equal to the excess
of (i) the capital contribution attributable to the unit over (ii) the
distributions from any source paid with respect to the units. As of December 31,
1998, the Partnership had agreed to purchase approximately 23,700 units for an
aggregate price of $0.2 million. The General Partner anticipates that these
units will be repurchased in the first and second quarters of 1999. As of
December 31, 1998, the Partnership has repurchased a cumulative total of 111,908
units at a cost of $1.4 million. In addition to these units, the General Partner
may purchase additional limited partnership units on behalf of the Partnership
in the future.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the Years Ended December
31, (In thousands of dollars, except
weighted-average unit amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating results:
Total revenues $ 24,545 $ 32,723 $ 31,436 $ 33,445 $ 37,467
Net gain on disposition of equipment 6,253 10,121 7,214 128 4,295
Loss on revaluation of equipment 4,276 -- -- -- 1,175
Equity in net income of unconsolidated
special-purpose entities 6,998 3,384 3,426 -- --
Net income (loss) 1,445 9,232 8,291 (1,974 ) (1,680 )
At year-end:
Total assets $ 88,337 $ 103,961 $ 113,525 $ 121,957 $ 139,848
Total liabilities 35,383 36,809 37,735 36,527 34,926
Note payable 30,000 30,000 31,286 30,000 30,000
Cash distribution $ 15,226 $ 17,384 $ 17,467 $ 17,518 $ 17,537
Cash distribution representing
a return of capital to the limited
partners $ 13,781 $ 8,152 $ 9,176 $ 16,642 $ 16,661
Per weighted-average limited partnership unit:
Net income (loss) $ 0.08 $ 1.01 $ 0.89 $ (0.34 ) $ (0.31 )
Cash distribution $ 1.76 $ 2.00 $ 2.00 $ 2.00 $ 2.00
Cash distribution representing
a return of capital $ 1.68 $ 0.99 $ 1.11 $ 2.00 $ 2.00
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth Fund VI
(the Partnership). The following discussion and analysis of operations focuses
on the performance of the Partnership's equipment in various segments in which
it operates and its effect on the Partnership's overall financial condition.
(B) Results of Operations - Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Partnership's equipment portfolio to re-pricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and the
equipment must be re-marketed. Major factors influencing the current market rate
for Partnership equipment include, but are not limited to, supply and demand for
similar or comparable types of transport capacity, desirability of the equipment
in the leasing market, market conditions for the particular industry segment in
which the equipment is to be leased, overall economic conditions, and various
regulations concerning the use of the equipment. Equipment that is idle or out
of service between the expiration of one lease and the assumption of a
subsequent lease can result in a reduction of contribution to the Partnership.
The Partnership experienced re-leasing or repricing activity in 1998 primarily
in its railcar, trailer, marine vessel, and container portfolios.
(a) Railcars: While this equipment experienced some re-leasing activity,
lease rates in this market remain relatively constant.
(b) Trailers: The Partnership's trailer portfolio operates in short-term
rental facilities or with short-line railroad systems. The relatively short
duration of most leases in these operations exposes the trailers to considerable
re-leasing activity.
(c) Marine vessels: Certain of the Partnership's marine vessels ended their
existing leases and were required to go into drydocking. These marine vessels
will be remarketed during 1999 exposing them to repricing and releasing risk.
(d) Marine containers: Some of the Partnership's marine containers that are
on lease are leased to operators of utilization-type leasing pools and, as such,
are highly exposed to repricing activity. The decline in marine container
contributions was due to equipment sales. Market conditions were relatively
constant in repricing activity during 1998.
(2) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment and investments in unconsolidated
special-purpose entities (USPEs), unless accompanied by an immediate replacement
of additional equipment earning similar rates (see Reinvestment Risk, below),
represents a reduction in the size of the equipment portfolio and may result in
a reduction of contribution to the Partnership. Lessees not performing under the
terms of their leases, either by not paying rent, not maintaining or operating
the equipment in accordance with the conditions of the leases, or other possible
departures from the lease terms, can result not only in reductions in
contribution, but also may require the Partnership to assume additional costs to
protect its interests under the leases, such as repossession or legal fees. The
Partnership experienced the following in 1998:
(a) Liquidations: During the year, the Partnership disposed of owned
equipment that included a commercial aircraft, an aircraft engine, marine
containers, trailers, and railcars, and an interest in a USPE trust that owned
four Stage II commercial aircraft for total proceeds of $29.1 million.
(b) Nonperforming lessees: A Brazilian lessee is having financial
difficulties. The lessee has contacted the General Partner and asked for an
extended repayment schedule for the lease payment arrearage. The General Partner
is currently in negotiation with the lessee to work out a suitable settlement
for both parties to collect the lease payments that are overdue.
(3) Reinvestment Risk
Reinvestment risk occurs when; the Partnership cannot generate sufficient
surplus cash after fulfillment of operating obligations and distributions to
reinvest in additional equipment during the reinvestment phase of Partnership
operations, equipment is sold or liquidated for less than threshold amounts,
proceeds from dispositions, or surplus cash available for reinvestment cannot be
reinvested at the threshold lease rates; or proceeds from sales or surplus cash
available for reinvestment cannot be deployed in a timely manner.
During the first six years of operations, the Partnership intends to increase
its equipment portfolio by investing surplus cash in additional equipment after
fulfilling operating requirements and paying distributions to the partners.
Subsequent to the end of the reinvestment period, the Partnership will continue
to operate for another two years and then begin an orderly liquidation over an
anticipated two-year period.
Other nonoperating funds for reinvestment are generated from the sale of
equipment prior to the Partnership's planned liquidation phase, the receipt of
funds realized from the payment of stipulated loss values on equipment lost or
disposed of during the time it is subject to lease agreements, or from the
exercise of purchase options in certain lease agreements. Equipment sales
generally result from evaluations by the General Partner that continued
ownership of certain equipment is either inadequate to meet Partnership
performance goals, or that market conditions, market values, and other
considerations indicate it is the appropriate time to sell certain equipment.
During 1998, the Partnership completed the purchase of an MD-82 Stage III
commercial aircraft for a cost of $13.4 million and paid acquisition and lease
negotiation fees of $0.7 million to FSI for the purchase of this equipment. The
Partnership made a deposit of $1.3 million toward this purchase in 1997, which
is included in the December 31, 1997 balance sheet as an equipment acquisition
deposit. Additionally, the Partnership purchased a portfolio of aircraft rotable
components for $2.2 million, a portfolio of marine containers for $5.0 million,
a group of railcars for $2.9 million, and a marine vessel for $9.6 million and
paid acquisition and lease negotiation fees of $1.1 million to FSI for the
purchase of this equipment.
Also during 1998, the Partnership entered into a commitment to purchase a marine
vessel for a cost of $6.7 million and made a deposit of $0.7 million toward this
purchase, which is included in the December 31, 1998 balance sheet as an
equipment acquisition deposit. The Partnership completed the purchase of this
equipment during February 1999 and paid $0.4 million in acquisition and lease
negotiation fees to FSI related to this acquisition.
(4) Equipment Valuation
In accordance with Financial Accounting Standards Board statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the General Partner reviews the carrying value of the
Partnership's equipment portfolio at least quarterly in relation to expected
future market conditions for the purpose of assessing the recoverability of the
recorded amounts. If the projected undiscounted future lease revenues plus
residual values are less than the carrying value of the equipment, a loss on
revaluation is recorded. Reductions of $4.3 million and $1.0 million to the
carrying value of owned equipment and partially owned equipment, respectively,
were required during 1998. No reductions were required to the carrying value of
equipment during 1997 or 1996.
As of December 31, 1998, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including the Partnership's
interest in equipment owned by USPEs, to be $114.6 million. This estimate is
based on recent market transactions for equipment similar to the Partnership's
equipment portfolio and the Partnership's interest in equipment owned by USPEs.
Ultimate realization of fair market value by the Partnership may differ
substantially from the estimate due to specific market conditions, technological
obsolescence, and government regulations, among other factors, that the General
Partner cannot accurately predict.
(C) Financial Condition - Capital Resources, Liquidity, and Unit
Redemption Plan
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering of $166.1 million and permanent
debt financing of $30.0 million. No further capital contributions from the
limited partners are permitted under the terms of the Partnership's limited
partnership agreement. The Partnership's total outstanding indebtedness,
currently $30.0 million, can only be increased by a maximum of $5.0 million
subject to specific covenants in existing debt agreements unless the
Partnership's senior lender will issue a waiver.
The Partnership relies on operating cash flow to meet its operating obligations,
to make cash distributions to the limited partners, and increase the
Partnership's equipment portfolio with any remaining available surplus cash.
For the year ended December 31, 1998, the Partnership generated $14.3 million in
operating cash (net cash provided by operating activities plus non-liquidating
cash distributions from USPEs) to meet its operating obligations and make
distributions of $15.2 million to the partners, but also used undistributed
available cash from prior periods of approximately $0.9 million.
Pursuant the terms of the limited partnership agreement, beginning December 1,
1994, if the number of units made available for purchase by limited partners in
any calendar year exceeds the number that can be purchased with reinvestment
plan proceeds, then the Partnership may, subject to certain terms and
conditions, redeem up to 2% of the outstanding units each year. The purchase
price to be offered for such units will be equal to 110% of the unrecovered
principal attributed to the units. Unrecovered principal is defined as the
excess of the capital contribution attributable to a unit over the distributions
from any source paid with respect to that unit. As of December 31, 1998, the
Partnership had agreed to purchase approximately 23,700 units for an aggregate
price of approximately $0.2 million. The General Partner anticipates that these
units will be repurchased during the first and second quarters of 1999. In
addition to these units, the General Partner may purchase additional units on
behalf of the Partnership in the future.
The General Partner has entered into a joint $24.5 million credit facility (the
Committed Bridge Facility) on behalf of the Partnership, PLM Equipment Growth &
Income Fund VII (EGF VII) and Professional Lease Management Income Fund I (Fund
I), both affiliated investment programs; and TEC Acquisub, Inc. (TECAI), an
indirect wholly-owned subsidiary of the General Partner, which may be used to
provide interim financing of up to (i) 70% of the aggregate book value or 50% of
the aggregate net fair market value of eligible equipment owned by the
Partnership, plus (ii) 50% of unrestricted cash held by the borrower. The
Partnership, EGF VII, Fund I, and TECAI collectively may borrow up to $24.5
million of the Committed Bridge Facility. Outstanding borrowings by one borrower
reduce the amount available to each of the other borrowers under the Committed
Bridge Facility. The Committed Bridge Facility also provides for a $5.0 million
Letter of Credit Facility for the eligible borrowers. Individual borrowings may
be outstanding for no more than 179 days, with all advances due no later than
December 14, 1999. Interest accrues at either the prime rate or adjusted LIBOR
plus 1.625% at the borrower's option and is set at the time of an advance of
funds. Borrowings by the Partnership are guaranteed by the General Partner. As
of December 31, 1998, no eligible borrower had any outstanding borrowings. As of
March 17, 1999, the Partnership had outstanding borrowings of $3.7 million and
TECAI had outstanding borrowings of $9.4 million; no other eligible borrower had
any outstanding borrowings. The General Partner believes it will be able to
renew the Committed Bridge Facility upon its expiration with similar terms as
those in the current Committed Bridge Facility.
The General Partner has not planned any expenditures, nor is it aware of any
contingencies that would cause it to require any additional capital to that
mentioned above.
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<PAGE>
(D) Results of Operations - Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1998 and 1997
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
decreased during the year ended December 31, 1998, when compared to the same
period of 1997. Gains or losses from the sale of equipment and certain expenses,
such as depreciation and amortization and general and administrative expenses
relating to the operating segments (see Note 5 to the audited financial
statements), are not included in the owned equipment operation discussion
because they are indirect in nature and not a result of operations, but the
result of owning a portfolio of equipment. The following table presents lease
revenues less direct expenses by segment (in thousands of dollars):
<TABLE>
<CAPTION>
For the Years
Ended December 31,
1998 1997
----------------------------
<S> <C> <C>
Rail equipment $ 3,254 $ 3,134
Aircraft, aircraft engines, and components 2,845 3,083
Trailers 2,478 2,890
Marine vessels 1,678 1,610
Marine containers 911 1,668
</TABLE>
Rail equipment: Rail equipment lease revenues and direct expenses were $4.1
million and $0.9 million, respectively, for the year ended December 31, 1998
compared to $4.1 million and $1.0 million, respectively, during the same period
of 1997. The increase in railcar contribution was due to lower repairs required
during 1998 when compared to the same period of 1997.
Aircraft, aircraft engines, and components: Aircraft lease revenues and direct
expenses were $4.0 million and $1.1 million, respectively, for the year ended
December 31, 1998, compared to $3.6 million and $0.5 million, respectively,
during the same period of 1997. The decrease in aircraft contribution was due to
the sale of a Stage II commercial aircraft during 1998 and the sale of a
portfolio of aircraft engines and components during the fourth quarter of 1997.
The sale of this equipment was offset, in part, by the purchase of an MD-82
Stage III commercial aircraft and a portfolio of aircraft rotable components
during the first quarter of 1998.
Trailers: Trailer lease revenues and direct expenses were $3.3 million and $0.8
million, respectively, for the year ended December 31, 1998, compared to $3.8
million and $0.9 million, respectively, during the same period of 1997. The
number of trailers owned by the Partnership has declined during 1998 and 1997
due to sales and dispositions. The result of this declining fleet has been a
decrease in trailer contribution.
Marine vessels: Marine vessel lease revenues and direct expenses were $5.2
million and $3.6 million, respectively, for the year ended December 31, 1998,
compared to $8.9 million and $7.3 million, respectively, during the same period
of 1997. The increase in marine vessel contribution was due to the receipt of a
$0.2 million loss-of-hire insurance refund during 1998 from Transportation
Equipment Indemnity Company, Ltd., an affiliate of the General Partner, due to
lower claims from the insured Partnership and other insured affiliated
partnerships. The decrease in marine vessel lease revenues and direct expenses
was due to sale of the Partnership's two marine vessels during the fourth
quarter of 1997, that were operating under a lease arrangement in which the
lessee paid a higher lease rate however, the Partnership paid for all operating
expenses. The decrease in lease revenues was offset in part, by the purchase of
an additional marine vessel during the second quarter of 1998 that is operating
under a bareboat charter in which the lessee pays a flat lease rate and also
pays for certain operating expenses while on lease.
Marine containers: Marine container lease revenues and direct expenses were $0.9
million and $13,000, respectively, for the year ended December 31, 1998,
compared to $1.7 million and $13,000, respectively, during the same quarter of
1997. The number of containers has declined during 1998 and 1997 due to sales
and dispositions. The result of this declining fleet has been a decrease in
container contribution.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $23.7 million for the year ended December 31, 1998
increased from $17.0 million for the same period in 1997. Significant variances
are explained as follows:
(i) A $4.8 million increase in depreciation and amortization expenses from
1997 levels reflects the purchase of certain assets during 1998. This increase
was offset in part by the sale of certain equipment during 1998 and 1997 and the
double-declining balance method of depreciation which results in greater
depreciation in the first years an asset is owned.
(ii)Loss on revaluation of equipment increased $4.3 million during the year
ended December 31, 1998 and resulted from the Partnership reducing the carrying
value of marine containers and marine vessels to their estimated net realizable
value. No revaluation of equipment was required during 1997.
(iii)A $0.2 million decrease in management fees was due to lower lease
revenues earned by the Partnership during 1998, when compared to 1997.
(iv)A $0.3 million decrease in interest expense was due to a lower average
debt balance on the short-term credit facility when compared to 1997.
(v) A $0.6 million decrease in administrative expenses was due to lower
costs for professional services needed to collect past due receivables due from
certain nonperforming lessees.
(vi)A $1.3 million decrease in the provision for bad debts was due to the
collection of $0.7 million from past due receivables during the year ended
December 31, 1998 that had previously been reserved for as a bad debt, and the
General Partner's evaluation of the collectibility of receivables due from
certain lessees.
(c) Net Gain (Loss) on Disposition of Owned Equipment
The net gain on the disposition of owned equipment for the year ended December
31, 1998 totaled $6.3 million, and resulted from the sale of a commercial
aircraft, an aircraft engine, marine containers, trailers, and railcars, with an
aggregate net book value of $6.1 million, for $12.4 million which included $1.4
million of unused engine reserves. The net gain on the disposition of equipment
for the year ended December 31, 1997 totaled $10.1 million, which resulted from
the sale of aircraft components, marine containers, and trailers, with an
aggregate net book value of $5.4 million, for proceeds of $7.2 million, and the
sale of two marine vessels with a net book value of $10.3 million for proceeds
of $17.8 million. Included in the gain of $8.3 million from the sale of the
marine vessels is the unused portion of accrued drydocking of $0.8 million.
(d) Interest and Other Income
Interest and other income increased $0.3 million due to higher average cash
balances available for investment throughout most of 1998 when compared to 1997.
<PAGE>
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
(USPEs)
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
<TABLE>
<CAPTION>
For the Years
Ended December 31,
1998 1997
------------------------------
<S> <C> <C>
Aircraft $ 8,642 $ 4,090
Mobile offshore drilling unit 243 1
Marine containers (20 ) --
Marine vessels (1,867 ) (707 )
=================================================================================== ==========
Equity in net income of USPEs $ 6,998 $ 3,384
=================================================================================== ==========
</TABLE>
Aircraft: As of December 31, 1998, the Partnership owned an interest in an
entity that owns a Boeing 767 commercial aircraft and an interest in a trust
that owns two commercial aircraft on a direct finance lease. As of December 31,
1997, the Partnership owned an interest in an entity that owns a Boeing 767
commercial aircraft, an interest in a trust that owns two commercial aircraft on
a direct finance lease, and an interest in a trust that held four commercial
aircraft. During the year ended December 31, 1998, lease revenues of $5.0
million and the gain from the sale of an interest in the trust that held four
commercial aircraft of $6.9 million, were offset by depreciation expense, direct
expenses, and administrative expenses of $3.2 million. During the same period of
1997, lease revenues of $7.6 million and the gain from the sale of an interest
in the trust that held six commercial aircraft of $3.4 million, were offset by
depreciation expense, direct expenses, and administrative expenses of $6.9
million. The decrease in lease revenues during the year ended December 31, 1998
was due to the sale of the Partnership's interest in a trust owning four
commercial aircraft during 1998 and the sale of the Partnership's interest in
another trust owning six commercial aircraft during the fourth quarter of 1997.
Depreciation expense, direct expenses, and administrative expenses also
decreased as a result of these sales.
Mobile offshore drilling unit: As of December 31, 1998 and 1997, the Partnership
owned an interest in a mobile offshore drilling unit. During the year ended
December 31, 1998, revenues of $1.2 million were offset by depreciation expense,
direct expenses, and administrative expenses of $1.0 million. During the same
period of 1997, revenues of $1.1 million were offset by depreciation expense,
direct expenses, and administrative expenses of $1.1 million. The contribution
from this equipment increased during 1998, when compared to the same period of
1997, due to a higher lease rate earned on this equipment and lower depreciation
expense due to the double-declining balance method of depreciation which results
in greater depreciation in the first years an asset is owned.
Marine containers: As of December 31, 1998, the Partnership owned an interest in
an entity that owns marine containers. During 1998, revenues of $0.1 million
were offset by depreciation expense, direct expenses, and administrative
expenses of $0.1 million. The Partnership purchased the interest in this entity
during the third quarter of 1998.
Marine vessels: As of December 31, 1998 and 1997, the Partnership owned an
interest in entities that own three marine vessels. During the year ended
December 31, 1998, revenues of $4.3 million were offset by depreciation expense,
direct expenses, and administrative expenses of $5.2 million and a loss on the
revaluation of a marine vessel of $1.0 million. During the same period of 1997,
revenues of $3.2 million were offset by depreciation expense, direct expenses,
and administrative expenses of $3.9 million. The primary reason for the
increases in revenues and depreciation expense, direct expenses, and
administrative expenses was due to the purchase of an interest in an additional
entity that owns a marine vessel during 1997. Loss on revaluation of equipment
of $1.0 million during the year ended December 31, 1998 resulted from the
Partnership reducing the carrying value of its interest in an entity owning a
marine vessel to its estimated net realizable value. No revaluation in the
carrying value of interests in marine vessels was required during 1997.
(f) Net Income
As a result of the foregoing, the Partnership's net income for the year ended
December 31, 1998 was $1.4 million, compared to a net income of $9.2 million
during the same period of 1997. The Partnership's ability to acquire, operate,
and liquidate assets, secure leases, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance during the
year ended December 31, 1998 is not necessarily indicative of future periods. In
the year ended December 31, 1998, the Partnership distributed $14.4 million to
the limited partners, or $1.76 per weighted-average limited partnership unit.
(2) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1997 and 1996
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
decreased during the year ended December 31, 1997, when compared to the same
period of 1996. Gains or losses from the sale of equipment and certain expenses,
such as depreciation and amortization and general and administrative expenses
relating to the operating segments (see Note 5 to the audited financial
statements), are not included in the owned equipment operation discussion
because they are indirect in nature and not a result of operations, but the
result of owning a portfolio of equipment. The following table presents lease
revenues less direct expenses by owned equipment type (in thousands of dollars):
<TABLE>
<CAPTION>
For the Years
Ended December 31,
1997 1996
----------------------------
<S> <C> <C>
Rail equipment $ 3,134 $ 2,774
Aircraft, aircraft engines, and components 3,083 3,982
Trailers 2,890 3,148
Marine containers 1,668 2,179
Marine vessels 1,610 3,816
</TABLE>
Rail equipment: Rail equipment lease revenues and direct expenses were $4.1
million and $1.0 million, respectively, for the year ended December, 31, 1997,
compared to $4.1 million and $1.3 million, respectively, during the same period
of 1996. Although the railcar fleet remained relatively the same size for both
years, the increase in railcar contribution resulted from fewer running repairs
during 1997 than were required on certain of the railcars in the fleet during
1996.
Aircraft, aircraft engines, and components: Aircraft lease revenues and direct
expenses were $3.6 million and $0.5 million, respectively, for the year ended
December 31, 1997, compared to $4.2 million and $0.2 million, respectively,
during 1996. The decrease in aircraft contribution was due to the sale of two
aircraft engines during the second quarter of 1996 and the sale of the aircraft
components during the fourth quarter of 1997.
Trailers: Trailer lease revenues and direct expenses were $3.8 million and $0.9
million, respectively, for the year ended December 31, 1997, compared to $4.2
million and $1.1 million, respectively, during 1996. The number of trailers
owned by the Partnership has been declining over the past 12 months due to sales
and dispositions. The result of this declining fleet has been a decrease in
trailer contribution.
Marine containers: Marine container lease revenues and direct expenses were $1.7
million and $13,000, respectively, for the year ended December 31, 1997,
compared to $2.2 million and $12,000, respectively, during 1996. The number of
marine containers owned by the Partnership has been declining over the past 12
months due to sales and dispositions. The result of this declining fleet has
been a decrease in marine container contribution.
Marine vessels: Marine vessel lease revenues and direct expenses were $8.9
million and $7.3 million, respectively, for the year ended December 31, 1997,
compared to $8.9 million and $5.1 million, respectively, during 1996. The
decrease in marine vessel contribution was due in part to the sale of two marine
vessels during the fourth quarter of 1997. The decrease in marine contribution
caused by these dispositions was offset in part by an increase in marine vessel
lease revenues due to the purchase of two marine vessels during the second
quarter of 1996 that were on lease for the full year of 1997, compared to being
on lease for only a partial period of 1996. The increase in lease revenues from
the purchased marine vessels was offset in part by lower day rates earned on two
marine vessels that were sold during 1997, when compared to 1996. Direct
expenses increased $2.2 million during the year ended 1997, due primarily to
repairs to two marine vessels that were not needed during 1996 and an increase
in the liability insurance for these marine vessels.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $17.0 million for the year ended December 31, 1997
decreased from $18.8 million for the same period in 1996. The significant
variances are explained as follows:
(i) A $2.6 million decrease in depreciation and amortization expenses from
1996 levels reflects the sale of certain assets during 1997 and 1996 and the
double-declining balance method of depreciation.
(ii)A $0.2 million decrease in management fees was due to lower lease
revenues.
(iii) A $0.7 million increase in administrative expenses was because of the
additional professional services needed to collect outstanding receivables due
from certain nonperforming lessees.
(iv)A $0.3 million increase in the allowance for bad debts was due to an
increase in uncollectable amounts due from certain lessees during 1997.
(c) Net Gain on Disposition of Owned Equipment
The net gain on the disposition of equipment for the year ended December 31,
1997 totaled $10.1 million, which resulted from the sale of aircraft components,
marine containers, and trailers, with an aggregate net book value of $5.4
million, for proceeds of $7.2 million, and the sale of two marine vessels with a
net book value of $10.3 million for proceeds of $17.8 million. Included in the
gain of $8.3 million from the sale of the marine vessels is the unused portion
of accrued drydocking of $0.8 million. For the year ended December, 31, 1996,
the $7.2 million net gain on the disposition of equipment resulted from the sale
or disposal of marine containers, aircraft engines, trailers, and railcars, with
an aggregate net book value of $6.0 million, for proceeds of $7.0 million., In
addition, one marine vessel with a net book value of $14.6 million was sold for
proceeds of $20.8 million. Included in the gain of $6.3 million from the sale of
the marine vessel was the unused portion of accrued drydocking of $0.1 million.
(d) Interest and Other Income
Interest and other income decreased $0.1 million during the year of 1997 when
compared to the same period of 1996. Interest income decreased $0.4 million
during 1997, due to lower cash balances available for investment. This decrease
was offset, in part, by the receipt of $0.3 million in business interruption
claims during 1997 resulting from the off-hire status of a marine vessel that
had various mechanical breakdowns.
(e) Equity in Net Income (Loss) of USPEs
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
<TABLE>
<CAPTION>
For the Years
Ended December, 31,
1997 1996
------------------------------
<S> <C> <C>
Aircraft $ 4,090 $ (1,853 )
Mobile offshore drilling unit 1 5,694
Marine vessels (707 ) (415 )
======================================================================================================
Equity in net income of USPEs $ 3,384 $ 3,426
======================================================================================================
</TABLE>
Aircraft: As of December 31, 1997, the Partnership owned an interest in an
entity that owns a Boeing 767 commercial aircraft, an interest in a trust that
owns two commercial aircraft on direct finance lease, and an interest in a trust
that holds four commercial aircraft. As of December 31, 1996, the Partnership
owned an interest in an entity that owned a Boeing 767 commercial aircraft, an
interest in a trust that held two commercial aircraft on direct finance lease,
and an interest in a trust that held ten commercial aircraft. During the year
ended December 31, 1997, lease revenues of $7.6 million and the gain from the
sale of an interest in a trust that held six commercial aircraft, of $3.4
million, were offset by depreciation expense, direct expenses, and
administrative expenses of $6.9 million. During the same period of 1996, lease
revenues of $6.3 million were offset by depreciation expense, direct expenses,
and administrative expenses of $8.2 million. The increase of $1.3 million in
revenues was due to the purchase of a trust that owns two commercial aircraft on
direct finance lease during 1997 and the purchase of a trust that holds five
commercial aircraft during the latter half of the first quarter of 1996. The
decrease of $1.3 million in depreciation expense, direct expenses, and
administrative expenses was primarily due to the double-declining balance method
of depreciation
Mobile offshore drilling unit: As of December 31, 1997, the Partnership owned an
interest in a rig that was purchased during the fourth quarter of 1996. In the
third quarter of 1996, the Partnership sold its interest in another rig. During
the year ended December 31, 1997, revenues of $1.1 million were offset by
depreciation expense, direct expenses, and administrative expenses of $1.1
million. During the same period of 1996, revenues of $0.8 million and the gain
from the sale of the rig of $5.8 million were offset by depreciation expense,
direct expenses, and administrative expenses of $0.9 million.
Marine vessels: As of December 31, 1997, the Partnership owned an interest in
entities that own three marine vessels, one of which was purchased during the
third quarter of 1997. As of December 31, 1996, the Partnership owned an
interest in two marine vessels. During the year ended December 31, 1997,
revenues of $3.2 million were offset by depreciation expense, direct expenses,
and administrative expenses of $3.9 million. During the same period of 1996,
revenues of $1.6 million were offset by depreciation expense, direct expenses,
and administrative expenses of $2.0 million. The primary reason revenues and
expenses increased during 1997 was due to the purchase of an interest in an
entity that owns a marine vessel during 1997.
(f) Net Income
As a result of the foregoing, the Partnership's net income for the year ended
December 31, 1997 was $9.2 million, compared to a net income of $8.3 million
during the same period in 1996. The Partnership's ability to operate, acquire
and liquidate assets, secure leases, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance in the year
ended December, 31, 1997 is not necessarily indicative of future periods. In the
year ended December 31, 1997, the Partnership distributed $16.5 million to the
limited partners, or $2.00 per weighted-average limited partnership unit.
(E) Geographic Information
Certain of the Partnership equipment operates in international markets. Although
these operations expose the Partnership to certain currency, political, credit
and economic risks, the General Partner believes that these risks are minimal or
has implemented strategies to control the risks. Currency risks are at a minimum
because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
by avoiding operations in countries that do not have a stable judicial system
and established commercial business laws. Credit support strategies for lessees
range from letters of credit supported by U.S. banks to cash deposits. Although
these credit support mechanisms generally allow the Partnership to maintain its
lease yield, there are risks associated with slow-to-respond judicial systems
when legal remedies are required to secure payment or repossess equipment.
Economic risks are inherent in all international markets and the General Partner
strives to minimize this risk with market analysis prior to committing equipment
to a particular geographic area. Refer to Note 6 to the audited financial
statements, for information on the lease revenues, net income (loss), and net
book value of equipment in various geographic regions.
Revenues and net operating income by geographic region are impacted by the time
period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years of
ownership due to the use of the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to change significantly in the future, as assets come
off lease and decisions are made either to redeploy the assets in the most
advantageous geographic location or sell the assets.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to U.S.- domiciled lessees consist of aircraft, trailers and railcars.
During 1998, U.S. lease revenues accounted for 33% of the total lease revenues
of wholly- and partially-owned equipment, while reporting a net loss of $3.5
million compared to the total aggregate net income for the Partnership of $1.4
million. The primary reason for this relationship is that a large gain was
realized from the sale of an asset in other geographic regions. In addition, the
Partnership depreciates its rail equipment over a 15-year period versus 12 years
for other equipment types owned and leased in other geographic regions.
The Partnership's owned equipment on lease to Canadian-domiciled lessees consist
of railcars. During 1998, Canadian lease revenues accounted for 7% of the total
lease revenues of wholly- and partially-owned equipment, while net income
accounted for $7.5 million of the total aggregate net income for the Partnership
of $1.4 million. The primary reason for this relationship is that a large gain
was realized from the sale of the commercial aircraft that were on lease in this
geographic region.
The Partnership's investment in an aircraft owned by a USPE on lease to South
American-domiciled lessees during 1998 accounted for 12% of the total lease
revenues of wholly- and partially-owned equipment. South American operations
accounted for $3.3 million of the total aggregate net income for the
Partnership.
The Partnership's owned equipment that was on lease to lessees domiciled in Asia
consists of aircraft. Lease revenues in this region accounted for 5% of the
total lease revenues of wholly- and partially-owned equipment and recorded a net
income of $5.0 million when compared to the total aggregate net income of the
Partnership of $1.4 million. The primary reason for this relationship is that a
large gain was realized from the sale of assets in this geographic region.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to lessees in the rest of the world consists of marine vessels, a rig, and
marine containers. During 1998, lease revenues from these operations accounted
for 43% of the total lease revenues of wholly- and partially-owned equipment,
while reporting a net loss from these operations of $6.7 million when compared
to the total aggregate net income for the Partnership of $1.4 million. The
primary reason for this relationship is that the Partnership recorded a loss on
the revaluation of certain owned marine vessels and marine containers of $4.3
million and investments in marine vessels owned by USPEs of $1.0 million.
(F) Effects of Year 2000
It is possible that the General Partner's currently installed computer systems,
software products, and other business systems, or the Partnership's vendors,
service providers, and customers, working either alone or in conjunction with
other software or systems, may not accept input of, store, manipulate, and
output dates on or after January 1, 2000 without error or interruption (a
problem commonly known as the "Year 2000" or "Y2K" problem). Since the
Partnership relies substantially on the General Partner's software systems,
applications, and control devices in operating and monitoring significant
aspects of its business, any Year 2000 problem suffered by the General Partner
could have a material adverse effect on the Partnership's business, financial
condition, and results of operations.
The General Partner has established a special Year 2000 oversight committee to
review the impact of Year 2000 issues on its software products and other
business systems in order to determine whether such systems will retain
functionality after December 31, 1999. The General Partner (a) is currently
integrating Year 2000-compliant programming code into its existing internally
customized and internally developed transaction processing software systems and
(b) the General Partner's accounting and asset management software systems have
either already been made Year 2000-compliant or Year 2000-compliant upgrades of
such systems are planned to be implemented by the General Partner before the end
of fiscal 1999. Although the General Partner believes that its Year 2000
compliance program can be completed by the end of 1999, there can be no
assurance that the compliance program will be completed by that date. To date,
the costs incurred and allocated to the Partnership to become Year 2000
compliant have not been material. Also, the General Partner believes the future
cost allocable to the Partnership to become Year 2000 compliant will not be
material.
It is possible that certain of the Partnership's equipment lease portfolio may
not be Year 2000 compliant. The General Partner is currently contacting
equipment manufacturers of the Partnership's leased equipment portfolio to
assure Year 2000 compliance or to develop remediation strategies. The General
Partner does not expect that non-Year 2000 compliance of its leased equipment
portfolio will have an adverse material impact on its financial statements.
Some risks associated with the Year 2000 problem are beyond the ability of the
Partnership or the General Partner to control, including the extent to which
third parties can address the Year 2000 problem. The General Partner is
communicating with vendors, services providers, and customers in order to assess
the Year 2000 compliance readiness of such parties and the extent to which the
Partnership is vulnerable to any third-party Year 2000 issues. There can be no
assurance that the software systems of such parties will be converted or made
Year 2000 compliant in a timely manner. Any failure by the General Partner or
such other parties to make their respective systems Year 2000 compliant could
have a material adverse effect on the business, financial position, and results
of operations from the Partnership. The General Partner will make an ongoing
effort to recognize and evaluate potential exposure relating to third-party Year
2000 noncompliance, and will develop a contingency plan if the General Partner
determines that third-party noncompliance will have a material adverse effect on
the Partnership's business, financial position, or results of operation.
The General Partner is currently developing a contingency plan to address the
possible failure of any systems due to the Year 2000 problems. The General
Partner anticipates these plans will be completed by September 30, 1999.
(G) Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of December 31, 1998,
the General Partner is reviewing the effect this standard will have on the
Partnership's consolidated financial statements.
(H) Inflation
Inflation had no significant impact on the Partnership's operations during 1998,
1997, or 1996.
(I) Forward-Looking Information
Except for historical information contained herein, the discussion in this Form
10-K contains forward-looking statements that involve risks and uncertainties,
such as statements of the Partnership's plans, objectives, expectations, and
intentions. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.
(J) Outlook for the Future
Several factors may affect the Partnership's operating performance in 1999 and
beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
The Partnership's operation of a diversified equipment portfolio in a broad base
of markets is intended to reduce its exposure to volatility in individual
equipment sectors.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent on many factors, such
as specific market conditions and economic activity, technological obsolescence,
and government or other regulations. The unpredictability of some of these
factors makes it difficult for the General Partner to clearly define trends or
influences that may impact the performance of the Partnership's equipment. The
General Partner continuously monitors both the equipment markets and the
performance of the Partnership's equipment in these markets. The General Partner
may make an evaluation to reduce the Partnership's exposure to those equipment
markets in which it determines that it cannot operate equipment and achieve
acceptable rates of return. Alternatively, the General Partner may make a
determination to enter those equipment markets in which it perceives
opportunities to profit from supply-demand instabilities or other market
imperfections.
The Partnership intends to use excess cash flow, if any, after payment of
operating expenses, principal and interest on debt, and cash distributions to
the partners to acquire additional equipment during the first six years of
Partnership operations. The General Partner believes that these acquisitions may
cause the Partnership to generate additional earnings and cash flow for the
Partnership.
(1) Repricing and Reinvestment Risk
Certain of the Partnership's aircraft, marine vessel, marine containers in
pools, railcar, and trailer portfolios will be remarketed in 1999 as existing
leases expire, exposing the Partnership to repricing risk/opportunity.
Additionally, the General Partner may elect to sell certain underperforming
equipment or equipment whose continued operation may become prohibitively
expensive. In either case, the General Partner intends to re-lease or sell
equipment at prevailing market rates; however, the General Partner cannot
predict these future rates with any certainty at this time, and cannot
accurately assess the effect of such activity on future Partnership performance.
The proceeds from the sold or liquidated equipment will be redeployed to
purchase additional equipment, as the Partnership is in its reinvestment phase.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the General Partner has
observed rising insurance costs to operate certain vessels into U.S. ports
resulting from implementation of the U.S. Oil Pollution Act of 1990. Ongoing
changes in the regulatory environment, both in the United States and
internationally, cannot be predicted with any accuracy and preclude the General
Partner from determining the impact of such changes on Partnership operations,
purchases, or sale of equipment. Under U.S. Federal Aviation Regulations, after
December 31, 1999, no person may operate an aircraft to or from any airport in
the contiguous United States unless that aircraft has been shown to comply with
Stage III noise levels. The Partnership has a Stage II aircraft that does not
meet Stage III requirements. This Stage II aircraft is scheduled either to be
modified to meet Stage III requirements, sold, or re-leased in a country that
does not require this regulation before the year 2000. The U.S. Department of
Transportation's Hazardous Materials Regulations, which regulate the
classification and packaging requirements of hazardous materials and which apply
particularly to the Partnership's tank railcars, issued a statement that
requires the owner to inspect a certain percentage of the tank railcars for a
protective coating to the outside of the tank as well as the inside of the metal
tank jacket whenever a tank is insulated. The Partnership owns tank railcars
that need to be inspected and, if needed, repaired before they can go back into
service by August 2000.
(3) Additional Capital Resources and Distribution Levels
The Partnership's initial contributed capital was composed of the proceeds from
its initial offering of $166.1 million, supplemented by permanent debt in the
amount of $30.0 million. The General Partner has not planned any expenditures,
nor is it aware of any contingencies, that would cause it to require any
additional capital or debt (an additional $5.0 million of debt is allowable
under the Partnership's debt agreement covenants which could be borrowed under
the Partnership's warehouse credit facility) to that mentioned above.
Pursuant to the limited partnership agreement, the Partnership will cease to
reinvest surplus cash in additional equipment beginning in its seventh year of
operations, which commences on January 1, 2000. Prior to that date, the General
Partner intends to continue its strategy of selectively redeploying equipment
throughout the reinvestment phase of the Partnership to achieve competitive
returns. By the end of this reinvestment period, the General Partner intends to
have assembled an equipment portfolio capable of achieving a level of operating
cash flow for the remaining life of the Partnership sufficient to meet its
obligations and sustain a predictable level of distributions to the partners.
The General Partner will evaluate the level of distributions the Partnership can
sustain over extended periods of time and, together with other considerations,
may adjust the level of distributions accordingly. In the long term, the
difficulty in predicting market conditions precludes the General Partner from
accurately determining the impact of changing market conditions on liquidity or
distribution levels.
The Partnership's permanent debt obligation begins to mature in November 2001.
The General Partner believes that sufficient cash flow will be available in the
future for repayment of debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of currency devaluation
risk. During 1998, 67% of the Partnership's total lease revenues from wholly-
and partially-owned equipment came from non-United States domiciled lessees.
Most of the Partnership's leases require payment in United States (U.S.)
currency. If these lessees currency devalues against the U.S. dollar, the
lessees could potentially encounter difficulty in making the U.S. dollar
denominated lease payments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements included in Item 14(a) of this Annual Report on Form 10-K
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(This space intentionally left blank)
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM INTERNATIONAL AND
PLM FINANCIAL SERVICES, INC.
As of the date of this annual report, the directors and executive officers of
PLM International and of PLM Financial Services, Inc. (and key executive
officers of its subsidiaries) are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------------- ------- ------------------------------------------------------------------
<S> <C> <C>
Robert N. Tidball 60 Chairman of the Board, Director, President, and Chief Executive
Officer, PLM International, Inc.;
Director, PLM Financial Services, Inc.;
Vice President, PLM Railcar Management Services, Inc.;
President, PLM Worldwide Management Services Ltd.
Randall L.-W. Caudill 51 Director, PLM International, Inc.
Douglas P. Goodrich 52 Director and Senior Vice President, PLM International, Inc.;
Director and President, PLM Financial Services, Inc.; President,
PLM Transportation Equipment Corporation; President, PLM Railcar
Management Services, Inc.
Warren G. Lichtenstein 33 Director, PLM International, Inc.
Howard M. Lorber 50 Director, PLM International, Inc.
Harold R. Somerset 63 Director, PLM International, Inc.
Robert L. Witt 58 Director, PLM International, Inc.
J. Michael Allgood 50 Vice President and Chief Financial Officer, PLM International,
Inc. and PLM Financial Services, Inc.
Robin L. Austin 52 Vice President, Human Resources, PLM International, Inc. and PLM
Financial Services, Inc.
Stephen M. Bess 52 President, PLM Investment Management, Inc.; Vice President and
Director, PLM Financial Services, Inc.
Richard K Brock 36 Vice President and Corporate Controller, PLM International, Inc.
and PLM Financial Services, Inc.
James C. Chandler 50 Vice President, Planning and Development, PLM International,
Inc. and PLM Financial Services, Inc.
Susan C. Santo 36 Vice President, Secretary, and General Counsel, PLM
International, Inc. and PLM Financial Services, Inc.
Janet M. Turner 42 Vice President, Investor Relations and Corporate Communications,
PLM International, Inc. and PLM Investment Management, Inc.
</TABLE>
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment as President and Chief Executive Officer, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989. Mr. Tidball was appointed a Director of PLM
Financial Services, Inc. in July 1997 and was elected President of PLM Worldwide
Management Services Limited in February 1998. He has served as an officer of PLM
Railcar Management Services, Inc. since June 1987. Mr. Tidball was Executive
Vice President of Hunter Keith, Inc., a Minneapolis-based investment banking
firm, from March 1984 to January 1986. Prior to Hunter Keith, he was Vice
President, General Manager, and Director of North American Car Corporation and a
director of the American Railcar Institute and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997.
He is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm serving emerging growth companies. Prior to founding
Dunsford Hill Capital Partners, Mr. Caudill held senior investment banking
positions at Prudential Securities, Morgan Grenfell Inc., and The First Boston
Corporation. Mr. Caudill also serves as a director of Northwest Biotherapeutics,
Inc., VaxGen, Inc., SBE, Inc., and RamGen, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Senior Vice President of PLM International in March 1994, and
appointed Director and President of PLM Financial Services, Inc. in June 1996.
Mr. Goodrich has also served as Senior Vice President of PLM Transportation
Equipment Corporation since July 1989 and as President of PLM Railcar Management
Services, Inc. since September 1992, having been a Senior Vice President since
June 1987. Mr. Goodrich was an executive vice president of G.I.C. Financial
Services Corporation of Chicago, Illinois, a subsidiary of Guardian Industries
Corporation, from December 1980 to September 1985.
Warren G. Lichtenstein was elected to the Board of Directors in December 1998.
Mr. Lichtenstein is the Chief Executive Officer of Steel Partners II, L.P.,
which is PLM International's largest shareholder, currently owning 16% of the
Company's common stock. Additionally, Mr. Lichtenstein is Chairman of the Board
of Aydin Corporation, a NYSE-listed defense electronics concern, as well as a
director of Gateway Industries, Rose's Holdings, Inc., and Saratoga Beverage
Group, Inc. Mr. Lichtenstein is a graduate of the University of Pennsylvania,
where he received a Bachelor of Arts degree in economics.
Howard M. Lorber was elected to the Board of Directors in January 1999. Mr.
Lorber is President and Chief Operating Officer of New Valley Corporation, an
investment banking and real estate concern. He is also Chairman of the Board and
Chief Executive Officer of Nathan's Famous, Inc., a fast food company.
Additionally, Mr. Lorber is a director of United Capital Corporation and Prime
Hospitality Corporation and serves on the boards of several community service
organizations. He is a graduate of Long Island University, where he received a
Bachelor of Arts degree and a Masters degree in taxation. Mr. Lorber also
received charter life underwriter and chartered financial consultant degrees
from the American College in Bryn Mawr, Pennsylvania. He is a trustee of Long
Island University and a member of the Corporation of Babson College.
Harold R. Somerset was elected to the Board of Directors of PLM International in
July 1994. From February 1988 to December 1993, Mr. Somerset was President and
Chief Executive Officer of California & Hawaiian Sugar Corporation (C&H Sugar),
a subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined C&H Sugar in 1984
as Executive Vice President and Chief Operating Officer, having served on its
Board of Directors since 1978. Between 1972 and 1984, Mr. Somerset served in
various capacities with Alexander & Baldwin, Inc., a publicly held land and
agriculture company headquartered in Honolulu, Hawaii, including Executive Vice
President of Agriculture and Vice President and General Counsel. Mr. Somerset
holds a law degree from Harvard Law School as well as a degree in civil
engineering from the Rensselaer Polytechnic Institute and a degree in marine
engineering from the U.S. Naval Academy. Mr. Somerset also serves on the boards
of directors for various other companies and organizations, including Longs Drug
Stores, Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993,
Mr. Witt has been a principal with WWS Associates, a consulting and investment
group specializing in start-up situations and private organizations about to go
public. Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel Corporation, an international advanced materials company with sales
primarily in the aerospace, transportation, and general industrial markets. Mr.
Witt also serves on the boards of directors for various other companies and
organizations.
J. Michael Allgood was appointed Vice President and Chief Financial Officer of
PLM International in October 1992 and Vice President and Chief Financial Officer
of PLM Financial Services, Inc. in December 1992. Between July 1991 and October
1992, Mr. Allgood was a consultant to various private and public-sector
companies and institutions specializing in financial operations systems
development. In October 1987, Mr. Allgood co-founded Electra Aviation Limited
and its holding company, Aviation Holdings Plc of London, where he served as
Chief Financial Officer until July 1991. Between June 1981 and October 1987, Mr.
Allgood served as a first vice president with American Express Bank Ltd. In
February 1978, Mr. Allgood founded and until June 1981 served as a director of
Trade Projects International/Philadelphia Overseas Finance Company, a joint
venture with Philadelphia National Bank. From March 1975 to February 1978, Mr.
Allgood served in various capacities with Citibank, N.A.
Robin L. Austin became Vice President, Human Resources of PLM Financial
Services, Inc. in 1984, having served in various capacities with PLM Investment
Management, Inc., including Director of Operations, from February 1980 to March
1984. From June 1970 to September 1978, Ms. Austin served on active duty in the
United States Marine Corps and served in the United States Marine Corp Reserves
from 1978 to 1998. She retired as a Colonel of the United States Marine Corps
Reserves in 1998. Ms. Austin has served on the Board of Directors of the
Marines' Memorial Club and is currently on the Board of Directors of the
International Diplomacy Council.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Investment Management, Inc. in
August 1989, having served as Senior Vice President of PLM Investment
Management, Inc. beginning in February 1984 and as Corporate Controller of PLM
Financial Services, Inc. beginning in October 1983. Mr. Bess served as Corporate
Controller of PLM, Inc. beginning in December 1982. Mr. Bess was Vice
President-Controller of Trans Ocean Leasing Corporation, a container leasing
company, from November 1978 to November 1982, and Group Finance Manager with the
Field Operations Group of Memorex Corporation, a manufacturer of computer
peripheral equipment, from October 1975 to November 1978.
Richard K Brock was appointed Vice President and Corporate Controller of PLM
International and PLM Financial Services, Inc. in June 1997, having served as an
accounting manager beginning in September 1991 and as Director of Planning and
General Accounting beginning in February 1994. Mr. Brock was a division
controller of Learning Tree International, a technical education company, from
February 1988 through July 1991.
James C. Chandler became Vice President, Planning and Development of PLM
International in April 1996. From 1994 to 1996 Mr. Chandler worked as a
consultant to public companies, including PLM, in the formulation of business
growth strategies. Mr. Chandler was Director of Business Development at Itel
Corporation from 1987 to 1994, serving with both the Itel Transportation Group
and Itel Rail.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM
International and PLM Financial Services, Inc. in November 1997. She has worked
as an attorney for PLM International since 1990 and served as its Senior
Attorney since 1994. Previously, Ms. Santo was engaged in the private practice
of law in San Francisco. Ms. Santo received her J.D. from the University of
California, Hastings College of the Law.
Janet M. Turner became Vice President of Investor Services of PLM International
in 1994, having previously served as Vice President of PLM Investment
Management, Inc. since 1990. Before 1990, Ms. Turner held the positions of
manager of systems development and manager of investor relations at the Company.
Prior to joining PLM in 1984, she was a financial analyst with The
Toronto-Dominion Bank in Toronto, Canada.
The directors of PLM International, Inc. are elected for a three-year term and
the directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM International Inc. or PLM
Financial Services, Inc., PLM Transportation Equipment Corp., or PLM Investment
Management, Inc.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership had no
pension, profit sharing, retirement, or similar benefit plan in effect as of
December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 5% interest in the
profits and losses (subject to certain special allocations of
income), cash available for distributions, and net disposition
proceeds of the Partnership. As of December 31, 1998, no investor was
known by the General Partner to beneficially own more than 5% of the
limited partnership units of the Partnership.
(B) Security Ownership of Management
Neither the General Partner and its affiliates nor any executive
officer or director of the General Partner and its affiliates owned
any limited partnership units of the Partnership as of December 31,
1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
During 1998, the Partnership paid or accrued the following fees to
FSI or its affiliates: management fees, $1.0 million; equipment
acquisition fees, $1.5 million; lease negotiation fees, $0.3 million,
and administrative and data processing services performed on behalf
of the Partnership, $0.9 million. The Partnership received a
loss-of-hire insurance refund from Transportation Equipment Indemnity
Company Ltd. (TEI), a wholly-owned, Bermuda-based subsidiary of PLM
International, of $0.2 million due to lower claims from the insured
Partnership and other insured affiliated programs for insurance
coverages during previous years.
During 1998, the USPEs paid or accrued the following fees to FSI or
its affiliates (based on the Partnership's proportional share of
ownership): management fees, $0.5 million; administrative and data
processing services, $0.1 million; equipment acquisition fees, $0.1
million, and lease negotiation fees, $12,000. The USPEs also paid TEI
$7,000 for insurance coverages during 1998 and received a
loss-of-hire insurance refund of $32,000.
(This space intentionally left
blank.)
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1.Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on Form
10-K.
(B) Reports on Form 8-K
None.
(C) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated by
reference to the Partnership's Registration Statement on Form S-1
(Reg. No. 33-40093) which became effective with the Securities and
Exchange Commission on December 23, 1991.
10.1 Management Agreement between Partnership and PLM Investment
Management, Inc. Incorporated by reference to the Partnership's
Registration Statement on Form S-1 (Reg. No. 33-40093) which became
effective with the Securities and Exchange Commission on December 23,
1991.
10.2 Note Agreement, dated as of August 1, 1993, regarding $30.0 million
in 6.7% senior notes due November 17, 2003.
10.3 Fourth Amended and Restated Warehousing Credit Agreement, dated as of
December 15, 1998, with First Union National Bank of North Carolina.
24. Powers of Attorney.
(This space intentionally left
blank.)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on
behalf of the Partnership by duly authorized officers.
Dated: March 17, 1999 PLM EQUIPMENT GROWTH FUND VI
PARTNERSHIP
By: PLM Financial Services, Inc.
General Partner
By: /s/ Douglas P. Goodrich
---------------------------
Douglas P. Goodrich
President and Director
By: /s/ Richard K Brock
---------------------------
Richard K Brock
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
*_______________________
Robert N. Tidball Director, FSI March 17, 1999
*_______________________
Douglas P. Goodrich Director, FSI March 17, 1999
*_______________________
Stephen M. Bess Director, FSI March 17, 1999
*Susan Santo, by signing her name hereto, does sign this document on behalf of
the persons indicated above pursuant to powers of attorney duly executed by such
persons and filed with the Securities and Exchange Commission.
/s/ Susan C. Santo
- ----------------------
Susan C. Santo
Attorney-in-Fact
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' report 34
Balance sheets as of December 31, 1998 and 1997 35
Statements of income for the years ended
December 31, 1998, 1997, and 1996 36
Statements of changes in partners' capital for the
years ended December 31, 1998, 1997, and 1996 37
Statements of cash flows for the years ended
December 31, 1998, 1997, and 1996 38
Notes to financial statements 39-52
All other financial statement schedules have been omitted, as the required
information is not pertinent to the registrant or is not material, or because
the information required is included in the financial statements and notes
thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth Fund VI:
We have audited the accompanying financial statements of PLM Equipment Growth
Fund VI (the Partnership), as listed in the accompanying index to financial
statements. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth Fund VI as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/S/ KPMG LLP
- ---------------------------
SAN FRANCISCO, CALIFORNIA
March 12, 1999
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Assets
Equipment held for operating leases, at cost $ 90,755 $ 71,597
Less accumulated depreciation (43,341 ) (33,895 )
-----------------------------------
Net equipment 47,414 37,702
Cash and cash equivalents 2,558 14,204
Restricted cash 1,416 792
Accounts receivable, less allowance for doubtful accounts of
$1,930 in 1998 and $2,524 in 1997 2,321 2,560
Investments in unconsolidated special-purpose entities 33,414 46,796
Net investment in direct finance lease 41 153
Lease negotiation fees to affiliate, less accumulated
amortization of $217 in 1998 and $92 in 1997 263 58
Debt issuance costs, less accumulated amortization
of $76 in 1998 and $61 in 1997 76 91
Debt placement fees to affiliate, less accumulated
amortization of $74 in 1998 and $59 in 1997 74 89
Prepaid expenses and other assets 93 181
Equipment acquisition deposits 667 1,335
-----------------------------------
Total assets $ 88,337 $ 103,961
===================================
Liabilities and partners' capital
Liabilities
Accounts payable and accrued expenses $ 1,147 $ 1,296
Due to affiliates 2,946 2,822
Lessee deposits and reserve for repairs 1,290 2,691
Note payable 30,000 30,000
-----------------------------------
Total liabilities 35,383 36,809
-----------------------------------
Partners' capital
Limited partners (limited partnership units of 8,206,339 and
8,247,264 as of December 31, 1998 and 1997, respectively) 52,954 67,152
General Partner -- --
-----------------------------------
Total partners' capital 52,954 67,152
-----------------------------------
Total liabilities and partners' capital $ 88,337 $ 103,961
===================================
</TABLE>
See accompanying notes to financial
statements.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
STATEMENTS OF INCOME
For the Years Ended December 31, (In
thousands of dollars, except weighted-average unit
amounts)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Revenues
Lease revenue $ 17,528 $ 22,116 $ 23,592
Interest and other income 764 486 630
Net gain on disposition of equipment 6,253 10,121 7,214
------------------------------------------------
Total revenues 24,545 32,723 31,436
------------------------------------------------
Expenses
Depreciation and amortization 14,604 9,793 12,394
Repairs and maintenance 3,961 4,743 3,085
Equipment operating expenses 2,270 3,635 3,775
Insurance expense to affiliate (188 ) 224 186
Other insurance expenses 378 1,277 694
Management fees to affiliate 997 1,187 1,363
Interest expense 2,018 2,296 2,339
General and administrative expenses
to affiliates 853 860 953
Other general and administrative expenses 1,004 1,587 766
Loss on revaluation of equipment 4,276 -- --
Provision for (recovery of) bad debts (75 ) 1,273 1,016
------------------------------------------------
Total expenses 30,098 26,875 26,571
------------------------------------------------
Equity in net income of unconsolidated
special-purpose entities 6,998 3,384 3,426
--------------------------------------------------------------------------------------------------------------
Net income $ 1,445 $ 9,232 $ 8,291
================================================
Partners' share of net income
Limited partners $ 666 $ 8,363 $ 7,418
General Partner 779 869 873
------------------------------------------------
Total $ 1,445 $ 9,232 $ 8,291
================================================
Net income per weighted-average limited
partnership unit $ 0.08 $ 1.01 $ 0.89
================================================
Cash distribution $ 15,226 $ 17,384 $ 17,467
================================================
Cash distribution per weighted-average
limited partnership unit $ 1.76 $ 2.00 $ 2.00
================================================
</TABLE>
See accompanying notes to financial
statements.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 1998, 1997, and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
-----------------------------------------------------
<S> <C> <C> <C>
Partners' capital as of December 31, 1995 $ 85,430 $ -- $ 85,430
Net income 7,418 873 8,291
Repurchase of limited partnership units (464 ) -- (464 )
Cash distribution (16,594 ) (873 ) (17,467 )
-----------------------------------------------------
Partners' capital as of December 31, 1996 75,790 -- 75,790
Net income 8,363 869 9,232
Repurchase of limited partnership units (486 ) -- (486 )
Cash distribution (16,515 ) (869 ) (17,384 )
-----------------------------------------------------
Partners' capital as of December 31, 1997 67,152 -- 67,152
Net income 666 779 1,445
Repurchase of limited partnership units (417 ) -- (417 )
Cash distribution (14,447 ) (779 ) (15,226 )
-----------------------------------------------------
Partners' capital as of December 31, 1998 $ 52,954 $ -- $ 52,954
=====================================================
</TABLE>
See accompanying notes to financial
statements.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(in thousands of dollars)
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 1,445 $ 9,232 $ 8,291
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 14,604 9,793 12,394
Loss on revaluation of equipment 4,276 -- --
Net gain on disposition of equipment (6,253 ) (10,121 ) (7,214 )
Equity in net income from unconsolidated special-purpose entities (6,998 ) (3,384 ) (3,426 )
Changes in operating assets and liabilities:
Restricted cash (624 ) 493 13
Accounts receivable, net (9 ) 946 160
Prepaid expenses and other assets 88 60 (14 )
Accounts payable and accrued expenses 133 (34 ) 196
Due to affiliates 124 645 217
Lessee deposits and reserve for repairs 16 240 448
-----------------------------------------
Net cash provided by operating activities 6,802 7,870 11,065
-----------------------------------------
Investing activities
Payments for purchase of equipment and capitalized repairs (31,739 ) (17 ) (13,927 )
Investments in and equipment purchased and placed in
unconsolidated special-purpose entities (3,778 ) (10,604 ) (26,287 )
Distribution from unconsolidated special-purpose entities 7,479 7,575 7,941
Distribution from liquidation of unconsolidated special-purpose
entities 16,679 1,736 11,677
Payments of acquisition fees to affiliate (1,486 ) -- (675 )
Payments for equipment acquisition deposits (667 ) (1,335 ) --
Principal payments received on direct finance lease 101 101 41
Payments of lease negotiation fees to affiliate (330 ) -- (152 )
Proceeds from disposition of equipment 10,936 25,017 27,379
-----------------------------------------
Net cash (used in) provided by investing activities (2,805 ) 22,473 5,997
-----------------------------------------
Financing activities
Proceeds from short-term note payable -- 10,551 12,506
Payments of short-term note payable -- (11,837 ) (11,220 )
Proceeds from short-term loan from affiliate -- 10,001 --
Payment of short-term loan to affiliate -- (10,001 ) --
Cash distribution paid to limited partners (14,447 ) (16,515 ) (16,594 )
Cash distribution paid to General Partner (779 ) (869 ) (873 )
Repurchase of limited partnership units (417 ) (486 ) (464 )
-----------------------------------------
Net cash used in financing activities (15,643 ) (19,156 ) (16,645 )
-----------------------------------------
Net (decrease) increase in cash and cash equivalents (11,646 ) 11,187 417
Cash and cash equivalents at beginning of year 14,204 3,017 2,600
---------------------------==============
Cash and cash equivalents at end of year $ 2,558 $ 14,204 $ 3,017
=========================================
Supplemental information
Interest paid $ 2,018 $ 2,297 $ 2,513
========================================================================================================================
</TABLE>
See accompanying notes to financial
statements.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation
Organization
PLM Equipment Growth Fund VI, a California limited partnership (the
Partnership), was formed on April 17, 1991 to engage in the business of
owning, leasing or otherwise investing in primarily used transportation and
related equipment. PLM Financial Services, Inc. (FSI) is the General
Partner of the Partnership. FSI is a wholly-owned subsidiary of PLM
International, Inc. (PLM International).
Beginning in the Partnership's seventh year of operations, which commences
on January 1, 2000, the General Partner will stop reinvesting excess cash,
if any, which, less reasonable reserves, will be distributed to the
Partners. Beginning in the Partnership's ninth year of operations, which
commences on January 1, 2002, the General Partner intends to begin an
orderly liquidation of the Partnership's assets. The Partnership will
terminate on December 31, 2011, unless terminated earlier upon sale of all
equipment or by certain other events.
FSI manages the affairs of the Partnership. The net income (loss) and cash
distributions of the Partnership are generally allocated 95% to the limited
partners and 5% to the General Partner, (see Net Income (Loss) and
Distributions per Limited Partnership Unit, below). The General Partner is
also entitled to receive a subordinated incentive fee after the limited
partners receive a minimum return on, and a return of, their invested
capital.
The General Partner has determined that it will not adopt the reinvestment
plan for the Partnership. Beginning November 24, 1995, if the number of
units made available for purchase by limited partners in any calendar year
exceeds the number that can be purchased with reinvestment plan proceeds,
then the Partnership may redeem up to 2% of the outstanding units each
year, subject to certain terms and conditions. The purchase price to be
offered by the Partnership for these units will be equal to 110% of the
unrecovered principal attributable to the units. The unrecovered principal
for any unit will be equal to the excess of (i) the capital contribution
attributable to the unit over (ii) the distributions from any source paid
with respect to the units. For the years ended December 31, 1998, 1997 and
1996, the Partnership had repurchased 40,925, 39,702 and 31,281 limited
partnership units for $0.4 million, $0.5 million and $0.5 million,
respectively.
As of December 31, 1998, the Partnership agreed to repurchase approximately
23,700 units for an aggregate price of approximately $0.2 million. The
General Partner anticipates that these units will be repurchased in the
first and second quarters of 1999. In addition to these units, the General
Partner may purchase additional units on behalf of the Partnership in the
future.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operations
The equipment of the Partnership is managed, under a continuing management
agreement, by PLM Investment Management, Inc. (IMI), a wholly-owned
subsidiary of FSI. IMI receives a monthly management fee from the
Partnership for managing the equipment (see Note 2). FSI, in conjunction
with its subsidiaries, sells equipment to investor programs and third
parties, manages pools of transportation equipment under agreements with
investor programs, and is a general partner of other programs.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Accounting for Leases
The Partnership's leasing operations generally consist of operating leases.
Under the operating lease method of accounting, the leased asset is
recorded at cost and depreciated over its estimated useful life. Rental
payments are recorded as revenue over the lease term. Lease origination
costs are capitalized and amortized over the term of the lease.
Periodically, the Partnership leases equipment with lease terms that
qualify for direct finance lease classification, as required by Statement
of Financial Accounting Standards No. 13, "Accounting for Leases".
Depreciation and Amortization
Depreciation of transportation equipment held for operating leases is
computed on the double-declining balance method, taking a full month's
depreciation in the month of acquisition, based upon estimated useful lives
of 15 years for railcars and, typically, 12 years for most other types of
equipment. The depreciation method is changed to straight line when annual
depreciation expense using the straight-line method exceeds that calculated
by the double-declining balance method. Acquisition fees and certain other
acquisition costs have been capitalized as part of the cost of the
equipment. Lease negotiation fees are amortized over the initial equipment
lease term. Debt issuance costs and debt placement fees are amortized over
the term of the loan (see Note 8). Major expenditures that are expected to
extend the useful lives or reduce future operating expenses of equipment
are capitalized and amortized over the estimated remaining life of the
equipment.
Transportation Equipment
In accordance with the Financial Accounting Standards Board's Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the General Partner reviews the carrying value
of the Partnership's equipment at least quarterly in relation to expected
future market conditions for the purpose of assessing recoverability of the
recorded amounts. If projected undiscounted future lease revenue plus
residual values are less than the carrying value of the equipment, a loss
on revaluation is recorded. Reductions of $4.3 million and $1.0 million to
the carrying value of owned equipment and partially owned equipment,
respectively, were required during 1998. No reductions to the carrying
value of equipment were required during either 1997, or 1996.
Equipment held for operating leases is stated at cost.
Investments in Unconsolidated Special-Purpose Entities
The Partnership has interests in unconsolidated special-purpose entities
(USPEs) that own transportation equipment. These interests are accounted
for using the equity method.
The Partnership's investment in USPEs includes acquisition and lease
negotiation fees paid by the Partnership to PLM Transportation Equipment
Corporation (TEC) and PLM Worldwide Management Services (WMS). TEC is a
wholly-owned subsidiary of FSI and WMS is a wholly-owned subsidiary of PLM
International. The Partnership's interest in USPEs are managed by IMI. The
Partnership's equity interest in the net income (loss) of USPEs is
reflected net of management fees paid or payable to IMI and the
amortization of acquisition and lease negotiation fees paid to TEC or WMS.
Repairs and Maintenance
Repair and maintenance costs related to railcars, marine vessels, and
trailers are usually the obligation of the Partnership. Maintenance costs
of most of the other equipment are the obligation of the lessee. If they
are not covered by the lessee, they are generally charged against
operations as incurred. To meet the maintenance requirements of certain
aircraft airframes and engines, reserve
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Repairs and Maintenance (continued)
accounts are prefunded by the lessee. Estimated costs associated with
marine vessel dry docking are accrued and charged to income ratably over
the period prior to such dry-docking. The reserve accounts are included in
the balance sheet as lessee deposits and reserve for repairs.
Net Income (Loss) and Distributions Per Limited Partnership Unit
The net income (loss) of the Partnership is generally allocated 95% to the
limited partners and 5% to the General Partner. Special allocations of
income are made to the General Partner equal to the deficit balance, if
any, in the capital account of the General Partner. Cash distributions of
the Partnership are generally allocated 95% to the limited partners and 5%
to the General Partner and may include amounts in excess of net income. The
limited partners' net income (loss) is allocated among the limited partners
based on the number of limited partnership units owned by each limited
partner and on the number of days of the year each limited partner is in
the Partnership.
Cash distributions are recorded when paid. Monthly unitholders receive a
distribution check 15 days after the close of the previous month's business
and quarterly unitholders receive a distribution check 45 days after the
close of the quarter.
Cash distributions to investors in excess of net income are considered a
return of capital. Cash distributions to the limited partners of $13.8
million, $8.2 million, and $9.2 million in 1998, 1997, and 1996,
respectively, were deemed to be a return of capital.
Cash distributions related to the fourth quarter of 1998 of $2.0 million,
1997 and 1996 of $2.6 million for each year, were paid during the first
quarter of 1999, 1998, or 1997, respectively.
Net Income (Loss) Per Weighted-Average Partnership Unit
Net income (loss) per weighted-average Partnership unit was computed by
dividing net income (loss) attributable to limited partners by the
weighted-average number of Partnership units deemed outstanding during the
year. The weighted-average number of Partnership units deemed outstanding
during the years ended December 31, 1998, 1997, and 1996 was 8,216,472,
8,257,256, and 8,292,853, respectively.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three
months or less as cash equivalents. The carrying amount of cash equivalents
approximates fair market value due to the short-term nature of the
investments.
Comprehensive Income
During 1998, the Partnership adopted Financial Accounting Standards Board's
Statement No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in
equity from nonowner sources. The Partnership's net income (loss) is equal
to comprehensive income for the years ended December 31, 1998, 1997, and
1996.
Restricted Cash
As of December 31, 1998 and 1997, restricted cash represented lessee
security deposits held by the Partnership.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
2. General Partner and Transactions with Affiliates
An officer of PLM Securities Corp., a wholly-owned subsidiary of the
General Partner, contributed $100 of the Partnership's initial capital.
Under the equipment management agreement, IMI, subject to certain
reductions, receives a monthly management fee attributable to either owned
equipment or interests in equipment owned by the USPEs equal to the lesser
of (i) the fees that would be charged by an independent third party for
similar services for similar equipment or (ii) the sum of (a) 5% of the
gross lease revenues attributable to equipment that is subject to operating
leases, (b) 2% of the gross lease revenues, as defined in the agreement,
that is subject to full payout net leases, and (c) 7% of the gross lease
revenues attributable to equipment for which IMI provides both management
and additional services relating to the continued and active operation of
program equipment, such as on-going marketing and re-leasing of equipment,
hiring or arranging for the hiring of crew or operating personnel for
equipment, and similar services. Partnership management fees payable were
$0.2 and $0.3 million as of December 31, 1998 and 1997, respectively. The
Partnership's proportional share of USPE management fees of $0.1 million
was payable as of December 31, 1998, and 1997. The Partnership's
proportional share of USPE management fee expense was $0.5 million, $0.5
million and $0.3 million during 1998, 1997, and 1996, respectively. The
Partnership reimbursed FSI $0.9 million, $0.9 million, and $1.0 million in
1998, 1997, and 1996, respectively, for data processing and administrative
expenses directly attributable to the Partnership. The Partnership's
proportional share of USPE data processing and administrative expenses
reimbursed to FSI was $0.1 million during 1998, 1997 and 1996.
The Partnership paid $0.2 million in 1997 and 1996, to Transportation
Equipment Indemnity Company Ltd. (TEI), which provides marine insurance
coverage for Partnership equipment and other insurance brokerage services.
TEI is an affiliate of the General Partner. No fees for owned equipment
were paid to TEI in 1998. The Partnership's proportional share of USPE
marine insurance coverage paid to TEI was $7,000, $0.1 million, and $0
during 1998, 1997, and 1996, respectively. A substantial portion of the
amount paid was to third-party reinsurance underwriters or placed in risk
pools managed by TEI on behalf of affiliated programs and PLM
International, which provide threshold coverages on marine vessel loss of
hire and hull and machinery damage. All pooling arrangement funds are
either paid out to cover applicable losses or refunded pro rata by TEI.
Also, during 1998, the Partnership and the USPEs received a $0.2 million
loss-of-hire insurance refund from TEI due to lower claims from the insured
Partnership and other insured affiliated programs. PLM International plans
to liquidate TEI in 1999. During 1998, TEI did not provide the same level
of insurance coverage as had been provided during 1997 and 1996. These
services were provided by an unaffiliated third party.
Debt placement fees were paid to the General Partner in an amount equal to
1% of the Partnership's long-term borrowings, less any costs paid to
unaffiliated parties related to obtaining the borrowing.
The Partnership and USPEs paid or accrued equipment acquisition and lease
negotiation fees of $1.9 million, $0.6 million, and $1.2 million during
1998, 1997, and 1996, respectively, to FSI, TEC and WMS.
As of December 31, 1998, approximately 58% of the Partnership's trailer
equipment was in rental facilities operated by PLM Rental, Inc., an
affiliate of the General Partner, doing business as PLM Trailer Leasing.
Revenues collected under short-term rental agreements with the rental
yards' customers are credited to the owners of the related equipment as
received. Direct expense associated with the equipment are charged directly
to the Partnership. An allocation of indirect expenses of the rental yard
operations is charged to the Partnership monthly.
The Partnership owned certain equipment in conjunction with affiliated
programs during 1998, 1997, and 1996 (see Note 4).
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
2. General Partner and Transactions with Affiliates (continued)
During 1997 the Partnership borrowed $1.0 million and $9.0 million from the
General Partner for 52 days and 3 days, respectively. The General Partner
charged the Partnership market interest rates. Total interest paid to the
General Partner was $17,000. There were no similar borrowings during 1998
or 1996.
The balance due to affiliates as of December 31, 1998 includes $0.2 million
due to FSI and its affiliates for management fees and $2.8 million due to a
USPE. The balance due to affiliates as of December 31, 1997 included $0.3
million due to FSI and its affiliates for management fees and $2.5 million
due to a USPE.
3. Equipment
The components of owned equipment as of December 31, are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
Equipment Held for Operating Leases 1998 1997
----------------------------------------------------- --------------------------------
<S> <C> <C>
Marine vessels $ 26,094 $ 16,035
Aircraft, aircraft engines and components 21,630 11,919
Rail equipment 18,638 15,657
Trailers 13,204 16,203
Marine containers 11,189 11,783
---------------------------------
90,755 71,597
Less accumulated depreciation (43,341 ) (33,895 )
--------------------------------
Net equipment $ 47,414 $ 37,702
=================================
</TABLE>
Revenues are earned by placing the equipment under operating leases. A
portion of the Partnership's marine containers and marine vessels is leased
to operators of utilization-type leasing pools that include equipment owned
by unaffiliated parties. In such instances, revenues received by the
Partnership consist of a specified percentage of revenues generated by
leasing the pooled equipment to sublessees after deducting certain direct
operating expenses of the pooled equipment. Rents for railcars are based on
mileage traveled or a fixed rate; rents for all other equipment are based
on fixed rates.
As of December 31, 1998, all owned equipment in the Partnership's portfolio
was on lease or operating in PLM-affiliated short-term trailer rental
facilities, except for 15 railcars and 59 marine containers with a net book
value of $0.3 million. As of December 31, 1997, all owned equipment in the
Partnership's portfolio was on lease or operating in PLM-affiliated
short-term trailer rental facilities, except for a railcar and 92 marine
containers with a net book value of $0.4 million.
During 1998, the Partnership entered into a commitment to purchase a marine
vessel for a cost of $6.7 million and made a deposit of $0.7 million toward
this purchase, which is included in the December 31, 1998 balance sheet as
equipment acquisition deposit. The Partnership completed the purchase of
this equipment during February 1999 and paid $0.3 million for acquisition
fees to FSI related to this acquisition.
Additionally, during 1998, the Partnership purchased a portfolio of
aircraft rotable components for $2.3 million, including acquisition fees of
$0.1 million; a portfolio of marine containers for $5.2 million, including
acquisition fees of $0.2 million; a group of railcars for $3.1 million,
including acquisition fees of $0.1 million; and a marine vessel for $10.1
million, including acquisition fees of $0.4 million. All acquisition fees
were paid to FSI.
The Partnership completed its commitment to purchase a MD-80 Stage III
commercial aircraft for $14.0 million during January 1998 including
acquisition fees of $0.6 million to FSI related to this acquisition. The
Partnership made a deposit of $1.3 million toward this purchase in 1997
which is
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
3. Equipment (continued)
included in the balance sheet as equipment acquisition deposits.
During 1998, the Partnership disposed of or sold a Boeing 737-200
commercial aircraft, an aircraft engine, marine containers, trailers, and
railcars, with an aggregate net book value of $6.1 million, for $12.4
million which includes $1.4 million of unused engine reserves.
During 1997, the Partnership disposed of or sold aircraft components,
marine containers, and trailers, with an aggregate net book value of $5.4
million, for proceeds of $7.2 million. The Partnership also sold two marine
vessels with a net book value of $10.3 million for proceeds of $17.8
million. Included in the gain of $8.3 million from the sale of the marine
vessels is the unused portion of accrued drydocking of $0.8 million.
Periodically, PLM International purchases groups of assets whose ownership
may be allocated among affiliated programs and PLM International. Generally
in these cases only assets that are on lease will be purchased by the
affiliated programs. PLM International will generally assume the ownership
and remarketing risks associated with off-lease equipment. Allocation of
the purchase price is determined by a combination of third-party industry
sources, recent transactions and published fair market value references.
During 1998, PLM International purchased a group of railcars that were
allocated to the Partnership at cost. During 1996, PLM International
realized a $0.7 million gain on the sale of 69 off-lease railcars purchased
by PLM International as part of a group of assets in 1994 that had been
allocated to the Partnership, PLM Equipment Growth Fund IV, PLM Equipment
Growth & Income Fund VII, Professional Lease Management Income Fund I, LLC,
and PLM International.
All wholly- and partially-owned equipment on lease is accounted for as
operating leases, except for one finance lease. Future minimum rentals
under noncancelable operating leases as of December 31, 1998, for wholly-
and partially-owned equipment during each of the next five years are
approximately $12.2 million in 1999, $7.6 million in 2000, $4.9 million in
2001, $2.6 million in 2002, $1.9 million in 2003, and $1.4 million
thereafter. Contingent rentals based upon utilization were $0.7 million in
1998, $2.8 million in 1997, and $7.0 million in 1996.
4. Investments in Unconsolidated Special-Purpose Entities
The net investments in USPEs include the following jointly-owned equipment
and related assets and liabilities as of December 31 (in thousands of
dollars):
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
64% interest in a trust owning a 767-200ER Stage III commercial
aircraft $ 11,536 $ 12,854
53% interest in an entity owning a product tanker 7,678 9,881
40% interest in a trust owning two commercial Stage III aircraft
on direct finance lease 4,435 4,581
30% interest in an entity owning a mobile offshore drilling unit 4,279 5,050
25% interest in an entity owning marine containers 2,475 --
50% interest in an entity owning a container feeder vessel 1,421 2,812
20% interest in an entity owning a handymax dry bulk carrier 1,311 1,513
50% interest in a trust that owned four Stage II commercial aircraft 279 6,614
17% interest in a trust that owned a Stage II commercial aircraft -- 3,491
-------------------------------------------------------------------------------------- -----------
Net investments $ 33,414 $ 46,796
========== ===========
</TABLE>
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
4. Investments in Unconsolidated Special-Purpose Entities (continued)
The Partnership has beneficial interests in two USPEs that own multiple
aircraft (the Trusts). One of these Trusts contain provisions, under
certain circumstances, for allocating specific aircraft to the beneficial
owners. During 1998, the Partnership increased its investment in a trust
owning four commercial aircraft by funding the installation of a hushkit on
an aircraft assigned to the Partnership in the trust for $1.3 million,
including acquisition and lease negotiation fees of $0.1 million that were
paid to FSI. In this Trust, the Partnership subsequently sold the two
commercial aircraft assigned to it with a net book value of $6.2 million
for proceeds of $13.1 million. During 1997, the Partnership's 17% interest
in one of the Trusts owning the commercial aircraft was sold for proceeds
of $5.2 million for its net investment of $1.8 million. The Partnership
received liquidating proceeds of $1.7 million during 1997. The remaining
liquidating proceeds of $3.5 were received during January 1998.
During 1998, the Partnership also purchased an interest in an entity owning
a portfolio of marine containers for $2.5 million, including acquisition
and lease negotiation fees of $0.1 million that were paid to FSI. The
remaining interest in this entity was purchased by an affiliated program.
During 1998, the Partnership reduced its interest in an entity owning a
container feeder vessel by $1.0 million to its net realizable value.
The following summarizes the financial information for the USPEs and the
Partnership's interest therein as of and for the year ended December 31 (in
thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
Net Net Net
Total Interest Total Interest Total Interest
USPEs of USPEs of USPEs of
Partnership Partnership Partnership
--------------------------- --------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Investments $ 67,308 $ 33,414 $ 95,743 $ 46,796 $ 97,980 $ 42,119
Lease revenues 22,809 9,934 27,145 10,935 24,157 8,728
Net income 22,942 6,998 6,411 3,384 5,955 3,426
</TABLE>
5. Operating Segments
The Partnership operates in five operating segments: trailer leasing,
railcar leasing, aircraft leasing, marine vessel leasing, marine container
leasing, and all other. Each equipment leasing segment engage in short-term
to mid-term operating leases to a variety of customers.
The General Partner evaluates the performance of each segment based on
profit or loss from operations before allocation of interest expense,
general and administrative expenses, and certain other expenses. The
segments are managed separately due to different business strategies for
each operation.
(This space intentionally left blank)
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
5. Operating Segments (continued)
The following tables present a summary of the operating segments (in
thousands of dollars):
<TABLE>
<CAPTION>
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1998 Leasing Leasing Leasing Leasing Leasing Other<F1> Total
------------------------------------ --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Lease revenue $ 3,968 $ 923 $ 5,231 $ 3,295 $ 4,111 $ -- $ 17,528
Interest income and other 19 89 64 10 20 562 764
Gain (loss) on disposition of 5,594 582 19 51 12 (5 ) 6,253
equipment
------------------------------------------------------------------------
Total revenues 9,581 1,594 5,314 3,356 4,143 557 24,545
Costs and expenses
Operations support 1,122 13 3,550 817 857 62 6,421
Depreciation and amortization 8,571 712 2,976 1,040 1,273 32 14,604
Interest expense -- -- -- -- -- 2,018 2,018
General and administrative expenses 491 76 389 820 355 723 2,854
Loss on revaluation of equipment -- 183 4,093 -- -- -- 4,276
Provision for (recovery of) bad (83 ) -- -- 22 (14 ) -- (75 )
debts
------------------------------------------------------------------------
Total costs and expenses 10,101 984 11,008 2,699 2,471 2,835 30.098
------------------------------------------------------------------------
Equity in net income (loss) of USPEs 8,642 (20 ) (1,867 ) -- -- 243 6,998
------------------------------------------------------------------------
========================================================================
Net income (loss) $ 8,122 $ 590 $ (7,561 )$ 657 $ 1,672 $ (2,035 ) $ 1,445
========================================================================
As of December 31, 1998
Total assets $ 26,534 $ 9,267 $ 25,194 $ 4,824 $ 10,913 $ 11,605 $ 88,337
========================================================================
<FN>
<F1> Includes interest income and costs not identifiable to a particular
segment, such as general and administrative, interest expense, and certain
operations support expenses. Also includes income from an investment in an
entity owning a mobile offshore drilling unit.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1997 Leasing Leasing Leasing Leasing Leasing Other<F2> Total
------------------------------------ --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Lease revenue $ 3,606 $ 1,681 $ 8,934 $ 3,760 $ 4,135 $ -- $ 22,116
Interest income and other -- 36 251 47 -- 152 486
Gain (loss) on disposition of 1,972 55 8,265 (171 ) -- -- 10,121
equipment
-------------------------------------------------------------------------
Total revenues 5,578 1,772 17,450 3,636 4,135 152 32,723
Costs and expenses
Operations support 618 12 7,326 870 1,001 52 9,879
Depreciation and amortization 1,582 1,147 4,060 1,522 1,452 30 9,793
Interest expense -- -- -- -- -- 2,296 2,296
General and administrative expenses 965 96 591 811 351 820 3,634
Provision for (recovery of) bad 1,188 (111 ) -- 153 43 -- 1,273
debts
-------------------------------------------------------------------------
Total costs and expenses 4,353 1,144 11,977 3,356 2,847 3,198 26,875
-------------------------------------------------------------------------
Equity in net income (loss) of USPEs 4,090 -- (707 ) -- -- 1 3,384
-------------------------------------------------------------------------
=========================================================================
Net income (loss) $ 5,315 $ 628 $ 4,766 $ 280 $ 1,288 $ (3,045 ) $ 9,232
=========================================================================
As of December 31, 1997
Total assets $ 33,093 $ 4,393 $ 26,492 $ 7,098 $ 9,129 $ 23,756 $ 103,961
=========================================================================
<FN>
<F2> Includes interest income and costs not identifiable to a particular
segment, such as general and administrative, interest expense, and certain
operations support expenses.
</FN>
</TABLE>
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
5. Operating Segments (continued)
<TABLE>
<CAPTION>
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1996 Leasing Leasing Leasing Leasing Leasing Other<F3> Total
------------------------------------ --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Lease revenue $ 4,215 $ 2,191 $ 8,915 $ 4,198 $ 4,073 $ -- $ 23,592
Interest income and other -- -- 67 19 -- 544 630
Gain (loss) on disposition of 591 136 6,267 180 40 -- 7,214
equipment
-------------------------------------------------------------------------
Total revenues 4,806 2,327 15,249 4,397 4,113 544 31,436
Costs and expenses
Operations support 234 12 5,098 1,050 1,299 47 7,740
Depreciation and amortization 2,560 1,504 4,718 1,975 1,678 (41 ) 12,394
Interest expense -- -- -- -- -- 2,339 2,339
General and administrative expenses 224 96 608 916 345 893 3,082
Provision for bad debts 628 416 -- 30 (59 ) 1 1,016
-------------------------------------------------------------------------
Total costs and expenses 3,646 2,028 10,424 3,971 3,263 3,239 26,571
-------------------------------------------------------------------------
Equity in net income (loss) of USPEs (1,853 ) -- (415 ) -- -- 5,694 3,426
-------------------------------------------------------------------------
=========================================================================
Net income (loss) $ (693 )$ 299 $ 4,410 $ 426 $ 850 $ 2,999 $ 8,291
=========================================================================
As of December 31, 1996
Total assets $ 40,678 $ 7,370 $ 30,858 $ 9,486 $ 10,537 $ 14,596 $ 113,525
=========================================================================
<FN>
<F3> Includes interest income and costs not identifiable to a particular
segment, such as general and administrative, interest expense, and certain
operations support expenses. Also includes the gain from the sale of an
interest in an entity owning a mobile offshore drilling unit.
</FN>
</TABLE>
6. Geographic Information
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Partnership leases or leased its aircraft, railcars, and trailers to
lessees domiciled in five geographic regions: United States, Canada,
Mexico, Europe, and Asia. Marine vessels, mobile offshore drilling units,
and marine containers are leased or were leased to multiple lessees in
different regions that operate worldwide.
The table below sets forth lease revenues by geographic region for the
Partnership's owned equipment and investments in USPEs grouped by domiciles
of the lessees as of and for the years ended December 31 (in thousands of
dollars):
<TABLE>
<CAPTION>
Owned Equipment Investments in USPEs
------------------------------------- --------------------------------------
Region 1998 1997 1996 1998 1997 1996
---------------------------- ------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 9,126 $ 7,132 $ 7,522 $ -- $ -- $ --
Canada 988 764 748 986 3,619 3,179
South America -- -- -- 3,283 3,149 3,149
Asia 1,260 2,658 3,207 -- -- 693
Europe -- 948 1,009 -- -- --
Rest of the world 6,154 10,614 11,106 5,665 4,167 1,707
------------------------------------- -------------------------------------
===================================== =====================================
Lease revenues $ 17,528 $ 22,116 $ 23,592 $ 9,934 $ 10,935 $ 8,728
===================================== =====================================
</TABLE>
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
6. Geographic Information (continued)
The following table sets forth net income (loss) information by region for
the owned equipment and investments in USPEs for the years ended December
31 (in thousands of dollars):
<TABLE>
<CAPTION>
Owned Equipment Investments in USPEs
------------------------------------- --------------------------------------
Region 1998 1997 1996 1998 1997 1996
---------------------------- ------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ (3,494 ) $ 1,219 $ 1,129 $ -- $ -- $ --
Canada 324 461 195 7,191 3,159 (1,576 )
South America -- -- -- 801 224 (274 )
Mexico -- -- -- 651 707 (3 )
Asia 4,980 (1,219 ) 887 -- -- 5,723
Europe -- 2,370 294 -- -- --
Rest of the world (5,086 ) 6,076 5,401 (1,645 ) (706 ) (444 )
------------------------------------- -------------------------------------
Regional income (loss) (3,276 ) 8,907 7,906 6,998 3,384 3,426
Administrative and other (2,277 ) (3,059 ) (3,041 ) -- -- --
===================================== =====================================
Net income (loss) $ (5,553 ) $ 5,848 $ 4,865 $ 6,998 $ 3,384 $ 3,426
===================================== =====================================
</TABLE>
The net book value of these assets as of December 31 are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
Owned Equipment Investments in USPEs
------------------------------------- --------------------------------------
Region 1998 1997 1996 1998 1997 1996
---------------------------- ------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 22,048 $ 14,250 $ 17,964 $ -- $ 3,491 $ --
Canada 1,889 1,978 2,059 279 6,614 10,993
South America -- -- -- 11,536 12,854 15,453
Mexico -- -- -- 4,435 4,581 4,429
Asia 2,084 5,552 6,663 -- -- --
Europe -- -- 3,141 -- -- --
Rest of the world 21,393 15,922 33,180 17,164 19,256 11,244
------------------------------------- -------------------------------------
===================================== =====================================
Net book value $ 47,414 $ 37,702 $ 63,007 $ 33,414 $ 46,796 $ 42,119
===================================== =====================================
</TABLE>
7. Net Investment in a Direct Finance Lease
During 1996, the Partnership entered into a direct finance lease for 48
trailers. Gross lease payments of $0.3 million were to be received over a
three-year period, which commenced in May of 1996. This lease allows each
trailer to be purchased for $1.00 at the end of the lease.
The components of the net investment in the direct finance lease as of
December 31, are as follows (in thousands in dollars):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Total minimum lease payments $ 42 $ 163
Less unearned income (1 ) (10 )
========= =========
$ 41 $ 153
========= =========
</TABLE>
Future minimum rentals receivable under the direct finance lease as of
December 31, 1998 year are approximately $42,000 in 1999 and $0 thereafter.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
8. Debt
In August 1993, the Partnership entered into an agreement to issue a
long-term note totaling $30.0 million to two institutional investors. The
note bears interest at a fixed rate of 6.7% per annum and has a final
maturity in 2003. Interest on the note is payable monthly. The note will be
repaid in three principal payments of $10.0 million on November 17, 2001,
2002, and 2003. The agreement requires the Partnership to maintain certain
financial covenants related to fixed-charge coverage. Proceeds from the
sale of the note were used to fund equipment acquisitions and to repay
obligations of the Partnership under the credit facility (see discussion
below).
The General Partner estimates, based on recent transactions, that the fair
market value of the $30.0 million fixed-rate note is $30.2 million.
The General Partner has entered into a joint $24.5 million credit facility
(the Committed Bridge Facility) on behalf of the Partnership, PLM Equipment
Growth & Income Fund VII (EGF VII) and Professional Lease Management Income
Fund I (Fund I), both affiliated investment programs; and TEC Acquisub,
Inc. (TECAI), an indirect wholly-owned subsidiary of the General Partner,
which may be used to provide interim financing of up to (i) 70% of the
aggregate book value or 50% of the aggregate net fair market value of
eligible equipment owned by the Partnership, plus (ii) 50% of unrestricted
cash held by the borrower. The Partnership, EGF VII, Fund I, and TECAI
collectively may borrow up to $24.5 million of the Committed Bridge
Facility. Outstanding borrowings by one borrower reduce the amount
available to each of the other borrowers under the Committed Bridge
Facility. The Committed Bridge Facility also provides for a $5.0 million
Letter of Credit Facility for the eligible borrowers. Individual borrowings
may be outstanding for no more than 179 days, with all advances due no
later than December 14, 1999. Interest accrues at either the prime rate or
adjusted LIBOR plus 1.625% at the borrower's option and is set at the time
of an advance of funds. Borrowings by the Partnership are guaranteed by the
General Partner. As of December 31, 1998, no eligible borrower had any
outstanding borrowings under this facility. The General Partner believes it
will be able to renew the Committed Bridge Facility upon its expiration
with similar terms as those in the current Committed Bridge Facility.
9. Concentrations of Credit Risk
As of December 31, 1998, no single lessee accounted for more than 10% of
the consolidated revenues for the owned equipment and partially owned
equipment during 1998, 1997 and 1996. In 1998, however, Triton Aviation
Services, Ltd. purchased a commercial aircraft from the Partnership and the
gain from the sale accounted for 16% of total consolidated revenues during
1998. Also, in 1996, Noble Asset Company Ltd. purchased a mobile offshore
drilling unit from the Partnership and the gain from the sale accounted for
13% of total consolidated revenues and Masterbulk Pte Ltd. purchased a
marine vessel from the Partnership and the gain from the sale accounted for
14% of total consolidated revenues during 1996.
As of December 31, 1998 and 1997, the General Partner believes the
Partnership had no other significant concentrations of credit risk that
could have a material adverse effect on the Partnership.
10. Income Taxes
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
10. Income Taxes (continued)
As of December 31, 1998, there were temporary differences of approximately
$35.0 million between the financial statement carrying values of certain
assets and liabilities and the federal income tax basis of such assets and
liabilities, primarily due to differences in depreciation methods,
equipment reserves, provisions for bad debts, lessee's prepaid deposits,
and the tax treatment of underwriting commissions and syndication costs.
11. Contingencies
PLM International, (the Company) and various of its affiliates are named as
defendants in a lawsuit filed as a purported class action on January 22,
1997 in the Circuit Court of Mobile County, Mobile, Alabama, Case No.
CV-97-251 (the Koch action). Plaintiffs, who filed the complaint on their
own and on behalf of all class members similarly situated (the class), are
six individuals who invested in certain California limited partnerships
(the Partnerships) for which the Company's wholly-owned subsidiary, PLM
Financial Services, Inc. (FSI), acts as the general partner, including the
Partnership, PLM Equipment Growth Funds V, and IV, and PLM Equipment Growth
& Income Fund VII (the Growth Funds). The state court ex parte certified
the action as a class action (i.e., solely upon plaintiffs' request and
without the Company being given the opportunity to file an opposition). The
complaint asserts eight causes of action against all defendants, as
follows: fraud and deceit, suppression, negligent misrepresentation and
suppression, intentional breach of fiduciary duty, negligent breach of
fiduciary duty, unjust enrichment, conversion, and conspiracy.
Additionally, plaintiffs allege a cause of action against PLM Securities
Corp. for breach of third party beneficiary contracts in violation of the
National Association of Securities Dealers rules of fair practice.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, and
control persons. Based on these duties, plaintiffs assert liability against
defendants for improper sales and marketing practices, mismanagement of the
Growth Funds, and concealing such mismanagement from investors in the
Growth Funds. Plaintiffs seek unspecified compensatory and recissory
damages, as well as punitive damages, and have offered to tender their
limited partnership units back to the defendants.
In March 1997, the defendants removed the Koch action from the state court
to the United States District Court for the Southern District of Alabama,
Southern Division (Civil Action No. 97-0177-BH-C) based on the district
court's diversity jurisdiction, following which plaintiffs filed a motion
to remand the action to the state court. Removal of the action to federal
court automatically nullified the state court's ex parte certification of
the class. In September 1997, the district court denied plaintiffs' motion
to remand the action to state court and dismissed without prejudice the
individual claims of the California plaintiff, reasoning that he had been
fraudulently joined as a plaintiff. In October 1997, defendants filed a
motion to compel arbitration of plaintiffs' claims, based on an agreement
to arbitrate contained in the limited partnership agreement of each Growth
Fund, and to stay further proceedings pending the outcome of such
arbitration. Notwithstanding plaintiffs' opposition, the district court
granted defendants' motion in December 1997.
Following various unsuccessful requests that the district court reverse, or
otherwise certify for appeal, its order denying plaintiffs' motion to
remand the case to state court and dismissing the California plaintiff's
claims, plaintiffs filed with the U.S. Court of Appeals for the Eleventh
Circuit a petition for a writ of mandamus seeking to reverse the district
court's order. The Eleventh Circuit denied plaintiffs' petition in November
1997, and further denied plaintiffs subsequent motion in the Eleventh
Circuit for a rehearing on this issue. Plaintiffs also appealed the
district court's order granting defendants' motion to compel arbitration,
but in June 1998 voluntarily dismissed their appeal pending settlement of
the Koch action, as discussed below.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
11. Contingencies (continued)
On June 5, 1997, the Company and the affiliates who are also defendants in
the Koch action were named as defendants in another purported class action
filed in the San Francisco Superior Court, San Francisco, California, Case
No. 987062 (the Romei action). The plaintiff is an investor in PLM
Equipment Growth Fund V, and filed the complaint on her own behalf and on
behalf of all class members similarly situated who invested in certain
California limited partnerships for which FSI acts as the general partner,
including the Growth Funds. The complaint alleges the same facts and the
same nine causes of action as in the Koch action, plus five additional
causes of action against all of the defendants, as follows: violations of
California Business and Professions Code Sections 17200, et seq. for
alleged unfair and deceptive practices, constructive fraud, unjust
enrichment, violations of California Corporations Code Section 1507, and a
claim for treble damages under California Civil Code Section 3345.
On July 31, 1997, defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition)
under the Federal Arbitration Act seeking to compel arbitration of
plaintiff's claims and for an order staying the state court proceedings
pending the outcome of the arbitration. In connection with this motion,
plaintiff agreed to a stay of the state court action pending the district
court's decision on the petition to compel arbitration. In October 1997,
the district court denied the Company's petition to compel arbitration, but
in November 1997, agreed to hear the Company's motion for reconsideration
of this order. The hearing on this motion has been taken off calendar and
the district court has dismissed the petition pending settlement of the
Romei action, as discussed below. The state court action continues to be
stayed pending such resolution. In connection with her opposition to the
petition to compel arbitration, plaintiff filed an amended complaint with
the state court in August 1997 alleging two new causes of action for
violations of the California Securities Law of 1968 (California
Corporations Code Sections 25400 and 25500) and for violation of California
Civil Code Sections 1709 and 1710. Plaintiff also served certain discovery
requests on defendants. Because of the stay, no response to the amended
complaint or to the discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a
memorandum of understanding (MOU) related to the settlement of those
actions (the monetary settlement). The monetary settlement contemplated by
the MOU provides for stipulating to a class for settlement purposes, and a
settlement and release of all claims against defendants and third party
brokers in exchange for payment for the benefit of the class of up to $6.0
million. The final settlement amount will depend on the number of claims
filed by authorized claimants who are members of the class, the amount of
the administrative costs incurred in connection with the settlement, and
the amount of attorneys' fees awarded by the Alabama district court. The
Company will pay up to $0.3 million of the monetary settlement, with the
remainder being funded by an insurance policy.
The parties to the monetary settlement have also agreed in principal to an
equitable settlement (the equitable settlement) which provides, among other
things, (a) for the extension of the operating lives of the Partnership,
PLM Equipment Growth Fund V, and PLM Equipment Growth & Income Fund VII
(the Funds) by judicial amendment to each of their partnership agreements,
such that FSI, the general partner of each such Fund, will be permitted to
reinvest cash flow, surplus partnership funds or retained proceeds in
additional equipment into the year 2004, and will liquidate the
partnerships' equipment in 2006; (b) that FSI will be entitled to earn
front end fees (including acquisition and lease negotiation fees) in excess
of the compensatory limitations set forth in the North American Securities
Administrators Association, Inc. Statement of Policy by judicial amendment
to the Partnership Agreements for each Fund; (c) for a one time redemption
of up to 10% of the outstanding units of each Fund at 80% of such
partnership's net asset value; and (d) for the deferral of a portion of
FSI's management fees. The equitable settlement also provides for payment
of the equitable settlement attorneys' fees from Partnership funds in the
event that distributions paid to investors in the Funds during the
extension period reach a certain internal rate of return.
<PAGE>
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
11. Contingencies (continued)
Defendants will continue to deny each of the claims and contentions and
admit no liability in connection with the proposed settlements. The
monetary settlement remains subject to numerous conditions, including but
not limited to: (a) agreement and execution by the parties of a settlement
agreement (the settlement agreement), (b) notice to and certification of
the monetary class for purposes of the monetary settlement, and (c)
preliminary and final approval of the monetary settlement by the Alabama
district court. The equitable settlement remains subject to numerous
conditions, including but not limited to: (a) agreement and execution by
the parties of the settlement agreement, (b) notice to the current
unitholders in the Funds (the equitable class) and certification of the
equitable class for purposes of the equitable settlement, (c) preparation,
review by the Securities and Exchange Commission (SEC), and dissemination
to the members of the equitable class of solicitation statements regarding
the proposed extensions, (d) disapproval by less than 50% of the limited
partners in each of the Funds of the proposed amendments to the limited
partnership agreements, (e) judicial approval of the proposed amendments to
the limited partnership agreements, and (f) preliminary and final approval
of the equitable settlement by the Alabama district court. The parties
submitted the settlement agreement to the Alabama district court on
February 12, 1999, and the preliminary class certification hearing is
scheduled for March 24, 1999. If the district court grants preliminary
approval, notices to the monetary class and equitable class will be sent
following review by the SEC of the solicitation statements to be prepared
in connection with the equitable settlement. The monetary settlement, if
approved, will go forward regardless of whether the equitable settlement is
approved or not. The Company continues to believe that the allegations of
the Koch and Romei actions are completely without merit and intends to
continue to defend this matter vigorously if the monetary settlement is not
consummated.
The Partnership, together with affiliates, initiated litigation in various
official forums in India against a defaulting Indian airline lessee to
repossess Partnership property and to recover damages for failure to pay
rent and failure to maintain the aircraft in accordance with the relevant
lease contract. The Partnership has repossessed all of the property
previously leased to the airline, and the airline has ceased operations. In
response to the Partnership's collection efforts, the airline filed
counter-claims against the Partnership in excess of the Partnership's
claims against the airline. The General Partner believes that the airline's
counterclaims are completely without merit, and the General Partner will
vigorously defend against such counterclaims.
The Partnership is involved as plaintiff or defendant in various other
legal actions incident to its business. Management does not believe that
any of these actions will be material to the financial condition of the
Company.
12. Subsequent Event
During February 1999, the Partnership borrowed $3.7 million under the
Committed Bridge Facility.
<PAGE>
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership. *
10. 1 Management Agreement between Partnership and *
PLM Investment Management, Inc.
10. 2 Note Agreement, dated as of August 1, 1993, regarding
$30.0 million in 6.7% senior notes due November 17, 2003. *
10. 3 Fourth Amended and Restated Warehousing Credit Agreement,
dated as of December 15, 1998, with First Union National
Bank of North Carolina. 54-128
24. Powers of Attorney. 129-131
- -------
* Incorporated by reference. See page 31 of this report.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned does hereby constitute and appoint Robert N.
Tidball, Susan Santo, J. Michael Allgood and Richard Brock, jointly and
severally, his true and lawful attorneys-in-fact, each with power of
substitution, for him in any and all capacities, to do any and all acts and
things and to execute any and all instruments which said attorneys, or any of
them, may deem necessary or advisable to enable PLM Financial Services, Inc., as
Manager of PLM Equipment Growth Fund VI, to comply with the Securities Exchange
Act of 1934, as amended (the "Act"), and any rules and regulations thereunder,
in connection with the preparation and filing with the Securities and Exchange
Commission of annual reports on Form 10-K on behalf of PLM Equipment Growth Fund
VI, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign the name of the undersigned, in any
and all capacities, to such annual reports, to any and all amendments thereto,
and to any and all documents or instruments filed as a part of or in connection
therewith; and the undersigned hereby ratifies and confirms all that each of the
said attorneys, or his substitute or substitutes, shall do or cause to be done
by virtue hereof. This Power of Attorney is limited in duration until May 1,
1999 and shall apply only to the annual reports and any amendments thereto filed
with respect to the fiscal year ended December 31, 1998.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
23rd day of February, 1999.
/s/ Douglas P. Goodrich
----------------------
Douglas P. Goodrich
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned does hereby constitute and appoint Robert N.
Tidball, Susan Santo, J. Michael Allgood and Richard Brock, jointly and
severally, his true and lawful attorneys-in-fact, each with power of
substitution, for him in any and all capacities, to do any and all acts and
things and to execute any and all instruments which said attorneys, or any of
them, may deem necessary or advisable to enable PLM Financial Services, Inc., as
Manager of PLM Equipment Growth Fund VI, to comply with the Securities Exchange
Act of 1934, as amended (the "Act"), and any rules and regulations thereunder,
in connection with the preparation and filing with the Securities and Exchange
Commission of annual reports on Form 10-K on behalf of PLM Equipment Growth Fund
VI, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign the name of the undersigned, in any
and all capacities, to such annual reports, to any and all amendments thereto,
and to any and all documents or instruments filed as a part of or in connection
therewith; and the undersigned hereby ratifies and confirms all that each of the
said attorneys, or his substitute or substitutes, shall do or cause to be done
by virtue hereof. This Power of Attorney is limited in duration until May 1,
1999 and shall apply only to the annual reports and any amendments thereto filed
with respect to the fiscal year ended December 31, 1998.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
23rd day of February, 1999.
/s/ Robert N. Tidball
------------------------
Robert N. Tidball
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned does hereby constitute and appoint Robert N.
Tidball, Susan Santo, J. Michael Allgood and Richard Brock, jointly and
severally, his true and lawful attorneys-in-fact, each with power of
substitution, for him in any and all capacities, to do any and all acts and
things and to execute any and all instruments which said attorneys, or any of
them, may deem necessary or advisable to enable PLM Financial Services, Inc., as
Manager of PLM Equipment Growth Fund VI, to comply with the Securities Exchange
Act of 1934, as amended (the "Act"), and any rules and regulations thereunder,
in connection with the preparation and filing with the Securities and Exchange
Commission of annual reports on Form 10-K on behalf of PLM Equipment Growth Fund
VI, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign the name of the undersigned, in any
and all capacities, to such annual reports, to any and all amendments thereto,
and to any and all documents or instruments filed as a part of or in connection
therewith; and the undersigned hereby ratifies and confirms all that each of the
said attorneys, or his substitute or substitutes, shall do or cause to be done
by virtue hereof. This Power of Attorney is limited in duration until May 1,
1999 and shall apply only to the annual reports and any amendments thereto filed
with respect to the fiscal year ended December 31, 1998.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
23rd day of February, 1999.
/s/ Stephen M. Bess
------------------------
Stephen M. Bess
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