INDEPENDENT AUDITORS' REPORT
The Partners
Spear Vessel
We have audited the accompanying balance sheet of the Spear Partnership (the
Partnership) as of December 31, 1998, and the related statements of operations,
changes in partners' capital, and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit 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 audit provides 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 the Partnership as of December
31, 1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles. The
accompanying 1999 and 1997 financial statements were not audited by us, and
accordingly, we express no opinion or any other form of assurance on them.
/s/ KPMG
SAN FRANCISCO, CALIFORNIA
June 9, 2000
<PAGE>
<TABLE>
<CAPTION>
SPEAR PARTNERSHIP
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31,
(IN THOUSANDS OF DOLLARS)
1999 1998
(unaudited)
--------------------------------------
ASSETS
<S> <C> <C>
Marine vessel held for lease, at cost $ 7,840 $ 7,840
Less accumulated depreciation (5,536) (5,074)
-------------------------------------
Net equipment 2,304 2,766
Accounts receivable 224 139
Prepaid expenses and other -- 7
-------------------------------------
Total assets $ 2,528 $ 2,912
=====================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 125 $ 135
Due to affiliates 27 9
Lessee deposits 174 82
-------------------------------------
Total liabilities 326 226
Partners' capital (deficit):
Limited partners 2,258 2,737
General partner (56) (51)
-------------------------------------
Total partners' capital 2,202 2,686
-------------------------------------
Total liabilities and partners' capital $ 2,528 $ 2,912
=====================================
</TABLE>
See accompanying auditors' report and notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
SPEAR PARTNERSHIP
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS)
1999 1998 1997
(unaudited) (unaudited)
----------------------------------------------------------
REVENUES
<S> <C> <C> <C>
Lease revenue $ 1,498 $ 1,824 $ 2,380
Interest and other income 51 -- 97
----------------------------------------------------------
Total revenues 1,549 1,824 2,477
----------------------------------------------------------
EXPENSES
Depreciation and amortization 464 949 1,153
Marine operating expenses 1,148 1,137 949
Repairs and maintenance 273 443 658
Management fees to affiliate 75 91 119
Insurance expense to affiliates -- (10) 20
Other insurance expense 112 161 225
Administrative expenses to affiliates 17 26 29
Administrative and other 24 22 20
Loss on revaluation -- 1,910 --
----------------------------------------------------------
Total expenses 2,113 4,729 3,173
----------------------------------------------------------
Net loss $ (564) $ (2,905) $ (696)
==========================================================
</TABLE>
See accompanying auditors' report and notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
SPEAR PARTNERSHIP
(A LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS OF DOLLARS)
Limited General
Partners Partner Total
--------------------------------------------------
<S> <C> <C> <C>
Partners' capital (deficit) at December 31, 1996 (unaudited) $ 6,222 $ (15) $ 6,207
Net loss (689) (7) (696)
Cash distribution (61) (1) (62)
------------------------------------------------
Partners' capital (deficit) at December 31, 1997 (unaudited) 5,472 (23) 5,449
Net loss (2,876) (29) (2,905)
Capital contribution 141 1 142
------------------------------------------------
Partners' capital (deficit) at December 31, 1998 2,737 (51) 2,686
Net loss (558) (6) (564)
Capital contribution 79 1 80
------------------------------------------------
Partners' capital (deficit) at December 31, 1999 (unaudited) $ 2,258 $ (56) $ 2,202
================================================
</TABLE>
See accompanying auditors' report and notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
SPEAR PARTNERSHIP
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS)
1999 1998 1997
(unaudited) (unaudited)
---------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (564) $ (2,905) $ (696)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 464 949 1,153
Loss on revaluation -- 1,910 --
Changes in operating assets and liabilities:
Accounts receivable (84) 34 (173)
Prepaid expenses 5 11 3
Accounts payable and accrued expenses (11) 90 (322)
Due to affiliates 18 (6) 6
Lessee deposits 92 (225) 91
---------------------------------------------------------
Net cash (used in) provided by operating activities (80) (142) 62
---------------------------------------------------------
Financing activities
Cash contributions (distributions)-General Partner 1 1 (1)
Cash contributions (distributions)-limited partners 79 141 (61)
----------------------------------------------------------
Net cash provided by (used in) financing activities 80 142 (62)
Net change in cash and cash equivalents -- -- --
Cash and cash equivalents at beginning of year -- -- --
---------------------------------------------------------
Cash and cash equivalents at end of year $ -- $ -- $ --
=========================================================
</TABLE>
See accompanying auditors' report and notes to financial statements.
<PAGE>
SPEAR PARTNERSHIP
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Spear Partnership, a California limited partnership (the Partnership), was
formed during December 1995. The Partnership was formed for the purpose of
purchasing a container cargo feeder marine vessel and commenced significant
operations in March 1996. The Partnership has no employees nor operations other
than the operation of the marine vessel. The Partnership is owned 99% by the
limited partners and 1% by the General Partner. The Partnership has two limited
partners: PLM Equipment Growth Fund VI (EGF VI), a California limited
partnership, and Professional Lease Management Income Fund I (Fund I), a
Delaware Limited Liability Company, (the Limited Partners). The General Partner
is the Spear Corporation (SC) which is owned 50% by EGF VI and 50% by Fund I.
The Limited Partnership is owned 50% by EGF VI and 50% by Fund I.
The marine vessel was purchased in March 1996 for $7.5 million. EGF VI paid
acquisition and lease negotiation fees of $0.2 million to FSI. No fees were paid
by Fund I.
The Partnership is expected to terminate during 2002 as EGF VI will be in
its liquidation phase and all equipment must be sold.
These accompanying 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 marine vessel in the Partnership is managed under a continuing management
agreement by PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary of
PLM Financial Services Inc. (FSI). FSI is a wholly-owned subsidiary of PLM
International, Inc. (PLM International). IMI receives a monthly management fee
from the Partnership for managing the marine vessel (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 the General Partner of EGF VI, the Manager of Fund I,
and the general partner of other limited partnerships.
CASH AND CASH EQUIVALENTS
All cash generated from operations is distributed to the partners, accordingly,
the Partnership has no cash balance at December 31, 1999 and 1998.
ACCOUNTING FOR LEASES
The marine vessel in the Partnership is leased under operating leases. Under the
operating lease method of accounting, the leased asset is recorded at cost and
depreciated over its estimated useful life. Rental payments are recorded as
revenue over the lease term as earned in accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases". Lease origination costs
are capitalized and amortized equally over 36 months.
DEPRECIATION
Depreciation is computed using the double-declining balance method, taking a
full month's depreciation in the month of acquisition, based upon an estimated
useful life of 12 years. The depreciation method
<PAGE>
SPEAR PARTNERSHIP
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION (CONTINUED)
changes to straight-line when the annual depreciation expense using the
straight-line method exceeds that calculated by the double-declining balance
method. Acquisition fees of $0.2 million, that were paid to FSI, had been
capitalized as part of the cost of the equipment. Major expenditures that are
expected to extend the marine vessel's useful life or reduce future equipment
operating expenses, have been capitalized and amortized over the estimated
remaining life of the marine vessel.
MARINE VESSEL
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", FSI reviews the carrying value of the Partnership's marine
vessel at least quarterly, and whenever circumstances indicated that the
carrying value of this asset may not be recoverable in relation to expected
future market conditions, for the purpose of assessing recoverability of the
recorded amounts. If projected undiscounted future cash flows and the fair
market value of the marine vessel was less than the carrying value of the marine
vessel, a loss on revaluation is recorded. A reduction of $1.9 million to the
carrying value of the marine vessel was required during 1998. No reduction to
the carrying value of the marine vessel was required during 1999 or 1997.
REPAIRS AND MAINTENANCE
Repair and maintenance for the marine vessel are the obligation of the
Partnership.
NET INCOME (LOSS) AND CASH DISTRIBUTION TO LIMITED PARTNERS
The net income (loss) and cash distributions of the Partnership are generally
allocated 99% to the limited partners and 1% to the General Partner. The net
income (loss) and cash distributions are generally allocated to the limited
partners based on their percentage of ownership in the Partnership. Certain
depreciable and amortizable amounts are not allocated to Fund I, such as
depreciation on acquisition fees and amortization on lease negotiation fees.
Otherwise, the limited partners 99% share of net income (loss) and cash
distributions are allocated 50% to EGF VI and 50% to Fund I.
Cash distributions are recorded when paid.
COMPREHENSIVE INCOME
The Partnership's net income is equal to comprehensive income for the year ended
December 31, 1999, 1998, and 1997.
2. GENERAL PARTNER
SC contributed $100 of the Partnership's initial capital. SC is owned by two
shareholders, EGF VI owns 50% and Fund I owns 50%. Dividends, if declared, are
paid to the shareholders annually based on the percentage of ownership each
shareholder owns.
3. TRANSACTIONS WITH AFFILIATES
Under the equipment management agreement, IMI, subject to certain reductions,
receives a monthly management fee attributable to owned equipment 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) 5% of the gross
<PAGE>
SPEAR PARTNERSHIP
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
lease revenues attributable to equipment that is subject to operating leases.
The Partnership's management fee expense to affiliate was $0.1 million during
1999, 1998, and 1997. The Partnership reimbursed FSI $17,000, $26,000, and
$29,000 during 1999, 1998, and 1997, respectively, for data processing and
administrative expenses directly attributable to the Partnership.
The Partnership paid $20,000 during 1997 to Transportation Equipment Indemnity
Company Ltd. (TEI), an affiliate of FSI, which provided marine insurance
coverage and other insurance brokerage services. The Partnership did not pay TEI
for insurance coverage during 1999 and 1998. A substantial portion of the amount
that was paid to TEI was then paid to third-party reinsurance underwriters or
placed in risk pools managed by TEI on behalf of affiliated programs and PLM
International, which provide threshold coverages on marine vessel loss of hire
and hull and machinery damage. All pooling arrangement funds are either paid out
to cover applicable losses or refunded pro rata by TEI. During 1998, the
Partnership received a $10,000 loss-of-hire insurance refund from TEI due to
lower claims from the insured Partnership and other insured affiliated programs.
During 1999 and 1998, TEI did not provide the same level of insurance coverage
as had been provided during 1997. These services were provided by an
unaffiliated third party. PLM International liquidated TEI in 2000.
Partnership management fees payable to IMI was $27,000 and $9,000 as of December
31, 1999 and 1998, respectively.
4. MARINE VESSEL ON LEASE
The Partnership's marine vessel is leased to multiple operators on a time
charter basis. In such instances, revenues are earned from each lessee that
hires the marine vessel for a specific voyage.
The marine vessel in the Partnership is used as collateral against the senior
loans of the Limited Partners.
The marine vessel lease is being accounted for as an operating lease. There are
no future minimum rentals under non-cancelable leases at December 31, 1999. Per
diem and short-term rentals consisting of utilization rate lease payments
included in lease revenues amounted to $1.5 million in 1999, $1.8 million in
1998, and $2.4 million in 1997.
5. GEOGRAPHIC INFORMATION
The Partnership's marine vessel is leased to multiple lessees in different
regions that operate worldwide.
6. 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 owning the Limited
Partners. Accordingly, no provision for income taxes has been made in the
financial statements of the Partnership.
As of December 31, 1999, the financial statement carrying amount of assets and
liabilities was approximately $4.3 million lower than the federal income tax
basis of such assets and liabilities, primarily due to differences in lessee
prepaid deposits, depreciation method, and the tax estimated useful life.
<PAGE>
SPEAR PARTNERSHIP
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
7. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Partnership to
concentrations of credit risk, consist principally of lease receivables.
The Partnership's lessees that accounted for 10% or more of the total revenues
for the marine vessel during the past three years were Kaud I. Larsen (85% in
1998 and 100% in 1997), Crowley American Transport (60% in 1999), Panamarian
Courice Corp. (18% in 1999), and Industrial Maritime Couriers (15% in 1999).
As of December 31, 1999, the General Partner believes the Partnership had no
other significant concentrations of credit risk that could have a material
adverse effect on the Partnership.
