UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal quarter ended September 30, 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 33-55796
-----------------------
PLM EQUIPMENT GROWTH & INCOME FUND VII
(Exact name of registrant as specified in its
charter)
California 94-3168838
(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 ____
<PAGE>
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
BALANCE SHEETS
(in thousands of dollars, except unit amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------------------------------
<S> <C> <C>
Assets
Equipment held for operating lease, at cost $ 69,514 $ 58,844
Less accumulated depreciation (33,364) (24,650)
---------------------------------------
36,150 34,194
Equipment held for sale -- 4,148
---------------------------------------
Net equipment 36,150 38,342
Cash and cash equivalents 929 9,327
Restricted cash 197 191
Accounts receivable, less allowance for doubtful accounts
of $464 in 1998 and $522 in 1997 1,060 887
Investments in unconsolidated special-purpose entities 37,463 31,377
Deferred charges, net of accumulated amortization
of $189 in 1998 and $274 in 1997 235 296
Prepaid expenses and other assets 52 49
---------------------------------------
Total assets $ 76,086 $ 80,469
=======================================
Liabilities and partners' capital
Liabilities:
Accounts payable and accrued expenses $ 711 $ 367
Due to affiliates 1,081 4,563
Lessee deposits and reserve for repairs 1,278 1,477
Notes payable 23,000 23,000
---------------------------------------
Total liabilities 26,070 29,407
Partners' capital:
Limited partners (5,334,211 limited partnership units as of
September 30, 1998 and 5,370,297 as of December 31, 1997) 50,016 51,062
General Partner -- --
---------------------------------------
Total partners' capital 50,016 51,062
---------------------------------------
Total liabilities and partners' capital $ 76,086 $ 80,469
=======================================
</TABLE>
See accompanying notes to financial
statements.
<PAGE>
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
STATEMENTS OF OPERATIONS
(in thousands of dollars, except weighted-average unit amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Lease revenue $ 3,800 $ 2,958 $ 10,424 $ 9,413
Interest and other income 145 121 285 226
Net gain on disposition of equipment 3 2 35 1,802
--------------------------------------------------------------------
Total revenues 3,948 3,081 10,744 11,441
--------------------------------------------------------------------
Expenses
Depreciation and amortization 1,841 2,143 5,685 6,701
Repairs and maintenance 642 365 1,477 992
Interest expense 427 418 1,259 1,273
Management fees to affiliate 212 163 588 524
Equipment operating expense 409 15 515 43
Insurance expense 130 28 191 65
General and administrative expenses
to affiliates 166 207 517 510
Other general and administrative expenses 100 98 367 262
Provision for (recovery of) bad debts (42) 171 1 226
--------------------------------------------------------------------
Total expenses 3,885 3,608 10,600 10,596
--------------------------------------------------------------------
Equity in net income (loss) of unconsolidated
special-purpose entities (848) 168 6,922 686
--------------------------------------------------------------------
Net income (loss) $ (785) $ (359 ) $ 7,066 $ 1,531
====================================================================
Partners' share of net income (loss)
Limited partners $ (912) $ (486 ) $ 6,686 $ 1,149
General Partner 127 127 380 382
--------------------------------------------------------------------
Total $ (785) $ (359 ) $ 7,066 $ 1,531
====================================================================
Net income (loss) per weighted-average
limited partnership unit $ (0.17) $ (0.09 ) $ 1.25 $ 0.21
====================================================================
Cash distributions $ 2,529 $ 2,544 $ 7,600 $ 7,633
====================================================================
Cash distributions per weighted-average
limited partnership unit $ 0.45 $ 0.45 $ 1.35 $ 1.35
====================================================================
</TABLE>
See accompanying notes to financial
statements.
<PAGE>
PLM EQUIPMENT GROWTH & INCOME FUND VII
( A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the period from December 31, 1996
to September 30, 1998
(in thousands of dollars)
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
------------------------------------------------------------
<S> <C> <C> <C>
Partners' capital as of December 31, 1996 $ 60,137 $ -- $ 60,137
Net income 593 508 1,101
Cash distribution (9,668) (508) (10,176)
------------------------------------------------------------
Partners' capital as of December 31, 1997 51,062 -- 51,062
Net income 6,686 380 7,066
Repurchase of limited partnership units (512) -- (512)
Cash distribution (7,220) (380) (7,600)
------------------------------------------------------------
Partners' capital as of September 30, 1998 $ 50,016 $ -- $ 50,016
============================================================
</TABLE>
See accompanying notes to financial
statements.
<PAGE>
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
----------------------------
<S> <C> <C>
Operating activities
Net income $ 7,066 $ 1,531
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,685 6,701
Net gain on disposition of equipment (35) (1,802)
Equity in net income from unconsolidated
special-purpose entities (6,922) (686)
Changes in operating assets and liabilities:
Restricted cash (6) (31)
Accounts receivable, net (204) 393
Prepaid expenses and other assets (3) 55
Accounts payable and accrued expenses 344 384
Due to affiliates 100 343
Lessee deposits and reserve for repairs (199) 490
-------------------
----------------
Net cash provided by operating activities 5,826 7,378
---------------------------------
Investing activities
Payments for equipment and capitalized repairs (3,466) (91)
Investment in and equipment purchased and placed in
unconsolidated special-purpose entities (22,261) --
Distributions from unconsolidated special-purpose entities 8,295 5,805
Distributions from liquidation of unconsolidated special-purpose entities 14,802 --
Payments of acquisition fees to affiliate (155) --
Payments of lease negotiation fees to affiliate (34) --
Proceeds from disposition of equipment 289 4,411
---------------------------------
Net cash (used in) provided by investing activities (2,530) 10,125
---------------------------------
Financing activities
Payments of short-term note payable -- (2,000)
Payments of due to affiliates (5,092) --
Cash recieved from affiliates 1,510 --
Cash distribution paid to limited partners (7,220) (7,251)
Cash distribution paid to General Partner (380) (382)
Repurchase of limited partnership units (512) --
---------------------------------
Net cash used in financing activities (11,694) (9,633)
---------------------------------
Net (decrease) increase in cash and cash equivalents (8,398) 7,870
Cash and cash equivalents at beginning of period 9,327 2,468
----------------
-------------------
Cash and cash equivalents at end of period $ 929 $ 10,338
=================================
Supplemental information
Interest paid $ 869 $ 864
=================================
Supplemental disclosure of noncash investing and financing activities:
Sale proceeds included in accounts receivable $ 16 $ 5
=================================
</TABLE>
See accompanying notes to financial
statements.
<PAGE>
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
1. Opinion of Management
In the opinion of the management of PLM Financial Services, Inc. (FSI or the
General Partner), the accompanying unaudited financial statements contain all
adjustments necessary, consisting primarily of normal recurring accruals, to
present fairly the financial position of PLM Equipment Growth & Income Fund VII
(the Partnership) as of September 30, 1998 and December 31, 1997, the statements
of operations for the three and nine months ended September 30, 1998 and 1997,
the statements of cash flows for the nine months ended September 30, 1998 and
1997, and the statements of changes in partners' capital for the period from
December 31, 1996 to September 30, 1998. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from the accompanying financial statements. For further information, reference
should be made to the financial statements and notes thereto included in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 1997,
on file with the Securities and Exchange Commission.
2. Repurchase of Limited Partnership Units
In 1997, the Partnership agreed to repurchase up to 46,000 limited partnership
units for an aggregate purchase price of up to a maximum of $0.7 million. As of
September 30, 1998, the Partnership had repurchased 36,086 limited partnership
units for $0.5 million. The General Partner may repurchase the additional units
in the future.
3. Cash Distributions
Cash distributions are recorded when paid and totaled $2.5 million and $7.6
million for the three and nine months ended September 30, 1998 and 1997. Cash
distributions to limited partners in excess of net income are considered to
represent a return of capital. Cash distributions to the limited partners of
$0.5 million and $6.1 million for the nine months ended September 30, 1998 and
1997, respectively, were deemed to be a return of capital. Cash distributions
related to the results from the third quarter of 1998, of $1.2 million, will be
paid during the fourth quarter of 1998.
4. Transactions with General Partner and Affiliates
The Partnership's proportional share of the affiliated expenses incurred by the
unconsolidated special-purpose entities (USPEs) during 1998 and 1997 is listed
in the following table (in thousands of dollars):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees $ 112 $ 127 $ 333 $ 374
Data processing and administrative
expenses 30 34 102 101
Insurance expense 3 35 18 141
</TABLE>
Transportation Equipment Indemnity Company, Ltd. (TEI), an affiliate of the
General Partner, provides marine insurance coverage for the Partnership's
investment in USPEs and other insurance brokerage services. TEI did not provide
the same level of insurance coverage during 1998 as had been provided during
1997. These services were provided by an unaffiliated third party.
The Partnership paid FSI $0.2 million for equipment acquisition and lease
negotiation fees during the nine months ended September 30, 1998. No similar
fees were paid to FSI during the same period of 1997.
<PAGE>
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Transactions with General Partner and Affiliates (continued)
The balance due to affiliates as of September 30, 1998 includes $0.1 million due
to FSI and its affiliates for management fees and $0.9 million due to affiliated
USPEs. The balance due to affiliates as of December 31, 1997 includes $0.1
million due to FSI and its affiliates for management fees and $4.5 million due
to an affiliated USPE.
The Partnership's proportional share of USPE-affiliated management fees, of $0.1
million and $0.2 million, was payable as of September 30, 1998 and December 31,
1997, respectively.
The Partnership's proportional share of equipment acquisition and lease
negotiation fees paid by USPEs to FSI during the nine months ended September 30,
1998 was $1.2 million. No similar fees were paid during the same period of 1997.
During the nine months ended September 30, 1998, the Partnership paid $5.1
million to affiliated USPEs.
5. Equipment
Owned equipment held for operating lease is stated at cost. Equipment held for
sale is stated at the lower of the equipment's depreciated cost or fair value,
less cost to sell, and is subject to a pending contract for sale. The components
of owned equipment are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------------------------
<S> <C> <C>
Marine vessels $ 22,212 $ 22,212
Trailers 17,547 18,111
Aircraft 15,933 8,305
Rail equipment 10,074 10,063
Portable heaters 3,595 --
Modular buildings 153 153
------------- --------------
69,514 58,844
Less accumulated depreciation (33,364) (24,650)
------------- --------------
36,150 34,194
Equipment held for sale -- 4,148
------------- --------------
Net equipment $ 36,150 $ 38,342
============= ==============
</TABLE>
As of September 30, 1998, all of the equipment was on lease or operating in
PLM-affiliated short-term trailer rental facilities, except for two commuter
aircraft and five railcars. As of December 31, 1997, all of the equipment was on
lease or operating in PLM-affiliated short-term trailer rental facilities,
except for two commuter aircraft that were held for sale and a railcar. The net
book value of the equipment off lease was $3.6 million and $4.1 million as of
September 30, 1998 and December 31, 1997, respectively.
The Partnership purchased a portfolio of portable heaters during the nine months
ended September 30, 1998 for $3.6 million, including $0.2 million in acquisition
fees paid to FSI.
During the nine months ended September 30, 1998, the Partnership disposed of or
sold trailers and a railcar with a net book value of $0.2 million for $0.3
million. The Partnership also reclassified the two commuter aircraft that were
held for sale at December 31, 1997 to owned equipment held for operating lease.
The sale of this aircraft has been postponed until a future date.
During the nine months ended September 30, 1997, the Partnership disposed of or
sold modular buildings and trailers with a net book value of $2.5 million for
$4.3 million.
<PAGE>
PLM EQUIPMENT GROWTH & INCOME FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
6. Investments in Unconsolidated Special-Purpose Entities
The net investments in USPEs include the following jointly-owned equipment and
related assets and liabilities (in thousands of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------------------------
<S> <C> <C>
75% interest in an entity owning marine containers $ 7,481 $ --
50% interest in a trust owning an MD-82 commercial aircraft 7,212 --
80% interest in an entity owning a bulk-carrier marine vessel 5,343 6,014
50% interest in a trust owning an MD-82 commercial aircraft 4,442 682
33% interest in two trusts owning three 737-200A commercial aircraft,
two aircraft engines, and a portfolio of aircraft rotables 4,429 8,036
24% interest in a trust owning a 767-200ER commercial aircraft 4,321 4,824
44% interest in an entity owning a bulk-carrier marine vessel 2,312 2,439
10% interest in an entity owning a mobile offshore drilling unit 1,526 1,712
50% interest in a trust that owned four 737-200A commercial aircraft 241 4,362
25% interest in a trust that owned four 737-200A commercial aircraft 156 3,308
Net investments $ 37,463 $ 31,377
============= =============
</TABLE>
As of September 30, 1998 and December 31, 1997, the Partnership had an interest
in trusts that owned multiple aircraft (the Trusts). As of December 31, 1997,
two of these Trusts contained provisions, under certain circumstances, for
allocating specific aircraft to the beneficial owners. During the nine months
ended September 30, 1998, in one of these Trusts, the Partnership sold the two
commercial aircraft assigned to it, with a net book value of $3.4 million, for
proceeds of $8.8 million. During the same period, in another trust, the
Partnership also sold the commercial aircraft assigned to it, with a net book
value of $2.7 million, for proceeds of $6.0 million.
During the nine months ended September 30, 1998, the Partnership completed its
commitment to purchase an interest in a trust owning an MD-82 Stage III
commercial aircraft for $7.2 million, including acquisition and lease
negotiation fees of $0.4 million that were paid to FSI for the purchase of this
equipment. The Partnership made a deposit of $0.7 million toward this purchase
in 1997. The Partnership also purchased an interest in another trust owning an
MD-82 Stage III commercial aircraft for $8.2 million, including acquisition and
lease negotiation fees of $0.4 million that were paid to FSI for the purchase of
this equipment. The remaining interest in this trust was purchased by an
affiliated program.
In addition, during the nine months ended September 30, 1998, the Partnership
purchased an interest in an entity owning 4,912 marine containers for $7.5
million, including acquisition and lease negotiation fees of $0.4 million that
were paid to FSI. The remaining interest in this entity was purchased by an
affiliated program.
7. Debt
The General Partner entered into a short-term, joint $50.0 million credit
facility that is due to expire on November 2, 1998. This facility was amended on
June 1, 1998 to temporarily increase the borrowing capacity of American Finance
Group, Inc. (AFG), a subsidiary of PLM International, Inc., from $50.0 million
to $55.0 million until September 1, 1998. On June 8, 1998, this facility was
amended again to temporarily increase AFG's borrowing capacity from $55.0
million to $60.0 million until July 8, 1998. As of September 30, 1998, the
Partnership had no borrowings under the short-term joint $50.0 million credit
facility. Among the other eligible borrowers, AFG had borrowings of $44.2
million, and TEC Acquisub, Inc., had borrowings of $0.3 million under the
short-term joint, $50.0 million credit facility as of September 30, 1998. No
other eligible borrower had any outstanding borrowings.
<PAGE>
PLM EQUIPMENT GROWTH FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Debt (continued)
The General Partner believes it will renew the credit facility upon its
expiration with similar terms as those in the current credit facility.
8. 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 period. The
weighted-average number of Partnership units deemed outstanding during the three
and nine months ended September 30, 1998 was 5,334,211 and 5,343,769,
respectively. The weighted-average number of Partnership units deemed
outstanding during the three and nine months ended September 30, 1997 was
5,370,297.
9. Contingencies
PLM International, Inc., (the Company) and various of its affiliates are named
as defendants in a lawsuit filed as a class action on January 22, 1997 in the
Circuit Court of Mobile County, Mobile, Alabama, Case No. CV-97-251 (the Koch
action). The plaintiffs, who filed the complaint on their own and on behalf of
all class members similarly situated, are six individuals who allegedly invested
in certain California limited partnerships (the Funds) for which the Company's
wholly-owned subsidiary, FSI, acts as the general partner, including PLM
Equipment Growth Funds IV, V, and VI, and the Partnership. The complaint asserts
eight causes of action against all defendants, as follows: fraud and deceit,
suppression, negligent misrepresentation and suppression, intentional breach of
fiduciary duty, negligent breach of fiduciary duty, unjust enrichment,
conversion, and conspiracy. Additionally, plaintiffs allege a cause of action
against PLM Securities Corp. for breach of third party beneficiary contracts in
violation of the National Association of Securities Dealers rules of fair
practice. Plaintiffs allege that each defendant owed plaintiffs and the class
certain duties due to their status as fiduciaries, financial advisors, agents,
and control persons. Based on these duties, plaintiffs assert liability against
the defendants for improper sales and marketing practices, mismanagement of the
Funds, and concealing such mismanagement from investors in the 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. In September 1997, the district court denied plaintiffs' motion
and dismissed without prejudice the individual claims of the California class
representative, reasoning that he had been fraudulently joined as a plaintiff.
In October 1997, defendants filed a motion to compel arbitration of plaintiffs'
claims, based on an agreement to arbitrate contained in the limited partnership
agreement of each Fund, and to stay further proceedings pending the outcome of
such arbitration. Notwithstanding plaintiffs' opposition, the district court
granted the motion in December 1997.
Following various unsuccessful requests that the district court reverse or
otherwise amend its decisions, plaintiffs filed with the U.S. Court of Appeals
for the Eleventh Circuit a notice of appeal from the district court's order
granting defendants' motion to compel arbitration and to stay the proceedings,
and of the district court's order denying plaintiffs' motion to remand and
dismissing the claims of the California plaintiff. This appeal was voluntarily
dismissed by plaintiffs in June 1998 pending settlement of the Koch action, as
discussed below.
On June 5, 1997, the Company and the affiliates who are also defendants in the
Koch action were named as defendants in another purported class action filed in
the San Francisco Superior Court, San Francisco, California, Case No. 987062
(the Romei action). The plaintiff is an investor in PLM Equipment Growth Fund V,
and filed the complaint on her own behalf and on behalf of all class members
similarly situated who invested in certain California limited partnerships for
which FSI acts as the general partner, including the Funds. The complaint
alleges the same facts and the same nine causes of action
<PAGE>
PLM EQUIPMENT GROWTH FUND VII
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Contingencies (continued)
as in the Koch action, plus five additional causes of action against all of the
defendants, as follows: violations of California Business and Professions Code
Sections 17200, et seq. for alleged unfair and deceptive practices, constructive
fraud, unjust enrichment, violations of California Corporations Code Section
1507, and a claim for treble damages under California Civil Code Section 3345.
On July 31, 1997, the defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition (the petition) under
the Federal Arbitration Act seeking to compel arbitration of plaintiff's claims
and for an order staying the state court proceedings pending the outcome of the
arbitration. In connection with this motion, plaintiff agreed to a stay of the
state court action pending the district court's decision on the petition to
compel arbitration. In October 1997, the district court denied the Company's
petition to compel arbitration and in November 1997, agreed to hear the
Company's motion for reconsideration of this order. The hearing on this motion
has been taken off calendar and the district court has dismissed the petition
pending settlement of the Romei action, as discussed below. The state court
action continues to be stayed pending such resolution. In connection with her
opposition to the petition to compel arbitration, the plaintiff filed an amended
complaint with the state court in August 1997 alleging two new causes of action
for violations of the California Securities Law of 1968 (California Corporations
Code Sections 25400 and 25500) and for violation of California Civil Code
Sections 1709 and 1710. Plaintiff also served certain discovery requests on
defendants. Because of the stay, no response to the amended complaint or to the
discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a memorandum
of understanding (MOU) related to the settlement of those actions. The MOU
contemplates a settlement and release of all claims in exchange for payment of
up to $6.0 million. The final settlement amount will depend on the number of
authorized claims filed by authorized claimants, the amount of the
administrative costs incurred in connection with the settlement, and the amount
of attorneys' fees awarded by the Alabama district court. The Company will pay
up to $0.3 million of the settlement, with the remainder being funded by an
insurance policy. The defendants will continue to deny each of the claims and
contentions and admit no liability in connection with the proposed settlement.
The settlement remains subject to numerous conditions, including but not limited
to (a) agreement and execution by the parties of a settlement agreement, (b)
notice to and certification of the class for settlement purposes and (c)
preliminary and final approval of the settlement by the Alabama district court.
The Company continues to believe that the allegations of the Koch and Romei
actions are completely without merit and intends to continue to defend this
matter vigorously if the settlement is not consummated.
10. Subsequent Event
The General Partner received a commitment letter dated October 29, 1998 from the
lender of the short-term credit facility extending the credit facility to
November 1, 1999. The terms of the credit facility remained substantially the
same as the previous credit facility.
(this space intentionally left blank)
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(I) RESULTS OF OPERATIONS
Comparison of PLM Equipment Growth & Income Fund VII's (the Partnership's)
Operating Results for the Three Months Ended September 30, 1998 and 1997
(A) Owned Equipment Operations
Lease revenues less direct expenses (defined as expenses for repairs and
maintenance, equipment operation, and asset-specific insurance) on owned
equipment increased during the three months ended September 30, 1998 when
compared to the same period of 1997. The following table presents lease revenues
less direct expenses by owned equipment type (in thousands of dollars):
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1998 1997
------------------------------
<S> <C> <C>
Trailers $ 964 $ 815
Marine vessels 609 739
Rail equipment 448 486
Aircraft 363 501
Portable heaters 237 --
Modular buildings 11 16
</TABLE>
Trailers: Trailer lease revenues and direct expenses were $1.2 million and $0.2
million, respectively, for the three months ended September 30, 1998, compared
to $0.9 million and $0.1 million, respectively, during the same period of 1997.
The increase in trailer contribution was due to the purchase of additional
equipment during the fourth quarter of 1997.
Marine vessels: Marine vessel lease revenues and direct expenses were $1.2
million and $0.6 million, respectively, for the three months ended September 30,
1998, compared to $0.8 million and $0.1 million, respectively, during the same
period of 1997. Lease revenues and direct expenses increased during the third
quarter of 1998, when compared to the same period of 1997, due to a change in
the lease arrangement for the Partnership's marine vessels. During the third
quarter of 1997, the marine vessels were operating under a bareboat charter in
which the lessee pays a flat lease rate and also pays for certain operating
expenses while on lease. During the third quarter of 1998, the marine vessels
were operating under a lease arrangement in which the lessee pays a higher lease
rate, however, the Partnership now pays for all operating expenses. The decrease
in marine vessel contribution was due to the increase in operating expenses
exceeding the increase in the lease rate.
Rail equipment: Rail equipment lease revenues and direct expenses were $0.7
million and $0.2 million, respectively, for the three months ended September 30,
1998 and 1997. The decrease in railcar contribution during 1998 was due to an
increase in required repairs during 1998 when compared to the same period of
1997.
Aircraft: Aircraft lease revenues and direct expenses were $0.5 million and $0.1
million, respectively, for the three months ended September 30, 1998, compared
to $0.5 million and $5,000, respectively, during the same period of 1997. The
decrease in aircraft contribution was due to additional repairs required to the
commuter aircraft that was off-lease during the three months ended September 30,
1998 which were not needed during 1997.
Portable heaters: Lease revenues and direct expenses for portable heaters were
$0.2 million and $0, respectively, for the three months ended September 30,
1998. The Partnership purchased this equipment during the first quarter of 1998.
Modular buildings: Modular building lease revenues and direct expenses were
$11,000 and $0, respectively, for the three months ended September 30, 1998,
compared to $16,000 and $0, respectively, during the same period of 1997. The
primary reason for the decrease in lease revenues was due to fewer modular
buildings on lease for the three months ended September 30, 1998 when compared
to the same period of 1997.
(B) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses were $2.7 million for the three months ended September
30, 1998, a decrease from $3.2 million for the same period in 1997. Significant
variances are explained as follows:
(1) A $0.3 million decrease in depreciation and amortization expenses from
1997 levels reflects the double-declining balance method of depreciation, which
was offset in part by the purchase of portable heaters during 1998.
(2) A $0.2 million decrease in bad debt expense was due to the collection
of $49,000 from past due receivables during the three months ended September 30,
1998 that had previously been reserved for as a bad debt and the General
Partner's evaluation of the collectability of receivables due from certain
lessees.
(C) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment for the third quarter of 1998 totaled
$3,000, and resulted from the sale of a trailer with an aggregate net book value
of $3,000 for proceeds of $6,000. The net gain on disposition of equipment for
the third quarter of 1997 totaled $2,000, and resulted from the sale of trailers
with a net book value of $29,000 for proceeds of $31,000.
(D) 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 Three Months
Ended September 30,
1998 1997
------------------------------
<S> <C> <C>
Mobile offshore drilling unit $ 21 $ (1)
Marine vessels (4) (133)
Marine containers (59) --
Aircraft, rotable components, and aircraft engines (806) 302
------------------------------------------------ -------------
Equity in net income (loss) of USPEs $ (848) $ 168
================================================ =============
</TABLE>
Mobile offshore drilling unit: During the three months ended September 30, 1998
and 1997, revenues of $0.1 million were offset by depreciation and
administrative expenses of $0.1 million. The increase in mobile offshore
drilling unit contribution is due to lower depreciation expense as a result of
the double declining-balance method of depreciation which results in greater
depreciation in the first years an asset is owned.
Marine vessels: During the three months ended September 30, 1998, lease revenues
of $0.9 million were offset by depreciation and administrative expenses of $0.9
million. During the same period of 1997, lease revenues of $0.9 million were
offset by depreciation and administrative expenses of $1.1 million. The decrease
in depreciation and administrative expenses was due primarily to lower
depreciation expense as a result of the double-declining balance method of
depreciation which results in greater depreciation in the first years an asset
is owned.
Marine containers: As of September 30, 1998, the Partnership owned an interest
in an entity that owns marine containers. During the third quarter of 1998,
revenues of $0.1 million were offset by depreciation and administrative expenses
of $0.1 million. The Partnership purchased this interest during September 1998.
Aircraft, rotable components, and aircraft engines: During the three months
ended September 30, 1998, lease revenues of $1.2 million were offset by
depreciation and administrative expenses of $2.0 million. During the same period
of 1997, lease revenues of $1.9 million were offset by depreciation and
administrative expenses of $1.6 million. Revenues decreased $0.7 million due to
the sale of the Partnership's investment in two trusts containing ten commercial
aircraft and a lower lease rate earned on certain equipment. The decrease in
lease revenues was offset in part by the Partnership's investment in two
additional trusts during 1998, each owning an MD-82 commercial aircraft. The
increase in expenses of $0.4 million was primarily due to depreciation expense
relating to the investment in two additional trusts during 1998 which was
partially offset by the sale of the Partnership's interest in two trusts.
(E) Net Loss
As a result of the foregoing, the Partnership had a net loss of $0.8 million for
the period ended September 30, 1998, compared to a net loss of $0.4 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 in the
third quarter of 1998 is not necessarily indicative of future periods. In the
third quarter of 1998, the Partnership distributed $2.4 million to the limited
partners, or $0.45 per weighted-average limited partnership unit.
Comparison of the Partnership's Operating Results for the Nine Months Ended
September 30, 1998 and 1997
(A) Owned Equipment Operations
Lease revenues less direct expenses (defined as expenses for repairs and
maintenance, equipment operation, and asset-specific insurance) on owned
equipment decreased during the nine months ended September 30, 1998, when
compared to the same period of 1997. The following table presents lease revenues
less direct expenses by owned equipment type (in thousands of dollars):
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
------------------------------
<S> <C> <C>
Trailers $ 2,930 $ 2,283
Marine vessels 2,056 2,539
Rail equipment 1,511 1,589
Aircraft 1,255 1,502
Portable heaters 486 --
Modular buildings 37 424
</TABLE>
Trailers: Trailer lease revenues and direct expenses were $3.5 million and $0.6
million, respectively, for the nine months ended September 30, 1998, compared to
$2.7 million and $0.4 million, respectively, during the same period of 1997. The
increase in trailer contribution was due to the purchase of additional equipment
during the fourth quarter of 1997.
Marine vessels: Marine vessel lease revenues and direct expenses were $2.8
million and $0.7 million, respectively, for the nine months ended September 30,
1998, compared to $2.7 million and $0.2 million, respectively, during the same
period of 1997. Lease revenues and direct expenses increased during the nine
months ended September 30, 1998, when compared to the same period of 1997, due
to a change in the lease arrangement with the current lessee. During 1997, the
marine vessels were operating under a bareboat charter in which the lessee pays
a flat lease rate and also pays for certain operating expenses while on lease.
During the third quarter of 1998, the marine vessels switched from a bareboat
charter to a lease arrangement in which the lessee pays a higher lease rate,
however, the Partnership now pays operating expenses. The decrease in marine
vessel contribution was due to the increase in operating expenses exceeding the
increase in the lease rate.
Rail equipment: Rail equipment lease revenues and direct expenses were $2.1
million and $0.5 million, respectively, for the nine months ended September 30,
1998 and 1997. The decrease in railcar contribution was due to higher repairs
required during 1998 when compared to the same period of 1997.
Aircraft: Aircraft lease revenues and direct expenses were $1.5 million and $0.3
million, respectively, for the nine months ended September 30, 1998, compared to
$1.5 million and $13,000, respectively, during the same period of 1997. The
decrease in aircraft contribution was due to required repairs to the commuter
aircraft that was off-lease during 1998. Similar repairs were not needed during
1997.
Portable heaters: Portable heater lease revenues and direct expenses were $0.5
million and $0, respectively, for the nine months ended September 30, 1998. The
Partnership purchased this equipment during the first quarter of 1998.
Modular buildings: Modular building lease revenues and direct expenses were
$37,000 and $0, respectively, for the nine months ended September 30, 1998,
compared to $0.4 million and $12,000, respectively, during the same quarter of
1997. The primary reason for the decrease in lease revenues and direct expenses
was the sale of the majority of this equipment during the second quarter of
1997.
(B) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses were $8.4 million for the nine months ended September
30, 1998, decreased from $9.5 million for the same period in 1997. Significant
variances are explained as follows:
(1) A $1.0 million decrease in depreciation and amortization expenses from
1997 levels reflects the double-declining balance method of depreciation which
was offset in part by the purchase of portable heaters during 1998.
(2) A $0.2 million decrease in bad debt expense was due, in part, to the
collection of $0.1 million from past due receivables during the nine months
ended September 30, 1998 that had previously been reserved for as a bad debt and
the General Partner's evaluation of the collectability of receivables due from
certain lessees.
(3) A $0.1 million increase in administrative expenses was due to higher
professional services during 1998, which were not needed during 1997, and higher
data processing costs.
(4) A $0.1 million increase in management fees was due to higher lease
revenues earned by the Partnership during 1998, when compared to the same period
in 1997.
(C) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment for the nine months ended September 30,
1998 totaled $35,000, and resulted from the sale of trailers and a railcar with
an aggregate net book value of $0.2 million for proceeds of $0.3 million. The
net gain on disposition of equipment for the nine months ended September 30,
1997 totaled $1.8 million, and resulted from the sale of modular buildings and
trailers with a net book value of $2.5 million for proceeds of $4.3 million.
(D) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
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 Nine Months
Ended September 30,
1998 1997
------------------------------
<S> <C> <C>
Aircraft, rotable components, and aircraft engines $ 7,174 $ 1,170
Mobile offshore drilling unit 58 (45)
Marine containers (59) --
Marine vessels (251) (439)
------------------------------------------------ -------------
Equity in net income of USPEs $ 6,922 $ 686
================================================ =============
</TABLE>
Aircraft, rotable components, and aircraft engines: During the nine months ended
September 30, 1998, lease revenues of $4.5 million and the gain from the sale of
the Partnership's interest in two trusts of $8.8 million were offset by
depreciation and administrative expenses of $6.1 million. During the same period
of 1997, lease revenues of $6.1 million were offset by depreciation and
administrative expenses of $4.9 million. Lease revenues decreased $1.6 million
due to the sale of the Partnership's investment in two trusts containing ten
commercial aircraft and a lower lease rate earned on certain equipment during
1998 when compared to the same period of 1997. The decrease in lease revenues
caused by these sales was partially offset by the Partnership's investment in
two additional trusts during 1998, each owning an MD-82 commercial aircraft. The
increase in expenses of $1.2 million was due primarily to the double-declining
balance method of depreciation of the investment in two additional trusts during
1998, which was partially offset by the sale of the Partnership's interest in
two other trusts.
Mobile offshore drilling unit: During the nine months ended September 30, 1998,
revenues of $0.3 million were offset by depreciation and administrative expenses
of $0.2 million. During the same period of 1997, lease revenues of $0.3 million
were offset by depreciation and administrative expenses of $0.3 million. The
increase in the contribution from this equipment was due to a lower depreciation
expense caused by the double-declining balance method of depreciation which
results in greater depreciation in the first years an asset is owned.
Marine containers: As of September 30, 1998, the Partnership owned an interest
in an entity that owns marine containers. During 1998, revenues of $0.1 million
were offset by depreciation and administrative expenses of $0.1 million. The
Partnership purchased this interest during September 1998.
Marine vessels: During the nine months ended September 30, 1998, lease revenues
of $2.6 million were offset by depreciation and administrative expenses of $2.9
million. During the same period of 1997, lease revenues of $2.7 million were
offset by depreciation and administrative expenses of $3.1 million. Marine
vessel lease revenues decreased during the nine months ended September 30 1998
due to a slightly lower lease rate earned on one of the marine vessels. The
decrease in depreciation and administrative expenses was due primarily to the
double-declining balance method of depreciation which results in greater
depreciation in the first years an asset is owned.
(E) Net Income
As a result of the foregoing, the Partnership's net income for the nine months
ended September 30, 1998 was $7.1 million, compared to a net income of $1.5
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 in
the nine months ended September 30, 1998 is not necessarily indicative of future
periods. In the nine months ended September 30, 1998, the Partnership
distributed $7.2 million to the limited partners, or $1.35 per weighted-average
limited partnership unit.
(II) FINANCIAL CONDITION -- CAPITAL RESOURCES, LIQUIDITY, AND DISTRIBUTIONS
For the nine months ended September 30, 1998, the Partnership generated
operating cash of $14.1 million (net cash provided by operating activities, plus
non-liquidating distributions from USPEs) to meet its operating obligations and
maintain the current level of distributions (total for nine months ended
September 30, 1998 of approximately $7.6 million) to the partners.
During the nine months ended September 30, 1998, PLM Financial Services, Inc.
(FSI or the General Partner), a wholly-owned subsidiary of PLM International,
Inc., sold owned equipment and two investments in USPEs and received aggregate
proceeds of $15.1 million. The Partnership purchased a portfolio of portable
heaters for $3.6 million including acquisition and lease negotiation fees of
$0.2 million that was paid to FSI for this equipment. The Partnership completed
its commitment to purchase an interest in a trust owning an MD-82 Stage III
commercial aircraft for $7.2 million, including acquisition and lease
negotiation fees of $0.4 million, that were paid to FSI for the purchase of this
equipment. The Partnership made a deposit of $0.7 million toward this interest
in 1997. The Partnership also purchased another interest in a trust owning an
MD-82 Stage III commercial aircraft for $8.2 million and an interest in an
entity owning 4,912 marine containers for $7.5 million, including acquisition
and lease negotiation fees of $0.8 million, that were paid to FSI for the
purchase of this equipment, the remaining interest in this trust and entity was
purchased by affiliated programs.
During the nine months ended September 30, 1998, the Partnership paid $5.1
million that was due to affiliated USPEs. As of September 30 1998, $0.9 million
in engine reserves and security deposits was due to an affiliated USPE.
The General Partner has entered into a short-term joint $50.0 million credit
facility. As of November 3, 1998, TEC Acquisub, Inc., an indirect wholly-owned
subsidiary of PLM International, Inc., had borrowings of $0.3 million and
American Finance Group, Inc., a subsidiary of PLM International, Inc., had
borrowings of $39.1 million under the short-term joint $50.0 million credit
facility. No other eligible borrower had any outstanding borrowings.
(III) 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" problem). As 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 year 1999. Although the General Partner believes that its Year 2000
compliance program can be completed by the beginning of 1999, there can be no
assurance that the compliance program will be completed by that date. 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.
Some risks associated with the Year 2000 problem are beyond the ability of the
Partnership to control, including the extent to which third parties can address
the Year 2000 problem. The General Partner has begun to communicate with
vendors, services providers and customers in order to assess the Year 2000
compliance readiness of such parties and the extent to which the 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 of the Partnership. The General Partner will make an ongoing effort
to recognize and evaluate potential exposure relating to third-party Year 2000
non-compliance and will develop a contingency plan if the General Partner
determines, or is unable to determine, that third-party non-compliance will have
a material adverse effect on the Partnership's business, financial position or
results of operation.
(IV) ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued two new
statements: SFAS No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in equity
from nonowner sources; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for a public company's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Partnership's fiscal year ended December
31, 1998, with earlier application permitted. The effect of the adoption of
these statements will be limited to the form and content of the Partnership's
disclosures and will not impact the Partnership's results of operations, cash
flow, or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of September 30,
1998, the General Partner is reviewing the effect this standard will have on the
Partnership's consolidated financial statements.
(V) OUTLOOK FOR THE FUTURE
Several factors may affect the Partnership's operating performance in 1998 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, or of their occurrence, 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 continually monitors both the
equipment markets and the performance of the Partnership's equipment in these
markets. The General Partner may decide to reduce the Partnership's exposure to
equipment markets in which it determines it cannot operate equipment to achieve
acceptable rates of return. Alternatively, the General Partner may make a
determination to enter 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
expenses, loan principal, and cash distributions, to acquire additional
equipment during the first seven years of Partnership operations, which
concludes December 31, 2001. The General Partner believes that these
acquisitions may cause the Partnership to generate additional earnings and cash
flow for the Partnership.
(VI) FORWARD-LOOKING INFORMATION
Except for the historical information contained herein, this Form 10-Q 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-Q should be read as being
applicable to all related forward-looking statements wherever they appear in
this Form 10-Q. The Partnership's actual results could differ materially from
those discussed here.
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Commitment Letter from First Union National Bank dated October
29, 1998 extending the $50.0 million Warehousing Credit
Agreement until November 2, 1998.
(b) Reports on Form 8-K
None.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLM EQUIPMENT GROWTH & INCOME FUND VII
By: PLM Financial Services, Inc.
General Partner
Date: November 4, 1998 By: /s/ Richard K Brock
-------------------
Richard K Brock
Vice President and
Corporate Controller
<PAGE>
[First Union Logo and Letterhead:
First Union Capital Markets
One First Union Center
Charlotte, North Carolina 28288-0601]
Via Facsimile and Federal Express
Mr. J. Michael Allgood
PLM International, Inc.
One Market, Steuart Street Tower, Suite 800
San Francisco, CA 94105-1301
October 29, 1998
RE: $50,000,000 Warehouse Facility
Dear Mr. Allgood,
We are pleased to confirm that First Union National Bank has approved of the
$50,000,000 Warehouse Commitment for American Finance Group Inc., TEC Acquisub
and PLM Growth Funds VI, VII and PLM Income Fund I, L.L.C. ("Funds").
The Effective date of the facility is 11/02/98, and Expiry date is 11/01/99.
Please call me at (704) 383 9687 if you have any questions.
Sincerely,
/s/ Russell D. Morrison
- ---------------------------------
Vice President
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,126
<SECURITIES> 0
<RECEIVABLES> 1,524
<ALLOWANCES> (464)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 69,514
<DEPRECIATION> (33,364)
<TOTAL-ASSETS> 76,086
<CURRENT-LIABILITIES> 0
<BONDS> 23,000
0
0
<COMMON> 0
<OTHER-SE> 50,016
<TOTAL-LIABILITY-AND-EQUITY> 76,086
<SALES> 0
<TOTAL-REVENUES> 10,744
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,340
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 1,259
<INCOME-PRETAX> 7,066
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,066
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,066
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
