<PAGE>
As filed with the Securities and Exchange Commission on May 6, 1996
Registration No. 33-83216
Post-Effective Amendment No. 5
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
PROFESSIONAL LEASE MANAGEMENT INCOME FUND II, L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
-------------------
Consisting of:
Cumulative Supplement No. 3 to the Prospectus;
Opinion re: Tax Matters;
Consent of Counsel; and
Consent of Independent Public Accountants
-------------------
This Post-Effective Amendment No. 5 to the Registration Statement
shall hereafter become effective in accordance with Section 8(c) of the
Securities Act of 1933, as amended.
===============================================================================
The Registration Statement, including the Prospectus forming a part
thereof and included in this Post-Effective Amendment No. 5, is hereby amended
as set forth in Cumulative Supplement No. 3 which is attached hereto.
<PAGE>
Prospective investors should note that disclosure regarding Professional Lease
Management Income Fund I, L.L.C. ("Fund I") and Professional Lease Management
Income Fund II, L.L.C. ("Fund II") (Fund I and Fund II collectively referred to
as the "Companies"), and the offer and sale of interests therein, is included in
the Prospectus dated January 24, 1995 to which this sticker supplement is
affixed, and Cumulative Supplement No. 3 to the Prospectus, dated May 6, 1996,
which follows the Prospectus.
The primary purpose of this Supplement is to update various information
contained in the Prospectus.
<PAGE> 1
<TABLE>
<S> <C>
MINIMUM COMPANY SIZE: $1,500,000 (75,000 Class A Units at
$20.00 per Class A Unit) per Company
MINIMUM INVESTMENT: $2,500 (125 Class A Units), or $1,000 (50
Class A Units) for IRAs and Qualified
Plans
</TABLE>
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C.
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND II, L.L.C.
An offering of limited liability company interests ("Class A Units") in a series
of two Delaware limited liability companies (the "Companies"), Professional
Lease Management Income Fund I, L.L.C. ("Fund I"), and Professional Lease
Management Income Fund II, L.L.C. ("Fund II"), providing 100% investment in
equipment and reserves because no front-end fees will be paid by investors.
THIS OFFERING INVOLVES SIGNIFICANT RISKS, INCLUDING:
-- The ownership, leasing, operation and sale of Equipment may be adversely
affected by various economic and business factors, including many factors which
are beyond the control of PLM Financial Services, Inc. (the "Manager"). For
instance, throughout the early 1990s, various equipment markets, such as the
markets for marine vessels, cargo containers and aircraft, have been impacted by
periodic imbalances in supply and demand. While the Manager will attempt to
position the Companies to take advantage of changes in market conditions, such
as oversupply in certain types of Equipment, the Companies may not always be in
a position to benefit from such changes which could result in a decline in
distribution levels.
-- As of the date of this Prospectus, the Equipment to be acquired by the
Companies is not fully specified; therefore, investors initially will not have
the opportunity to assess fully the risks that may be associated with a
Company's Equipment portfolio.
-- Class A Members must be prepared to hold their Class A Units for the life
of the Company in which they have invested (anticipated to be not more than ten
years from the Closing Date for each Company) since there are restrictions on
transfer, there may not be a market for the Class A Units and investors may be
able to resell their Class A Units, if at all, only at a discount which may be
significant.
-- There are certain tax risks associated with this offering, including the
possible adverse effects of future tax legislation. The Companies will not apply
for a ruling from the Internal Revenue Service as to any of the tax
considerations associated with an investment in the Companies.
-- During the life of each Company, a substantial portion of distributions
paid to Class A Members will be deemed a return of capital.
-- Since investors in the Companies ("Class A Members") will not participate
in the management of the Companies, they must rely totally on the Manager for
management of the Companies.
-- Class A Members will have limited voting rights.
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANIES
---------------- -------------- ----------------
<S> <C> <C> <C>
PER CLASS A UNIT $ 20.00 N/A $ 20.00
TOTAL MINIMUM PER
COMPANY $ 1,500,000.00 N/A $ 1,500,000.00
TOTAL MAXIMUM PER
COMPANY $ 100,000,000.00 N/A $ 100,000,000.00
TOTAL MAXIMUM FOR BOTH
COMPANIES $ 200,000,000.00 N/A $ 200,000,000.00
</TABLE>
---------------------------------------------------------------------------
(SEE NOTE TO TABLE ON THE FOLLOWING PAGE.)
THE DATE OF THIS PROSPECTUS IS JANUARY 24, 1995
ANY SUPPLEMENT AND/OR STICKERS
WHICH UPDATE THIS PROSPECTUS ARE CONTAINED
INSIDE THE BACK COVER.
(THE COVER PAGE IS CONTINUED ON THE FOLLOWING PAGE.)
<PAGE> 2
NOTE TO TABLE:
(1) The Manager will pay out of its own corporate funds, as a capital
contribution to each Company in its capacity as the Initial Class B Member,
a fee for the sale of Class A Units to PLM Securities Corp. ("PLM
Securities"), the Managing Placement Agent for this offering, which fee
shall be equal to no more than 10% of the purchase price of Class A Units
sold (the "Managing Placement Agent Fee"). Out of the Managing Placement
Agent Fee, an amount equal to 8.5% of the purchase price of Class A Units
sold will be paid (7% initially, followed by .5% per year payable over three
additional years) as commissions to other broker-dealers ("Selected Agents")
who sell Class A Units (the "Selected Agent Fee"). (See "Plan of
Distribution" and "Compensation of Manager and Affiliates.")
Subscriptions for Class A Units in each Company, except subscriptions
received from Pennsylvania residents, will be held in an escrow account
established for each such Company at Sanwa Bank California until they aggregate
$1,500,000 (the "Minimum Subscription Amount"). Subscriptions for Class A Units
in each Company received from Pennsylvania investors will be held in the
applicable escrow account until each Company receives aggregate subscriptions of
$5,000,000 from all investors, including Pennsylvania residents. The offerings
of the Companies will be conducted serially, commencing with Fund I and
concluding with Fund II after the Fund I offering is closed (assuming the
Manager determines to proceed with the Fund II offering). (See "Plan of
Distribution.")
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND IN SUPPLEMENTAL SALES MATERIAL PROVIDED BY THE MANAGER OR ITS
AFFILIATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY
STATE OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH STATE OR JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF EITHER OF THE
COMPANIES SINCE THE DATE HEREOF. IF, HOWEVER, ANY MATERIAL CHANGE IN THE
COMPANIES' AFFAIRS OCCURS AT ANY TIME WHEN THIS PROSPECTUS IS REQUIRED TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED AND SUPPLEMENTED APPROPRIATELY.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATION TO
THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY
OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THIS PROGRAM ARE NOT PERMITTED.
PENNSYLVANIA INVESTORS: BECAUSE THE MINIMUM INVESTMENT CLOSING AMOUNT IS
UNDER $10,000,000, YOU ARE CAUTIONED TO EVALUATE CAREFULLY THE COMPANIES'
ABILITY TO ACCOMPLISH FULLY THEIR STATED OBJECTIVES AND INQUIRE AS TO THE
CURRENT DOLLAR VOLUME OF COMPANY SUBSCRIPTIONS.
SEE "RISK FACTORS" AND "CONFLICTS OF INTEREST".
Professional Lease Management Income Fund is not a mutual fund or any other type
of investment company within the meaning of the Investment Company Act of 1940
and is not subject to regulation thereunder.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 3
INTRODUCTION
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C.
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND II, L.L.C.
An offering of limited liability company interests ("Class A Units") in a
series of two Delaware limited liability companies, Professional Lease
Management Income Fund I, L.L.C. ("Fund I"), and Professional Lease Management
Income Fund II, L.L.C. ("Fund II"), providing 100% investment in equipment and
reserves because no front-end fees will be paid by investors. Fund I and Fund II
(the "Companies") will purchase, lease, charter, or otherwise invest in,
diversified portfolios of long-lived, low obsolescence capital equipment that is
easily transportable by and among prospective users (the "Equipment"), altering
the composition of Equipment types and the percentages of used and new Equipment
to allow them to take advantage of changes in market conditions. In its capacity
as the sole Class B Member, PLM Financial Services, Inc., a Delaware corporation
(the "Manager"), is initially entitled to a 15% interest in each Company's cash
distributions. When the cash distributions paid on a Class A Unit equal or
exceed the original Capital Contribution of $20.00, the Class B Member's
interest in cash distributions will increase to 25% with respect to the holder
of such Class A Unit. The Manager will receive additional compensation in the
form of certain fees paid solely out of revenues.
USE OF PROCEEDS (BY EACH COMPANY, ASSUMING $100,000,000 RAISED BY EACH COMPANY):
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF CLASS A
PROCEEDS CAPITAL CONTRIBUTIONS
------------- ---------------------
<S> <C> <C>
Equipment Costs and
Cash Reserves $100,000,000 100%
Organizational and
Offering Expenses -0- 0%
------------- ------
Total $100,000,000 100%
</TABLE>
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF THE OFFERING............................ 1
The Companies.................................... 1
Manager.......................................... 1
Offering......................................... 1
Risk Factors..................................... 2
Compensation Paid By Companies................... 3
Other Compensation -- Managing Placement Agent
Fee............................................ 5
Business of the Companies........................ 6
Objectives of the Companies...................... 7
Reinvestment of Cash Flow and Net Disposition
Proceeds....................................... 7
Specified Equipment.............................. 8
Distributions to Class A Members................. 8
The Class A Units................................ 8
Transferability of Class A Units................. 8
Redemption Provision............................. 9
The Class B Units................................ 9
Termination of the Companies..................... 9
Roll-Ups......................................... 9
Leverage......................................... 10
Tax Ruling....................................... 10
Depreciation..................................... 10
Escrow Arrangement............................... 10
Conflicts of Interest............................ 11
Limited Liability Company Form................... 11
Glossary......................................... 11
RISK FACTORS....................................... 11
General.......................................... 12
Total Reliance on the Manager and Conflicts of
Interest.................................... 12
Limited Voting Rights of Investors............. 12
Limited Transferability of Class A Units -- No
Public Market Exists; Possibility of
Significant Discount Upon Sale of Units..... 12
Return of Capital.............................. 13
Business Risks................................... 13
Certain Risks of the Equipment Leasing
Business.................................... 13
Risks of Equipment Operations.................. 13
Risks Inherent in Equipment Leases............. 14
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
No Assurance of Successful Operations.......... 15
Unspecified Equipment and Leases............... 15
Leverage....................................... 16
Possible Negative Consequences of Government
Regulation.................................. 16
Uncertainty of Residual Value of Equipment..... 16
Default By Lessees............................. 17
Tort Liability................................. 17
Loss of Equipment Registration................. 17
Competition.................................... 17
Investment Risks................................. 18
Liability of Class A Members for Obligations of
a Company................................... 18
Return of Distributions by Class A Members..... 18
Risks of Joint Investments..................... 19
Manager's Experience........................... 19
Potential Lack of Diversity at Inception....... 20
Tax Risks........................................ 20
Federal Tax Considerations in General.......... 20
Partnership Status............................. 21
Allocations.................................... 22
Passive Activity Loss Limitations.............. 22
Companies as the Owners of the Equipment....... 22
Sale or Other Disposition of Equipment or Class
A Units -- Tax Liability.................... 23
Additional Taxes............................... 23
Reliance on Existing Law....................... 23
Investment by Qualified Plans, IRAs and Other
Exempt Entities............................. 24
ERISA Considerations........................... 24
ESTIMATED USE OF PROCEEDS.......................... 25
COMPENSATION OF MANAGER AND AFFILIATES............. 26
Compensation Paid By Companies................... 26
Other Compensation -- Managing Placement Agent
Fee............................................ 29
CONFLICTS OF INTEREST.............................. 30
Competition with Manager and Affiliates;
Competition for Management's Time.............. 30
Transactions With Affiliates..................... 31
Acquisitions..................................... 31
Joint Investments................................ 32
</TABLE>
ii
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Insurance........................................ 32
Organizational Chart............................. 33
FIDUCIARY RESPONSIBILITY........................... 34
General.......................................... 34
Investment Opportunities......................... 34
Indemnification.................................. 35
Investor Remedies................................ 36
BUSINESS OF THE COMPANIES.......................... 37
General.......................................... 37
Objectives of the Companies...................... 39
Leasing and Operation of Equipment............... 40
Management of Assets of the Companies............ 42
The Equipment Manager............................ 43
Management Strategy.............................. 43
General Industry Overview........................ 44
Specified Equipment.............................. 45
Equipment Profiles............................... 46
Marine Vessels................................... 46
Marine Cargo Containers.......................... 47
Mobile Offshore Drilling Units................... 48
Railroad Rolling Stock........................... 50
Airline Industry................................. 52
Trailers......................................... 54
Other Equipment.................................. 55
Government Regulation............................ 55
Equipment Registration........................... 64
Acquisition of Equipment......................... 66
Joint Investments................................ 68
Insurance........................................ 69
Reserves......................................... 70
Reinvestment and Liquidation..................... 70
Competition...................................... 71
Residual Values.................................. 71
Lessee Insolvency and Bankruptcy................. 72
PRIOR PERFORMANCE.................................. 74
General.......................................... 74
Prior Performance Tables......................... 77
PORTFOLIO SUMMARY FOR PLM EQUIPMENT GROWTH FUNDS... 78
</TABLE>
iii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT......................................... 79
General.......................................... 79
Equipment Management and Other Services.......... 79
Management Personnel............................. 80
Committees....................................... 84
Business Combinations with PLM International..... 85
TRANSFERABILITY OF CLASS A UNITS................... 86
General Limitations.............................. 86
Redemption Provision............................. 86
Exempt Transfers................................. 87
Additional Restrictions on Transfer.............. 88
ALLOCATIONS AND DISTRIBUTIONS...................... 90
Between the Class A Members and the Class B
Members........................................ 90
Among the Class A Members........................ 91
Timing of Distributions.......................... 92
INCOME TAX CONSIDERATIONS.......................... 92
Summary.......................................... 92
General.......................................... 95
Partnership Status............................... 97
Certain Principles of Partnership Taxation....... 101
Limitations on Utilization of Losses............. 106
Fees and Reimbursements to the Manager and
Affiliates..................................... 109
Ownership of Equipment........................... 110
Title to Aircraft................................ 112
Title to Marine Vessels.......................... 113
Cost Recovery and Depreciation................... 115
Antichurning Rules............................... 116
Interest Deductions.............................. 119
Cash Distributions............................... 120
Sale of Equipment................................ 121
Disposition of Class A Units..................... 123
Termination of a Partnership for Tax Purposes.... 126
Section 754 Election............................. 126
Investment by Qualified Plans, IRAs and Exempt
Entities....................................... 128
Investment by Nonresident Alien Individuals and
Foreign Corporations........................... 129
Taxes............................................ 130
Company Tax Returns and Tax Information.......... 132
</TABLE>
iv
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audit of a Company............................... 133
Interest and Penalties........................... 134
Foreign Tax Considerations....................... 135
Future Federal Income Tax Changes................ 136
State Taxes...................................... 136
Need for Independent Advice...................... 138
ERISA CONSIDERATIONS............................... 138
Fiduciaries Under ERISA.......................... 138
Prohibited Transactions Under ERISA and the
Code........................................... 139
"Plan Assets".................................... 140
Other ERISA Considerations....................... 141
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............. 142
Operations....................................... 142
Liquidity........................................ 142
SUMMARY OF THE OPERATING AGREEMENTS................ 144
The Class A Units................................ 145
The Class B Units................................ 146
Nonassessability of Class A Units................ 146
Liability of Class A Members..................... 146
Allocations and Distributions.................... 147
Transfer of Class A Units........................ 147
Transfer of Class B Units........................ 148
Change of Ownership Status and Repurchase of
Class A Units.................................. 149
Responsibilities of the Manager.................. 150
Records and Reports.............................. 150
Meetings of the Class A Members.................. 151
Voting Rights.................................... 151
Roll-Ups......................................... 152
Power of Attorney................................ 153
Company Term..................................... 154
INVESTOR SUITABILITY STANDARDS..................... 155
Net Worth/Income................................. 155
Purchase of Class A Units Through Certain
Selected Agents................................ 157
Subscribers' Representations and Warranties...... 158
Citizenship...................................... 160
Special Limit on Ownership of Units by Benefit
Plans.......................................... 161
</TABLE>
v
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PLAN OF DISTRIBUTION............................... 162
General.......................................... 162
Offering of Class A Units........................ 163
Escrow Arrangements and Fundings................. 165
Subscription for Class A Units................... 167
SALES MATERIAL..................................... 167
REPORTS TO CLASS A MEMBERS......................... 168
LEGAL MATTERS...................................... 169
EXPERTS............................................ 169
FURTHER INFORMATION................................ 169
GLOSSARY........................................... 170
FINANCIAL STATEMENTS............................... F-1
APPENDIX I -- PRIOR PERFORMANCE TABLES............. I-1
EXHIBITS
A. FIFTH AMENDED AND RESTATED
OPERATING AGREEMENT................................ A-1
B. SUBSCRIPTION AGREEMENT, SIGNATURE
PAGE AND POWER OF ATTORNEY......................... B-1
</TABLE>
vi
<PAGE> 10
SUMMARY OF THE OFFERING
The Companies. The Professional Lease Management Income Fund is an
equipment leasing program consisting of Professional Lease Management Income
Fund I, L.L.C., a Delaware limited liability company ("Fund I"), and
Professional Lease Management Income Fund II, L.L.C., a Delaware limited
liability company ("Fund II"). (Fund I and Fund II are each referred to as a
"Company," and collectively as the "Companies"). The Companies were formed on
August 22, 1994 under the Delaware Limited Liability Company Act (the "Delaware
Act"). A copy of the Fifth Amended and Restated Operating Agreement pursuant to
which each Company is governed is set forth in its entirety as Exhibit A to this
Prospectus ("Operating Agreement"). Investors will become members (referred to
as "Class A Members") in the Company in which they purchase Class A Units, and
will be entitled to share in the income, losses and capital of the Company in
which they are a Class A Member. The Companies will be wholly separate entities,
and investors will have an interest in only the Company (or Companies) in which
they purchase Class A Units. The management of the business of the Companies is
entrusted with the Manager who will manage and control the affairs of the
Companies and will have general responsibility and ultimate authority over
matters affecting the Companies. Class A Members' Capital Contributions (the
money investors pay for their Class A Units) will be subject to the risks of the
business of the Company in which they are a Class A Member.
Manager. The Manager of the Companies is PLM Financial Services, Inc., a
Delaware corporation, a wholly-owned subsidiary of PLM International, Inc., a
Delaware corporation ("PLM International"), with its principal place of business
located at One Market, Steuart Street Tower, Suite 900, San Francisco,
California 94105-1301 (telephone (415) 974-1399). (See "Conflicts of Interest:
Competition with Manager and Affiliates; Competition for Management's Time" and
"Management.") The Companies represent the Manager's seventeenth (17th) public
program involving diversified portfolios of Equipment.
Offering. The Companies will not pay any compensation to the Manager and
its Affiliates in connection with the organization of the Companies, the
offering of Class A Units in the Companies or the acquisition of Equipment by
the Companies. In addition, the Companies will not reimburse any Organizational
and Offering Expenses incurred by the Manager or its Affiliates in connection
with the Offerings. Therefore, Investment in Equipment by each Company shall
equal 100% of all Capital Contributions from the Original Class A Members of
such Company. However, the Manager and its Affiliates will receive compensation
from the Companies in connection with the management and liquidation of the
Equipment of the Companies. In its capacity as Initial Class B
1
<PAGE> 11
Member, the Manager will pay, on behalf of each Company, all Organizational and
Offering Expenses, including the Management Placement Agent Fee, and any costs
associated with making a Section 754 Election (other than any costs associated
with tax consequences to a Class A Member as a result of a Section 754
Election). In return for payment of such expenses, the Manager, as a Class B
Member, is initially entitled to a 15% interest in each Company's cash
distributions. When the cash distributions paid on a Class A Unit equal or
exceed the original Capital Contribution of $20.00, the Manager's interest as a
Class B Member in cash distributions will increase to 25% with respect to the
holder of such Class A Unit. Such interest will be shared with additional Class
B Members admitted to the Company, if any. (See "Compensation of Manager and
Affiliates" and "Summary of the Operating Agreements: The Class B Units.")
Risk Factors. An investment in the Companies involves various risks,
including the following:
- The ownership, leasing, operation and sale of Equipment may be adversely
affected by various economic and business factors, including many factors
which are beyond the control of the Manager. For instance, throughout the
early 1990s, various equipment markets, such as the markets for marine
vessels, cargo containers and aircraft, have been impacted by periodic
imbalances in supply and demand. While the Manager will attempt to
position the Companies to take advantage of changes in market conditions,
such as oversupply in certain types of Equipment, the Companies may not
always be in a position to benefit from such changes which could result in
a decline in distribution levels.
- As of the date of this Prospectus, the Equipment to be acquired by the
Companies is not fully specified; therefore, investors initially will not
have the opportunity to assess fully the risks that may be associated with
a Company's Equipment portfolio.
- Class A Members must be prepared to hold their Class A Units for the life
of the Company in which they have invested (anticipated to be not more
than ten years from the Closing Date for each Company) since there are
restrictions on transfer, there may not be a market for the Class A Units
and investors may be able to resell their Class A Units, if at all, only
at a discount which may be significant.
- There are certain tax risks associated with this offering, including the
possible adverse effects of future tax legislation. The Companies will not
apply for a ruling from the
2
<PAGE> 12
IRS as to any of the tax considerations associated with an investment in
the Companies.
- During the life of each Company, a substantial portion of distributions
paid to Class A Members will be deemed a return of capital.
- Since Class A Members will not participate in the management of the
Companies, they must rely totally on the Manager for management of the
Companies.
- During the life of each Company the Manager will receive substantial
compensation in the form of its interest in distributions and fees for its
services.
- Class A Members will have limited voting rights.
Compensation Paid By Companies. The following summarizes the types,
estimated amounts and recipients of compensation to be paid by the Companies to
the Manager and its Affiliates. Other than the compensation discussed in this
section and the Managing Placement Agent Fee (discussed below) to be paid by the
Manager in its capacity as the Initial Class B Member, the Manager and its
Affiliates shall not be entitled to receive any compensation for services
rendered to the Company, including without limitation services rendered in
connection with the offering of Class A Units, the acquisition of Equipment and
initial lease negotiations. Some of the compensation summarized below will be
paid regardless of the success or profitability of each Company's operations and
investments. While such compensation and fees were established by the Manager
and are not based on arm's-length negotiations, the Manager, nevertheless,
believes that such compensation and fees are comparable to those which would be
charged by an unaffiliated entity or entities for similar services. The Manager
has discretion with respect to all decisions related to a Company's
transactions, including liquidation of its portfolio, and may therefore be able
to affect the timing and amount of compensation payable by the Companies. (See
"Compensation of Manager and Affiliates.")
Equipment Management Fee. PLM Investment Management, Inc. ("IMI") will
receive a monthly fee equal to the lesser of (a) the fees which would be
charged by an independent third party for similar services for similar
equipment or (b) the sum of (i) for that Equipment for which IMI provides
only Basic Equipment Management Services (A) 2% of the Gross Lease Revenues
attributable to Equipment which is subject to Full Payout Net Leases, and
(B) 5% of the Gross Lease Revenues attributable to Equipment which is
subject to Operating Leases, and (ii) for that Equipment for which IMI
provides Supplemental Equipment Management Services, 7% of the Gross Lease
Revenues attributable to such Equipment. The total amount of such Equipment
Management Fee is not
3
<PAGE> 13
determinable at this time. No Equipment Management Fee will be earned, however,
in connection with transactions involving the purchase of interests in residual
values or remarketing proceeds revenue or similar interests as described in
Section 2.02(r)(y) of the Operating Agreements. (See "Business of the Companies:
Management of Assets of the Companies.")
Re-Lease Fee. The Manager or an Affiliate will earn, as compensation
for providing re-leasing services for any Equipment for which the Manager
has, following the expiration of the current or most recent lease, charter
or other contract for the use of the Equipment, arranged a subsequent lease,
charter or other contract for the use of such Equipment to a lessee or other
third party, other than the current or most recent lessee or other operator
of such Equipment, on a monthly basis, a Re-Lease Fee equal to the lesser of
(a) the fees which would be charged by an independent third party for
comparable services for comparable equipment or (b) 2% of Gross Lease
Revenues derived from such re-lease; provided, however, that no Re-Lease Fee
shall be payable if such Re-Lease Fee would cause the combination of
Equipment Management Fees and the Re-Lease Fee with respect to such
Equipment to exceed 7% of Gross Lease Revenues. The total amount of such
Re-Lease Fee is not determinable at this time.
Equipment Liquidation Fee. TEC shall receive as compensation for the
sale of items of Equipment, a fee equal to the lesser of (i) 50% of the
Competitive Equipment Sales Commission or (ii) 3% of the sales price of
Equipment which it sells on behalf of a Company; provided, however, that
such amount shall not be paid until the Class A Members have received
distributions equal to the Preliminary Return Amount. Until the Preliminary
Return Amount is so distributed, the amount of such fee shall accrue without
interest. Accrued Equipment Liquidation Fees shall be paid to TEC
immediately following distribution of the Preliminary Return Amount to the
Class A Members; provided, however, that such amounts shall be paid to TEC
only if the Net Disposition Proceeds from the sale of such Equipment are
actually distributed to the Members. The Equipment Liquidation Fee, with
respect to any sale of Equipment, shall be reduced by the amount of any
resale fees paid to any third parties with respect to such sale.
Insurance Premiums and Commissions. Transportation Equipment Indemnity
Company, Ltd. ("TEI") may provide insurance, insurance brokerage and risk
management services to the Companies. However, until such time as 75% or
more of the gross revenue of TEI is derived from the provision of such
services other than to Manager, the Companies, and
4
<PAGE> 14
their Affiliates, TEI may derive no profit in connection with the providing of
insurance coverage, insurance brokerage or risk management services to the
Companies.
Reimbursement of Expenses. Reimbursement of expenses may occur for the
services the Manager and its Affiliates provide such as managerial, sales,
legal, accounting, data processing, tax preparation and advice, maintenance,
administrative and secretarial and other services as more fully described in
Sections 2.02(k) and 3.15 of the Operating Agreements. On an annual basis,
per Company, this amount is estimated to be approximately between $25,000
(assuming only a minimum of 75,000 Class A Units in each of the Companies is
sold) and $450,000 (assuming 5,000,000 Class A Units in each of the
Companies are sold.) These amounts are approximations of reimbursable
expenses for the first year of operations and are based on reimbursable
expenses of prior programs sponsored by the Manager, and do not include
expenses incurred in the offering of Class A Units which are being paid by
the Manager as Initial Class B Member. (See "Prior Performance.")
Class B Members' Interest. The cash distributions of each Company will
be distributed initially 85% to the Class A Members and 15% to the Class B
Members (consisting initially of only the Manager in its capacity as Initial
Class B Member). When the aggregate cash distributions paid on a Class A
Unit to the Original Class A Member or any permitted transferee with respect
to such Class A Unit equal or exceed the original Capital Contribution of
$20.00 for such Class A Unit, then cash distributions as between a Class A
Member holding such a Class A Unit and the Class B Members will be
distributed 25% to the Class B Members and 75% to such Class A Member. The
Class B Members will also have a 1% interest in each Company's items of
income, gain, loss, deduction, credit and tax preference and will be
entitled to certain special allocations of income and deductions. The
Manager, in its capacity as the Initial Class B Member, will pay out of its
own corporate funds, as a capital contribution to the Companies, all
Organizational and Offering Expenses, including the Managing Placement Agent
Fee, incurred in connection with the Offerings, and any costs associated
with making a Section 754 Election (other than any costs associated with tax
consequences to a Class A Member as a result of a Section 754 Election), in
return for its interest as a Class B Member. (See "Income Tax
Considerations: Section 754 Election" and "Summary of the Operating
Agreements: The Class B Units.")
Other Compensation -- Managing Placement Agent Fee. The Manager, in its
capacity as the Initial Class B Member of the
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Companies, will pay out of its own corporate funds, as a Capital Contribution to
each of the Companies, a fee for the sale of Class A Units to PLM Securities
Corp., the Managing Placement Agent, which fee shall be equal to no more than
10% of the purchase price of the Class A Units sold. Out of the Managing
Placement Agent Fee, the Managing Placement Agent will pay 8.5% of the purchase
price of Class A Units sold to other broker-dealers who sell Class A Units. This
fee is exclusive of any due diligence reimbursement which will not exceed up to
0.5% of the purchase price of the Class A Units sold. (See "Plan of
Distribution.")
Except as otherwise disclosed in this Prospectus, the Companies will not
engage in transactions with the Manager or any of its Affiliates. (See
"Fiduciary Responsibility.")
Business of the Companies. The principal purpose of the Companies is to
invest 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 "Equipment"). The portfolio of the Equipment
may include commercial, corporate or commuter aircraft (including spare and
rotable parts, components or engines), intermodal ("piggyback") and
over-the-road trailers and highway tractors, marine vessels, mobile offshore
drilling units, marine and domestic cargo containers and chassis, railroad
rolling stock, and other ancillary transportation-related equipment or other
similar long-lived, low obsolescence capital equipment. As described below under
"Business of the Companies: Specified Equipment," the Manager has identified
approximately $15 million of Equipment for acquisition by Fund I, all of which
is currently subject to lease commitments. In conducting its Equipment business,
each Company intends to purchase, lease, charter, purchase options to purchase,
purchase equity interests in equipment-owning entities or otherwise invest in
Equipment, to enter into contracts with lessees, sublessees, lessors,
sublessors, charterers, subcharterers and other unaffiliated parties respecting
the use of the Equipment, to have Equipment operated on the behalf of each
Company by an Affiliate, to sell or otherwise dispose of Equipment and to engage
in all business activities related and incidental thereto, including, without
limitation, the borrowing and lending of funds. It is anticipated that most of
the Equipment will be subject to Operating Leases (leases, charters or other
contractual arrangements for the use of the Equipment which are not Full Payout
Net Leases). Each Company may also lease Equipment under Full Payout Net Leases
(long-term leases and other contracts for the lease or use of Equipment with Net
Lease provisions, under which a Company will receive non-cancellable payments
during the initial non-cancellable fixed lease or other contract term which will
be sufficient to recover its Purchase Price of the Equipment).
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Objectives of the Companies. The primary objectives of each Company are as
follows:
INVESTMENT IN AND LEASING OF CAPITAL EQUIPMENT: to invest in a
diversified leasing portfolio of low obsolescence Equipment having long
lives and high residual values, at prices that the Manager 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; and
SAFETY THROUGH DIVERSIFICATION: to create a significant degree of
safety relative to other equipment leasing investments through the purchase
of a diversified Equipment portfolio. This diversification may reduce the
exposure to market fluctuations in any one sector. The purchase of used
long-lived, low obsolescence Equipment typically at prices which are
substantially below the cost of new equipment should also reduce the impact
of economic depreciation and may create the opportunity for appreciation in
certain market situations, where supply and demand return to balance from
oversupply conditions,
while providing:
CASH DISTRIBUTIONS: to generate cash distributions, which may be
substantially tax-deferred (i.e., distributions which are not subject to
current taxation) during the early years of each Company, to investors
beginning in the month after the minimum number of Class A Units are sold in
such Company, a portion of which may represent a return of an investor's
investment; and
GROWTH POTENTIAL THROUGH REINVESTMENT: to increase each Company's
revenue base by reinvesting a portion of its operating cash flow in
additional Equipment 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 a
Company's portfolio does not mean that in all cases a Company's aggregate
net income and distributions will increase upon the reinvestment of
operating cash flow.
(See "Business of the Companies.") Distributions may be substantially
tax-deferred during the early years of the Companies. THERE IS NO ASSURANCE THAT
ANY OR ALL OF THE OBJECTIVES OF EITHER COMPANY WILL BE ATTAINED. (See "Risk
Factors" and "Income Tax Considerations.")
Reinvestment of Cash Flow and Net Disposition Proceeds. The Manager intends
to reinvest a portion of each Company's Cash Flow and Net Disposition Proceeds
in additional Equipment
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during the six years after the year which includes the Closing Date for each
such Company. Cash Flow is defined in the Operating Agreements to mean generally
cash receipts from operations less cash expenses relating to operations. Net
Disposition Proceeds is defined in the Operating Agreements to mean generally
net cash proceeds from the refinancing, sale or other disposition of Equipment.
(See "Business of the Companies -- Reinvestment and Liquidation.")
Specified Equipment. The Manager has identified approximately $15 million
of used and new Equipment for initial acquisition by Fund I. The order in which
Fund I may acquire this Equipment is subject to the ultimate discretion of the
Manager and will be based on a variety of factors. Subject to its receipt of the
Minimum Subscription Amount ($1,500,000, exclusive of subscriptions from
Pennsylvania residents) and the availability of sufficient funds, Fund I will
acquire this Equipment. For a description of this Equipment, see "Business of
the Companies: Specified Equipment." The Manager will identify certain Equipment
for initial acquisition by Fund II prior to the offering of Class A Units for
Fund II.
Distributions to Class A Members. Cash distributions are anticipated to
commence for each Company in the month after the Minimum Subscription Amount is
received. Distributions will be determined monthly and paid quarterly; however,
Class A Members may elect to receive distributions on a monthly basis.
Additionally, Class A Members may elect to have their distributions split and
sent automatically to up to two different payee locations. During the life of
each Company, a substantial portion of distributions paid to Class A Members
will be deemed a return of capital. There can be no assurances as to the amount
of such distributions. (See "Allocations and Distributions.")
The Class A Units. The Minimum Subscription Amount per Company is
$1,500,000 (representing 75,000 Class A Units at $20.00 per Class A Unit) and
maximum capitalization per Company is $100,000,000 (representing 5 million Class
A Units at $20.00 per Class A Unit). The Offerings of Class A Units of the
Companies will be conducted serially, commencing with the Fund I Offering and
concluding with the Fund II Offering after the Fund I Offering is closed
(assuming the Manager determines to proceed with the Fund II Offering). (See
"Plan of Distribution.")
Transferability of Class A Units. There is no public market for the Class A
Units and none is expected to develop. To prevent the Companies from possessing
the corporate characteristic of "free transferability" for purposes of
determining whether each Company should be treated as a partnership under the
Internal Revenue Code of 1986, as amended (the "Code"), the Class A Units will
not be transferable without the consent of the Manager,
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<PAGE> 18
which may be withheld in its absolute discretion. (See "Transferability of Class
A Units.")
Redemption Provision. Upon the conclusion of the 30-month period
immediately following the termination of each Offering, each Company may, at the
Manager's sole discretion, redeem up to 2% of the outstanding Class A Units that
may be tendered each year. The purchase price paid by the Companies for
outstanding Class A Units upon redemption will be equal to 105% of the amount
Class A Members paid for the Class A Units, less the amount of cash
distributions Class A Members have received relating to such Class A Units. This
price may not bear any relationship to the fair market value of a Class A Unit.
(See "Transferability of Class A Units: Redemption Provision.")
The Class B Units. As a Capital Contribution to each of the Companies, the
Manager, in its capacity as Initial Class B Member, will pay all Organizational
and Offering Expenses and any costs associated with making a Section 754
Election (other than any costs associated with tax consequences to a Class A
Member as a result of a Section 754 Election) on behalf of each Company. In
exchange for such Capital Contribution, the Manager, as Initial Class B Member,
will receive 100 Class B Units in each Company. As a Class B Member, the Manager
assumes liability to creditors of the Companies to the same extent that a
general partner of a limited partnership formed under the Delaware Limited
Partnership Act is liable. In addition, as a Class B Member, the Manager is
initially entitled to a 15% interest in each Company's cash distributions. When
the cash distributions paid on a Class A Unit equal or exceed the original
Capital Contribution of $20.00, the Manager's interest as a Class B Member in
cash distributions will increase to 25% with respect to the holder of such Class
A Unit. Such interest will be shared with additional Class B Members admitted to
the Company, if any. (See "Income Tax Considerations: Section 754 Election" and
"Summary of the Operating Agreements: The Class B Units.")
Termination of the Companies. Between the eighth and tenth years of
operations of a Company, the Manager intends to begin the dissolution and
liquidation of such Company in an orderly fashion, unless a Company is
terminated earlier upon sale of all of its Equipment or by certain other events.
Each Company may be extended if the Manager in its discretion believes that such
extension will enable such Company to dispose of its assets on more favorable
terms than it would be able to otherwise. In no event will Fund I extend beyond
December 31, 2010 or Fund II extend beyond December 31, 2011. (See "Summary of
the Operating Agreements: Company Term.")
Roll-Ups. Without the approval of holders of at least 66 2/3% of all its
outstanding Class A Units, neither Company will enter into any transaction
involving the acquisition, merger, conversion,
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or consolidation, either directly or indirectly, of the Company and the issuance
of securities of a Roll-Up Entity, unless the Class A Units involved in the
transaction have been listed for at least twelve months on a national securities
exchange or traded through the Nasdaq National Market or the transaction
involves the conversion to partnership, corporate, trust or association form of
only the Company if, as a consequence of the transaction, there will be no
significant adverse change in the Class A Members' voting rights, the term of
existence of the Company, compensation of the Manager or its Affiliates, or the
Company's investment objectives. (See "Summary of the Operating Agreements:
Roll-Ups".)
Leverage. Each Company intends to acquire Equipment primarily on an all
cash basis; however, in certain cases borrowings may be used to finance the
purchase of Equipment. Where long-term borrowings are utilized by a Company they
will be limited to approximately 20% of the aggregate cost of all Equipment
owned by such Company at the time any such borrowing is originated. Such
borrowings are nonrecourse to the Class A Members. Additionally, the Companies
may also lease or charter Equipment from unaffiliated owners and make future
commitments to purchase or invest in Equipment. (See "Risk Factors: Business
Risks -- Leverage" and "Business of the Companies: Acquisition of
Equipment -- Interim Borrowings and -- Long-Term Borrowings.")
Tax Ruling. The Manager has not requested a private ruling from the IRS as
to any of the tax considerations associated with an investment in Class A Units.
The absence of a ruling increases the risk of challenge by the IRS. As to the
status of the Companies as partnerships for federal income tax purposes and
certain other federal income tax matters, the Manager is relying upon an opinion
of Jackson, Tufts, Cole & Black, which is described under the caption "Income
Tax Considerations." (See also "Risk Factors: Tax Risks -- Partnership Status.")
Counsel's opinion is limited in scope and is qualified by certain assumptions.
Depreciation. The Equipment will be eligible for different methods and
periods of cost recovery ("depreciation") depending on various factors,
including the type of Equipment, the location of the Equipment and the nature of
lessees of the Equipment. (See "Income Tax Considerations: Cost Recovery and
Depreciation.")
Escrow Arrangement. Subscriptions for Class A Units in each Company will be
submitted to Sanwa Bank California, as escrow holder, and will be held in
separate escrow accounts established for each Company at Sanwa Bank California
("Escrow Account"), in each case until subscriptions for the Minimum
Subscription Amount ($1,500,000) have been received. Subscriptions from
Pennsylvania investors will be held in the applicable escrow account until in
each case the subscriptions for a Company are in the aggregate at least
$5,000,000 from all investors, including Pennsylvania residents. The Offerings
of the Companies will be
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conducted serially, commencing with the Fund I Offering and concluding with the
Fund II Offering after the Fund I Offering is closed (assuming the Manager
determines to proceed with the Fund II Offering). While held in an Escrow
Account, the funds will be invested in the escrow holder's Market Value Savings
Account, the earnings of which will be distributed to the investors in all
events. (See "Plan of Distribution.")
Conflicts of Interest. The Manager will have conflicts of interest in the
management of the Companies, including having interests which may be
inconsistent with those of the Class A Members under some circumstances and
being permitted to engage in other activities which may conflict with those of
the Companies. In addition, there will be conflicts of interests inherent in
managing both Fund I and Fund II simultaneously. The section of this Prospectus
entitled "Conflicts of Interest" discusses the most important of these conflicts
and how the Manager intends to resolve them.
Limited Liability Company Form. A limited liability company is a relatively
new form of business entity, generally considered to be a convenient vehicle for
commercial ventures, with statutes governing limited liability companies adopted
or pending adoption in over 46 states. (See "Risk Factors: Investment
Risks -- Liabilities of Class A Members for Obligations of a Company.") A
limited liability company is a hybrid entity containing certain characteristics
of corporations and partnerships. As with a corporation, a limited liability
company affords investors, known as "members," limited liability. (See "Summary
of the Operating Agreements: Liability of Class A Members.") As with a
partnership, a limited liability company generally affords members flow-through
tax treatment of income, gains, credits, losses and deductions. (See "Risk
Factors: Tax Risks -- Partnership Status.")
Glossary. For definitions of certain key capitalized terms used in this
Prospectus, see "Glossary".
RISK FACTORS
An investment in a Company involves various risks. Prospective investors
should consider the following factors, among others discussed in this
Prospectus, before making a decision to invest in a Company. The material set
forth below is intended merely to summarize and highlight certain factors
relating to an investment in the Companies and is not intended to summarize in
full or replace portions of this Prospectus which discuss these factors at
greater length.
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GENERAL
1. Total Reliance on the Manager and Conflicts of Interest. The Companies
will be managed exclusively by the Manager and its Affiliates. Class A Members
are not permitted to take part in the management of the Companies. The success
of each Company, to a large extent, will depend on the quality of its
management, particularly as it relates to Equipment acquisition, re-leasing and
disposition. Accordingly, potential investors should not purchase Class A Units
unless they are willing to entrust all aspects of the management of the
Equipment to the Manager and its Affiliates. In certain instances the Companies'
interests may conflict with those of the Manager or its Affiliates and the
interests of Fund I may conflict with those of Fund II. (See "Conflicts of
Interest," "Management," and "Business of the Companies.")
2. Limited Voting Rights of Investors. Class A Members have only limited
voting rights on matters affecting the business of the Company in which they
have invested as they are not permitted to take part in the management of a
Company. For any matter submitted for vote of the Class A Members, a vote of at
least a Majority in Interest of the Class A Members (Class A Members owning more
than 50% of all Class A Units entitled to vote) is required for approval. (See
"Summary of the Operating Agreements -- Voting Rights.")
3. Limited Transferability of Class A Units -- No Public Market Exists;
Possibility of Significant Discount Upon Sale of Units. Prior to this offering
there has been no public market for the Class A Units, and the Class A Units
cannot be transferred without the consent of the Manager which may be withheld
in its absolute discretion. The Manager intends to limit transfers so that they
do not exceed the number of transfers permitted by one of the safe harbors
available under IRS Notice 88-75, which was issued to furnish guidance regarding
the publicly-traded partnership rules of Section 7704 of the Code. Generally,
this safe harbor requires that all nonexempt transfers and redemptions of Class
A Units in any calendar year not exceed 5% of the outstanding interests in the
capital or profits of a Company. Consequently, investors in a Company may not be
able to liquidate their investments in the event of an emergency. Moreover, the
Class A Units may not be readily acceptable as collateral for a loan and may not
be used as collateral without the permission of the Manager. Therefore, Class A
Members must be prepared to hold their Class A Units for the life of the Company
in which they have invested and may be able to resell their Class A Units, if at
all, only at a discount which may be significant. Investors should note that
under the redemption provisions of the Operating Agreement, the Manager, in its
sole discretion, may establish an amount for redemption, which amount generally
will not exceed 2% of the outstanding Class A Units per year. (See
"Transferability of Class A Units.")
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4. Return of Capital. Cash distributions may be characterized as a return
of capital, a return on capital or a portion of each. During the life of a
Company, certain distributions, or substantial portions thereof, paid to Class A
Members will be a return of capital. The portion of any distribution
constituting a return of capital depends on the residual values which may be
realized on the disposition of a Company's Equipment and will not be
determinable until the Equipment portfolio is liquidated. (See "Allocations and
Distributions" and "Summary of Operating Agreements -- Allocations and
Distributions.")
BUSINESS RISKS
5. Certain Risks of the Equipment Leasing Business. The business of leasing
and investing in equipment is subject to many risks including the following: (i)
the availability of satisfactory equipment, (ii) the risk of technological and
economic obsolescence, (iii) the risks associated with the inability to lease
the Equipment, (iv) the risk of lack of enforcement remedies against lessees who
are (or are controlled by) foreign entities, and (v) the possibility of defaults
of lessees. The Companies will primarily acquire items of Equipment for which
lease commitments exist at the time of purchase; however, they may acquire items
of Equipment for which they do not have a lease commitment. Equipment
acquisition decisions are made by the Credit Review Committee. The Credit Review
Committee reviews every lease and other Equipment transaction, and every lessee
and other third party credit on behalf of the Companies. The decisions of the
Committee are discretionary (with no compulsory standards being set) and the
formation of the Committee does not relieve the Manager of its fiduciary duties
to the Companies. (See "Fiduciary Responsibility" and "Management:
Committees -- Credit Review Committee.")
6. Risks of Equipment Operations. Equipment ownership and operation is
subject to many risks, including the possible inability to keep all the
Equipment under leases yielding revenues which, after payment of operating and
all associated expenses, provide, together with any anticipated sale proceeds, a
return acceptable to the Equipment owner. The ability to operate Equipment
profitably may be adversely affected by various economic and business factors,
including economic and business factors affecting the transportation and
Equipment leasing industries, in particular. Most of these factors are beyond
the control of the Manager, PLM Investment Management, Inc., a wholly-owned
subsidiary of the Manager which will provide certain management services
regarding the Equipment ("IMI"), and the lessees of the Equipment, and include:
(a) general economic conditions, such as inflation, competition,
fluctuations in general business conditions, and availability of financing;
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(b) fluctuations in supply and demand for various types of Equipment,
resulting from, among other things, obsolescence, changes in the methods or
economics of a particular mode of transportation or Equipment sector or
changes in government regulations or safety standards resulting in reduced
lease revenues;
(c) increases in maintenance expenses, taxes, insurance costs and
management fees attributable to the Equipment;
(d) the risk of an uninsured loss with respect to the Equipment or an
insured loss for which insurance proceeds are inadequate, resulting in a
possible loss of invested capital in and any profits anticipated from such
Equipment;
(e) the effects of strikes and other labor disputes on a Company's
acquisition, leasing and/or operation of the Equipment, the lessees of the
Equipment and the economy in general;
(f) bankruptcies, contract disputes or defaults in payment by lessees of
the Equipment resulting in uncollectible accounts;
(g) the risk of war or of foreign expropriation of, or damage to,
Equipment used on the high seas and in foreign countries, such as certain
marine vessels, cargo containers, aircraft and mobile offshore drilling
units, which may result in the loss of such Equipment; and
(h) loss of revenues during periods when the Equipment is not being
utilized.
(See "Risk Factors: Investment Risks -- Manager's Experience.")
Certain of the foregoing factors have recently impacted several specific
equipment segments. For instance, the increased competitive pressures in the
airline industry have lead to heavy financial losses and cash shortages for many
airlines. (See "Business of the Companies: Airline Industry.") In addition, the
recessionary market conditions in Europe and Japan have exerted downward
pressure on marine vessel operating revenues and have adversely affected the
market for marine containers. (See "Business of the Companies: Marine Vessels
and Marine Cargo Containers.") Fluctuations in supply and demand occurred in the
markets for marine vessels, cargo containers and aircraft throughout the early
1990s, and, to a lesser extent, in the mobile offshore drilling unit segment.
(See "Business of the Companies: Marine Vessels, Marine Cargo Containers,
Airline Industry and Mobile Offshore Drilling Units.")
7. Risks Inherent in Equipment Leases. Equipment leases may be categorized
generally as either "Operating Leases" or "Full Payout Net Leases." Operating
Leases typically are short- and
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mid-term leases or other contracts for the use of the Equipment under which the
lessor or other owner normally will receive aggregate payments in an amount that
is less than the lessor's or other owner's Purchase Price of the Equipment. Full
Payout Net Leases are long-term leases or other contracts for the use of the
Equipment under which the non-cancellable payments due during the initial term
of the lease or other contract are sufficient to recover the investment in such
Equipment. Both Companies intend to invest primarily in Equipment subject to
Operating Leases. In order to recover its Purchase Price of such Equipment, each
Company, on termination of an Operating Lease, must (i) obtain a satisfactory
renewal from the original lessee or other user or a new lessee or other user or
(ii) sell the Equipment for an adequate price. There can be no assurance that
the Companies will successfully accomplish either of these alternatives. This
may result in the loss of anticipated revenues and the inability to recover the
Companies' investment in Equipment. In the instance of short-term Operating
Leases, such risks are magnified. (See "Business of the Companies: Leasing and
Operation of the Equipment.")
In connection with Operating Leases, the Companies may encounter
considerable competition from other lessors offering Full Payout Net Leases.
Competitors of the Companies may write Full Payout Net Leases at lower rates, or
larger competitors with a lower cost of capital may offer Operating Leases at
lower rates, and as a result, assuming the same acquisition costs of Equipment,
the Companies may be at a competitive disadvantage. (See "Business of the
Companies: Competition.")
8. No Assurance of Successful Operations. The Companies were formed on
August 22, 1994 and have no operating history. No assurance can be given that
either Company's operations will be successful or that the Companies will meet
their stated investment objectives. Specifically, there is no assurance that
cash will be available for distribution to investors.
9. Unspecified Equipment and Leases. As described under "Business of the
Companies: Specified Equipment," for Fund I, the Manager has identified
approximately $15 million of Equipment for acquisition by Fund I. The purchase
price of this specified Equipment will be about 15% of the total amount of
Capital Contributions (the money investors pay for their Class A Units) if
5,000,000 Class A Units are sold in Fund I. Until additional Equipment is
identified in supplements to this Prospectus or in quarterly and/or annual
investor reports, investors will have no information about any other Equipment
to be purchased by either of the Companies and therefore will not have the
opportunity to fully assess the risks that may be associated with a Company's
Equipment portfolio. Investors must rely solely upon the judgment and ability of
the Manager with respect to the selection and
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evaluation of any as yet unidentified Equipment. (See "Business of the
Companies.")
10. Leverage. Each Company intends to acquire Equipment primarily on an all
cash basis; however, in certain cases borrowings may be used to finance the
purchase of Equipment for the benefit of a Company when the Company does not
have adequate capital to purchase the Equipment itself. If the Companies were
unable to meet repayment schedules with respect to such borrowings, the assets
of the Companies would be at risk of foreclosure. Where long-term borrowings are
utilized they will be limited to approximately 20% of the aggregate cost of all
Equipment owned by each Company at the time any such borrowing is originated.
Such borrowings are nonrecourse to the Class A Members. Additionally, the
Companies may also lease or charter Equipment from unaffiliated owners and make
future commitments to purchase or invest in Equipment. (See "Business of the
Companies: Acquisition of Equipment -- Interim Borrowings and -- Long-Term
Borrowings" and "Risk Factors: Investment Risks -- Liabilities of Class A
Members for Obligations of a Company.")
11. Possible Negative Consequences of Government Regulation. The use,
maintenance and ownership of certain types of Equipment are regulated by
federal, state and/or local authorities which may impose restrictions and
financial burdens on the Companies' ownership and operation of Equipment and,
accordingly, affect the profitability of the Companies. Changes in government
regulations or industry standards, or deregulation, may also affect the
ownership, operation and resale of Equipment. Equipment acquired by a Company
may be registered in countries other than the United States and will likely
operate in international and foreign territories. Accordingly, such Equipment
may be subject to the risk of adverse future economic, political and
governmental actions in the countries in which such Equipment is registered or
operated, including the risk of foreign expropriation and the risk of loss
arising from war. In addition, certain types of Equipment (such as railcars,
aircraft and marine vessels) are subject to extensive safety and operating
regulations by governmental agencies and/or industry organizations. Such
agencies or organizations may require modifications or capital improvements to
items of Equipment which may result in the removal of such Equipment from
service for a period of time or significant capital expenditures. For certain
regulatory factors specific to certain types of Equipment which are anticipated
to be owned by the Companies, see "Business of the Companies: Government
Regulation."
12. Uncertainty of Residual Value of Equipment. The ultimate cash return
from an investment in Class A Units will depend, in part, upon the residual
value of the Equipment, either for sale or continued operation under lease or
other contract. The residual value depends on, among other factors, the
condition of the
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Equipment, the cost of comparable new Equipment, the age of the Equipment, the
technological obsolescence of the Equipment and supply and demand regarding the
Equipment. Some of these factors are not within the control of the Manager. (See
"Business of the Companies.")
13. Defaults by Lessees. The default by a lessee under a lease or other
contract may cause Equipment to be returned to a Company at a time when the
Manager or its agents may be unable to arrange promptly for the re-leasing or
sale of the Equipment. Although the financial history of potential lessees and
other contracting parties will be reviewed, there can be no assurance that a
default will not occur. (See "Management: Committees -- Credit Review
Committee.") In such event, a Company would lose anticipated revenues and may be
unable to recover its investment in the Equipment. If any indebtedness is
secured by the returned Equipment, and the reserves of a Company and the rental
revenues and sales proceeds generated by other items of Equipment are not
sufficient to pay off such indebtedness, the lender may foreclose on and acquire
ownership of the returned Equipment. In addition, lessees of Equipment
encountering financial difficulties may voluntarily or involuntarily become
subject to the provisions of the United States Bankruptcy Code or similar laws
of foreign nations. (See "Business of the Companies: Lessee Insolvency and
Bankruptcy.")
14. Tort Liability. In leasing and operating the Equipment, the Companies
will, in certain instances, be exposed to tort liability. Although each Company
will use its best efforts to minimize the possibility and exposure of such tort
liability, no assurances can be given that its assets will be protected against
any such claims based in tort. A tort is a private or civil wrong or injury,
independent of contract. (See "Business of the Companies -- Insurance.")
15. Loss of Equipment Registration. Certain types of equipment are subject
to certain registration requirements. Registration with the U.S. Federal
Aviation Administration ("FAA") is required for the operation of aircraft within
the United States. Similarly, certain types of marine vessels must be U.S.
registered prior to operation in the waterways of the United States. Failure to
register or loss of such registration of aircraft or marine vessels could result
in substantial penalties, seizure and forfeiture, the premature sale of such
Equipment and the inability to operate and lease the Equipment. If Class A Units
are sold to Aliens, opportunities for registration of marine vessels for
operation in United States waterways will be severely limited. (See "Business of
the Companies: Equipment Registration" and "Investor Suitability Standards:
Citizenship.")
16. Competition. The Equipment leasing industry is highly competitive. The
Companies' competitors include independent
17
<PAGE> 27
leasing companies, affiliates of banks and insurance companies and equipment
leasing partnerships. Many of these entities may have larger Equipment
inventories, greater financial resources and more experience in the industry
than the Companies or the Manager. (See "Conflicts of Interest: Competition with
Manager and Affiliates; Competition for Management's Time" and "Business of the
Companies: Competition.")
INVESTMENT RISKS
17. Liability of Class A Members for Obligations of a Company. The limited
liability company is a relatively new form of business organization. The first
statute in the United States governing limited liability companies was adopted
more than 15 years ago. Since then, statutes governing limited liability
companies have been adopted or are pending adoption in over 46 states. The
principles of law governing the limitation of liability of members in a limited
liability company have not been authoritatively established as to limited
liability companies organized under the laws of one jurisdiction but operating
or owning property, incurring obligations, or having members resident in other
jurisdictions. In jurisdictions where the limited liability of Class A Members
can be preserved by filing a foreign registration, the Companies will make such
filings if the Companies have operations or own property in such jurisdictions.
Both of the Companies are governed by the Delaware Act, which provides that no
member or manager of a limited liability company shall be obligated personally
for the debts, obligations and liabilities of a limited liability company solely
by reason of being a member or acting as a manager of a limited liability
company, but that a member or manager may agree to be obligated personally for
any or all of the debts, obligations or liabilities of a limited liability
company. In the Operating Agreements, only Class B Members, including the
Manager, assume such unlimited liability.
Certain jurisdictions have not adopted legislative provisions similar to
those set forth in the Delaware Act and some have not adopted any laws governing
limited liability companies. Persuasive arguments can be made in support of the
conclusion that Delaware law should be applied by courts in such jurisdictions.
However, since there is no authoritative precedent on this issue in these
jurisdictions, a question exists as to whether a court in such a jurisdiction
might hold that the Class A Members are not entitled to the limitation of
liability provided by the Operating Agreements and the Delaware Act.
18. Return of Distributions by Class A Members. In accordance with the
Delaware Act, under certain circumstances, Class A Members will be obligated to
return any distribution from a Company to the extent that, after giving effect
to the distribution, all liabilities of such Company (other than nonrecourse
liabilities
18
<PAGE> 28
and liabilities to Members on account of their interests in such Company) exceed
the fair value of its assets (including, as to assets serving as security for
nonrecourse liabilities, that portion of the fair value of such assets which
exceeds the amount of such nonrecourse liabilities) or as otherwise provided by
applicable law. (See "Summary of the Operating Agreements: Liability of Class A
Members.")
19. Risks of Joint Investments. It is contemplated that each Company will
participate on a co-tenancy or partnership basis in investments in certain types
of Equipment the purchase prices of which are substantial. This involves risks
not otherwise present if a Company were the sole owner of the Equipment. These
risks include the possibility that the participating Company's co-investors
might become bankrupt, that such co-investors may at any time have economic or
business interests or goals which are inconsistent with those of the Company, or
that such co-investors may be in a position to take action contrary to the
instructions or the requests of the Company or contrary to the Company's
policies or objectives. (See "Business of the Companies: Joint Investments.")
20. Manager's Experience. The Manager's experience in the Equipment leasing
industry has been primarily confined to the railroad, aircraft, container,
marine vessel and trailer industries, with more recent expansion into the area
of mobile offshore drilling units. To the extent that a Company invests in other
types of Equipment, including aircraft components, it will be competing in areas
in which the Manager has more limited experience. (See "Management.")
Due in part to extended worldwide recessionary conditions experienced over
the past several years, the markets for certain types of transportation
equipment, primarily aircraft, marine containers and marine vessels, have been
depressed or have performed below historical norms. The generally weak demand
and excess supply in these markets resulted in lower lease rates and reduced
asset values and has correspondingly adversely affected the cash flow of certain
prior programs managed by the Manager. The Manager continues to closely manage
and monitor the impact of these factors on the financial position of the prior
programs. The return of lease rates to their historical levels may be dependent
on a number of factors including improved international economic conditions, the
absence of technological obsolescence, new government regulations, increased
industry-specific demand, and the increased availability and corresponding cost
of financing.
The depressed nature of certain equipment sectors, combined with the impact
of certain regulatory policies, has led to volatility in fair market values for
certain types of equipment. Uncertain market conditions have caused the Manager
to more closely monitor the changes in market values for these types of
equipment,
19
<PAGE> 29
and on occasion, the Manager has made adjustments to the book values (due to
permanent impairment of value) for certain items of equipment held by prior
programs managed by the Manager that reflect this volatility. While there has
continued to be a general decline in certain market values, the total estimated
fair market value of the assets generally still exceeds the aggregate carrying
value of the equipment held in the prior programs. (See "Prior Performance:
General -- Manager's Experience in Prior Programs.")
In addition, based on current operating lease revenues and near-term trends,
the Manager has, historically, found it necessary to reduce distributions in
certain prior programs managed by the Manager. Future distribution levels will
be a function of operating cash flow and market trends, including the level of
interest rates for alternative financing, and industry-specific demand and
supply.
21. Potential Lack of Diversity at Inception. Investor funds will be
released to a Company from the applicable Escrow Account once subscriptions for
Class A Units of that Company equal to the Minimum Subscription Amount of
$1,500,000 have been accepted. All such funds of Fund I will be employed to
purchase some of the Equipment identified in "Business of the Companies:
Specified Equipment." When Fund II obtains funds equal to the Minimum
Subscription Amount, all such funds will similarly be employed to purchase
certain Equipment identified for acquisition by Fund II prior to the offering of
Class A Units by Fund II. At this level of capitalization, a Company's portfolio
will not be nearly as widely diversified, either as to Equipment type or lessees
or other contracting parties, as the portfolio will be when and if the level of
a Company's capitalization is substantially greater. There can, however, be no
assurance that a Company's capitalization will exceed the Minimum Subscription
Amount. (See "Estimated Use of Proceeds.") The relative lack of diversity may
impose greater risks on initial investors in the Companies because the
performance of the Companies will be more adversely affected by any inability to
place items of Equipment on lease on a profitable basis or by an uninsured loss
attributable to any such Equipment.
TAX RISKS
22. Federal Tax Considerations in General. A ruling from the IRS has not
been obtained, and the Manager does not presently intend to apply for a ruling,
with respect to any of the tax considerations associated with an investment in
Class A Units. Availability of the tax treatment described in this Prospectus
may be challenged by the IRS upon audit of the tax returns of either of the
Companies or of any Class A Member. It should be noted that the determination of
items of each Company's income, gain, loss, deduction and credit will be made at
the level of the Companies rather than in separate proceedings with the Class A
Members,
20
<PAGE> 30
and Class A Members generally will be required to report Company items
consistent with the tax returns of the Company in which they have invested.
Any adjustment to a tax return of a Company as a result of an audit by the
IRS would also result in adjustment to the tax returns of the Class A Members,
and may result in an examination of other items in such returns unrelated to a
Company, or an examination of prior years' tax returns. Class A Members could
incur substantial legal and accounting costs in contesting any challenge by the
IRS, regardless of the outcome.
The primary tax benefits associated with an investment in Class A Units are
the "tax-deferred" distributions (i.e., distributions which are not subject to
current taxation) which may be available as a result of cost recovery or
depreciation deductions. The availability of tax-deferred distributions may be
reduced by the imposition of the alternative minimum tax. The IRS may
successfully challenge the amount or timing of the depreciation deductions
claimed by a Company (including the salvage value used by such Company, in
certain circumstances, to determine those deductions), with the result that the
depreciation deductions of such Company may be reduced and Company income (or
loss) may be increased (or decreased) for a taxable year. The tax considerations
associated with an investment in a Company could be affected by a number of
different factors which are described in detail under the caption "Income Tax
Considerations."
For any year in which a Company has income in excess of deductions, each
Class A Member will be required to report his share of such income on his
federal and state tax returns and will be responsible for the payment of taxes
thereon. Such taxes might in some cases be greater than cash distributions
received by the Class A Member from a Company for the year.
23. Partnership Status. Each Operating Agreement provides that each Company
is intended to be classified as a partnership for federal income tax purposes.
However, the IRS may successfully contend that a Company should be treated as a
corporation for federal income tax purposes rather than as a partnership. The
Manager has not requested, and does not intend to request, a ruling from the IRS
that each Company will be treated as a partnership and not as an "association"
taxable as a corporation. Even if each Company sought such a ruling, it is
unlikely that the IRS would issue a tax ruling. In the absence of a ruling,
there can be no assurance that a Company will not constitute an association
taxable as a corporation. With regard to their tax status, the Companies will
rely upon the opinion of Jackson, Tufts, Cole & Black, special counsel to the
Companies, to the effect that each Company will be treated as a partnership for
tax purposes notwithstanding the fact that a ruling from the IRS will not be
sought. Such opinions of counsel, however, are not binding on the IRS.
21
<PAGE> 31
Section 7704 of the Code treats certain partnerships, the interests of which
are deemed to be "publicly-traded," as corporations. While the Manager will use
its best efforts to limit the type and number of transfers of Class A Units to
those which will allow the Companies to satisfy at least one of the safe harbors
under IRS Notice 88-75, the Manager cannot warrant that the Companies will
satisfy one of these safe harbors. Certain transfers of Class A Units could
occur which would cause the Companies to fall outside these safe harbors. While
the failure to meet a safe harbor will not create a presumption that a
partnership is publicly-traded, no assurance can be given that if the amount and
type of trading in the Class A Units were to fall outside the safe harbors, the
IRS would not claim that each Company was a "publicly-traded partnership"
taxable as a corporation. (See "Transferability of Class A Units" and "Income
Tax Considerations -- Partnership Status.")
If the IRS were successful in characterizing the Companies as associations
taxable as corporations, then the Companies would be subject to tax without
deductions for cash distributions to Class A Members and such distributions
would be recharacterized as portfolio income to the Class A Members.
24. Allocations. If the allocations of each Company's profit and loss to
the Class A Members made pursuant to each Operating Agreement were successfully
challenged by the IRS, Class A Members may be required to recognize additional
taxable income without any corresponding increase in distributions of cash from
a Company.
25. Passive Activity Loss Limitations. Class A Members may not be able
currently to deduct a Company's tax losses as a result of limitations on the
current utilization of passive activity losses. In addition, any portfolio
income generated by a Company may not be netted against Company tax losses. (See
"Income Tax Considerations: Limitations on Utilization of Losses -- Passive
Activity Loss Limitations.")
26. Companies as the Owners of the Equipment. Each Company intends to
structure each lease transaction so that the lease will be treated as a lease
rather than as a financing arrangement for tax purposes. If, however, the IRS
were successful in challenging the status of a lease by treating the lessee as
the owner of the subject item of Equipment and a Company as a secured creditor,
such Company would not be entitled to cost recovery or depreciation deductions
with respect to that item of Equipment. (See "Income Tax Considerations:
Ownership of Equipment -- Lease versus Sale.")
In addition, the IRS may assert upon audit that any pass-through entities
organized by a Company to hold title to the Equipment are associations taxable
as corporations and, thus, are the true owners of the Equipment for tax
purposes. If the IRS were
22
<PAGE> 32
successful in such assertions, it would result in the imposition of tax on such
entities without deductions for cash distributions to a Company, the taxation of
cash distributions to a Company to the extent of such earnings and profits, and
the recharacterization of such entities' cash distributions as portfolio income
to a Company. (See "Income Tax Considerations: Title to Equipment.")
27. Sale or Other Disposition of Equipment or Class A Units -- Tax
Liability. A sale or other disposition of Equipment or the disposition of a
Class A Member's interest in a Company may result in a tax liability to the
Class A Member in excess of any cash proceeds received by such Class A Member.
To the extent a Class A Member's federal tax liabilities exceed cash proceeds,
such excess would be a nondeductible cost to such Class A Member.
28. Additional Taxes. Class A Members may be required to file tax returns
and pay state or local taxes, such as income, franchise or personal property
taxes, as a result of an investment in a Company, and any use of the Equipment
in a country other than the United States may subject Class A Members to income
taxation in such country. (See "Income Tax Considerations: State Taxes and
Foreign Tax Considerations.") The Companies may be required to file tax returns
and pay state or local taxes as a result of the operations of the Companies in
states and localities. The Companies' payment of such taxes and the costs
associated with the filing of any state or local tax returns will reduce the
amount of cash available to the Companies for distribution to the Class A
Members.
Although each Company should be treated as a partnership for federal income
tax purposes, in certain states, criteria for partnership classification of
limited liability companies (such as the Companies) for state and local purposes
may be substantially different from the criteria employed for federal income tax
purposes. Moreover, in Pennsylvania, limited liability companies will be taxed
as corporations with the result that a portion of cash distributions to
Pennsylvania investors will be treated as portfolio income (rather than passive
income) for Pennsylvania state income tax purposes. Accordingly, there can be no
assurance that each Company will be treated as a partnership for state and local
tax purposes. Each prospective investor is urged to consult his tax advisor with
respect to the state and local tax consequences of an investment in the
Companies. (See "Income Tax Considerations -- State Taxes.")
29. Reliance on Existing Law. Tax benefits associated with an investment in
Class A Units could be lost and/or substantial tax liabilities incurred by
reason of changes in the tax laws. There is no assurance that changes in the
interpretation of applicable tax laws will not be made by administrative or
judicial action which will adversely affect the tax consequences of an
investment in Class A
23
<PAGE> 33
Units. Administrative or judicial changes may or may not be retroactive with
respect to transactions entered into prior to the date on which they occur.
Periodic consultations with an investor's professional advisor may be necessary
given the possibility of such changes.
30. Investment by Qualified Plans, IRAs and Other Exempt Entities. The
Companies will generate unrelated business taxable income to Class A Members
which are Qualified Plans (trusts established pursuant to the terms of pension,
profit sharing or stock bonus plans meeting the requirements of Code Section
401), IRAs (Individual Retirement Accounts) and corporations, community chests,
funds or foundations that qualify under Section 501(c)(3) of the Code ("Exempt
Entities") with the result that the Companies' income will be subject to tax to
the extent that the Qualified Plans', IRAs' or Exempt Entities' unrelated
business taxable income from all sources exceeds $1,000. (See "Income Tax
Considerations: Investment by Qualified Plans, IRAs and Exempt Entities.")
31. ERISA Considerations. Fiduciaries of Qualified Plans and IRA owners
should consider whether (i) an investment in Class A Units is in accordance with
the documents and instruments governing the Qualified Plan or IRA, (ii) the
purchase of Class A Units is prudent in light of the potential difficulties that
may exist in liquidating Class A Units, (iii) an investment in Class A Units
will provide sufficient cash distributions in light of the Qualified Plan's or
IRA's likely required benefit payments or other distributions, (iv) the
evaluation of the investment in Class A Units has properly taken into account
the potential costs of determining and paying any amounts of federal income tax
that may be owed on unrelated business taxable income in connection with the
Class A Units, (v) in the case of a fiduciary of a Qualified Plan, that the
investment, unless made for an individually directed account under the Qualified
Plan, is made solely in the interests of participants in the Qualified Plan, and
(vi) the fair market value of Class A Units will be sufficiently ascertainable,
and with sufficient frequency, to enable the Qualified Plan or IRA to value its
assets in accordance with the rules and policies of the Qualified Plan or IRA.
(See "Income Tax Considerations: Investment by Qualified Plans, IRAs and Exempt
Entities.")
To avoid classification of a pro rata portion of a Company's underlying
assets as "plan assets" of investors which are Benefit Plans, each Company
intends to restrict the ownership of Units by Benefit Plans to less than 25% of
the total value of each class of the outstanding Units at all times. (See "ERISA
Considerations: 'Plan Assets'.") Benefit Plan investors include Qualified Plans,
IRAs and certain other entities included in the definition of Benefit Plans in
each Operating Agreement.
24
<PAGE> 34
ESTIMATED USE OF PROCEEDS
The following table sets forth information concerning the estimated use of
proceeds of the Offering of Class A Units for each Company. Except as otherwise
disclosed in this Prospectus, the Companies will not engage in transactions with
the Manager or any of its Affiliates and all items of compensation are disclosed
in the table below or under the caption "Compensation of Manager and
Affiliates."
<TABLE>
<CAPTION>
MINIMUM PROCEEDS MAXIMUM PROCEEDS
PER COMPANY PER COMPANY
(75,000 CLASS A (5,000,000 CLASS A
UNITS SOLD)(1) UNITS SOLD)(1)
-------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ------------ -------
<S> <C> <C> <C> <C>
Gross Offering
Proceeds........ $1,500,000 100.00% $100,000,000 100.00%
Selling
Commission(2)... -0- .00 -0- .00
Organization
Expense(2)..... -0- .00 -0- .00
---------- ------- ------------ -------
Total Expenses... -0- .00 -0- .00
---------- ------- ------------ -------
Net Proceeds to
Company
Available for
Equipment...... $1,500,000 100.00% $100,000,000 100.00%
========== ======= ============ =======
Investment in
Equipment(3)..... $1,485,000 99.00% $ 99,250,000 99.25%
Reserves(4)....... 15,000 1.00 750,000 00.75
Total Investment
in Equipment and
Reserves......... 1,500,000 100.00 100,000,000 100.00
Total Offering
Expenses......... -0- .00 -0- .00
---------- ------- ------------ -------
Total Application
of Proceeds...... $1,500,000 100.00% $100,000,000 100.00%
========== ======= ============ =======
</TABLE>
- ---------------
(1) Does not include five Class A Units purchased by the Initial Class A Member.
(2) The Manager, in its capacity as Initial Class B Member, will pay all
Organizational and Offering Expenses, including selling commissions, for
each Company. See "Summary of the Operating Agreements: The Class B Units"
and "Plan of Distribution."
(3) Does not include approximately $20,000,000 in Equipment which would be
acquired in the event the maximum proceeds are raised and each Company
utilizes the maximum leverage allowed or any Equipment which may be acquired
with Retained Proceeds.
(4) The Manager shall establish and maintain reserves equal to the lesser of (i)
1% of Capital Contributions from Class A Members or (ii) $750,000. The
Manager, in its sole discretion, may at any time increase the amount of the
Company's reserves to an amount which it determines to be reasonable and
necessary in connection with the operation of the Company's business and
affairs; provided, however, that the amount of reserves may be decreased or
eliminated during the liquidation stage of the Company.
25
<PAGE> 35
COMPENSATION OF MANAGER AND AFFILIATES
COMPENSATION PAID BY COMPANIES
The following table summarizes the types, estimated
amounts and recipients of compensation to be paid by the Companies to the
Manager and its Affiliates. Other than the compensation discussed in this table
and the Managing Placement Agent Fee (discussed below) to be paid by the Manager
in its capacity as the Initial Class B Member, the Manager and its Affiliates
shall not be entitled to receive any compensation for services rendered to the
Company, including without limitation services rendered in connection with the
offering of Class A Units, the acquisition of Equipment and initial lease
negotiations. Some of the compensation summarized below will be paid regardless
of the success or profitability of each Company's operations and investments.
While such compensation and fees were established by the Manager and are not
based on arm's-length negotiations, the Manager, nevertheless, believes that
such compensation and fees are comparable to those which would be charged by an
unaffiliated entity or entities for similar services. The Manager has discretion
with respect to all decisions related to a Company's transactions, including
liquidation of its portfolio, and may therefore be able to affect the timing and
amount of compensation payable by the Companies.
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED AMOUNT
AMOUNT AMOUNT FOR BOTH
PER COMPANY PER COMPANY COMPANIES
ASSUMING ASSUMING ASSUMING
MINIMUM MAXIMUM MAXIMUM
ENTITY 200,000 5,000,000 10,000,000
RECEIVING CLASS A UNITS CLASS A UNITS CLASS A UNITS
COMPENSATION TYPE OF COMPENSATION ARE SOLD ARE SOLD ARE SOLD
- -------------- ------------------------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
OFFERING AND ORGANIZATIONAL STAGE
NONE
EQUIPMENT ACQUISITION STAGE
NONE
OPERATIONAL AND SALE OR LIQUIDATION STAGES
PLM Investment Equipment Management Fee. A monthly Not Not Not
Management, fee equal to the lesser of (a) the determinable determinable determinable
Inc. ("IMI") fees which would be charged by an at this time at this time at this time
independent third party for similar
services for similar equipment or
(b) the sum of (i) for that
Equipment for which IMI provides
only Basic Equipment Management
Services (A) 2% of the Gross Lease
Revenues attributable to Equipment
which is subject to Full Payout Net
Leases, and (B) 5% of the Gross
Lease Revenues attributable to
Equipment which is subject to
Operating Leases, and (ii) for that
Equipment for which IMI provides
Supplemental Equipment Management
Services, 7% of the Gross Lease
Revenues attributable to such
Equipment. No Equipment Management
Fee will be earned, however, in
connection with transactions
involving the purchase of interests
in residual values or remarketing
proceeds revenue or similar
interests as described in Section
2.02(r)(y) of the Operating
Agreements. (See "Business of the
Companies: Management of Assets of
the Companies.")
</TABLE>
26
<PAGE> 36
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED AMOUNT
AMOUNT AMOUNT FOR BOTH
PER COMPANY PER COMPANY COMPANIES
ASSUMING ASSUMING ASSUMING
MINIMUM MAXIMUM MAXIMUM
ENTITY 200,000 5,000,000 10,000,000
RECEIVING CLASS A UNITS CLASS A UNITS CLASS A UNITS
COMPENSATION TYPE OF COMPENSATION ARE SOLD ARE SOLD ARE SOLD
- -------------- ------------------------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
The Manager or Re-Lease Fee. As compensation for Not Not Not
an Affiliate providing re-leasing services for determinable determinable determinable
any Equipment for which the Manager at this time at this time at this time
has, following the expiration of the
current or most recent lease,
charter or other contract for the
use of the Equipment, arranged a
subsequent lease, charter or other
contract for the use of such
Equipment to a lessee or other third
party, other than the current or
most recent lessee or other operator
of such Equipment, the Manager or an
Affiliate shall receive, on a
monthly basis, a Re-Lease Fee equal
to the lesser of (a) the fees which
would be charged by an independent
third party for comparable services
for comparable equipment or (b) 2%
of Gross Lease Revenues derived from
such re-lease; provided, however,
that no Re-Lease Fee shall be
payable if such Re-Lease Fee would
cause the combination of Equipment
Management Fees and the Re-Lease Fee
with respect to such Equipment to
exceed 7% of Gross Lease Revenues.
Transportation Insurance Premiums and Commissions. Not Not Not
Equipment Until such time as 75% or more of determinable determinable determinable
Indemnity the gross revenue of TEI is derived at this time at this time at this time
Company, Ltd. from the provision of insurance,
("TEI") insurance brokerage and risk
management services other than to
the Manager, the Companies, and
their Affiliates, TEI may derive no
profit in connection with the
providing of insurance coverage,
insurance brokerage or risk
management services to the
Companies.
The Manager Reimbursement of Expenses. $25,000 $450,000 $900,000
and its Reimbursement of expenses may occur
Affiliates for the services the Manager and its
Affiliates provide such as
managerial, sales, legal,
accounting, data processing, tax
preparation and advice, maintenance,
administrative, secretarial and
other services as more fully
described in Sections 2.02(k) and
3.15 of the Operating Agreements.
The amounts set forth on this table
are approximations of reimbursable
expenses for the first year of
operations and are based on
reimbursable expenses of prior
programs sponsored by the Manager,
and do not include expenses incurred
in the offering of Class A Units
which are being paid by the Manager
as Initial Class B Member. (See
"Prior Performance.")
</TABLE>
27
<PAGE> 37
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED AMOUNT
AMOUNT AMOUNT FOR BOTH
PER COMPANY PER COMPANY COMPANIES
ASSUMING ASSUMING ASSUMING
MINIMUM MAXIMUM MAXIMUM
ENTITY 200,000 5,000,000 10,000,000
RECEIVING CLASS A UNITS CLASS A UNITS CLASS A UNITS
COMPENSATION TYPE OF COMPENSATION ARE SOLD ARE SOLD ARE SOLD
- -------------- ------------------------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
TEC Equipment Liquidation Fee. With Not Not Not
respect to each item of Equipment determinable determinable determinable
sold by TEC, a fee equal to the at this time at this time at this time
lesser of (i) 50% of the Competitive
Equipment Sales Commission or (ii)
3% of the sales price of Equipment
which it sells on behalf of a
Company; provided, however, that
such amount shall not be paid until
the Class A Members have received
distributions equal to the
Preliminary Return Amount. Until the
Preliminary Return Amount is so
distributed, the amount of such fee
shall accrue without interest.
Accrued Equipment Liquidation Fees
shall be paid to TEC immediately
following distribution of the
Preliminary Return Amount to the
Class A Members; provided, however,
that such amounts shall be paid to
TEC only if the Net Disposition
Proceeds from the sale of such
Equipment are actually distributed
to the Members. Such fee, with
respect to any sale of Equipment,
shall be reduced by the amount of
any resale fees paid to any third
parties with respect to such sale.
</TABLE>
28
<PAGE> 38
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED AMOUNT
AMOUNT AMOUNT FOR BOTH
PER COMPANY PER COMPANY COMPANIES
ASSUMING ASSUMING ASSUMING
MINIMUM MAXIMUM MAXIMUM
ENTITY 200,000 5,000,000 10,000,000
RECEIVING CLASS A UNITS CLASS A UNITS CLASS A UNITS
COMPENSATION TYPE OF COMPENSATION ARE SOLD ARE SOLD ARE SOLD
- -------------- ------------------------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
The Manager Class B Members' Interest. The cash Not Not Not
distributions of each Company will determinable determinable determinable
be distributed initially 85% to the at this time at this time at this time
Class A Members and 15% to the Class
B Members (consisting initially of
only the Manager in its capacity as
Initial Class B Member.) When the
aggregate cash distributions paid on
a Class A Unit to the Original Class
A Member or any permitted transferee
with respect to such Class A Unit
equal or exceed the original Capital
Contribution of $20.00 for such
Class A Unit, then cash
distributions as between a Class A
Member holding such a Class A Unit
and the Class B Members will be
distributed 25% to the Class B
Members and 75% to such Class A
Member. The Class B Members will
also have a 1% interest in each
Company's items of income, gain,
loss, deduction, credit and tax
preference and will be entitled to
certain special allocations of
income and deductions. The Manager,
in its capacity as the Initial Class
B Member, will pay out of its own
corporate funds, as a capital
contribution to the Companies, all
Organizational and Offering
Expenses, including the Managing
Placement Agent Fee, incurred in
connection with the Offerings, and
any costs associated with making a
Section 754 Election (other than any
costs associated with tax
consequences to a Class A Member as
a result of a Section 754 Election),
in return for its interest as a
Class B Member. (See "Income Tax
Considerations: Section 754
Election" and "Summary of the
Operating Agreements: The Class B
Units.")
</TABLE>
OTHER COMPENSATION -- MANAGING PLACEMENT AGENT FEE
The Manager, in its capacity as the Initial Class B Member of the Companies,
will pay out of its own corporate funds, as a Capital Contribution to each of
the Companies, a fee for the sale of Class A Units to PLM Securities Corp., the
Managing Placement Agent, which fee shall be equal to no more than 10% of the
purchase price of the Class A Units sold. Out of the Managing Placement Agent
Fee, the Managing Placement Agent will pay 8.5% of the purchase price of Class A
Units sold to other broker-dealers who sell Class A Units. This fee is exclusive
of any due diligence reimbursement which will not exceed up to 0.5% of the
purchase price of the Class A Units sold. (See "Plan of Distribution.")
Except as otherwise disclosed in this Prospectus, the Companies will not
engage in transactions with the Manager or any of its Affiliates. (See
"Fiduciary Responsibility.")
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CONFLICTS OF INTEREST
The Companies will be subject to various conflicts of interest arising out
of their relationships with the Manager and its Affiliates, which relationships
are outlined in the Organizational Chart appearing at the end of this section.
Nothing herein shall relieve the Manager and its Affiliates from their general
fiduciary obligations to both Companies as set forth under "Fiduciary
Responsibility". These conflicts include the following:
COMPETITION WITH MANAGER AND AFFILIATES; COMPETITION FOR MANAGEMENT'S TIME
The Manager has sponsored other investor programs which will be in potential
competition with the Companies in connection with the purchase of Equipment as
well as opportunities to lease and sell Equipment. PLM Equipment Growth Fund
("Growth Fund"), PLM Equipment Growth Fund II ("Growth Fund II"), PLM Equipment
Growth Fund III ("Growth Fund III"), PLM Equipment Growth Fund IV ("Growth Fund
IV"), PLM Equipment Growth Fund V ("Growth Fund V"), PLM Equipment Growth Fund
VI ("Growth Fund VI") and PLM Equipment Growth & Income Fund VII ("Growth Fund
VII") have each been organized to acquire types of Equipment similar to types
which will be acquired by the Companies. Growth Fund, Growth Fund II, Growth
Fund III, Growth Fund IV, Growth Fund V and Growth Fund VI have acquired most of
their Equipment prior to the Companies' commencement of their offering of Class
A Units. As a consequence, competition among the Companies and prior programs,
other than Growth Fund VII, for initial purchases of Equipment should be
insubstantial, although since each program may reinvest undistributed cash in
additional Equipment, competition for Equipment is likely to occur in the
future. The Manager and its Affiliates may also form additional investor
programs which, in addition to Growth Fund VII, may be competitive with the
Companies, and the Companies may be competitive with each other.
The Manager is a wholly-owned subsidiary of PLM International, Inc. ("PLM
International"), which will also be in direct competition with both Companies
with respect to the acquisition, leasing and sale of Equipment. If two or more
investor programs or entities, including but not limited to PLM International,
Growth Fund, Growth Fund II, Growth Fund III, Growth Fund IV, Growth Fund V,
Growth Fund VI, Growth Fund VII and either or both of the Companies, are in a
position to acquire the same Equipment, the Manager will determine which program
or entity will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The Manager will
generally afford priority to the program or entity that has had funds available
to purchase Equipment for the longest
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<PAGE> 40
period of time. If two or more investor programs or entities, including a
Company, are in a position to enter into leases with the same lessee or to sell
Equipment to the same purchaser, the Manager will generally afford priority to
the Equipment which has been available for lease or sale for the longest period
of time. (See "Fiduciary Responsibility: Investment Opportunities --
Modification.")
Certain senior executives of the Manager and its Affiliates also serve as
officers and directors of PLM International, and are required to apportion their
time among these entities. The Companies will, therefore, be in competition with
PLM International for the attention and management time of the Manager and its
Affiliates.
TRANSACTIONS WITH AFFILIATES
Except as otherwise disclosed in this Prospectus, a Company will not engage
in any transactions with the Manager or any of its Affiliates.
ACQUISITIONS
TEC will, and the Manager or other Affiliates of the Manager (other than
investor programs sponsored by the Manager or its Affiliates) may, acquire
Equipment for a Company provided that (i) the acquisition is in such best
interest of such Company and (ii) no benefit to the Manager or its Affiliates
arises from the acquisition, other than the interim income or loss derived from
rent or other payments received and expenses incurred until the invested capital
of TEC, the Manager or other Affiliate is no longer at risk and the Equipment
acquired is purchased by the Company. If a loan secured by Equipment is assumed
in connection with any such acquisition, such loan must have the same interest
terms at the time such Equipment is acquired by a Company as it had at the time
such Equipment was first acquired by TEC, the Manager or other Affiliate. In
acquiring Equipment not specified in this Prospectus for a Company, TEC does not
intend to hold such Equipment for more than 120 days (but in no event for more
than six months) prior to transfer to such Company. TEC shall resell the
Equipment to a Company for a price equal to the cost of the Equipment to TEC.
TEC, the Manager or such other Affiliate will retain any rent or other payments
received for the Equipment, and bear all expenses and liabilities with respect
to such Equipment, for all periods during which the invested capital of TEC, the
Manager or other Affiliate is at risk and prior to the acquisition of the
Equipment by a Company. The Manager's ability to purchase Equipment and operate
it on a short-term basis prior to transferring it to a Company in no way alters
the Manager's fiduciary duty to act at all times with integrity and to exercise
due diligence in all matters relating to the Companies. In addition, the ability
to
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<PAGE> 41
purchase and operate Equipment on a short-term basis in no way alters the
Manager's general policy, in instances where Equipment is suitable for two or
more programs or entities under the control of the Manager, of placing the
Equipment with the program or entity that has had funds available to purchase
Equipment the longest. (See "Fiduciary Responsibility: Investment
Opportunities -- Modifications.")
In certain instances, the Manager may find it necessary, in connection with
the ordering and acquisition of Equipment, to make advances to manufacturers or
vendors with funds borrowed by the Manager for such purpose. The Companies will
not borrow money from the Manager or any of its Affiliates with a term in excess
of twelve months. Interest will be paid on loans or advances (in the form of
deposits with manufacturers or vendors of Equipment or otherwise) from the
Manager or its Affiliates from their own funds at a rate equal to that which
would be charged by third party financing institutions on comparable loans for
the same purpose in the same geographic area, but in no event in excess of the
Manager's or Affiliate's own cost of funds. In addition, if the Manager or its
Affiliates borrow money and loan or advance it on a short-term basis to or on
behalf of a Company, the Manager or such Affiliates shall receive no greater
interest rate and financing charges from such Company than that which the
Manager or such Affiliates are paying. (See "Business of the Companies:
Acquisition of Equipment -- Advances by the Manager.") The Companies will not
loan money to the Manager or its Affiliates.
JOINT INVESTMENTS
The Manager or one of its Affiliates may participate in joint investments in
Equipment with either or both of the Companies provided each such transaction
satisfies certain conditions. (See "Risk Factors," "Business of the Companies:
Joint Investments" and "Income Tax Considerations: Title to Aircraft and Cost
Recovery and Depreciation.")
INSURANCE
The Manager intends to cause the Companies to obtain insurance and risk
management services and may purchase such services through the Manager's
Affiliate TEI. (See "Business of the Companies: Insurance.") Until such time as
75% or more of TEI's gross revenue is derived from the provision of insurance,
insurance brokerage and risk management services other than to the Manager, the
Companies and their Affiliates, TEI may provide such services to the Companies
only at TEI's cost and with no profit to TEI. Once at least 75% of TEI's gross
revenue from the provision of insurance, insurance brokerage and risk management
services is derived from sources other than the Manager, the Companies and their
Affiliates, TEI may derive a profit from the
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<PAGE> 42
provision of insurance and such services to the Companies. In all events,
however, the premiums, commissions, and any other compensation paid by the
Companies to TEI must be comparable and competitive with the compensation that
would be payable to any non-Affiliate which renders comparable services or
provides comparable coverage that could reasonably be made available to the
Companies.
ORGANIZATIONAL CHART
The following diagram sets forth the structure of the Manager and its
principal corporate Affiliates and the investor programs they have sponsored
(including the Companies):
CORPORATE STRUCTURE
[CHART]
INVESTOR PROGRAMS
<TABLE>
<S> <C>
2 Public Diversified
Transportation Equipment
Partnership Programs;
General Partners: FSI and
PLM, Inc., or FSI
PLM Equipment Growth Fund;
General Partner: FSI
PLM Equipment Growth Fund
II; General Partner: FSI
PLM Equipment Growth Fund
III; General Partner: FSI
</TABLE>
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<PAGE> 43
PLM Equipment Growth Fund
IV; General Partner: FSI
PLM Equipment Growth Fund V;
General Partner: FSI
PLM Equipment Growth Fund
VI; General Partner: FSI
PLM Equipment Growth &
Income Fund VII; General
Partner: FSI
Professional Lease
Management Income Fund
I.L.L.C. and Professional
Lease Management Income
Fund II, L.L.C. (the
Companies); Manager: FSI
Typically for each investor program, PLM Securities is the managing
placement agent, TEC is the seller of the equipment to the program and IMI is
the equipment manager. (See "Compensation of Manager and Affiliates".)
Persons investing in the Companies will not have an interest in the
corporations or other partnership programs discussed above unless they are also
an investor in those corporations or other partnership programs.
FIDUCIARY RESPONSIBILITY
GENERAL
The Manager is accountable to each of the Companies as a fiduciary. As such,
pursuant to the terms of the Operating Agreements, the Manager must at all times
act with integrity and good faith and exercise due diligence in all activities
relating to the conduct of the business of the Companies and in resolving
conflicts of interest not otherwise permitted by the Operating Agreements and
which are not prohibited as a matter of law.
INVESTMENT OPPORTUNITIES
General. Under Delaware law, general partners are held to a duty of the
highest good faith in conducting partnership affairs. Delaware case law has not
clearly defined the scope of a manager's fiduciary duty to its limited liability
company or the members thereof. However, it is logical to conclude that case law
will liken such fiduciary duty to that of a general partner. Since the Manager
and certain partnerships it has sponsored will acquire and lease Equipment, the
Manager may be deemed to have a position adverse to a Company. Certain
provisions of the Operating Agreements relieve the Manager and its Affiliates
from an aspect of their state common law fiduciary duties. While Delaware case
law has
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<PAGE> 44
yet to define the extent to which such fiduciary duties may be waived by
agreement, the Delaware Court of Chancery has exhibited a liberal approach,
which suggests contemplated conflicts between a partnership and its general
partner (and, by analogy, between the Companies and the Manager) are
permissible.
Modification. The Operating Agreements provide that, if two or more
investor programs or entities which are affiliated with the Manager, including
but not limited to Growth Fund, Growth Fund II, Growth Fund III, Growth Fund IV,
Growth Fund V, Growth Fund VI, Growth Fund VII, PLM International, and a
Company, are in a position to acquire the same Equipment, the Manager will
determine which program or entity will purchase the Equipment based upon the
objectives of each and the suitability of the acquisition in light of those
objectives. (The Manager will generally afford priority to the program or entity
that has had funds available to purchase Equipment for the longest period of
time.) If two or more investor programs or entities, including a Company, are in
a position to enter into leases with the same lessee or to sell Equipment to the
same purchaser, the Manager will generally afford priority to the Equipment
which has been available for lease or sale for the longest period of time. (See
"Conflicts of Interest: Competition with Manager and Affiliates -- Competition
for Management's Time.")
Detriment and Benefit. Without modifying this aspect of the Manager's state
common law fiduciary duties, the Manager could not serve as the manager for a
Company and the manager or general partner for other investor programs
(including the other Company) acquiring and leasing Equipment at the same time.
This modification may operate as a detriment to Class A Members because there
may be business opportunities that will not be made available to a Company. The
Manager believes that the Class A Members may benefit by this modification in
its state common law fiduciary duties because by serving as manager or general
partner for other programs, and through its affiliation with PLM International,
it has achieved economies of scale and recognition in the marketplace that
should benefit the Companies in the operation of their businesses.
INDEMNIFICATION
The Operating Agreements do not exculpate the Manager from liability or
provide it with any defenses for breaches of its fiduciary duty as modified by
the provisions of the Operating Agreements. Section 2.04 of the Operating
Agreements, however, provides that the Manager and its Affiliates which render
services to a Company (an "Indemnified Party") are not liable to such Company
for any of their acts or omissions, except for acts or omissions involving their
misconduct or negligence, if the Manager determines, in good faith, that the act
or omission was in the best
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<PAGE> 45
interest of the Company. Pursuant to this Section of the Operating Agreements
and Delaware law, an Indemnified Party will be entitled to indemnification from
a Company under certain circumstances for losses and for liabilities it may
incur in dealings with third parties on behalf of such Company. In the event of
any such losses or liabilities, the Manager will seek indemnification from such
Company. As a result of these provisions, investors may be entitled to more
limited rights of action than they would otherwise have. In the opinion of the
SEC, indemnification for liabilities arising under the Securities Act of 1933,
as amended, is contrary to public policy and therefore unenforceable.
INVESTOR REMEDIES
Provisions clarifying the rights of investors to bring limited liability
company derivative actions are contained in the Delaware Act, which governs the
Companies. These rights include the right to institute legal action on behalf of
a Company (a limited liability derivative action) to recover damages for a
breach by the Manager of its fiduciary duty. In addition, (i) investors may have
the right, subject to procedural and jurisdictional requirements, to bring
limited liability company class actions in federal courts to enforce their
rights under the federal and state securities laws; and (ii) investors who have
suffered losses in connection with the purchase or sale of their Class A Units
may be able to recover such losses from the Manager where the losses result from
a violation by the Manager of the anti-fraud provisions of federal or state
securities laws.
Investors should note that the fiduciary duty owed by a general partner to
its partners (and, in this case, the Manager to the Members) is similar in many
respects to the fiduciary duty owed by the directors of a corporation to its
shareholders. Therefore, a general partner (and, in this case, the Manager) by
analogy should enjoy the benefits of a rule similar to the rule commonly
referred to as the "business judgment rule" which provides that directors are
not liable for mistakes in the good faith exercise of honest business judgment
or for losses incurred in the good faith performance of their duties when
performed with such care as an ordinarily prudent person would use. Accordingly,
the Manager may not be held liable for mistakes made or losses incurred in the
good faith exercise of reasonable business judgment.
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<PAGE> 46
BUSINESS OF THE COMPANIES
GENERAL
The principal purpose of each of the Companies is to invest 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 Companies may also invest in similar items of new equipment. The portfolios
of Equipment may include commercial, corporate or commuter aircraft (including
spare and rotable parts, components or engines), intermodal ("piggyback") and
over-the-road trailers and highway tractors, marine vessels, mobile offshore
drilling units, marine and domestic cargo containers and chassis, railroad
rolling stock, and other ancillary transportation-related equipment or other
similar long-lived, low obsolescence capital equipment. In conducting its
Equipment business, each Company intends to purchase, lease, charter, purchase
options to purchase, purchase equity interests in equipment-owning entities or
otherwise invest in Equipment, to enter into contracts with lessees, sublessees,
lessors, sublessors, charterers, subcharterers and other unaffiliated parties
respecting the use of the Equipment, to have Equipment operated on its behalf by
an Affiliate, to sell or otherwise dispose of Equipment and to engage in all
business activities related and incidental thereto, including, without
limitation, the borrowing and lending of funds. It is anticipated that most of
the Equipment will be subject to Operating Leases (leases, charters or other
contractual arrangements for the use of the Equipment which are not Full Payout
Net Leases). A Company may also lease Equipment under Full Payout Net Leases
(long-term leases and other contracts for the use of Equipment with Net Lease
provisions, under which such Company will receive non-cancellable payments
during the initial non-cancellable fixed lease or other contract term which will
be sufficient to recover its Purchase Price of the Equipment).
The Manager believes that there are significant benefits available through
investing in low obsolescence, long-lived capital equipment. A wide range of
investment structures exists and the Manager has experience in tailoring
equipment investment structures to a particular investment opportunity. The
principal investment vehicle for the Companies will be the outright acquisition
of Equipment, where a Company will purchase an item of Equipment and hold title
to that Equipment directly or through a special purpose equipment owning entity
and enter into leases or other contracts with unaffiliated parties regarding the
use of Equipment. A Company may, within certain limitations, also jointly
purchase Equipment with other Affiliated Programs and with unaffiliated third
parties. Under these forms of investment, a Company would generate cash proceeds
from the leasing or operation of its Equipment and ultimately receive sales
proceeds upon the liquidation of the Equipment.
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<PAGE> 47
The Companies may, in certain circumstances, lease in Equipment rather than
purchase it. In this case, a Company would also generate cash proceeds from the
subleasing, subchartering or operation of the Equipment but would be required to
make a lease payment from those proceeds to the lessor or other owner of
Equipment. A Company would generally not have an interest in the residual value
of the Equipment that is leased in by such Company.
In certain other circumstances, a Company may make an investment which would
provide it with a future option to lease or purchase Equipment at prices or
rates which the Manager considers favorable. In such a case, a Company would,
upon its exercise of the option, receive the ownership or lessee benefits
previously described. Such an arrangement would generate no cash flow to a
Company until such time as it exercised its option. However, to the extent a
Company chooses not to exercise the option, any initial investment would
generally be lost without recovery. A Company may also, on occasion, make other
commitments to lease, purchase or purchase options in Equipment at future points
in time on conditions which the Manager deems to be in such Company's best
interest.
In certain circumstances, a Company may also purchase an interest in
residual values or remarketing proceeds in Equipment at a future point in time,
but not purchase any rights or interest in interim or current lease revenues.
Such an arrangement would generate no cash flow to a Company until such time as
it was entitled to its residual value interest in the Equipment. However, a
Company would not, as a rule, make such an investment unless the Manager, in its
judgment, exerted adequate control over the remarketing of the Equipment. In
addition, interests in residual values or remarketing proceeds and similar
interests shall not exceed 10% of the total assets of a Company.
In general, the Manager intends that investments in Equipment, other than
the direct or indirect acquisitions of Equipment, will be limited to no more
than 10% of the assets of a Company.
The Companies may enter into any of the above transactions or any
combination of them and engage in all business activities related and incidental
thereto.
Each Company is structured to promote the active management of its portfolio
through the flexibility to alter the composition of the Equipment types and the
percentages of used and new Equipment. This strategy involves using short to
medium term operating leases to encourage the continuous adjustment of lease
contract rates to changing market conditions, thereby providing the potential
for the Company to take advantage of rising interest rates and changes in tax
policy to the extent they occur. See "Specified Equipment" below for a
description of the items of Equipment, totalling approximately $15 million, the
lessees of that Equipment and the terms of the acquisi-
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<PAGE> 48
tions and leases, that the Manager has identified for initial acquisition by
Fund I, all of which is currently subject to lease or lease commitments. The
Manager will identify certain Equipment for initial acquisition by Fund II prior
to the Offering of Class A Units by Fund II.
OBJECTIVES OF THE COMPANIES
The primary objectives of each Company are as follows:
INVESTMENT IN AND LEASING OF CAPITAL EQUIPMENT: to invest in a
diversified leasing portfolio of low obsolescence Equipment having long
lives and high residual values, at fair market prices that the Manager
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; and
SAFETY THROUGH DIVERSIFICATION: to create a significant degree of
safety relative to other equipment leasing investments through the purchase
of a diversified Equipment portfolio. This diversification may reduce the
exposure to market fluctuations in any one sector. The purchase of used
long-lived, low obsolescence Equipment typically at prices which are
substantially below the cost of new equipment should also reduce the impact
of economic depreciation and may create the opportunity for appreciation in
certain market situations, where supply and demand return to balance from
oversupply conditions,
while providing:
CASH DISTRIBUTIONS: to generate cash distributions, which may be
substantially tax-deferred (i.e., distributions which are not subject to
current taxation) during the early years of each Company, to investors
beginning in the month after the minimum number of Class A Units are sold in
such Company, a portion of which may represent a return of an investor's
investment; and
GROWTH POTENTIAL THROUGH REINVESTMENT: to increase each Company's
revenue base by reinvesting a portion of its operating cash flow in
additional Equipment 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 a
Company's portfolio does not mean that in all cases a Company's aggregate
net income and distributions will increase upon the reinvestment of
operating cash flow.
The Manager shall cause each Company to make monthly distributions of Cash
Available for Distribution to all Class A
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Members who have elected to receive monthly distributions and it shall make
quarterly distributions to those Class A Members who have not elected to receive
monthly distributions. In December of each year, each Class A Member shall have
the opportunity to change its distribution election. Additionally, Class A
Members may elect to have their distributions split and sent automatically to up
to two different payee locations. The Manager may from time to time, taking into
consideration economic cycles in the markets for equipment and then-current
yields available on investments that are comparable to this investment, adjust
the cash distributions either to increase or decrease the current yield and
adjust the amount of cash to be reinvested in additional Equipment. The
achievement by each Company of its objectives, including distribution of cash or
the provision of tax benefits at any time or in any amount, cannot be assured or
guaranteed. During the life of each Company, a substantial portion of
distributions paid to Class A Members will be deemed a return of capital. (See
"Risk Factors.")
LEASING AND OPERATION OF EQUIPMENT
To accomplish its objectives, a Company's portfolio of Equipment will
consist primarily of used Equipment which will be generally subject to Operating
Leases of varying terms entered into with unaffiliated parties which the Manager
believes to be creditworthy. Upon expiration of an Operating Lease, the
Companies intend to re-lease the Equipment under Operating Leases, although the
type of lease or other contract may vary depending upon which type of lease or
other contract the Manager believes to be preferable in a particular market.
There are generally three basic forms of Operating Leases into which the Manager
may enter. The particular type of lease or other contract that the Manager will
seek to negotiate will depend upon industry practice and the market conditions
at the time the lease or other contract is being negotiated.
One form of Operating Lease is the "net" lease wherein the lessee or other
operator pays the lessor or other owner a fixed stream of noncancellable
payments during the term of the contract. Under a net lease, the lessee is
responsible for all or substantially all operating costs of the equipment
including maintenance, insurance and property taxes. In the shipping industry, a
variation of the net lease is the "bareboat" charter under which the charterer
pays all or substantially all of the vessel's operating expenses and the owner
generally receives a fixed non-cancellable charter payment. Since net leases
provide for non-cancellable payments with no corresponding expenses, they
provide the most predictable source of earnings.
The second type of Operating Lease is the "full service" lease under which
the lessor or other owner typically provides and pays for some or all of the
operating costs of the equipment under
40
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contract including maintenance, insurance and taxes, and in some cases, provides
supplemental services such as crewing and managing the maintenance or repair of
the equipment. Should any of the Equipment be leased under a full service lease,
typically the lessee will pay the Company owning such Equipment a fixed amount
per month. Such Company will be responsible for some or all of the operating
costs and may provide rental abatements in certain circumstances when the
Equipment is not available for service. The shipping industry equivalent of a
full service lease is referred to as a time charter under which the lessor or
other owner would be responsible for crewing, maintaining and insuring the
vessel it owns. The Companies may generally seek to enter into full service
leases or time charters in order to control the maintenance of a particular item
of Equipment and to attempt to realize higher net rental proceeds. However,
because of fluctuations in operating expenses and the potential for rental
abatements, the net proceeds to be realized by the Companies from full service
leases would be less predictable than from net leases.
The third type of Operating Lease is the "utilization" lease whereby the
owner receives payments based upon the lessee's or operator's utilization of the
equipment. The lessee or other operator leases or otherwise operates the
equipment for a non-cancellable term, but the rate paid by the lessee or other
operator is a function either of its utilization of the equipment or of the
revenues or profitability from its operation of the equipment. In some
instances, the rate paid is a function of the utilization or profitability of a
pool of equipment of which the owner's equipment is only a portion. Under
utilization leases, equipment leased to a lessee which is not being utilized by
the lessee may not generate any cash for the lessor. Utilization leases may
result in more volatile cash flows because rental rates tend to fluctuate with
short-term current ("spot") market rates. Thus, they represent greater risk than
a net lease or a full service lease, but also allow the owner to enjoy
relatively higher rates and to participate in any improvements in the spot
market rates.
The Companies may, in certain cases, also enter into "full payout net"
leases. This is a variation of the net lease under which the non-cancellable
rental payments under the initial non-cancellable fixed term of the lease are
adequate to provide a return of the Purchase Price of the Equipment.
The Manager or one of its Affiliates may also operate the Equipment directly
in certain circumstances. In this case, a Company would receive all operating
revenues from the Equipment's operation but would be required to pay or
reimburse all of the direct Equipment operating expenses. Examples of situations
under which the Manager might operate Equipment directly include, but are not
limited to, the PLM Rental, Inc. (an Affiliate of the Manager) operation under
which PLM Rental, Inc. operates a
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fleet of trailers on short-term per diem rental contracts and contracts of
affreightment, under which a Company, in return for a fixed payment, would
contract to move freight from one point to another.
MANAGEMENT OF ASSETS OF THE COMPANIES
The Manager shall have full and complete charge of all affairs of each
Company, and the management and control of a Company's business shall rest
exclusively with the Manager subject to the terms and conditions of the
applicable Operating Agreement. The Manager shall have the rights, powers, and
authority granted to the Manager thereunder, and, except as otherwise provided
in the Operating Agreements, to managers of limited liability companies under
the Delaware Act, to obligate and bind a Company and, on behalf and in the name
of a Company, to take such action as the Manager deems necessary or advisable
including, without limitation, making, executing, and delivering purchase and
sale, installment sale, participation, co-tenancy, partnership, management,
purchase option, put and other agreements; leases, charters, subleases,
subcharters, assignments, and other transfers and conveyances; promissory notes,
checks, drafts, and other negotiable instruments; and all other documents and
agreements which the Manager deems reasonable or necessary in connection with
the development of such Company's business and the Equipment and the operation
and management thereof. The execution and delivery of any such instrument
executed by the Manager, acting alone, shall be sufficient to bind a Company.
All of the Equipment owned by a Company will require Basic Equipment
Management Services. This includes identifying prospective lessees or users of
the Equipment and negotiating leases or other contracts with those users,
monitoring and, to the extent necessary, enforcing the lessee's or user's
obligations to operate, maintain, repair and insure the Equipment in accordance
with the terms of the lease and billing and collecting amounts due from the
lessee or user under its contract. With respect to a Company's Equipment, the
Manager will engage its Affiliate PLM Investment Management, Inc. ("IMI"), to
provide Basic Equipment Management Services under an Equipment Management
Agreement.
In many cases, a Company may require Supplemental Equipment Management
Services with respect to its Equipment. Examples would include time charters of
its marine vessels and other full service leasing arrangements under which a
Company would be required to maintain, repair, insure, provide crews and in some
cases operate the Equipment for the benefit of the lessee, charterer or other
operator. Other examples include transactions in which a Company arranges with
an Affiliate to operate the Equipment on its behalf or enters into short-term
leases for its Equipment. These activities require additional equipment
management capabilities
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and services beyond the Basic Equipment Management Services which the Manager
has contracted with IMI to provide. These additional services may also include
the frequent and active remarketing of the Equipment. The Manager will contract
on behalf of each Company with qualified parties to provide these services. It
may, but will have no obligation to, contract with IMI to provide these
Supplemental Equipment Management Services, in which case IMI will be entitled
to additional Equipment Management Fee compensation. Costs of unaffiliated
parties providing Supplemental Equipment Management Services will be paid
directly by the Company receiving such services. (See "Compensation of Manager
and Affiliates: Compensation Paid by Companies -- Equipment Management Fee.")
THE EQUIPMENT MANAGER
IMI is engaged in the business of providing lease management and investment
services relating to various types of transportation equipment, primarily in
connection with equipment leasing programs sponsored by the Manager and its
Affiliates. IMI also provides such services for transportation equipment,
specifically railcars, for unrelated parties. While the fees payable by each
Company to IMI for managing the Equipment will be established by the Manager and
IMI and thus cannot be considered to be based on arm's-length negotiations, the
Manager and IMI believe that these fees are comparable to those which would be
charged by an unaffiliated entity for similar services. Under the Equipment
Management Agreements, each Company agrees to indemnify IMI against all claims
and losses arising from the use, operation, control, possession, maintenance,
repair or storage of the Equipment, but not with respect to claims or losses
arising from IMI's negligence, bad faith, recklessness or misconduct.
MANAGEMENT STRATEGY
An important aspect of each Company's Equipment management strategy will be
to take advantage of the cyclical price fluctuations which, historically, have
existed in many of the equipment markets. The Manager's strategy is to take
advantage of these pricing cycles to maintain or enhance a Company's asset base.
Because of variations in business activity and other factors, imbalances between
supply and demand for specific types of equipment frequently exist. This can
result in equipment prices being significantly different from those which would
be expected if supply and demand were in balance.
The Manager has observed these pricing cycles in many of the equipment
markets and believes that they exist with enough regularity to provide
significant opportunities. The Manager has observed a general pattern creating
these opportunities. First, an upturn in demand for a particular equipment type,
either from a
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general economic upturn or the increased usage of that type of equipment, will
cause the price of the equipment to rise as demand outstrips the available
supply of the equipment. Soon thereafter, new businesses utilizing the equipment
can be expected to enter the market and manufacturers supplying the equipment to
those businesses will increase production to satisfy this expansion. This
increased production will drive prices for the equipment back to normal levels.
In many cases, however, this expansion will exceed the levels of equipment
required for a balance of supply and demand at normal business levels, and will
create a glut of equipment, driving the market price well below normal values
and replacement costs. It is this point in the equipment market cycle that
provides the greatest opportunity for acquiring equipment at a price below its
inherent value, or underlying economic value, which the Companies expect to
exploit. These oversupply conditions generally reverse, as some excess equipment
is retired, and the regular growth in business activity causes the supply and
demand levels to return to parity. At this point, the equipment can frequently
be sold at a small gain. Alternatively, a change in market conditions can bring
about another supply shortage and a significant profit potential. This is not
the only sequence of events leading to the acquisition of equipment at prices
below, or the sale of equipment at prices above, its inherent value or
underlying economic value, but it is representative of the sequence of demand
and supply imbalances that are most likely to create such opportunities.
The Manager intends to focus on markets where imbalances in supply and
demand currently exist and which, in the judgment of the Manager, have used
Equipment prices which are below replacement costs. It is the replacement costs
which, in the long term, with long-lived, low obsolescence Equipment, reflect
the underlying economic value of Equipment.
Further, management strategy involves using short to medium term operating
leases to encourage the continuous adjustment of lease contract rates to
changing market conditions, thereby providing the potential for the Company to
take advantage of rising interest rates and changes in tax policy to the extent
they occur.
GENERAL INDUSTRY OVERVIEW
Equipment leasing continues to be a dynamic, growing industry worldwide,
with transportation equipment playing an important role. Equipment such as
railcars, aircraft, trailers and marine vessels and cargo containers are used by
businesses daily to transport their goods and services to people around the
world.
Growth in international trade continues to increase the demand for
transportation equipment. New policies, such as the North American Free Trade
Agreement (NAFTA), combined with the expanding global economy have the potential
to open new business opportunities for U.S. companies according to the Equip-
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ment Leasing Association of America. This means more goods and services are
expected to be delivered over longer distances with fewer trade barriers, which
should result in a consistent demand for transportation equipment worldwide.
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) PLM
<S> <C>
1980 43
1985 1990
1994 130
</TABLE>
Equipment leasing offers businesses the ability to acquire the capital
equipment they need without having to make large capital expenditures. This
appeals to businesses because it allows them to use their cash for other
critical business and operational needs.
As a result, the equipment leasing industry has grown from a $43 billion
industry in 1980 to a projected $129 billion industry in 1994.1
SPECIFIED EQUIPMENT
TEC, an Affiliate of the Manager, currently owns or has under contract for
acquisition the Equipment described below. Subject to the receipt of the Minimum
Subscription Amount and the availability of sufficient funds, Fund I will
acquire this Equipment for a purchase price equal to the cost of the Equipment
to TEC. TEC will retain any rent or other payments received for the Equipment,
and bear all expenses and liabilities with respect to such Equipment, for all
periods prior to the acquisition of the Equipment by Fund I. (See "Conflicts of
Interest: Acquisitions".) Fund I's specified Equipment may be acquired by Fund I
in any order, depending upon the availability of funds, the Manager's evaluation
of market conditions at the time of acquisition, and the furtherance of Fund I's
investment objectives.
TEC has identified for acquisition 1,475 used pressurized tank cars having a
purchase price of $33,500,000. It is anticipated that Fund I will acquire up to
314 of these tank cars for a total purchase price of approximately $8,000,000.
The remaining tank cars will be purchased by other Affiliated entities. The tank
cars are currently subject to leases of varying lease lengths and terms with
approximately 35 different lessees, including such companies as Exxon Chemical,
Bayway Refining, Coastal Refining & Marketing, CF
- ---------------
1 Source: U.S. Department of Commerce, Economics and
Statistics Administration.
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Industries, Diamond Shamrock, Farmland Industries, ARCO Chemical, and Coastal
Chemical. (See "Business of the Companies: Railroad Rolling Stock and Government
Regulation -- Railcars.")
TEC has identified for acquisition by Fund I approximately 450 new 45-foot
piggy-back dry van trailers, manufactured by Wabash National Corporation, for a
total purchase price of approximately $7,000,000. Pursuant to a long-term
agreement between PLM International and the Kankakee, Beaverville and Southern
Railroad ("KBS"), the trailers will be rented on a per diem basis to major
railroads through the various inter-change agreements KBS has with the 15 major
railroads.
The Kankakee, Beaverville and Southern Railway is a short-line railroad
based in Kankakee, Illinois.
EQUIPMENT PROFILES
The following are brief profiles of the types of Equipment identified as
specified Equipment, as well as other types of Equipment that may be purchased
by the Companies.
MARINE VESSELS
Recessionary market conditions in Europe and Japan presently continue to
exert downward pressure on vessel operating revenues; however, this is beginning
to change. The current relative stability between supply and demand for vessels
precludes an imbalance sufficient to overcome the present "softness" in the
shipping markets and put upward pressure on vessel rates. As a result of the
supply-demand equilibrium, 1994 vessel rates were relatively flat, with slight
improvement in late 1994, which improvement is anticipated to continue into
1995.
Significant percentages (over 40%) of the world's bulk and tanker fleets
have achieved ages of 15 years or older, with many reaching retirement age
(generally, 20 to 25 years or older) in the next several years. With the
expected recovery of international markets, and the scrapping of older vessels
as they reach retirement age, demand for new and "younger" used vessels should
continue to rise, exerting upward pressure on prices, residual values, and
rates.
Handysize Dry Bulk Carriers. Handysize dry bulk carriers are generally
categorized as ships ranging in size from 10,000 to 50,000 dead weight tons
("DWT") that are used to carry a wide variety of dry bulk cargoes. Minor bulk
cargoes, which consist of forest products, iron and steel products, agricultural
products, ores, minerals and petcoke, fertilizers, bauxite and alumina, cement
and other construction materials and salt, are the cargoes principally carried
by handysize dry bulk carriers. Of the three major bulk
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cargoes, handysize vessels carry a substantial amount of grain, limited volumes
of coal and minimal quantities of iron ore.
Handysize vessels are particularly well-suited to ship bulk cargoes in the
Asia/Pacific region, which has many countries with significant coastal economies
that are dependent on shipping for the transportation of goods. Unlike most
larger dry bulk carriers, handysize vessels have cranes or derricks fitted on
deck for the loading and discharging of cargo in ports which do not have
suitable shore facilities. Handysize vessels can also enter draft restricted
ports which may be closed to larger vessels. Since many countries in the
Asia/Pacific region have shallow ports and inadequate infrastructure, the use of
larger vessels is frequently limited. In addition, despite the availability of
deep water ports in some of the more developed countries of the region, such as
Japan, Taiwan and Korea, the high cost of inland transportation and mountainous
terrain often favor the use of handysize vessels which are able to make direct
calls to smaller ports. The flexibility of handysize dry bulk carriers with
respect to the wide variety of commodities which may be transported offers some
protection against individual commodity demand fluctuations and increases vessel
utilization. Charterers of dry bulk carriers are typically traders or industrial
companies which ship either a final product or a raw material. Charter or lease
terms depend on the service in which the vessel is involved. A trader will
typically contract for a trip charter from the spot market (short-term current
market), while a company which is shipping large amounts of raw material on a
regular basis may enter into a longer-term charter for that vessel.
Tankers. Tankers and specialized tankers (product and chemical tankers)
carry crude oil and oil-related products such as chemicals as well as vegetable
oils over a variety of routes. Sizes of tankers range from supertankers in the
200,000-450,000 DWT range through mid-size tankers from 50,000-200,000 DWT, and
the smaller trading vessels below 50,000 DWT. Tankers are both owned and leased
by major oil companies as well as other industrial companies, traders, national
governments, and independent shipowners. Tankers are chartered or leased by
three primary types of charterers: companies acting as traders of oil; oil
companies which purchase oil and transport it to and from refining operations;
and chemical companies and large industrial concerns with "in-house"
requirements. The terms of charters or leases range from trip charters of
approximately one month to five-year charters.
MARINE CARGO CONTAINERS
The intermodal transportation industry will soon enter its fifth decade.
This is an industry which was founded on a need to improve the economics of
transportation by reducing port time and streamlining cargo operations of cargo
vessels. By the end of the 1960s, containers were built in compliance with 20-
and 40-foot
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dimensional standards approved by the International Standards Organization and
were transported in up to 1,000 unit lots on vessels serving both the
Trans-Atlantic and Trans-Pacific trades.
Ocean transportation companies use containerization because they recognize
that it improves their vessel utilization and reduces their labor costs compared
to traditional methods. Thousands of tons of cargo can be loaded or unloaded in
up to one fifth the time, allowing vessels to spend less idle time in ports and
thereby complete more journeys per year. Containers may also lower packaging
costs, and reduce the loss due to damage and pilferage compared to other methods
of transporting certain goods.
Customer groups include steamship companies, agricultural producers,
financial companies and equipment lessors. Worldwide standardization of marine
cargo containers has stimulated expansion and standardization of port handling
facilities and ship construction. Containers are also "intermodal," that is,
they can be moved via various modes of transportation, including by ship, by
truck and by rail. Standardization and this "intermodal" feature have simplified
cargo handling and reduced related costs and overall door-to-door transit time.
Cargo containers can be classified into four categories: (i) dry van
containers; (ii) temperature-controlled units (refrigerated and insulated
containers); (iii) tank containers; and (iv) "specials" -- flat, folding flat or
platform containers, bulk containers and open-top containers. Containers
typically come in 20- and 40-foot lengths, and are generally constructed of
steel or steel alloy. The typical economic life of containers, depending on the
type, is approximately 15 years.
After several years of strong demand, the market for marine containers was
adversely affected in 1993 by the depressed economies of Japan and Europe.
Normal seasonal "slow downs" during the winter months continued through the
remainder of the year, resulting in lower per diem and utilization rates for
both non-refrigerated and refrigerated units.
Industry consolidation, a trend noted in prior periods, has continued. Those
fewer, larger remaining operators have reacted to current market conditions by
reducing their orders for new equipment. Over time, reductions in deliveries of
new equipment, combined with normal container fleet attrition, should bring the
supply-demand equation back into balance from a period of oversupply in the
early 1990s. The expected upturn in the economies of Japan and Europe have led
to industry forecasts of strengthening container markets late in 1994 and
continuing into 1995.
MOBILE OFFSHORE DRILLING UNITS
Offshore drilling contractors use mobile offshore drilling units to drill
oil and gas exploration and development wells for oil and
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gas companies. In general, there are three types of mobile offshore drilling
units, (i) jackup rigs, which are mobile platforms supported by legs jacked down
to the sea floor, (ii) semi-submersible rigs, which drill while floating, and
(iii) platform drilling rigs, which are placed on permanent development
platforms to drill oil and gas development wells. As the primary use for these
units is drilling of oil and gas wells, the values of mobile offshore drilling
units are dependent on the worldwide demand for offshore drilling services. The
demand for offshore drilling services is impacted by the demand for oil and gas
and the supply of available mobile offshore drilling units.
Jackup rigs consist of the rig hull which includes the drilling rig, jacking
system, crew quarters, loading and unloading facilities, storage areas for bulk
and liquid materials, helicopter landing deck and other related equipment.
Jackup rigs are capable of operating in water depths as shallow as ten feet and
as deep as 400 feet, and can drill to depths of 25,000 feet. Jackup rigs are
used primarily in determining the existence and the extent of productive
reservoirs with exploration wells; however, certain jackup rigs may be used to
drill development wells from permanent platforms (where oil or gas is removed
from the earth in large volumes).
Semi-submersible rigs consist of deck areas for drilling, living and
storage, which are connected by columns to twin pontoon-type hulls.
Semi-submersible rigs are capable of operating in water depths as shallow as 100
feet and as deep as 5,000 feet and drill to depths of 25,000 feet.
Semi-submersible rigs are used almost exclusively to drill exploration wells,
but for certain offshore projects they may be utilized to drill development
wells.
Platform drilling rigs consist of drilling equipment and machinery arranged
in modular packages which are transported to and assembled on fixed offshore
platforms.
Mobile offshore drilling units are generally owned by the drilling
contractors which operate them; however, over the past several years a market
has developed for short- to medium-term bareboat charters or leases from
investor owners to drilling contractors. These charters have terms ranging from
six months to three years and in general are of the bareboat form -- leaving the
operating and marketing of a unit with the drilling contractor/charterer.
The Manager has targeted mobile offshore drilling Equipment, specifically
jackup rigs, for investment because of the economic similarities between (i)
such Equipment and its market and (ii) other Equipment and market segments in
which a Company may invest. The high replacement cost of jackup rigs coupled
with expectations of continuing decreasing supply and stable or increasing
demand may lead to greater charter rates and sales prices for well maintained
used jackup rigs.
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The offshore drilling industry is undergoing a correction of an imbalance of
its rig supply and demand. This process was induced by the oversupply of rigs
caused by the reduction of offshore drilling demand from 1982 through 1986,
which followed an unprecedented level of new rig building from 1979 through
1983. Over the last six years, the demand for oil and gas drilling services has
improved; however, oil and gas drilling rates are still well below levels
justifying new rig construction. If demand continues at existing levels or
increases and the rig supply continues to shrink through attrition, demand and
supply of offshore rigs could reach equal levels at some point within the next
few years; however, no assurance can be given that this will occur.
Demand for offshore drilling services is generally believed to be closely
related to current oil and gas prices and the long-term outlook for those
prices. The U.S. Gulf of Mexico primarily is a gas drilling region and the
international markets are more closely tied to oil. During 1993, Gulf of Mexico
offshore drilling demand increased significantly as natural gas prices rose in
the United States due to the perception that the oversupply of gas in the United
States' markets was exhausted and new production supply was needed. The demand
levels reached in the Gulf of Mexico in 1993 continued into 1994 even as the
natural gas price stabilized and declined from 1993 levels. Demand for offshore
drilling services in the international markets has declined approximately 20%
since its peak in early 1993; however, industry observers believe that the
international markets have stabilized and demand will increase in several
regions during 1995. There can be no assurance at this time that such a demand
increase will occur; however, the worldwide capacity for oil production only
exceeds demand by 5% or less, implying that additional productive capacity
should be needed to meet the needs of the growing developing economies. A
significant portion of this added capacity may come from offshore exploration
and development.
RAILROAD ROLLING STOCK
In 1980, the U.S. Congress passed the Staggers Act which substantially
deregulated the nation's railroad industry. Following the passage of the
Staggers Act, the railroads began to operate more efficiently with more
attention focused on their cost structure and the competition posed by other
modes of transportation. A continuing trend since deregulation has been the
concentration of traffic in core routes leading to mergers and the abandonment
of branch lines. The resulting change in track mileage, when combined with an
over building of railcars in the late 1970s led to a substantial surplus of
railcars in the early 1980s and declining prices and rental rates.
As a result of these developments, the North American railcar fleet declined
from approximately 1.7 million cars to a current level
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of approximately 1.1 million cars. Since 1980, retirements of aging railcars
have exceeded new car production and the former surplus of cars has disappeared.
The relationship of scrappings of aging railcars exceeding new additions to the
railcar fleet is expected to continue. In response, the demand for and the value
of desirable used railcars, as well as their rental rates, have grown
dramatically. Railroad operators have offset the decline in overall fleet size
by improving utilization (trips per year) for the cars; however, this
improvement is becoming incrementally smaller. In other segments, such as
pressurized tankcars in liquified petroleum gas ("LPG") service, new car
additions have forced moderate reductions in rental rates or caused older cars
to be moved into different types of service (e.g., anhydrous ammonia) where
rates are somewhat lower.
The expectation that the U.S. economy will continue to expand, together with
a declining rail fleet and maximization of fleet utilization, is anticipated to
result in strong demand for railcars and relatively stable rental rates in the
future, although no assurance can be given that such strong demand and stable
rental rates will occur.
The Manager has targeted several types of rail assets for investment,
including open top gondola and hopper cars, covered hopper cars, pressure and
non-pressure tank cars, intermodal cars, box cars, flatcars, locomotives and
maintenance of way equipment used in track maintenance.
The Association of American Railroads ("AAR"), a private, voluntary trade
association of the major U.S. railroads, has established the principal controls
over the movement of railcars throughout the U.S. network by means of a number
of detailed rules regarding interchange, car hire and car service. Except for
federal safety and inspection rules, the locomotive leasing business is
relatively free of formalized trade practices or operating rules in contrast
with the freight car leasing industry.
Certain railcars which may be acquired by a Company will be designed for
shipping liquified petroleum gas ("LPG"), chlorine and other flammable or toxic
chemical products, which are required to be pressurized for shipment by rail.
Although these railcars are specially designed and subject to strict regulation,
the acquisition of such cars may increase a Company's exposure to tort
liability.
In order to minimize a Company's exposure to tort liability, the Manager
intends to enter into railcar leases which provide that a Company will be
indemnified, subject to certain exceptions, by the lessees against any loss,
liability, claim, damage or expense arising out of, or in connection with, the
use of the railcars during the term of the leases. The Manager, however, cannot
give any assurances that all leases will include such indemnification provi-
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sions or that such indemnification provisions will be sufficient to protect a
Company from any such liability.
Subject to availability at reasonable rates, each of the Companies intends
to purchase contingent liability insurance. In the event of claims for damages
in which neither the lessee nor the hauling carrier is responsible, such
insurance should protect a Company subject to the deductible and coverage limits
thereunder. Coverage for pollution liability is not, however, likely to be
available to a Company in connection with its railcars.
AIRLINE INDUSTRY
The Airline Deregulation Act of 1978 significantly altered the nation's
regulatory framework and the leasing of aircraft. That Act was designed to
encourage the development of an air transportation system which relies on
competitive market forces to determine the type and price of air service
offered. One of the key elements of airline deregulation is the freedom to enter
new markets offering opportunities to serve the public better while enhancing
the potential for profit. This led to an aggressive route expansion and route
alignment by major and national carriers. The European Union (formerly, the
European Community), the twelve-nation organization of European nations which
may mandate legislative action by its members ("EU"), adopted a similar measure
in 1992 which initially resulted in increased orders by European national and
charter carriers. In recent years, however, many airlines, both domestic and
foreign, experienced heavy financial losses and cash shortages due to increased
competitive pressures. The airline industry began a turnabout in 1993, and
observers hope for profitability in 1994. Such profitability is expected to
result from emphasized cost-cutting, reduced capital spending, and anticipated
traffic growth in the U.S. and Far East.
To accommodate anticipated international and domestic traffic growth,
airlines are expected to take delivery of new aircraft previously on order.
However, certain observers predict that demand for new aircraft will outstrip
supply over the next several years due to lags in production as aircraft
manufacturers, who reduced production in the early 1990s, re-adjust to increased
production schedules. Further, substantial numbers of older aircraft that cannot
economically meet FAA regulatory requirements relating to noise, aging, and
corrosion will be retired from service. These factors are expected to strengthen
residual values for Stage 3 aircraft (i.e., aircraft which meet stringent noise
level restrictions) and rates for aircraft during this period, although no
assurances can be given that residual values and lease rates will strengthen.
(See "Business of the Companies: Government Regulation -- Aircraft.")
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Operating leasing continues to be a significant form of aircraft financing.
The major reasons for this are:
(1) A shortage of capital to finance additional aircraft because of the
current perceived credit and cyclical risks, and a structural change in
capital markets;
(2) Airline managements' increasing focus on tactical marketing devices
such as scheduling, pricing, distribution rather than ownership, and the
attendant requirements for flexibility which operating leases provide; and
(3) The desire of lessees to keep financing off their balance sheets.
On the basis of these factors, Operating Leases for both used and new
aircraft should continue to play an important role in the aircraft markets.
Commercial Aircraft. Commercial airlines provide regularly scheduled
medium- or long-haul passenger or cargo air service generally using aircraft
seating more than 90 passengers or cargo aircraft with a payload over 20,000
pounds. These airlines can be classified as "major airlines," e.g., American
Airlines, Delta Airlines and United Airlines; "national airlines" (formerly
known as regional carriers), e.g., Alaska Airlines and Southwest Airlines; and
"other certified carriers," including other charter or more-limited-route
carriers, such as American Trans Air. These carriers generally operate
exclusively jet aircraft fleets ranging from 90 to 350 or more passengers. If
current U.S. Federal Aviation Administration ("FAA") forecasts prove correct,
U.S. major airlines will carry 72 million passengers annually by the end of this
decade.
Commuter Aircraft. Commuter airlines are defined as carriers which provide
regularly scheduled passenger or cargo air service predominantly with aircraft
seating between 10 and 90 passengers or cargo aircraft with a payload of 20,000
pounds or less. Commuter airlines serve an important role in the U.S.
transportation system by providing frequent passenger and cargo services to
approximately 830 airports in North America, with 73% of these communities
depending exclusively on regional airlines for scheduled service, and by
accounting for about 30% of all scheduled operations. The Regional Airlines
Association reports that regional/commuter airlines provide scheduled air
transportation to a substantial majority of all communities that have facilities
for air transportation. Commuter carriers primarily provide "hub and spoke"
service that links outlying towns and communities to the nation's principal
airports and cities. Commuter operations are fully integrated into the FAA
system of air navigation and traffic control and must conduct flight operations
in accordance with FAA regulations.
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Corporate Aircraft. Corporate aircraft are used by many business entities
to accommodate their employees' business travel requirements more quickly and
conveniently than normal commercial passenger service, or to serve locations
that do not have scheduled air service. Corporate aircraft also can provide
cargo service between manufacturing or service facilities for urgent delivery of
products, components or documents. Corporate aircraft may range from small
single-engine piston aircraft to airline-type jets, with seating configurations
of four to 50 passengers, and may include helicopters.
Helicopters. Helicopters are used for corporate shuttle, emergency medical
service, or delivery of parts and supplies. They are ideally suited to service
generally inaccessible or remote areas such as mobile offshore drilling unit
sites, mountainous terrain, or urban areas congested by traffic. Helicopters are
single- or twin-engine, piston- or turbine-powered. Major manufacturers include
Bell Helicopter division of Textron, Eurocopter, a result of the merger of
Messerschmidt Boelkow-Blohm GmbH and Aerospatiale, Agusta Aviation and Sikorsky
Helicopter division of United Technologies.
Aircraft Spares and Rotables. The high utilization rate of today's air
carriers requires a large supply of airframes, avionic and engine spare parts.
This demand is not dramatically affected by industry downturns due to the
continuous requirement to replace, exchange and overhaul the aircraft's spares
and rotables.
Over the next ten years, the spare parts market, which includes jet engines,
is expected to exceed $330 billion with the demand for airframe parts averaging
approximately $12.5 billion per year and avionics parts averaging approximately
$5 billion per year. Due to the increased utilization of older Stage 2 aircraft
(i.e., aircraft which do not satisfy certain noise level restrictions) and the
delayed introduction of new Stage 3 aircraft, the demand level for spares and
rotables is presently expected to remain stable with moderate increases
anticipated during the next five years.
TRAILERS
There are two main types of trailers which are used to haul freight across
the highways of the United States. The first type is piggyback trailers, often
referred to as trailers on flatcars. These are intermodal trailers designed to
be either transported on railroad flatcars or pulled by a tractor over the road.
Such trailers are used for the shipment of various products and goods which are
more economically handled in truckload lots. Piggyback trailers range in length
from 40-feet to 48-feet, have a set of twin axles and eight wheels and may be
refrigerated for the shipment of perishable goods, such as fresh produce.
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The second main type of trailer is over-the-road trailers which range in
length from 45-feet to 53-feet and which are designed to be pulled by a tractor
exclusively, as their name implies, over the road. The design emphasis of such
trailers is the minimization of weight without the sacrifice of strength,
thereby helping to maximize fuel efficiency for operators.
Highway tractors supply the motive power for over-the-road transport of
trailers. Large fleet operators typically have one tractor for approximately
every two trailers. Operators specializing in less than truckload loads
typically have one tractor for approximately every three trailers in their
fleet.
Trailer industry performance, tied closely to the overall health of the U.S.
economy, improved from 1992 to 1993. The recovery of the domestic economy has
created demand for both over-the-road and intermodal trailer equipment, and has
resulted in increases in new equipment orders. With manufacturers reporting new
order backlogs stretching out several months, the demand for all types of
trailer equipment is currently outstripping available supplies, although no
assurances can be made that these trends will continue.
OTHER EQUIPMENT
In addition to the equipment described above, each of the Companies may
invest in other types of capital equipment that is easily transportable by and
among prospective lessees, provided that such acquisitions are compatible with
such Company's investment objectives. Other such equipment will generally be
long-lived capital equipment and may include material handling equipment,
machine tools, modular buildings, and manufacturing, construction and production
machinery.
GOVERNMENT REGULATION
The use, maintenance and ownership of Equipment is regulated by federal,
state, local and/or foreign governmental authorities and regulations which may
impose restrictions and financial burdens on a Company's ownership and operation
of Equipment and accordingly, affect the profitability of a Company. Applicable
governmental regulations include the following:
Marine Vessels. Each of the Companies intends to acquire marine vessels.
Certain U.S. federal statutes and regulations provide for the forfeiture to the
U.S. government of transportation Equipment, including marine vessels and
aircraft, found to be used in the transportation of illegal drugs and other
contraband. Upon the acquisition of vessels, under the Sea Carrier Initiative
Program the Manager will cause the vessel owner to enter into a Sea Carrier
Initiative Agreement with the U.S. Customs Service whereby the vessel owner
shall agree to take affirmative steps to deter illegal access to and use of such
vessels by those engaged in trafficking of
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illegal drugs. The law regarding seizure of vessels provides for an exception
with respect to the owners of vessels where the illegal activity has occurred
without the owner's knowledge, consent, gross negligence or willful blindness.
There can be no assurance that if a marine vessel owned by a Company and leased
to a third party was found to be engaged in such illegal activities, that it
would not be seized or detained by the U.S. government. However, the extent to
which a Company has complied with the Sea Carrier Initiative Agreement will be
considered a mitigating factor and taken into consideration in any case which
might arise. In the event of a seizure or detainment, insurance coverages of the
Company owning such vessel should mitigate its loss of income or pecuniary
damages.
The U.S. Oil Pollution Act of 1990 ("Oil Pollution Act") requires, among
other things, that all newly constructed oil tankers and oceangoing barges, or
those undergoing a major conversion, have double hulls if they will be operating
in U.S. waters. Additionally, under the Oil Pollution Act owners are required to
either retrofit existing single hulled vessels with double hulls or remove them
from service in U.S. waters in accordance with a statutory timetable beginning
in 1995. This timetable will result in total conversion of the tank vessel fleet
to double hull vessels by 2015. During the phase-out period, the Oil Pollution
Act also requires that rules be enacted by the Secretary of Transportation
respecting tanker vessels over 5,000 gross registered tons affected by the
double hull requirement which will require such tankers to comply, until 2015,
with structural and operational requirements that will provide as substantial
protection to the environment as is economically and technologically feasible.
The Department of Transportation ("DOT") has already enacted one aspect of such
rules, requiring vessels to carry certain emergency lightering equipment on
board. Other rules are being developed by the DOT. As such rules are enacted,
the resulting structural and operation requirements may increase operating costs
or affect the choice of marine vessels by operators and, therefore, may possibly
adversely affect the profitability of any tanker owned by a Company. In
addition, vessels operating in international trade must comply with
international design standards which in some cases are more stringent than or
incompatible with U.S. standards.
The Oil Pollution Act provides for liability of, among others, owners and
operators of tanker vessels and mobile offshore drilling units ("Responsible
Parties") for recovery of costs and damages resulting from an oil discharge,
subject to certain defenses. The Oil Pollution Act generally limits this
liability with respect to each incident involving a tanker to the greater of
$1,200 per gross registered ton or $10,000,000 and for each incident involving a
mobile offshore drilling unit to removal costs and $75,000,000. However, under
certain circumstances the Oil Pollution Act provides that the limits on
liability may not be available and additional
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liability may be assessed under other federal statutes. A Company may acquire
vessels and mobile offshore drilling units affected by these and other
provisions of the Oil Pollution Act and regulations promulgated thereunder, such
as proposed regulations regarding structural and operational measures to reduce
oil spills from tank vessels without double hulls discussed above, proposed
regulations regarding mandatory oil spill response plans (for marine vessels and
mobile offshore drilling units) and regulations requiring that vessel and mobile
offshore drilling unit owners demonstrate evidence of financial responsibility
at least equal to the maximum amount of the owner's liability under the Oil
Pollution Act and the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended ("CERCLA"). Therefore, the Oil Pollution Act may have
a material adverse effect on the residual values of affected vessels.
Some state legislatures are considering or have adopted legislation which
places unlimited liability for oil pollution on owners of tankers and provides
for the possibility of substantial civil penalties. Under such legislation
owners of vessels may be exposed to liability in some states in excess of
available insurance coverage. Additionally, the possibility of increased
liability may make more difficult the process of supplying evidence of financial
responsibility sufficient to satisfy the requirements of some states. Such
evidence is necessary to operate vessels in certain states and the failure to
provide such evidence while operating can lead to substantial penalties.
Alternatively, operators may choose not to transport to or from certain states,
in order to reduce their exposure to unlimited liability. This could disrupt
trade patterns and temporarily impact the adequacy of world shipping capacity,
though the effects of this legislation can only be determined over time.
If the Manager deems it advisable, a Company may structure the ownership of
such vessels in an effort to shield the other assets of such Company from
exposure to tort liability from the vessels. Subject to the availability of
insurance at reasonable rates and to the deductible and coverage limits
thereunder, the Manager intends to acquire standard insurance coverage for all
marine vessels, including hull and machinery, protection and indemnity, and
freight, demurrage, defense, and pollution policies. There can be no assurances
that the standard coverages noted above will be available at commercially
acceptable rates with respect to all marine vessels.
Marine Cargo Containers and Refrigerated Trailers. Since 1987, over 130
countries, including the United States, have become parties to the Montreal
Protocol on Substances that Deplete the Ozone Layer (a protocol to the Vienna
Convention for the Protection of the Ozone Layer) (the "Montreal Protocol").
Under the Montreal Protocol, the party countries have agreed to control their
emissions of chlorofluorocarbons ("CFCs") by any means, includ-
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ing controls on production and use. Effective in August 1992, certain of the
parties to the Montreal Protocol, including the United States and the EU,
ratified the London Amendments to the Montreal Protocol, agreeing to phase out
the production and use of CFCs by the year 2000, with intermediate targets of a
50% reduction by 1995 and an 85% reduction by 1997 of each country's calculated
levels of production and consumption of certain "Controlled Substances,"
including certain refrigerants and foaming agents (specifically, CFC-11 and
CFC-12) used in certain temperature-controlled units (including refrigerated and
insulated marine cargo containers and refrigerated trailers) which may be
acquired by the Company. At a meeting of the parties to the Montreal Protocol
held in Copenhagen in 1992, adjustments were made to the Montreal Protocol to
accelerate the date of the total phase-out of CFCs to 1996. Such adjustments are
binding on all parties to the Montreal Protocol. In addition, certain amendments
to the Montreal Protocol were made in Copenhagen which add
hydrochlorofluorocarbons ("HCFCs"), including the substance R-22 (another
refrigerant used in refrigerated trailers), to the substances controlled by the
Montreal Protocol, and provide for the phase-out of HCFCs by 2030 or earlier.
Such amendments were ratified by 27 countries, including the United States, as
of March 1994. The EU and the United States have adopted regulations roughly
meeting or exceeding the modified phase-out schedule of the Montreal Protocol.
The Clean Air Act Amendments of 1990 (the "Clean Air Act") provided for
phasing out in the United States of the production and consumption of certain
CFCs and other substances which have been found to cause or contribute
significantly to harmful effects on the stratospheric ozone layer, including
CFC-11, CFC-12 and R-22. The schedule for such phase-out was accelerated
effective January 1, 1994 to implement the Copenhagen adjustments and
amendments. Pursuant to the Clean Air Act and regulations promulgated
thereunder, production and consumption of CFCs must be phased out by January 1,
1996, subject to certain exceptions, and HCFCs must be phased out as early as
2003, and no later than 2030 (depending on the substance).
Any new regulation or revision to existing regulations restricting the
production and use of products containing CFC-11, CFC-12, R-22 and other
refrigerants could limit the use of certain refrigerated marine cargo containers
and, therefore, could adversely affect such containers' ultimate residual value
and the rental rates they command.
Mobile Offshore Drilling Units. The Companies may acquire mobile offshore
drilling units which are used primarily in oil and gas exploration and
development drilling. Operation of such Equipment is affected by changes in
public policy and by federal, state, local, and foreign laws and regulations.
The adoption of laws and
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regulations curtailing exploration and development drilling for oil and gas for
economic, environmental, and other policy reasons may adversely affect lease and
residual values of mobile offshore drilling units.
Mobile offshore drilling unit operations are subject to numerous federal,
state, local and foreign laws and regulations relating to the protection of the
environment, including, with respect to units operating in U.S. navigable
waters, the Outer Continental Shelf Lands Act, as amended ("OCSLA"), and the
Clean Water Act. In addition to the liability of owners and operators of mobile
offshore drilling units under the Oil Pollution Act discussed above in
connection with marine vessels, the Clean Water Act provides that civil and
administrative penalties may also be charged against owners in actions brought
by the federal government, permits the government to withhold clearance to
proceed to operate in certain circumstances when a civil penalty has been or may
be assessed, and provides extensive liability for clean-up costs in the event
liability for discharge of oil is not otherwise established under the Oil
Pollution Act.
Mobile offshore drilling units are subject to hazards inherent in the
offshore drilling industry, such as blowouts and fires, together with the
typical hazards applicable to marine vessels in general. Although both Companies
intend to acquire and maintain insurance coverage to protect against such events
and to seek indemnification by the operators of such units, there can be no
assurance that the Companies will be adequately protected under all
circumstances.
Railcars. Certain railroad tankcars which may be acquired by a Company will
be designed for shipping liquified petroleum gas ("LPG"), chlorine and other
flammable or toxic chemical products, which are required to be pressurized for
rail shipment. (See "Business of the Companies: Equipment Profiles -- Railroad
Rolling Stock.") On December 21, 1990, the DOT announced the adoption of certain
regulations which comprehensively revise the Hazardous Materials Regulations
with respect to hazard communications, classification and packaging requirements
(the "Railcar Regulations") which could have significant adverse effects on the
pressurized commodity transportation industries and, therefore, could materially
adversely affect the economics of a Company's ownership and use of pressurized
railroad tankcars. The Railcar Regulations provide for an October 1, 1991
effective date; however, two- to five-year transition periods are provided for
compliance with most of the new requirements.
In addition, the DOT adopted a safety regulation which may affect the
procedures and costs associated with the inspection, detection, and repair of
certain tankcars. The regulation contains safety standards that (i) permit the
use of railroad tankcar tanks with tank shell thicknesses in localized areas
that are less than the
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applicable minimum at the time of fabrication of the tankcar otherwise specified
in the Code of Federal Regulations where the weak spots result from repair
operations; and (ii) require the measurement of tankcar tank thicknesses under
certain conditions. The intended effect of this action is to ensure that tank
repairs do not result in a reduction in the level of safety and to facilitate
commerce by allowing the use of tankcar tanks with localized thin spots for the
transportation of hazardous materials.
The DOT has proposed regulations addressing standards for the inspection of
tankcar tanks to detect tank shell cracks and pits as well as the thinning of
tank shells from repairs and causes other than repairs, such as internal or
external corrosion. The DOT is concerned that some insulated tanks have
substantial corrosion on the external tank surface apparently due to a reaction
between insulation components and condensation. In addition, the DOT is
concerned about internal corrosion caused by the transportation of corrosive
materials such as acids. The DOT has also proposed regulations intended to
reduce the risk of violent rupture and release of hazardous materials when
tankcars are involved in accidents. In addition, periodically the Federal
Railroad Administration of the DOT may issue emergency orders requiring the
inspection and/or repair of certain tankcars. The impact of these regulations
and emergency orders on a Company could be a reduction in the useful life of the
tankcars it may own on account of a reduction in tank thickness below minimum
standards and the banning of existing tankcars which do not meet current
specifications as a result of the phasing out of certain grandfather clauses or
the cost of retrofitting tankcars which do not meet current and any new tankcar
safety specifications.
Additionally, the Association of American Railroads ("AAR") implemented a
tankcar stub sill inspection program in July 1992. Stub sill tankcars are
tankcars in which the tank rests on a truck shorter than the length of the tank
as opposed to those tankcars with a continuous underframe running the length of
the tank. Under this program, a schedule is provided according to which all stub
sill tankcars must be inspected within seven years and all defects and cracks
repaired. The AAR has also enacted new requirements for the construction of new,
and the inspection, testing and protective treatment of existing, tankcars
transporting molten sulphur.
Aircraft. The Companies may also acquire used aircraft. (See "Business of
the Companies: Equipment Profiles -- Airline Industry.")
The FAA has promulgated regulations to control aircraft noise applicable to
the operation of civil aircraft in the United States. Noise level restrictions
are classified as Stages 1, 2 and 3, with Stage 3 being the most restrictive.
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On October 28, 1990, the United States Congress enacted The Airport Noise
and Capacity Act of 1990 (the "Airport Act"). The Airport Act, among other
things, prohibits the operation of commercial jet transports which do not comply
with Stage 3 noise level restrictions to or from U.S. airports after December
31, 1999. The Airport Act gives the Secretary of Transportation the authority to
grant waivers under certain limited circumstances to U.S. air carriers allowing
such carriers to continue operating Stage 2 aircraft representing 15 or less
percent of the aircraft used by such carriers to provide air transportation
until December 31, 2003.
On September 25, 1991, the FAA promulgated regulations establishing a
schedule of phased-in compliance with the Airport Act's prohibition on the
operation of Stage 2 aircraft. The regulations provide that aircraft operators
have, on a yearly basis, the choice of complying with either a schedule which
focuses on the phase-out of Stage 2 aircraft (the "Stage 2 Phase-Out Schedule")
or, alternatively, a schedule which focuses on the phase-in of Stage 3 aircraft
(the "Stage 3 Phase-In Schedule"). Compliance with the Stage 2 Phase-Out
Schedule is based on the number of owned or leased Stage 2 aircraft listed on
the operator's operations specifications for operations to or from airports in
the contiguous United States on any one day selected by the operator between
January 1, 1990 through July 1, 1991, subject to certain adjustments (the "Base
Level"). Operators who choose to comply with the Stage 2 Phase-Out Schedule will
be required to reduce their Stage 2 fleets, calculated by reference to the Base
Level, by (i) twenty-five percent (25%) by the end of 1994, (ii) fifty percent
(50%) by the end of 1996, and (iii) seventy-five percent (75%) by the end of
1998. Operators who choose to comply with the Stage 3 Phase-In Schedule will be
required to operate a fleet composed of not less than (i) fifty-five percent
(55%) Stage 3 aircraft after 1994, (ii) sixty-five percent (65%) Stage 3
aircraft after 1996, and (iii) seventy-five (75%) Stage 3 aircraft after 1998.
The Manager believes that, to date, various hush kit and re-engining
programs have been developed or announced which will permit retrofitting of
certain Stage 2 aircraft to comply with the Airport Act prior to the Airport
Act's deadline. Hush kit programs for Stage 2 aircraft currently cost
approximately $1.5 million to $3.0 million per aircraft. Re-engining programs
for certain Stage 2 aircraft also exist, though at significantly higher costs.
For example, reengining programs presently available for certain narrow-bodied
Stage 2 aircraft are estimated to be about $8 million.
Aircraft owned by a Company may operate inside and outside of the United
States. Chapter 3 of Annex 16 to the Convention on International Civil Aviation
sets forth aircraft noise standards similar to, but not identical with, Stage 3
standards under the FAA rules. In October 1990, the International Civil Aviation
Organization ("ICAO"), an agency of the United Nations, unanimously
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adopted a resolution which provides a time line for member states choosing to
phase out non-Chapter 3 aircraft, urging member states not to begin the phase-in
of restrictions until April 1, 1995, and not to provide for total phase-out of
non-Chapter 3 aircraft earlier than April 1, 2002. Both the European Civil
Aviation Conference ("ECAC"), an organization composed of the aviation
authorities of approximately 25 European countries, and the EU have taken action
to prohibit the registration of additional aircraft which do not comply with
Chapter 3 noise abatement standards and to restrict the use of non-Chapter 3
aircraft following the ICAO time line. In fact, the ECAC and the EU are
discussing implementation of noise abatement standards more stringent than those
presented by the ICAO. As a result, aircraft operating in Europe will be subject
to more restrictive noise abatement standards in the future.
The Manager intends generally to acquire only Stage 3 aircraft and Stage 2
aircraft or their equivalent (i.e., Chapter 3 as described above) which either
have hush kit or re-engining programs currently available or in the later stages
of development which allow for the upgrade of aircraft from Stage 2 to Stage 3
in an economically feasible manner.
State legislatures and other governmental bodies, as well as some domestic
and foreign airport authorities, have considered or adopted noise reduction
measures, including limitations on use or operation of, and restrictions on,
types of aircraft. The DOT has encouraged domestic airport authorities to
develop noise abatement plans and submit them to the FAA for review and
consideration of their uniformity, lawfulness, and non-discriminatory nature.
State and local regulations restricting the use of airports or requiring
modification of Equipment or substitution of aircraft, particularly state or
local regulations which may lack uniformity, could increase operating costs or
affect the choice of aircraft by operators and, therefore, could adversely
affect the profitability of any aircraft owned by a Company.
The FAA also imposes strict requirements governing aircraft inspection and
certification, maintenance, equipment requirements, general operating and flight
rules (including limits on arrivals and departures), certification of personnel,
and recordkeeping in connection with aircraft maintenance. FAA regulations
establish standards for repairs, periodic overhauls, and alterations, and
require that the owner or operator of an aircraft establish an airworthiness
inspection program to be carried out by certified mechanics qualified to issue
an airworthiness certificate.
Aviation incidents and accidents raised concerns over aircraft structural
degradation as a result of corrosion and fatigue cracking. In response to these
concerns regarding the structural integrity of older aircraft, industry task
forces (with participation of the FAA and foreign aviation authorities) have
been established, among
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other reasons, to review structural maintenance requirements for older
commercial jet transports. The task forces recommendations have included
mandatory modification instead of continued inspection at certain operational
milestones for specific areas of concern, and mandatory corrosion prevention and
control programs. As discussed below, these recommendations have resulted, and
are likely to result in the future, in new FAA and foreign authority
airworthiness maintenance standards mandating more restrictive monitoring,
testing, inspection and repair requirements.
For instance, the FAA has developed maintenance requirements ("airworthiness
directives" or "ADs") requiring additional inspection and/or repair work on
older Boeing, McDonnell-Douglas, Fokker, Airbus, British Aerospace and Lockheed
transports. These so-called "aging aircraft" ADs mandate extensive inspections
and modifications/repairs to aircraft structure to assure structural integrity.
Additionally, the FAA has required airlines, through other ADs on large
transport aircraft, to develop comprehensive corrosion prevention and control
programs to assure that corrosion is detected when present, and that suitable
corrosion treatment is applied to the structure to inhibit corrosion. The FAA is
in the process of preparing a general plan for corrosion control, to be applied
to new aircraft from the date of purchase, and which would modify some existing
ADs to make them applicable only to older aircraft. Together, these aging
aircraft and corrosion prevention and control programs will require the
expenditure of substantial sums on older aircraft -- perhaps up to $2 million or
more per aircraft on some of the older models -- but substantially less on newer
aircraft.
In Europe, similar requirements promulgated by authorities equivalent to the
FAA which participated in the task forces require airlines to take similar
action with respect to the inspection and modification/repair of aircraft and
implementation of corrosion inspection and control programs. United States and
European airlines will therefore be faced with additional maintenance
expenditures on their older transport aircraft which could adversely affect fair
market lease and sales values. These additional expenditures and standardized
maintenance procedures should, however, permit airlines to extend the useful
lives of such transports.
The operation of the aircraft in foreign jurisdictions can also lead to
certain third party creditors of the operator having detention and sale powers
over the aircraft for unpaid charges incurred by that aircraft or another
aircraft in the operator's fleet of aircraft. For example in the United Kingdom
and Continental Europe, certain airports, aviation authorities and Eurocontrol
(the regulatory body overseeing European airtraffic control) have such powers in
respect of unpaid landing fees and navigation charges. In such an instance, the
lessor of the aircraft might be required to settle debts owed to such creditors
by lessees before it could repossess its
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aircraft and, as certain of such debts "follow the aircraft," prior to a sale of
the aircraft even if repossession is secured. In addition, the United States
Bankruptcy Code may not apply with the result that in the event of bankruptcy of
the aircraft lessee, Section 1110 of the United States Bankruptcy Code would not
be applicable. Section 1110, in certain instances, may provide lessors with
improved repossession rights with respect to aircraft leased by lessees who are
subject to bankruptcy proceedings. (See "Business of the Companies: Lessee
Insolvency and Bankruptcy.")
Because forfeiture provisions exist for aircraft which are found to be used
in the transportation of illegal drugs and other contraband, upon acquisition of
aircraft, the Manager may cause the aircraft owner to enter into the Air Carrier
Initiative Program, a program similar to the Sea Carrier Initiative Program
described above.
Aircraft acquired by a Company may subject such Company to tort liability.
(See "Risk Factors: Business Risks -- Tort Liability.") Section 504 of the
Federal Aviation Act of 1958, as amended, provides that, under certain
circumstances, lessors of civil aircraft shall not be liable for any injury to
or death of persons, or damage to or loss of property, caused by the operation
of such aircraft by lessees. Although it is expected that the provisions of
Section 504 will protect a Company from liability for potential injury, death,
damage or loss caused by any aircraft owned by a Company, there are certain
circumstances under which courts have held that the protections of Section 504
may not apply. Because there is little case law interpreting Section 504, there
can be no assurance that its provisions will fully protect a Company from all
liabilities which may be attributable to aircraft owned by such Company. While
the Companies will attempt to require lessees to obtain and maintain insurance
protecting the Companies against potential liability, there can be no assurance
that the Companies will obtain sufficient coverage or that the Companies will be
insured against all potential occurrences, since most insurance policies contain
various exclusions.
Regulatory systems may vary from country to country and thereby increase the
cost and other burdens of regulatory compliance.
EQUIPMENT REGISTRATION
Aircraft and marine vessels are subject to certain registration requirements
imposed by the federal government. U.S. registration, which is generally
required for operation of aircraft within the United States, is permitted for an
association (which is how a Delaware limited liability company would be
classified for both aircraft and vessel registration purposes) which owns an
aircraft and is organized under the laws of the United States or of any state,
territory or possession of the United States only if the
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president and two-thirds or more of the board of directors and other managing
officers thereof are U.S. Citizens and at least 75% of the voting interest
therein is owned or controlled by persons who are citizens of the United States
or one of its possessions. In addition, title to certain aircraft which a
Company may acquire may be held by a trust for the benefit of that Company. A
trust of which a U.S. Citizen or a resident alien of the United States
("Resident Alien") is the trustee may own United States registered aircraft if
the trustee is not subject to removal or certain control or influence by
beneficiaries more than 25% of whom are neither U.S. Citizens nor Resident
Aliens. (See "Income Tax Considerations: Ownership of Equipment -- Title to
Aircraft.") Similarly, certain types of marine vessels must be registered prior
to operation in the waterways of the United States. An association may register
its vessels with the federal government only if all of its members are U.S.
Citizens.
The U.S. registration requirements for marine vessels is much stricter than
the U.S. registration requirements for aircraft. While a Company can register an
aircraft with the federal government even though 25% of its Members are non-U.S.
Citizens, that same Company would be precluded from registering a marine vessel
of which it was the direct owner with the federal government. If a Company
intends to admit non-U.S. Citizens as Members, such Company will be precluded
from directly acquiring any marine vessel which requires U.S. registry.
If at any time a Company which owns U.S. registered aircraft (or serves as
the beneficiary of a trust which does so) and/or U.S. registered marine vessels
fails to satisfy the registration requirements (whether due to
misrepresentation, change in citizenship status, or transfer of Units to a
person other than a U.S. Citizen, in the case of vessels, or to a person other
than a U.S. Citizen or Resident Alien, in the case of aircraft), U.S.
registration may be challenged by an agency of the federal government. Any
challenge, if successful, could result in substantial penalties, seizure and
forfeiture, the premature sale of such Equipment, the loss of the benefits of
the central recording system with respect to aircraft (thereby leaving the
aircraft exposed to liens or other interests not of record), and a breach of
lease agreements entered into in connection with the acquisition and leasing of
such Equipment. (See "Risk Factors: Business Risks -- Loss of Equipment
Registration.") Accordingly, the Manager will not admit a non-U.S. Citizen as a
Class A Member or a Substituted Class A Member of either Company if such
admission would result in the potential inability to register aircraft or
vessels requiring U.S. registration, or the invalidity of such registration.
Further, the Manager will not cause the Companies to acquire a direct interest
in any marine vessel which requires U.S. registration if such Company has
admitted or intends to admit any non-U.S. Citizen as a Member. (See "Risk
Factors: General -- Limited Transferability of Class A
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Units; Possibility of Significant Discounts," "Investor Suitability Standards,"
and "Summary of the Operating Agreements.")
ACQUISITION OF EQUIPMENT
Interim Borrowings. The Companies intend to acquire Equipment primarily on
an all cash basis; however, in certain cases borrowings may be used to finance
the purchase of Equipment. The Manager has entered into a joint $25,000,000
credit facility (the "Committed Bridge Facility") on behalf of Growth Fund VII,
for which the Manager serves as general partner, and TEC AcquiSub, Inc.
("TECAI"), an indirect wholly owned subsidiary of the Manager. The Committed
Bridge Facility is available to provide interim (not in excess of twelve months)
financing, secured by the equipment purchased by Growth Fund VII or TECAI using
such credit facility, and the maximum amount of such financing is determined
under different formulas for Growth Fund VII and TECAI. Growth Fund VII may
obtain financing under the Committed Bridge Facility of up to (i) 50% of the net
book value of equipment purchased by Growth Fund VII, including the equipment
purchased with the Committed Bridge Facility, less any equipment off-lease and
any equipment for which lease or rental payments are more than 90 days past due,
but only to the extent the net book value of such excluded equipment exceeds 15%
of all of Growth Fund VII's equipment, plus (ii) 50% of unrestricted cash held
by Growth Fund VII, minus any debt of Growth Fund VII. Outstanding borrowings by
Growth Fund VII and TECAI reduce the amounts available under the Committed
Bridge Facility. Individual borrowings may be outstanding for no more than 150
days with all advances due no later than June 30, 1995, when the Committed
Bridge Facility will expire.
It is anticipated that the Committed Bridge Facility will become available
to each of the Companies on the same or similar terms extended to Growth Fund
VII once each Company's minimum impound requirements are met. The Committed
Bridge Facility, if entered into by the Manager on behalf of the Companies,
would prohibit the Companies from accessing any additional indebtedness during
the initial offering period.
Assuming the Committed Bridge Facility is made available to the Companies on
its current terms, at the maturity of each advance to TECAI, either of the
Companies or Growth Fund VII, as determined in the discretion of the Manager,
will purchase any equipment then financed by TECAI under the Committed Bridge
Facility. Generally, TECAI will purchase equipment utilizing the Committed
Bridge Facility on an interim basis when a Company or Growth Fund VII does not
have adequate capital to purchase the equipment itself, and TECAI will hold
title until such time (generally less than six months) as either Company or
Growth Fund VII has raised adequate capital to purchase the equipment.
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In all cases, the Companies and Growth Fund VII will purchase the Equipment from
TECAI at the same price paid by TECAI, and during the period that any equipment
is owned by TECAI on an interim basis, TECAI will be entitled to all earnings
generated from the equipment and will be responsible for all expenses, including
financing costs, of the equipment.
If the Companies become parties to the Committed Bridge Facility, to the
extent that the Companies are unable to raise sufficient capital through the
sale of Class A Units to repay their portion of the Committed Bridge Facility,
the Companies will continue to be obligated under the Committed Bridge Facility
until the Companies generate proceeds from their operations or the sale of
Equipment sufficient for repayment. There can be no assurance that the Companies
will become parties to the Committed Bridge Facility. (See "Risk Factors:
Business Risks--Leverage.") The Manager will guarantee the repayment of all
borrowings under the Committed Bridge Facility.
Long-Term Borrowings. In addition, a Company may borrow funds in the form
of long-term debt to enable such Company to acquire additional items of
Equipment, when the Manager determines that such financing is likely to enhance
the overall return to a Company. It is anticipated that such long-term
borrowings would be limited to approximately 20% of the aggregate cost of all
Equipment owned by a Company at the time any such borrowing is originated. Such
borrowings are nonrecourse to the Class A Members. (See "Risk Factors:
Investment Risks -- Liabilities of Class A Members for Obligations of a
Company.")
Advances by the Manager. The Manager or one of its Affiliates may advance
to a Company funds required for the purchase of Equipment or for a deposit on
items of Equipment. In this event, the Company to whom funds are advanced will
pay the Manager or its Affiliate interest on the funds so expended, which will
be calculated at a rate equal to that charged by unaffiliated lenders on
comparable loans for the same purposes in the same geographic area, but in no
event in excess of the Manager's or Affiliate's own cost of funds. In addition,
if, in connection with the advance of funds with respect to any item of
Equipment by the Manager or one of its Affiliates, the Manager or Affiliate
borrows funds from a third party lender, neither Company will be required to pay
interest to the Manager or Affiliate at a rate greater than that which such
third party lender is charging. In no event will the Manager and its Affiliates
extend financing to a Company with a term in excess of twelve months.
Furthermore, in no event will a Company acquire Equipment from a program in
which the Manager or any of its Affiliates has an interest.
Term of Investment of Net Offering Proceeds. Any of the net Proceeds
received by a Company in connection with the offering of Class A Units which
have not been invested or committed to
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investment in Equipment within two years of the date of this Prospectus (except
for such working capital reserves as are determined to be necessary in the sole
discretion of the Manager) will be distributed by a Company to its Class A
Members on a pro rata basis. The proceeds so distributed will equal the
uninvested Capital Contributions from such Class A Members. Any such
distribution would constitute a return of capital for federal income tax
purposes.
JOINT INVESTMENTS
General. In connection with a Company's investments in certain types of
Equipment the purchase prices of which are substantial (e.g., certain marine
vessels with purchase prices in excess of $10 million and commercial aircraft,
the purchase prices of which typically are not less than $20 million), it is
contemplated that a Company may participate, on a tenancy in common (i.e., co-
tenancy) or partnership basis, with partnerships or other programs organized by
the Manager or one of its Affiliates. The Manager or one or more of its
Affiliates may participate in their individual capacities in such joint
investments, but only in connection with transactions which would be unavailable
to a Company without such participation and in a manner consistent with the
fiduciary obligation of the Manager to such Company and its Class A Members.
(See "Conflicts of Interest" and "Fiduciary Responsibility.") Subject to the
requirements set forth below under the caption "Investments With
Non-Affiliates," a Company may also participate in joint ownership arrangements
with non-Affiliates. (See "Income Tax Considerations -- Ownership of
Equipment.")
Investments with PLM Partnerships and Other Programs. In the event that a
Company invests in a joint venture arrangement with another program formed or
managed by the Manager or one of its Affiliates, the following conditions must
be met: (i) each co-investor will be required to have substantially similar
investment objectives to those of the Company; (ii) each co-investor must make
its investment on substantially the same terms and conditions as the Company;
(iii) each co-investor must have a compensation structure for equipment
management substantially identical to that of the Company; (iv) there must be no
duplicate fees; (v) the Company has a right of first refusal to buy the
equipment if the co-investor wishes to sell the equipment held by the venture;
and (vi) the venture must be entered into in order to obtain diversification or
to relieve the Manager or its Affiliates from commitments entered into under
Section 2.02(n) of the Operating Agreements. In no event will a Company acquire
a limited partnership or limited liability company interest in any other
Program.
Investments with Non-Affiliates. Each Company may acquire equipment jointly
with non-Affiliates and may invest in a co-tenancy or partnership that owns
equipment, provided that (i) the
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venture owns and operates specified equipment; (ii) the Company acquires a
controlling interest in the venture; (iii) the Company, as a result of the form
of ownership of the equipment, is not charged directly or indirectly more than
once for the same services; (iv) the agreement between the co-investors does not
permit or require the Company or the Manager to take any action with respect to
the equipment which would be impermissible under the terms of the applicable
Operating Agreement; and (v) the investment does not result in the payment of
duplicate fees.
Risks. The investment by a Company in a venture which owns Equipment may
under certain circumstances involve risks not otherwise present, including, for
example, risks associated with the possibility that a Company's co-investor
might become bankrupt or that a co-investor may have economic or business
interests or goals which are inconsistent with the business interests or goals
of the Company. Among other things, actions by such a co-investor might have the
result of subjecting Equipment owned by the venture to liabilities in excess of
those contemplated by the Company or might have other adverse consequences for
the Company. Inasmuch as no one co-investor may control the venture, there will
be a potential risk of impasse on decisions, including a proposed sale of the
Equipment, and, although it is anticipated that each co-investor (including the
Company) will have a right of first refusal should one or more of the other co-
investors desire to sell Equipment owned by the venture, a Company may not have
the resources to purchase such Equipment. (See "Risk Factors: Investment
Risks -- Risks of Joint Investments.")
INSURANCE
Each of the Companies will purchase and maintain, or cause to be purchased
and maintained, such insurance policies as the Manager deems reasonably
necessary to protect the interests of such Company. The Manager intends to cause
the Companies to obtain insurance and risk management through TEI, an Affiliate
of the Manager. In so doing, the Manager will combine the purchasing power of
the Companies with that of other programs sponsored by the Manager to obtain
from TEI (based upon its reinsurance rates) insurance at prices which the
Manager believes to be more favorable than would otherwise be available to the
Companies. In no event will TEI be permitted to be compensated by the Companies
at a rate greater than is otherwise available to the Companies for comparable
coverage and, in this regard, the Manager shall obtain quotes from at least two
unaffiliated parties providing similar coverage or insurance services. (See
"Conflicts of Interest: Transactions with Affiliates -- Insurance.")
In general, it is anticipated that each Company will also maintain, or cause
to be maintained, insurance coverage against
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third-party bodily injury and property damage liability in connection with
Equipment ownership and operation, as well as policies insuring such Company
against loss of or damage to its Equipment provided such insurance is obtainable
at reasonable cost. The Companies may also carry business interruption insurance
covering loss of income resulting from Equipment loss or damage. The policies
described above will have such limits and deductible amounts as the Manager
deems advisable, based on the costs involved and the operations of the
Companies. In addition, such policies will have certain exclusions from coverage
for risks which are uninsurable or are not insurable at rates deemed reasonable
by the Manager. Such exclusions may include damage or loss by war, air piracy,
nuclear accidents and other similar risks.
Each Manager will also obtain a fidelity bond which will insure it against
loss caused by the fraud or dishonesty of any of its employees or agents and the
employees and agents of the Manager and its Affiliates. The limit of liability
on the bond will be $500,000 per occurrence.
RESERVES
The Manager shall establish and maintain reserves equal to the lesser of (i)
1% of Capital Contributions from Class A Members or (ii) $750,000. The Manager,
in its sole discretion, may at any time increase the amount of a Company's
reserves to an amount which it determines to be reasonable and necessary in
connection with the operation of such Company's business and affairs; provided,
however, that the amount of reserves may be decreased or eliminated during the
liquidation stage of a Company.
REINVESTMENT AND LIQUIDATION
The Manager intends to reinvest a portion of each Company's Cash Flow and
Net Disposition Proceeds into Equipment during the six years after the year
which includes the Closing Date for each such Company. The Manager also intends
to reinvest such funds in making capital improvements to Equipment. At the
beginning of the seventh year after the year which includes the Closing Date of
a Company, such Company will stop reinvesting Cash Flow and Net Disposition
Proceeds, all of which, less reasonable reserves, will be distributed to the
Members. (For a discussion of the Companies' distribution policy, see
"Allocations and Distributions.")
The Equipment may be sold for cash or on deferred payment terms. (See
"Income Tax Considerations: Sale of Equipment.") The Manager will determine when
Equipment should be sold based upon numerous factors, with a view toward
achieving the investment objectives of each Company. The Manager intends to
evaluate each item of Equipment periodically to determine whether such Equipment
should remain in a Company's portfolio
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or be sold, depending on such Company's operating results, economic conditions,
tax considerations, the nature and condition of the Equipment, market trends and
other factors. (See "Business of the Companies: Management Strategy.")
COMPETITION
The equipment leasing industry is highly competitive. Equipment
manufacturers now offer users the ability to lease rather than purchase nearly
every type of equipment. Moreover, payment conditions vary considerably,
depending on the type of equipment.
Competition from Full Payout Net Leases. It is anticipated that the
Equipment will be subject primarily to Operating Leases; Full Payout Net Leases
may be utilized to a lesser extent. The Companies may encounter considerable
competition from lessors which use primarily Full Payout Net Leases which are
written for a longer term and offer a lower rental rate than Operating Leases.
While some lessees will prefer the flexibility offered by a shorter-term
Operating Lease, other lessees will prefer the longer term and lower rental rate
possible with a Full Payout Net Lease. A Company has the flexibility to alter
its relative proportion of Operating Leases to Full Payout Net Leases depending
on market and economic factors.
Other Competition. There are numerous other potential investors, including
limited partnerships structured and managed similarly to the Companies, seeking
to purchase Equipment subject to either Operating Leases or Full Payout Net
Leases, many of which have greater financial resources and more experience than
the Companies or the Manager. Additionally, the Manager is affiliated with PLM
International and with other investor programs which own and operate
transportation equipment similar to the Equipment which the Companies
contemplate purchasing. (See "Conflicts of Interest: Competition with Manager
and Affiliates; Competition for Management's Time.")
RESIDUAL VALUES
It is not possible to forecast with certainty the value of any Equipment for
continued productive use or for resale. The market value of used Equipment
depends upon its physical condition, possibly the location of the Equipment, the
supply and demand for Equipment of its type and its remaining useful life in
relation to the cost of new Equipment at the time. With the proper selection of
a portfolio of used Equipment, however, a Company is more likely to be insulated
from the initial major downward force on residual values experienced by a
portfolio of new Equipment. Because new Equipment has not been previously owned
and can be custom-ordered to some extent, the price of a new item of Equipment
will normally be at a premium over that which would be paid for a similar item
of used Equipment. The premium value of the new
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item of Equipment also reflects the less quantifiable perceived value of owning
"new" Equipment. This results in an immediate depreciation in the value of a
portfolio of new Equipment once placed in service, a feature which does not
generally exist with a portfolio of used Equipment.
By owning and leasing a diversified pool of used Equipment, a Company will
pay a price for the Equipment which will already be discounted for the perceived
benefits of new Equipment, and which will closely reflect the actual market
price at current market conditions, all other factors (e.g., supply and demand,
general economic conditions, etc.) being equal. This will potentially enable a
Company to benefit from current values and hence profit more immediately from
any increase in residual value, without having to "recover" the initial discount
(or depreciation) in value of new Equipment which occurs immediately when it is
placed in service.
LESSEE INSOLVENCY AND BANKRUPTCY
Lessees of Equipment encountering financial difficulties may voluntarily or
involuntarily become subject to the provisions of the United States Bankruptcy
Code ("Bankruptcy Code"). Generally, under the Bankruptcy Code a lease is
treated in the same manner as an executory contract which the bankrupt estate
has the power to assume or reject. If the bankrupt estate assumes a lease, it
must comply with all of the lease provisions; if the lease is in default, it
must cure the existing defaults and provide adequate assurance of its ability to
perform the obligations under the lease in the future. A rejection of the lease
constitutes a breach of the lease as of the date of the bankruptcy which
entitles the lessor to the return of the leased Equipment and gives the lessor a
priority claim for the reasonable value of debtor's use of the Equipment from
the date of the bankruptcy until the date of the rejection and an unsecured
claim for damages due to the breach of the lease. The lessor may or may not
recover any or all of its priority or unsecured claim if there are not
sufficient assets in the bankruptcy estate. Under the section of the Bankruptcy
Code dealing with general executory contracts, there is no deadline by which the
debtor must assume or reject the lease prior to submission of a plan of
reorganization; but the lessor may ask the bankruptcy court for an order setting
a date for such assumption or rejection. In any event, the decision to assume or
reject a lease, the cure of defaults or the return of the leased Equipment may
involve substantial delays. This may result in the lessor of the Equipment being
unable to repossess the Equipment or collect owed rental payments for
substantial periods of time, if at all. In addition, the lessor may be required
to return to the bankruptcy estate certain payments made by the lessee to the
lessor during the 90 days preceding bankruptcy.
Under the automatic stay provisions of the Bankruptcy Code, Equipment
lessors, except in certain circumstances, are prevented
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from repossessing leased Equipment which is part of the debtor's bankrupt estate
unless they petition the bankruptcy court for an order modifying the stay for
cause, or unless the bankrupt estate rejects the lease. Prior to issuing such an
order, a bankruptcy court will usually require a showing that there is a lack of
adequate protection of the lessor's interest in the Equipment or other serious
prejudice to the lessor's interest. However, Section 1110 of the Bankruptcy Code
provides additional protection to certain aircraft lessors. Under Section 1110,
the automatic stay provisions do not apply to such lessors (and thus the lessor
may repossess the aircraft), unless within 60 days after the commencement of the
bankruptcy proceeding the bankrupt estate agrees to perform all obligations
under the lease and cures all defaults. Although few courts have interpreted
Section 1110 of the Bankruptcy Code, the Second and Third Circuits Courts of
Appeals have ruled that Section 1110 does apply in a non-acquisition
sale-leaseback transaction ("sale-leaseback"). The Companies may enter into
sale-leasebacks of aircraft.
In the event a lessee located outside the United States becomes unable to
pay its debts, the Bankruptcy Code may not apply, with the result that, in the
event of a bankruptcy of an aircraft lessee, Section 1110 of the Bankruptcy Code
would not be applicable. In addition, as with a domestic lessee, there is a risk
of being unable to repossess the Equipment or to collect owed rental payments
for substantial periods of time, if at all.
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PRIOR PERFORMANCE
GENERAL
The Manager and its Affiliates are primarily engaged in the organization,
distribution and management of leasing programs specializing in diversified
portfolios of long-lived, low obsolescence capital equipment. Over the last 23
years, the Manager and its Affiliates have managed equipment for themselves and
approximately 145,000 investors from whom a total of approximately $2.3 billion
has been raised. The Manager and its Affiliates currently have under management
approximately $2.1 billion of equipment. The Companies are the Manager's
fifty-fifth program offering and its seventeenth public program involving
diversified portfolios of long-lived, low obsolescence capital Equipment. As of
December 31, 1994, cumulative cash distributions to investors in public programs
sponsored by the Manager and/or its Affiliates totalled approximately $1.1
billion (a portion of which may be deemed a return of capital). On average, more
than 95% of the equipment (calculated based on the acquisition cost of the
equipment) has been on-lease at any given time.
Public Diversified Equipment Programs. In addition to Growth Fund, Growth
Fund II, Growth Fund III, Growth Fund IV, Growth Fund V, Growth Fund VI and
Growth Fund VII (collectively, the "PLM Equipment Growth Funds"), the Manager is
or was the sole general partner of four public limited partnerships investing in
diversified transportation equipment portfolios: PLM Transportation Equipment
Partners VI 1984 Leveraged Fund (a program with three partnerships); PLM
Transportation Equipment Partners VII 1985 Income Fund (a program with three
partnerships); PLM Transportation Equipment Partners VIII 1985 Leveraged Fund (a
program with four partnerships); and PLM Transportation Equipment Partners IX
1986 Income Fund (a program with four partnerships). The Manager and PLM, Inc.,
a wholly-owned subsidiary of TEC, were the co-general partners of the following
public limited partnerships investing in diversified transportation Equipment
portfolios: PLM Transportation Equipment Partners I (an income program with two
partnerships); PLM Transportation Equipment Partners II (a leveraged program
with two partnerships); PLM Transportation Equipment Partners III (an income
program with two partnerships); PLM Transportation Equipment Partners IV (a
leveraged program with three partnerships); and PLM Transportation Equipment
Partners V Income Fund (an income program with four partnerships). The foregoing
are the only public diversified Equipment programs consisting primarily of
long-lived, low obsolescence capital equipment that is easily transportable by
and among lessees sponsored by the Manager or an Affiliate thereof over the last
thirteen years.
The Manager will provide, at no cost, upon the request of any interested
investor, a copy of the most recent Form 10-K Annual Report of any of the
foregoing partnerships which are still in
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operation filed with the Securities and Exchange Commission ("SEC") over the
last 24 months (exhibits to such Annual Reports will be provided upon payment of
a reasonable fee).
From 1987 to 1993, the PLM Equipment Growth Funds, taken as a group,
purchased equipment having an aggregate purchase price of approximately $1.3
billion. (See "Appendix I -- Prior Performance Tables -- Table B.")
Private Programs. The Manager, TEC, and IMI have sponsored or co-sponsored
38 private individual ownership and partnership programs which have raised
approximately $175 million of equity and purchased approximately $200 million of
equipment.
Equipment and Lessees. PLM International, the PLM Equipment Growth Funds,
individual ownership and private programs, and the remaining public diversified
equipment programs owned, as of December 31, 1993, approximately 6,600 items of
railroad rolling stock, over 26,000 cargo containers, 40 marine vessels and
barges, over 11,000 trailers, 27 commercial aircraft and 12 aircraft engines, 30
commuter and corporate aircraft, two portfolios of aircraft components and
rotables, one letroporter and five mobile offshore drilling units, with an
aggregate acquisition cost of approximately $1.4 billion.
The equipment owned by PLM International, individual ownership and private
programs, and by public diversified equipment programs (including the PLM
Equipment Growth Funds) is leased to scheduled and charter air carriers,
trucking companies, railroads, shippers and companies that sublease trailers and
containers on trip rental and other short-term bases. The following is a
partial, select list of lessees for PLM International and for prior diversified
programs sponsored by the Manager and its Affiliates:
ACF Industries
Alaska Airlines, Inc.
Allied Corporation
American Maize Products Company
American Cyanamid
American President Lines, Ltd.
Atlantic Richfield Company
Bendix Corp.
Braathens, S.A.F.E.
British Airways, PLC
British Midland Airways, Ltd.
Burlington Northern
Canadian National Railway
Canadian Pacific Railroad
Cargill, Inc.
Chevron U.S.A. Inc.
Chevron Canada Resources
Clipper Express
Coastal Refining and Marketing, Inc.
Comair, Inc.
Consolidated Rail Corporation
Coors Transportation Company
Crowley Maritime Corporation
CSX Corporation
Delta Air Lines, Inc.
Detroit Edison Company
DHL World Airways
Dome Petroleum Limited
Dow Chemical Canada, Inc.
Dual Drilling Company
East Asiatic Company, Ltd. A/S
Embraer Aircraft Corp.
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Esso Chemicals Canada Limited
Exxon Chemical
FMC Corporation
Gearbulk Ltd.
Gulfstream Aerospace
Hong Kong Ming Wah Shipping Co., Ltd.
Ingram Barge Company
Landstar System Holdings, Inc.
Maine Central Railroad
Missouri-Nebraska Express, Inc.
Mobil Oil Corporation
Northwest Airlines, Inc.
Ohio Power Company
Pacific Carriers Ltd.
Petroleum Helicopters, Inc.
Potash Corporation
Scanports Shipping Ltd.
Shell Oil Company
Sherwin-Williams
Sky West Aviation, Inc.
Stena Bulk AB
Stolt Tankers and Terminals (Holdings) S.A.
Stroh Brewery Company
Sun Refining and Marketing Company
The Pillsbury Company
TransAmerica Equipment Leasing
Transbrasil S/A Linhas Aereas
Trans Ocean Ltd.
Trinity Industries
U.S. Air Group, Inc.
Union Carbide Canada
Union Pacific Railroad Company
United Parcel Service
Unocal Canada Limited
Yellow Freight System Inc.
PLM developed and offered the first PLM Equipment Growth Fund in 1986 in
anticipation of changes in the tax laws. As of December 31, 1993, over 65,000
investors have invested more than $1 billion in the first seven PLM Equipment
Growth Funds.
Manager's Experience in Prior Programs. Due in part to extended worldwide
recessionary conditions experienced over the past several years, the markets for
certain types of transportation equipment, primarily aircraft, marine containers
and marine vessels, have been depressed or have performed below historical
norms. The generally weak demand and excess supply in these markets resulted in
lower lease rates and reduced asset values and has correspondingly adversely
affected the cash flow of certain prior programs managed by the Manager. The
Manager continues to closely manage and monitor the impact of these factors on
the financial position of the prior programs. The return of lease rates to their
historical levels may be dependent on a number of factors including improved
international economic conditions, the absence of technological obsolescence,
new government regulations, increased industry-specific demand, and the
increased availability and corresponding cost of financing.
In its prior programs, the Manager evaluates whether the current fair market
value of equipment represents the effects of current market conditions or
permanent impairment of value (e.g., technological obsolescence or regulatory
changes). Equipment whose carrying value is determined to be permanently
impaired, without possibility of being leased at an acceptable rate, has its
book value adjusted to the estimated net realizable value.
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The depressed nature of certain equipment sectors, combined with the impact
of certain regulatory policies, has led to volatility in fair market values for
certain types of equipment. Uncertain market conditions have caused the Manager
to more closely monitor the changes in market values for these types of
equipment, and on occasion, the Manager has made adjustments to the book values
for certain items of equipment held by prior programs managed by the Manager
that reflect this volatility. While there has continued to be a general decline
in certain market values, the total estimated fair market value of the assets
generally still exceeds the aggregate carrying value of the equipment held in
the prior programs.
In addition, based on current operating lease revenues and near-term trends,
the Manager has, historically, found it necessary to reduce distributions in
certain prior programs managed by the Manager. Future distribution levels will
be a function of operating cash flow and market trends, including the level of
interest rates for alternative financing, and industry-specific demand and
supply.
PRIOR PERFORMANCE TABLES
Additional information concerning the PLM Equipment Growth Funds and certain
other public diversified equipment leasing programs sponsored by the Manager and
its Affiliates is contained in Appendix I to this Prospectus in the following
Prior Performance Tables:
<TABLE>
<S> <C> <C>
Table A -- Experience in Raising and Investing Funds
Table B -- Acquisition of Equipment by Prior Public
Programs
Table C -- Operating Results of Prior Programs
Table D -- Sales or Dispositions of Equipment by Prior
Public Programs
Table E -- Compensation to the Manager and Affiliates
</TABLE>
THE INFORMATION SET FORTH IN THE PRIOR PERFORMANCE TABLES CONTAINED IN
APPENDIX I TO THIS PROSPECTUS IS INCLUDED HEREIN SOLELY TO INFORM INVESTORS OF
THE PRIOR AND NOT FUTURE PERFORMANCE OF EQUIPMENT LEASING PROGRAMS SPECIALIZING
IN DIVERSIFIED PORTFOLIOS OF LONG-LIVED, LOW OBSOLESCENCE CAPITAL EQUIPMENT
PREVIOUSLY SPONSORED BY THE MANAGER AND ITS AFFILIATES AND SHOULD NOT BE
CONSIDERED AS INDICATIVE OF POSSIBLE CAPITALIZATION OR OPERATIONS OF THE
COMPANIES. PURCHASERS OF CLASS A UNITS OFFERED HEREBY WILL HAVE NO INTEREST IN
THE PROGRAMS DESCRIBED IN APPENDIX I UNLESS THEY ARE ALSO INVESTORS IN THOSE
PROGRAMS.
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PORTFOLIO SUMMARY FOR PLM EQUIPMENT GROWTH FUNDS
The following is a summary of the Growth Funds I, II, III, IV, V and VI
lease portfolios including their last purchases and purchase commitments as of
December 31, 1993.
<TABLE>
<CAPTION>
MARINE
AIRCRAFT RAIL VESSELS CONTAINERS TRAILERS MODUS* TOTAL
------------ ------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Growth Fund I
Purchase Price..... $ 46,785,220 $ 25,723,023 $ 21,627,941 $ 12,321,880 $10,195,049 $ 13,845,425 $130,498,538
Percent of
Portfolio........ 36% 20% 16% 9% 8% 11% 100.00%
Growth Fund II
Purchase Price..... $ 47,796,527 $ 19,010,491 $ 28,232,694 $ 17,251,343 $15,355,028 $ 15,611,111 $143,257,194
Percent of
Portfolio........ 33% 13% 20% 12% 11% 11% 100.00%
Growth Fund III
Purchase Price..... $ 69,135,977 $ 37,758,120 $ 59,584,557 $ 18,475,623 $ 5,007,575 $ 11,328,075 $201,289,927
Percent of
Portfolio........ 34% 19% 30% 9% 2% 6% 100.00%
Growth Fund IV
Purchase Price..... $ 54,557,655 $ 8,186,942 $ 59,181,734 $ 19,964,587 $ 1,073,100 $ 13,861,545 $156,825,563
Percent of
Portfolio........ 35% 5% 38% 13% 0% 9% 100.00%
Growth Fund V
Purchase Price..... $ 22,068,473 $ 13,224,541 $ 84,416,506 $ 34,174,603 $ 5,127,902 $ 36,626,758 $195,638,783
Percent of
Portfolio........ 11% 7% 43% 17% 3% 19% 100.00%
Growth Fund VI
Purchase Price..... $ 54,653,506 $ 5,000,553 $ 49,482,589 $ 17,476,401 $19,444,731 $ 21,913,980 $167,971,760
Percent of
Portfolio........ 33% 3.2% 29% 10% 12% 13% 100.00%
Total.......... $294,997,358 $108,903,670 $302,526,021 $119,664,437 $56,203,385 $113,186,894 $995,481,765
30% 11% 30% 12% 6% 11% 100.00%
</TABLE>
- ---------------
* Mobile Offshore Drilling Units
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MANAGEMENT
GENERAL
The Manager is a financial services firm principally engaged in the
organization, distribution and management of leasing programs specializing in
diversified portfolios of long-lived, low obsolescence capital equipment. The
Manager will have responsibility for supervising all aspects of the Companies'
business. The Manager has the ultimate authority in all matters affecting the
business and affairs of the Companies. The Manager may resign from the Companies
under the conditions set forth in each of the Operating Agreements and may be
removed by the vote of a Majority in Interest of the Class A Members. During
this public offering of Class A Units, the Manager will maintain a net worth in
excess of $2,000,000. The Manager will contract, on behalf of each Company, with
its wholly-owned subsidiary, PLM Investment Management, Inc. ("IMI"), for
certain management services relating to the Equipment. (See "Summary of the
Operating Agreements.")
In January 1995, PLM International entered into an agreement to form a new
equipment leasing and management company that will acquire certain assets and
operations of Boston-based, privately-held American Finance Group ("AFG"). The
newly formed entity will be a wholly-owned subsidiary of the Manager. The
Manager will not assume any of the liabilities for AFG's prior investor
programs. The Manager will provide management services to these prior investor
programs and it is anticipated that the new entity will also develop and manage
new syndicated products.
The Manager is a wholly-owned subsidiary of PLM International, Inc. ("PLM
International"). PLM International intends to continue the leasing and
syndication business of the Manager as well as pursuing equipment leasing
opportunities for its own account. PLM International will, therefore, be in
direct competition with the Companies with respect to the acquisition, leasing
and sale of Equipment. (See "Conflicts of Interest: Competition with Manager and
Affiliates; Competition for Management's Time.")
EQUIPMENT MANAGEMENT AND OTHER SERVICES
Pursuant to an Equipment Management Agreement to be entered into by each
Company with IMI, a wholly-owned subsidiary of the Manager, IMI will perform or
cause to be performed Basic Equipment Management Services. Such services include
identifying and negotiating Net Lease contracts with prospective lessees and
operators for medium-term Operating Leases (generally one year or longer),
administering and, to the extent necessary, enforcing the lessee's and
operator's obligations to use, maintain, repair, insure and return the Equipment
in accordance with the terms of the lease or other contract, and billing to and
collecting
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from the lessee or operator amounts due under the lease or other contract and
taking appropriate action in the event of a lessee or operator default. Upon the
request of the Manager, IMI may provide Supplemental Equipment Management
Services.
The principal offices of the Manager and IMI are located at One Market,
Steuart Street Tower, Suite 900, San Francisco, California 94105-1301.
The three principal subsidiaries of the Manager (including IMI) and their
specific activities are described below:
PLM Investment Management, Inc. IMI was formed in 1977 and provides a full
range of management and investment services to investors regarding various types
of transportation and related equipment. IMI now manages, through PLM
International, private individual ownership and partnership programs and nine
public programs previously sponsored by it or its Affiliates, a fleet of
diversified, long-lived, low obsolescence capital equipment that is easily
transportable by and among lessees, including approximately 6,600 items of
railroad rolling stock, over 26,000 cargo containers, 40 marine vessels and
barges, over 11,000 trailers, 27 commercial aircraft and 12 aircraft engines, 30
commuter and corporate aircraft, two portfolios of aircraft components and
rotables, one letroporter and five mobile offshore drilling units. The foregoing
includes Equipment managed as of December 31, 1993.
PLM Securities Corp. PLM Securities was formed in 1978 to manage the
placement of the investor programs sponsored by the Manager and its Affiliates
and is a member of the National Association of Securities Dealers, Inc.
("NASD"). PLM Securities will act as the Managing Placement Agent of the
Offerings.
PLM Transportation Equipment Corporation. TEC was formed in 1979 to arrange
for the acquisition, financing, initial leasing and delivery of all
transportation equipment for sale to investors and partnerships in the
individual ownership and partnership programs sponsored by the Manager and its
Affiliates. TEC will purchase Equipment from vendors and sell it to the
Companies at cost.
MANAGEMENT PERSONNEL
The directors and executive officers of the Manager and PLM International
(and key executive officers and operations personnel of its subsidiaries) are as
follows:
J. ALEC MERRIAM, 59, was appointed Chairman of the Board of PLM
International in September 1990, having served as a Director of the Manager and
PLM International since February 1988. From 1972 until 1988, Mr. Merriam was
Executive Vice President and Chief Financial Officer of Crowley Maritime
Corporation, a San Francisco-based company engaged in maritime ship-
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ping and transportation services. Previously, he was Chairman of the Board and
Treasurer of LOA Corporation of Omaha, Nebraska, and served in various financial
positions with Northern Natural Gas, also of Omaha.
ROBERT N. TIDBALL, 55, was appointed as President and Chief Executive
Officer of PLM International in March 1989 and, in April 1989, Mr. Tidball
became a Director of PLM International. At the time of his appointment, he was
Executive Vice President of PLM International. Mr. Tidball was elected President
of PLM Railcar Management Services, Inc. in January 1986. Prior to joining PLM,
Mr. Tidball was Executive Vice President of Hunter Keith, Inc., a
Minneapolis-based investment banking firm, from March 1984 to January 1986. From
1972 to 1984, he was Vice President and General Manager of North American Car's
Railcar Leasing Division and a Director of North American Car Corporation, the
American Railcar Institute and the Railway Supply Association.
ALLEN V. HIRSCH, 41, was appointed President of PLM Securities Corp. in
August 1992 and has served as the President of the Manager since January 1986
and President of TEC since August 1985. Mr. Hirsch previously served as a Vice
President of the Manager and Senior Vice President of TEC from August 1984 to
August 1985. Mr. Hirsch also served as a Vice President of TEC from July 1982 to
August 1984 and of PLM Securities from July 1982 to October 1, 1987. Mr. Hirsch
also served as President of IMI from August 1985 to August 1989. Mr. Hirsch is
also a Director of the Manager and PLM Securities Corp. and an Executive Vice
President and a Director of PLM International. Mr. Hirsch also serves as Vice
Chairman of PLM International's Board of Directors. He joined PLM, Inc. in July
1981, as Assistant to the Chairman. Prior to joining PLM, Inc., Mr. Hirsch was a
Research Associate at the Harvard Business School. From January 1977 through
September 1978, Mr. Hirsch was a consultant with the Booz, Allen and Hamilton
Transportation Consulting Division, leaving that employment to obtain his
master's degree in business administration.
J. MICHAEL ALLGOOD, 45, was appointed Vice President, Finance and Chief
Financial Officer of PLM International in October 1992 and of the Manager 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 and operational 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
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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.
STEPHEN M. BESS, 48, was appointed President of IMI in August 1989 having
served as its Senior Vice President since February 1984. Mr. Bess also served as
Corporate Controller of the Manager from October 1983 to February 1984, and,
prior to that, as Corporate Controller of PLM, Inc., from December 1982 to
October 1983. Mr. Bess is also a Vice President of the Manager. Prior to joining
PLM, Inc., 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 Corp., a
manufacturer of computer peripheral equipment, from October 1975 to November
1978.
DAVID J. DAVIS, 38, was appointed Vice President and Corporate Controller of
PLM International and the Manager in January 1994. From March 1993 through
January 1994, Mr. Davis was engaged as a consultant for various firms, including
PLM. Prior to that Mr. Davis was Chief Financial Officer of LB Credit
Corporation in San Francisco from July 1991 to March 1993. From April 1989 to
May 1991, Mr. Davis was Vice President and Controller for ITEL Containers
International Corporation which was located in San Francisco. Between May 1978
and April 1989, Mr. Davis held various positions with Transamerica Leasing Inc.,
in New York, including that of Assistant Controller for their rail leasing
division.
FRANK DIODATI, 40, was appointed President of PLM Railcar Management
Services Canada Limited in November 1986. Prior to joining PLM, Mr. Diodati was
employed by General Electric Railcar Services Limited from 1974 through 1986 in
a variety of positions, including Manager of Marketing and Sales.
DOUGLAS P. GOODRICH, 48, was appointed Senior Vice President of PLM
International in March 1994. Mr. Goodrich has also served as Vice President of
TEC 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, a subsidiary of Guardian Industries Corp. of Chicago, Illinois from
December 1980 to September 1985.
DIRK LANGEVELD, 43, was appointed Vice President of TEC's Marine Group in
June of 1990 and Senior Vice President in August of 1991. Mr. Langeveld was
Executive Vice President, Chief Operation Officer, and a Director of Marine
Transport Lines from 1987 to 1990. From 1977 to 1987 Mr. Langeveld was
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employed by Stolt Tankers and Terminals Inc. in a variety of executive positions
in the United States and the Far East.
STEVEN O. LAYNE, 40, was appointed Vice President and General Manager of
TEC's Air Group in November 1992 having served as Vice President, Commuter and
Corporate Aircraft since July of 1990. Mr. Layne was employed as the Chief
Financial Officer of Al-Pal, Inc., an international waste management company,
from April 1990 to July 1990. Between October 1989 and April 1990, Mr. Layne was
a Vice President for Aviation Services, Inc. From January 1988 to October 1989,
he was Manager of Technical Markets for Broman Aircraft Corporation. Mr. Layne
also attained the rank of Major in the United States Air Force Reserves, having
served in the United States Air Force from June 1976 to January 1988.
STEPHEN PEARY, 46, became Vice President, Secretary and General Counsel of
the Manager and PLM International in February 1988 and Senior Vice President of
PLM International in March 1994. Mr. Peary was Assistant General Counsel of the
Manager from August 1987 through January 1988. Previously Mr. Peary was engaged
in the private practice of law in San Francisco. Mr. Peary is a graduate of the
University of Illinois, Georgetown University Law School, and Boston University
(Masters of Taxation Program).
THOMAS L. WILMORE, 52, was appointed Vice President -- Rail of TEC, in March
1994 and has served as Vice President, Marketing for PLM Railcar Management
Services, Inc. since May 1988. Prior to joining PLM, Mr. Wilmore was Assistant
Vice President Regional Manager for MNC Leasing Corp. in Towson, Maryland from
February 1987 to April 1988. From July 1985 to February 1987, he was President
and Co-Owner of Guardian Industries Corp., Chicago, Illinois and between
December 1980 and July 1985, Mr. Wilmore was an Executive Vice President for its
subsidiary, G.I.C. Financial Services Corporation.
ROBERT L. PAGEL, 58, joined the Boards of Directors of the Manager and PLM
International in 1988. From June 1990 to April 1991, Mr. Pagel was President and
Co-Chief Executive Officer of The Diana Corporation, a holding company traded on
the New York Stock Exchange. Prior to June 1990, Mr. Pagel was President and
Chief Executive Officer of FanFair Corporation, specializing in sports fans'
gift shops. He previously served as President and Chief Executive Officer of
Super Sky International, Inc., a publicly traded company engaged in the
manufacture of skylight systems, located in Mequon, Wisconsin. He was formerly
Chairman and Chief Executive Officer of Blunt, Ellis & Loewi, Inc., a
Milwaukee-based investment firm. Mr. Pagel retired from Blunt, Ellis & Loewi in
1985 after a career spanning 20 years in all phases of the brokerage and
financial industries. Mr. Pagel has also served on the Board of Governors of the
Midwest Stock Exchange.
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WALTER E. HOADLEY, 78, was elected to the Board of Directors of PLM
International in September 1989. He served as a Director of PLM, Inc., from
November 1982 to June 1984 and PLM Companies, Inc. from October 1985 to February
1988. Dr. Hoadley has been a Senior Research Fellow at the Hoover Institute
since 1981. He was Executive Vice President and Chief Economist for the Bank of
America from 1968 to 1981 and Chairman of the Federal Reserve Bank of
Philadelphia from 1962 to 1966. Dr. Hoadley has also served as a Director of
Transcisco Industries, Inc. since February 1988.
HAROLD R. SOMERSET, 60, 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, a recently acquired subsidiary of Alexander & Baldwin, Inc.
("C&H"). Mr. Somerset joined C&H in 1984 as Executive Vice President and Chief
Operating Officer, having served on its Board of Directors since 1978, a
position in which he continues to serve. 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 -- Agriculture, Vice President, General Counsel and
Secretary. In addition to a law degree from Harvard Law School, Mr. Somerset
also holds degrees in civil engineering from the Rensselaer Polytechnic
Institute and 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
headquartered in Maryland.
COMMITTEES
To facilitate organization, analysis, negotiation, documentation, management
and final disposition of investments for the investor programs sponsored by the
Manager and its Affiliates, the Manager has established the following two
committees which oversee the programs:
Credit Review Committee. The Credit Review Committee reviews every
lease and other equipment transaction and lessee and other third party
credit on behalf of the investor programs, including analysis of financial
statements and references and product, market and management reviews of
prospective lessees. This Committee makes the investment decisions with
respect to purchases of or other investment in Equipment. The decisions of
the Committee are discretionary and the formation of the Committee does not
relieve the Manager of its fiduciary duties to the Companies. The members of
this Committee are Messrs. Tidball, Bess, Allgood, Hirsch, Davis and
Goodrich.
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Investment Advisory Committee. The Investment Advisory Committee
reviews investor program operations on at least a quarterly basis, with
emphasis on cash distributions to investors, cash management decisions,
lease and other contract administration and Equipment remarketing issues and
ultimate disposition of assets. The Investment Advisory Committee is
organized with a view to applying an interdisciplinary approach, involving
management, financial, legal and marketing expertise, to the analysis of
investor program operations. The members of this Committee are Messrs. Bess,
Peary, Hirsch, Allgood, Davis, Goodrich and Tidball.
BUSINESS COMBINATIONS WITH PLM INTERNATIONAL
Without the approval of holders of at least 66 2/3% of all outstanding Class
A Units, neither Company shall enter into any transaction involving the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of such Company and the issuance of securities of a Roll-Up Entity,
unless such a transaction involves Class A Units if the Class A Units have been
listed for at least twelve months on a national securities exchange or traded
through the Nasdaq National Market, or the conversion to partnership, corporate,
trust or association form of such Company only if, as a consequence of the
transaction, there will be no significant adverse change in the Class A Members'
voting rights, the term of existence of such Company, compensation of the
Manager or its Affiliates, or such Company's investment objectives. Class A
Members who do not consent to a Roll-Up shall be given the option of (i)
accepting the securities of the Roll-Up Entity; or (ii) receiving cash in an
amount equal to the non-consenting Class A Members' pro rata share of the
appraised value of the net assets of the Company. (See "Summary of the Operating
Agreements -- Roll-Ups".) In addition, PLM International and its Affiliates,
including the Manager, will not collectively acquire for investment 5% or more
of the Class A Units and such Class A Units shall have restricted voting rights
in any matter where the interests of a Company and/or the Class A Members'
interests directly conflict with those of the Manager or its Affiliates.
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TRANSFERABILITY OF CLASS A UNITS
The Manager anticipates that no public market will develop for the Class A
Units. The Companies do not intend to list the Class A Units on any exchange or
to permit trading on any over-the-counter market. In addition, there are
substantial restrictions on the transferability of Class A Units.
GENERAL LIMITATIONS
To prevent the Companies from possessing the corporate characteristic of
"free transferability" for purposes of determining whether the Companies should
be treated as partnerships for income tax purposes, the Class A Units cannot be
transferred without the consent of the Manager, whose consent may be withheld in
its sole and absolute discretion. Further, to prevent the Class A Units from
being considered "publicly-traded" and, thereby endeavor to avoid taxation of
the Companies as corporations under Section 7704 of the Code, Class A Units
cannot be transferred without the consent of the Manager. The Manager intends to
monitor transfers of Class A Units in an effort to ensure that all transfers
will be within certain safe harbors promulgated under IRS Notice 88-75, which
was issued to furnish guidance regarding the publicly-traded partnership rules
of Section 7704 of the Code. These safe harbors limit the number of transfers
that can occur in any one year. The Manager intends to cause each Company to
comply with the safe harbor that restricts nonexempt transfers and redemptions
to no more than 5% of the total outstanding interests in each Company's capital
or profits in any one year. To provide the potential for liquidity, each Company
may, in the Manager's sole and absolute discretion, redeem up to 2% of its
outstanding Class A Units each year.
REDEMPTION PROVISION
Upon the conclusion of the 30-month period following the termination of the
Offering, each Company may, at the sole discretion of the Manager, repurchase up
to 2% of its outstanding Class A Units. On a quarterly basis, the Manager, at
its discretion, may establish an amount for redemption, generally not to exceed
2% of the outstanding Class A Units per year, subject to the Manager's good
faith determination that such redemptions should not (i) cause a Company to be
taxed as a corporation under Section 7704 of the Code or (ii) impair the capital
or operations of a Company. (Each Company may redeem Class A Units in excess of
the 2% limitation if, in the good faith judgment of the Manager, the conditions
imposed in the preceding sentence would remain satisfied.) The redemption price
for Class A Units will be 105% of the selling Class A Member's Unrecovered
Principal attributable to the Class A Units for sale. Following the
determination of the annual redemption amount, redemptions will occur on a
quarterly
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basis. All requests for redemption, which must be made in writing and
accompanied by the Certificates, if any, applicable to the Class A Units for
which redemption is requested, must be on file as of the quarterly Record Date
in which the redemption is to occur. The Manager will maintain a master list of
requests for redemption with priority being given to Class A Units owned by
estates, followed by IRAs and Qualified Plans. All other Class A Members will be
treated on a first come, first serve basis. Redemption requests made by or on
behalf of nonAffiliated Class A Members will be given priority over those made
by an Affiliated Class A Member. All redemption requests will remain in effect
until and unless cancelled, in writing, by the requesting Class A Member(s).
In addition, investors should note that the redemption price is based on a
percentage of the selling Class A Member's Unrecovered Principal and is,
therefore, arbitrary and may not bear any relationship to the fair market value
of a Class A Unit.
For tax consequences relating to the redemption of Class A Units, see
"Income Tax Considerations: Disposition of Class A Units -- General."
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for purposes
of calculating the volume limitations imposed by the safe harbors under IRS
Notice 88-75 and will generally be permitted by the Manager:
(1) Transfers in which the basis of the Class A Unit in the hands of the
transferee is determined by reference to its basis in the hands of the
transferor, or is determined under Section 732 of the Code. Transactions in
which basis is determined by reference to the transferor include the
following: Class A Units acquired by corporations in exchange for stock, in
reorganizations, and as certain contributions to capital; gifts of Class A
Units; and Class A Units contributed to another partnership. Transfers of
Class A Units in which the basis is determined under Section 732 of the Code
include certain nonliquidating as well as liquidating distributions by a
parent partnership to its partners of interests in a subpartnership;
(2) Transfers at death;
(3) Transfers between members of a family bearing the relationships
specified in Section 267(c)(4) of the Code. "Members of a family" include
brothers and sisters, spouse, ancestors (including parents and
grandparents), and lineal descendants (including children and
grandchildren);
(4) Transfers resulting from the issuance of Class A Units in exchange
for cash, property, or services;
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(5) Transfers resulting from distributions from Qualified Plans; and
(6) Any block transfer. A "block transfer" is defined as a transfer by a
Class A Member in one or more transactions during any 30-day period of Class
A Units representing in the aggregate more than 5% of the total outstanding
interests in capital or profits of the Company.
ADDITIONAL RESTRICTIONS ON TRANSFER
The following additional restrictions will apply to each transfer: (i) no
transfer will be permitted which, in the good faith determination of the
Manager, will result in the possible invalidation of the registration of any
Equipment (in the case of U.S. registered aircraft, such registration being
subject to possible invalidation should in excess of 25% of the Units be owned
by or for Aliens and, in the case of U.S. registered marine vessels, such
registration being subject to possible invalidation should any Unit be owned by
or for a non-U.S. Citizen); (ii) no transfer may be made if it would cause 25%
or more of each class of the outstanding Units to be owned by Benefit Plans; and
(iii) no transfer will be permitted unless the transferee obtains such
governmental approvals as may reasonably be required by the Manager, including
without limitation, the written consent of the California Commissioner of
Corporations and of any other state securities agency or commission having
jurisdiction over the transfer. The rule of the California Commissioner of
Corporations which applies to the transfer of the Class A Units prohibits
transfers without the Commissioner's prior consent except as provided in the
following section of the California Code of Regulations:
260.141.11. Restriction on Transfer
(a) The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall
cause a copy of this section to be delivered to each issuee or transferee of
such security at the time the certificate evidencing the security is
delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the
prior written consent of the Commissioner (until this condition is removed
pursuant to Section 260.141.12 of these rules), except: (1) to the issuer;
(2) pursuant to the order or process of any court; (3) to any person
described in subdivision (i) of Section 25102 of the Code or Section
260.105.14 of these rules; (4) to the transferor's ancestors, descendants,
or spouse, or any custodian or trustee for the account of the transferor or
the transferor's ancestors, descendants or spouse; or to a transferee by a
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trustee or custodian for the account of the transferee or the transferee's
ancestors, descendants, or spouse; (5) to holders of securities of the same
class of the same issuer; (6) by way of gift or donation inter vivos or on
death; (7) by or through a broker-dealer licensed under the Code (either acting
as such or as a finder) to a resident of a foreign state, territory or country
who is neither domiciled in this state to the knowledge of the broker-dealer,
nor actually present in this state if the sale of such securities is not in
violation of any securities law of the foreign state, territory or country
concerned; (8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group; (9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required; (10)
by way of a sale qualified under Sections 25111, 25112, 25113, or 25121 of the
Code, of the securities to be transferred, provided that no order under Section
25140 or subdivision (a) of Section 25143 is in effect with respect to such
qualification; (11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation; (12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or subdivision (a)
of Section 25143 is in effect with respect to such qualification; (13) between
residents of foreign states, territories or countries who are neither domiciled
nor actually present in this state; (14) to the State Controller pursuant to the
Unclaimed Property Law or to the administrator of the unclaimed property law of
another state; (15) by the State Controller pursuant to the Unclaimed Property
Law or by the administrator of the unclaimed property law of another state if,
in either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser; (16) by a trustee to a successor
trustee when such transfer does not involve a change in the beneficial ownership
of the securities; or (17) by way of an offer and sale of outstanding securities
in an issuer transaction that is subject to the qualification requirement of
Section 25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102; provided that any such transfer is on the
condition that any certificate evidencing the security issued to such transferee
shall contain the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial
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issuance or upon any transfer thereof, shall bear on their face a legend,
prominently stamped or printed thereon in capital letters of not less than
10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY,
OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S
RULES."
All references to "Code" in the foregoing rules refer to the California
Corporations Code. Any attempted transfer in violation of the foregoing rules
will be void.
For a discussion of the mechanics of transfers of Class A Units and
admission to a Company as a Substituted Class A Member, see "Summary of the
Operating Agreements: Transfer of Class A Units."
ALLOCATIONS AND DISTRIBUTIONS
BETWEEN THE CLASS A MEMBERS AND THE CLASS B MEMBERS
Generally, each Operating Agreement will allocate net profits and net loss
as follows: 99% to the Class A Members and 1% to the Class B Members. The Class
B Members will also be specially allocated (i) 100% of the expenditures incurred
in connection with the organization of a Company and in connection with the
initial public offering of Class A Units of a Company, and (ii) Company income
equal to the excess of cash distributed to the Class B Members over the Class B
Members' 1% share of net profits. The effect on the Class A Members of this
special income allocation will be to increase the net loss or decrease the net
profits allocable to the Class A Members by an equal amount. In addition, the
cash distributions of each Company will be distributed initially 15% to the
Class B Members and 85% to the Class A Members. When the aggregate cash
distributions paid on a Class A Unit to the original Class A Member purchasing
such Class A Unit from Company or any permitted transferee with respect to such
Class A Unit equal or exceed the original Capital Contribution of $20.00 for
such Class A Unit, then cash distributions as between a Class A Member holding
such a Class A Unit and the Class B Members will be distributed 25% to the Class
B Members and 75% to such Class A Member. Upon liquidation of the Companies,
final cash distributions will be made to the Members in accordance with the
positive balances of their Capital Accounts. In order to substantially reduce or
eliminate the differences among the Capital Accounts of the Class A Members due
to differing admission dates of such Class A Members to a Company, the Manager
will specially allocate net profits and net loss
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among the Class A Members in such manner and in such amounts so as to equalize
the Capital Account balances of the Class A Members. Such special allocations
will begin in the fiscal year that the last Class A Member is admitted as a
Member of such Company. (See "Income Tax Considerations: Certain Principles of
Partnership Taxation -- Allocations.")
Net profits and net loss (as more fully described under the definitions of
"Net Profits" and "Net Loss" in the Glossary) will be computed without taking
into account, in each taxable year of each Company, any items of income, gain,
loss or deduction specially allocated. No Class A Member or Class B Member will
be required to contribute cash to the capital of a Company in order to restore a
closing Capital Account deficit.
AMONG THE CLASS A MEMBERS
As a general rule, net profits and net loss allocable to the Class A Members
will be apportioned among them in accordance with the number of Class A Units
owned by each, and cash distributions allocable to the Class A Members will be
allocated and distributed among them in accordance with the number of Class A
Units owned by each.
The Companies will utilize conventions for purposes of determining the
ownership of Class A Units with reference to the allocation of net profits and
net loss among the Class A Members. Except during the period in which Class A
Units are being offered for a particular Company (the "Offering Period"), such
Company will conduct an interim closing of its books as of the close of each
calendar month and will determine the net profits or net loss for that calendar
month which, to the extent allocable to the Class A Members, will then be
apportioned among them solely with reference to the ownership of Class A Units
as of the fifteenth day of the month. A different convention will be utilized
during the Offering Period, whereby net profits and net loss allocable to the
Class A Members will be apportioned among them in the ratio which the product of
the number of Class A Units owned by a Class A Member multiplied by the number
of days in which the Class A Member owns such Class A Units during the Offering
Period bears to the sum of such products for all Class A Members.
Except during the Offering Period, cash distributions allocable to the Class
A Members who are entitled to 85% or 75% of cash distributions, as the case may
be, will be apportioned among and distributed to such Class A Members solely
with reference to the number of Class A Units owned by each as of the close of
business on the date the Manager determines the time and amount of cash
distributions (the "Record Date") for each such distribution. During the
Offering Period, cash distributions allocable to the Class A Members who are
entitled to 85% or 75% of cash distributions, as the case may be, will be
apportioned among and
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distributed to such Class A Members with reference to both (i) the number of
such Class A Units owned by each as of each Record Date and (ii) the number of
days since the previous Record Date (or, in the case of the first Record Date,
the commencement of the Offering Period) that the Class A Member has owned such
Class A Units.
It is only upon liquidation of each Company's Equipment portfolio that it
can be determined whether a distribution is a return of capital or a return on
capital. However, a substantial portion of distributions made prior to
liquidation of each Company may be deemed a return of capital.
TIMING OF DISTRIBUTIONS
Distributions will be determined and paid quarterly, although a Class A
Member may elect to receive distributions on a monthly basis. Investors who wish
to make this election can do so by checking the appropriate box on the
Subscription Agreement or, if no Subscription Agreement is completed, by asking
their Selected Agent to make a corresponding designation to the Manager. Each
December, Class A Members will be given another opportunity to elect to receive
monthly distributions or, for those Class A Members already receiving monthly
distributions, to elect to receive distributions on a quarterly basis.
Cash distributions may be characterized as a return of capital, a return on
capital or a portion of each. During the life of the Companies, certain
distributions, or portions thereof, paid to investors will be a return of
capital. The portion of any distribution constituting a return of capital
depends in part on the residual values which may be realized on the disposition
of each Company's Equipment and is not determinable until the Equipment
portfolio is liquidated.
INCOME TAX CONSIDERATIONS
SUMMARY
The following is a summary of relevant federal income tax considerations
concerning an investment in a Company. This summary was prepared, and the
related opinions were given, by Jackson, Tufts, Cole & Black, special counsel to
the Companies, and is based upon the Internal Revenue Code of 1986, as amended
and in effect as of the date of this Prospectus (the "Code"), applicable
Regulations promulgated thereunder, published rulings and court decisions and
upon the assumption that the Companies will operate their businesses as
described in the Prospectus. A more detailed tax analysis, including items not
discussed in this summary, follows the Summary.
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Classification as a "Partnership." Counsel has rendered its opinion that
each Company will be classified as a partnership for federal income tax
purposes. (See "Income Tax Considerations: General; and Partnership Status.")
Taxation of Class A Members. A Class A Member's share of a Company's income
generally is not identical to the Class A Member's share of cash distributions.
Any cash distributions in excess of a Class A Member's adjusted tax basis in his
Class A Units will cause such Class A Member to recognize such excess as taxable
income. (See "Income Tax Considerations: Certain Principles of Partnership
Taxation.")
Income Recognition. The Companies' tax returns will be prepared using the
accrual method of accounting. Under such method, the Companies will include in
income items such as rentals and interest as and when earned by the Companies,
whether or not received. In addition, certain of the Companies' Equipment leases
may be subject to Section 467 of the Code which could result in a Class A Member
receiving increased allocations of taxable income (or reduced allocations of
loss) in earlier years without any increase in cash available for distribution
until subsequent years. (See "Income Tax Considerations: Certain Principles of
Partnership Taxation -- Income Recognition.")
Allocations of Profits and Losses. Counsel has opined that the tax
allocation provisions in each Operating Agreement should comply with Code
Section 704(b) and the Regulations promulgated thereunder and each Class A
Member's distributive share of income, gain, loss and deduction should be
determined and allocated substantially in accordance with each Operating
Agreement. (See "Income Tax Considerations: Certain Principles of Partnership
Taxation -- Allocations.")
Limitations on Deduction of Losses. There are certain limitations on the
ability of a Class A Member to utilize his distributive share of losses from the
Companies to offset income from other sources. (See "Income Tax Considerations:
Limitations on Utilization of Losses.")
Deductibility of Fees. The Companies intend to pay, and deduct, various
fees including fees paid to the Manager. Subject to certain assumptions, counsel
has opined that it is more likely than not that such fees will be deductible.
(See "Income Tax Considerations: Fees and Reimbursements to the Manager and
Affiliates.")
Ownership of Leased Equipment. In order for the Companies and Class A
Members to be entitled to depreciation deductions, the leases of Equipment must
be treated as leases rather than sales or financings for federal income tax
purposes. Each Company intends to structure each lease transaction so that the
lease will be treated as a lease rather than a financing arrangement for federal
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income tax purposes. (See "Income Tax Considerations: Ownership of Equipment.")
Title to Aircraft and Marine Vessels. The Companies may hold title to
aircraft, marine vessels and other equipment through various forms including
single and multiple beneficiary trusts, limited partnerships and equipment
pools. The tax aspects attributable to such methods of ownership can vary. (See
"Income Tax Considerations: Ownership of Equipment -- Title to Aircraft, --
Title to Marine Vessels and -- Equipment Pools".)
Sale or Exchange of Equipment. A Company's gain or loss on sale or
disposition of an item of Equipment will equal the difference between sale
proceeds (including the amount of any indebtedness to which the Equipment is
subject) and a Company's adjusted tax basis in the Equipment. In certain
circumstances, the amount of tax payable by a Class A Member on his share of
gain on sale of Equipment may exceed his share of cash proceeds therefrom. (See
"Income Tax Considerations: Sale of Equipment.")
Disposition of Class A Units. On sale or disposition of Class A Units, a
Class A Member will recognize gain equal to the excess, if any, of cash received
(plus the Class A Member's share of any Company liabilities) over the Class A
Member's tax basis in the Class A Units. Such gain will be taxed at ordinary
income tax rates to the extent of depreciation recapture. In certain
circumstances, the amount of tax payable by a Class A Member on the gain
realized from a sale or disposition of his Class A Units may exceed the cash
received therefrom. (See "Income Tax Considerations -- Disposition of Class A
Units.")
Tax Elections. The Manager in its sole discretion has the authority under
the Operating Agreements to make any elections available to the Companies with
respect to federal, state and local tax matters, including the decision whether
or not to file a Section 754 Election, which affects the tax consequences to a
transferee incident to a transfer of Units. Depending on the facts of each
transfer, the existence or absence of such election may have an adverse effect
on the marketability and sale price of Class A Units. (See "Income Tax
Considerations: Section 754 Election.")
Investment by Qualified Plans, IRAs and Other Exempt Entities. The
Companies will generate unrelated business taxable income to Class A Members
which are Qualified Plans, IRAs and corporations, community chests, funds or
foundations that qualify under Section 501(c)(3) of the Code ("Exempt
Entities"), with the result that the Companies' income will be subject to tax to
the extent that a Qualified Plan's, IRA's or Exempt Entity's unrelated business
taxable income from all sources exceeds $1,000. (See "Income Tax Considerations:
Investment by Qualified Plans, IRAs and Exempt Entities.")
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Alternative Minimum Tax. The tax preference items and adjustments under the
alternative minimum tax that may be present in the Companies include the excess
of depreciation deductions claimed over deductions that would be allowable if
the Equipment were subject to depreciation over its ADR midpoint life using the
150% declining balance method, switching to the straight-line method in later
years. (See "Income Tax Considerations: Taxes -- Alternative Minimum Tax.")
State and Local Tax Considerations. The Companies may be required to file
tax returns and pay state and local taxes as a result of the operations of the
Companies. The Companies' payment of such taxes will reduce the amount of cash
available for distribution to the Class A Members. Further, each Company will be
treated as a corporation rather than a partnership for Pennsylvania state and
local tax purposes with the result that a portion of cash distributions to
Pennsylvania investors will be treated as portfolio income (rather than passive
income) for Pennsylvania state income tax purposes. Each prospective investor is
urged to consult his tax advisor with respect to the state and local tax
consequences of an investment in a Company.
Foreign Tax Considerations. Because the Companies may acquire Equipment
which is operated outside the United States, Class A Members may be required to
file returns and pay taxes in foreign jurisdictions. Class A Members who pay
foreign tax as a result of a Company's operations may be entitled to a foreign
tax credit or deduction to reduce their United States tax liability. (See
"Income Tax Considerations: Foreign Tax Considerations.")
Dissolution of Company. Upon dissolution of a Company, a Class A Member
will recognize taxable income if the cash received (including the reduction in
his share of a Company's liabilities) exceeds his tax basis in his Class A
Units. (See "Income Tax Considerations: Certain Principles of Partnership
Taxation.")
GENERAL
Subject to the qualifications and assumptions set forth herein and in
counsel's opinion, counsel has opined that each Company should be classified as
a partnership for federal income tax purposes, that the allocations of Net
Profits and Net Loss in each Operating Agreement should be respected for federal
income tax purposes, and on certain other issues.
Neither the Manager, the Companies, nor counsel can guarantee that any
federal income tax advantages described in this summary will be available. An
opinion of counsel represents only such counsel's best legal judgment, and has
no binding effect or official status of any kind, so that no assurance can be
given that the opinions of counsel would be sustained by a court, if contested,
or that legislative or administrative changes or court decisions may
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not be forthcoming which would require modifications of the statements and
conclusions expressed herein. Except for the opinions specifically addressed
herein, counsel has not opined as to the probable outcome on the merits of any
issue discussed below. Final disallowance of all or any portion of a Company's
federal income tax advantages would of course adversely affect an investment in
a Company.
Counsel will not prepare or review either Company's income tax information
returns, which will be prepared by management and independent accountants for
the Companies. Each Company has made and will make a number of decisions on such
tax matters as to the expensing or capitalizing of particular items, the proper
period over which capital costs may be depreciated or amortized and many other
similar matters. Such matters are handled by each Company, often with the advice
of independent accountants retained by each Company, and are usually not
reviewed with counsel.
The following discussion is not intended as a substitute for careful tax
planning by prospective investors. The income tax consequences of an investment
in a limited liability company such as the Companies are often uncertain and
complex and will not be the same for all investors. Details of significance to a
particular taxpayer may not be present, as it is impractical to set forth in a
discussion of acceptable length all aspects of federal income tax law that may
be relevant to an investment in a Company. The discussion below considers the
federal income tax considerations associated with an investment in a Company by
individuals who are citizens of the United States or resident aliens and is not
intended to deal with matters which may be relevant to other investors, such as
corporations, partnerships or trusts. The discussion, however, does describe
some, but not all, of the material federal income tax considerations associated
with an investment in a Company by non-resident aliens and foreign corporations
and Keogh plans and pension and profit-sharing plans qualifying under Section
401(a) of the Code (collectively, "Qualified Plans"), individual retirement
accounts described in Section 408 of the Code ("IRAs"), and corporations,
community chests, funds or foundations qualifying under Section 501(c)(3) of the
Code (collectively, "Exempt Entities"). A corporate investor should be aware
that the tax consequences of its investment in a Company will differ in several
material respects from those applicable to individuals.
FOR THE FOREGOING REASONS, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT THE
INVESTOR'S OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES ARISING FROM AN INVESTMENT IN A COMPANY AS THEY RELATE TO THE
INVESTOR'S OWN TAX SITUATION.
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PARTNERSHIP STATUS
The ability of an investor to obtain the tax benefits from an investment in
a Company will depend in part upon the classification of each Company as a
partnership for federal income tax purposes rather than as an "association"
taxable as a corporation. The Manager has not requested, and does not intend to
request, a ruling from the IRS that each Company will be taxed as a partnership
and not as an "association." (See "Risk Factors: Tax Risks -- Partnership
Status.") Even if each Company sought such a ruling, it is unlikely that the IRS
would issue a tax ruling. In the absence of such a tax ruling, there can be no
assurance that each Company will be classified as a partnership. Each Company,
however, will rely upon an opinion of counsel that each Company will be treated
as a partnership for federal income tax purposes and not as an association
taxable as a corporation.
Counsel's opinion is based in part upon Sections 301.7701-2 and 301.7701-3
of the Regulations, which provide that, in the absence of significant relevant
"other factors," an unincorporated organization will not be treated as a
corporation for federal income tax purposes unless it has three of the
following: (i) continuity of life; (ii) free transferability of interests; (iii)
limited liability; and (iv) centralized management. In counsel's opinion, each
Company will lack continuity of life, free transferability of interests, and
limited liability.
Section 301.7701-2(b)(1) of the Regulations provides that if the death,
insanity, bankruptcy, retirement, resignation, expulsion or other event of
withdrawal of a general partner of a limited partnership causes a dissolution of
the partnership, continuity of life does not exist; furthermore, continuity of
life does not exist notwithstanding the fact that a dissolution of the limited
partnership may be avoided, upon such an event of withdrawal of a general
partner, by the remaining general partners agreeing to continue the partnership
or by at least a majority in interest of the remaining partners agreeing to
continue the partnership. See Glensder Textile Co. v. Commissioner, 46 B.T.A.
176 (1942), acq. 1942-1 C.B. 8.
Although Section 301.7701-2(b)(1) of the Regulations and Glensder Textile
specifically address the dissolution of a limited partnership, the IRS has ruled
that the contingent continuity of life concept reflected in the regulation and
Glensder Textile applies in classifying limited liability companies such as the
Companies. See Rev. Rul. 94-30, 1994-19 I.R.B. 6; Rev. Rul. 94-51, 1994-32
I.R.B. 11. In Glensder Textile, the court concluded that a limited partnership
lacked continuity of life because upon the death, retirement, or incapacity of a
general partner, the remaining general partners would have to agree to continue
the partnership, and there was no assurance that they would do so. The court
noted that the contingent continuity of a partnership was not analogous to the
chartered
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life of a corporation, which continues regardless of the death or resignation of
its directors or stockholders.
Under each Company's Operating Agreement, unless at least a majority in
interest of the remaining Members affirmatively votes to elect a new manager who
would become a Class B Member (as a result of which the business will be
continued), each Company is dissolved upon the death, withdrawal, removal,
bankruptcy or involuntary dissolution of the last remaining Class B Member.
Thus, if the last remaining Class B Member ceases to be a Member of the Company
for any reason, the continuity of such Company is not assured because at least a
majority in interest of the remaining Members must agree to continue the
business. Consequently, each Company lacks the corporate characteristic of
continuity of life.
Section 301.7701-2(c)(1) provides that an organization has the corporate
characteristic of centralized management if any person (or group of persons that
does not include all the members) has continuing exclusive authority to make
management decisions necessary to the conduct of the business for which the
organization was formed.
Section 301.7701-2(c)(2) provides that the persons who have this authority
may, or may not, be members of the organization and may hold office as a result
of a selection by the members from time to time, or may be self-perpetuating in
office. Centralized management can be accomplished by election to office, by
proxy appointment, or by any other means that has the effect of concentrating in
a management group continuing exclusive authority to make management decisions.
Under each Company's Operating Agreement, each Company is managed by the
Manager. Therefore, each Company possesses the corporate characteristic of
centralized management.
Section 301.7701-2(d)(1) provides that an organization has the corporate
characteristic of limited liability if under local law there is no member who is
personally liable for the debts of, or claims against, the organization. A
person is personally liable if a creditor of an organization may proceed against
the assets of such person to the extent that the assets of the organization are
insufficient to satisfy the creditor's claim.
The Delaware Act provides that except as otherwise provided in the operating
agreement, the members of a limited liability company are not personally liable
for a limited liability company's debts, obligations, or liabilities solely by
reason of being members. The Operating Agreement of each Company provides that
the Class B Members are liable for the Company's debts, obligations, or
liabilities to the same extent as a general partner of a limited
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partnership formed under the Delaware Limited Partnership Act. Consequently,
each Company should not possess the corporate characteristic of limited
liability.
Section 301.7701-2(e)(1) provides that an organization has the corporate
characteristic of free transferability of interests if each of the members or
those members owning substantially all of the interests in the organization have
the power, without the consent of other members, to substitute for themselves in
the same organization a person who is not a member of the organization. For this
power of substitution to exist in the corporate sense, the member must be able,
without the consent of other members, to confer upon the member's substitute all
the attributes of the member's interest in the organization. The characteristic
of free transferability does not exist if each member can, without the consent
of the other members, assign only the right to share in the profits but cannot
assign the right to participate in the management of the organization.
Under each Company's Operating Agreement, a Class A Member cannot transfer
his Class A Units to another person without the consent of the Manager, which
consent may be withheld in the Manager's absolute discretion. Therefore, each
Company lacks the corporate characteristic of free transferability of interests.
Counsel's opinion also takes into account Section 7704 of the Code which
provides, with certain exceptions which are not relevant to this discussion,
that "publicly-traded partnerships" are taxable as corporations. Section 7704(b)
of the Code defines the term "publicly-traded partnership" to mean any
partnership if: (i) interests in the partnership are traded on an established
securities market or (ii) interests in the partnership are readily tradable on a
secondary market or the substantial equivalent thereof. The legislative history
of Code Section 7704 provides that a secondary market for interests in a
partnership is generally indicated by the existence of a person standing ready
to make a market in the interests. Absent the actual listing of interests on an
exchange or the quotation of interests on an established secondary market, the
substantial equivalent of a secondary market will be deemed to exist only if the
holders of interests in the partnership have a readily available regular and
ongoing opportunity to sell or exchange their interests through a public means
of obtaining or providing information of offers to buy, sell, or exchange
interests. The substantial equivalent to a secondary market could be viewed as
existing where a regular plan of redemptions by a partnership provides holders
of interests with readily available, regular, and ongoing opportunities to
dispose of their interests in a time frame that a market-maker would provide and
prospective buyers have similar opportunities to acquire such interests.
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Each Operating Agreement provides that no transfer of any Class A Unit "will
be recognized or effective for any purpose" to the extent it is determined by
the Manager to be effectuated through an "established securities market" or a
"secondary market (or the substantial equivalent thereof)," within the meaning
of Section 7704 of the Code, so as to adversely affect the tax status of a
Company as a partnership rather than an association taxable as a corporation;
the Manager will also prohibit any transfer of Class A Units which, in the
Manager's good faith judgment, will cause a Company to fall outside of the safe
harbors of IRS Notice 88-75, discussed below. (See "Risk Factors: Investment
Risks -- Limited Transferability of Class A Units.")
In IRS Notice 88-75, which is a preview of forthcoming regulations under
Section 7704(b) of the Code, the IRS lists certain types of limited, non-public
transfers which will be disregarded in determining whether a partnership is
publicly traded. Recognizing that these exempted transfers will not result in a
Company being deemed publicly traded, Section 6.05 of each Operating Agreement
incorporates six categories of these exempt transfers ("exempt transfers") and
provides that the Manager will generally permit exempt transfers to occur. (See
"Transferability of Class A Units: Exempt Transfers.")
In addition to providing for the exempt transfers, IRS Notice 88-75 states
that partnership interests will not be deemed "readily tradable on a secondary
market (or the substantial equivalent thereof)" if any of the three safe harbors
provided for in that Notice is satisfied. One of these is the "five percent safe
harbor." It provides that a secondary market or its equivalent will not exist if
the sum of the interests in partnership capital or profits attributable to those
partnership interests that are sold or redeemed during the partnership's taxable
year does not exceed five percent of the total interests in partnership capital
or profits. The six categories of exempt transfers do not count towards the five
percent ceiling. In determining whether a Company satisfies the five percent
safe harbor, non-exempt privately arranged transactions and redemptions, if any,
of Class A Units by a Company pursuant to the redemption provisions of Section
6.10 of each Operating Agreement, will all be counted.
While the Manager will use its best efforts to limit the type and number of
transfers of Class A Units to those which will allow each Company to remain
within the five percent safe harbor, the Manager does not warrant that each
Company will satisfy this safe harbor during each of its taxable years. It is
conceivable that transfers of Class A Units could occur which would cause a
Company to fall outside the safe harbor. In this regard, IRS Notice 88-75 states
that failure to meet any of the safe harbors will not create a presumption that
a secondary market or its equivalent exists for partnership interests. This
Notice, however, remains the
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IRS' only promulgation of official guidance under Code Section 7704 to date. No
assurances can be offered that if the amount and type of trading in the Class A
Units were to fall outside the safe harbor, the IRS would not claim publicly
traded partnership status with respect to a Company.
If for any reason a Company were treated for federal income tax purposes as
a corporation, such Company's income, deductions and credits would be reflected
only on its income tax return rather than being passed through to Class A
Members, and such Company would be required to pay income tax at corporate tax
rates on any net income. Any amounts available (after corporate taxes) for
distribution to the Class A Members would be treated as dividends to the extent
of current and accumulated earnings and profits. In addition, distributions from
such Company would be classified as portfolio income rather than passive
activity income and thus would not be eligible to be offset by previous passive
activity losses attributable to such Company. (See "Income Tax Considerations:
Limitations on Utilization of Losses -- Passive Activity Loss Limitations.")
THE FOLLOWING DISCUSSION IS BASED UPON THE ASSUMPTION THAT EACH COMPANY WILL BE
CLASSIFIED AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES.
CERTAIN PRINCIPLES OF PARTNERSHIP TAXATION
General. A partnership is not subject to federal income tax, but is
required to file a partnership information tax return each year (Form 1065).
Each Class A Member will be required to take into account, in computing the
Class A Member's federal income tax liability, the Class A Member's distributive
share (as determined by each Operating Agreement and reported on Schedule K-1 to
Form 1065) of all items of a Company's income, gain, loss, deduction, credit and
tax preference for any taxable year of a Company ending within or with the
taxable year of the Class A Member without regard to whether the Class A Member
has received or will receive any cash distributions from a Company. Thus, a
Class A Member may be subject to tax if a Company has net income even though no
corresponding cash distribution is made.
Cash distributions from a partnership are generally not the equivalent of
partnership income for income tax purposes. If the cash distributed by a Company
in any year to a Class A Member exceeds the Class A Member's share of a
Company's taxable income for the year, the excess will constitute a return of
capital. A return of capital is applied first to reduce the tax basis of a Class
A Member's interest in a Company. (See "Income Tax Considerations: Limitations
on Utilization of Losses -- Tax Basis.") Any amounts in excess of such tax basis
will generally be treated as the
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proceeds of a "sale" of the Class A Member's interest in a Company and treated
as either capital gain and/or ordinary income for the year in which the
distribution occurs. (See "Income Tax Considerations: Disposition of Class A
Units.")
A Class A Member's distributive share of any taxable income generated by a
Company will not be deemed to be "net earnings from self employment."
Accordingly, such income will not be subject to the tax imposed on self-employed
persons by Sections 1401 through 1403 of the Code, commonly referred to as
"social security taxes." Prospective investors who receive social security
benefits should be aware that, although income generated by a Company will not
be deemed to be "net earnings from self employment," such income will be
included in a Class A Member's "modified adjusted gross income" under Section 86
of the Code for purposes of determining whether a Class A Member's social
security benefits, if any, are subject to taxation.
Income Recognition. The Companies' tax returns will be prepared using the
accrual method of accounting. Under the accrual method, a Company will recognize
as income items such as interest and rentals as and when earned by a Company
whether or not they are received. In certain circumstances, where a lease
provides for varying rental payments, increasing in the later years of the lease
(step rentals), Section 467 of the Code requires the lessor to take the rentals
into income as if the rent accrued at a constant level rate. This provision
applies to sale-leaseback transactions. An additional consequence of the
application of Section 467 would be a conversion of a portion of a Company's
rental income (passive) from such lease to interest income (portfolio). If step
rentals are provided for in a lease, IMI anticipates that the lease will fall
within one of the exceptions to such provision and, therefore, a Company should
recognize such income as it is earned under the lease rather than at a constant
level rate.
Allocations. The items of income, gain, loss, deduction and tax preference
will be allocated among the Members in accordance with each Operating Agreement.
(See "Allocations and Distributions.") The Regulations under Section 704(b) of
the Code provide that the allocations set forth in a partnership agreement will
be respected for tax purposes unless the allocation does not have "substantial
economic effect," in which case the allocations of items of income, gain, loss,
deduction and tax preference will be determined in accordance with each
partner's interest in the partnership.
In general, an allocation has substantial economic effect if it reflects the
manner in which the economic benefits and burdens are shared by the partners,
and if it is consistent with the underlying economic arrangement among the
partners. The Regulations promulgated under Section 704(b) provide that an
allocation has substantial economic effect if, as of the end of the partnership
year
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to which the allocation relates, (i) it has "economic effect," i.e., the
allocation is consistent with the underlying economic arrangement of the
partners so that the partner to whom an item is allocated must bear the economic
benefit or burden of that item, and (ii) such effect is "substantial," i.e.,
there is a reasonable possibility that the allocation will affect substantially
the dollar amounts to be received by the partners from the partnership
independent of tax consequences.
An allocation has "economic effect" under the Regulations if: (i) each
partner's share of partnership items, including certain nondeductible
expenditures (such as syndication expenses), is reflected by an increase or
decrease in the capital account established for the partner; (ii) liquidation
proceeds are distributed in accordance with capital account balances; and (iii)
any partner with a capital account deficit following the distribution of
liquidation proceeds is required to restore such deficit to the partnership.
The Regulations further provide that liquidating distributions must be made
by the end of the taxable year of liquidation or, if later, within 90 days after
the date of the liquidation. In addition, the Regulations provide that an
allocation can have substantial economic effect even if a partner is not
required to restore a deficit balance in his capital account, but only (i) to
the extent the allocation does not reduce his capital account balance below zero
(after reducing the capital account for certain adjustments, allocations or
distributions in excess of income which are reasonably expected in the future)
and (ii) if the partnership agreement contains a "qualified income offset." A
partnership agreement contains a "qualified income offset" if it provides that a
partner who unexpectedly receives such an adjustment, allocation or distribution
that reduces his capital account below zero will be allocated income or gain in
an amount and manner sufficient to eliminate his deficit capital account balance
as quickly as possible.
With respect to allocations of loss and deductions attributable to
nonrecourse debt, the Regulations provide that such allocations will be
respected if the partners who were allocated the deductions bear the burden of
the future income related to the previous deductions. In particular, the
following additional elements must be satisfied: (i) the partnership agreement
must provide for allocations of nonrecourse deductions in a manner consistent
with allocations of some other significant partnership item attributable to the
property securing the nonrecourse liability; and (ii) the partnership agreement
must contain a "minimum gain chargeback."
A partnership agreement contains a "minimum gain chargeback" if it provides
that if there is a net decrease in partnership "minimum gain" during a
partnership taxable year, all partners with a deficit capital account balance at
the end of such year (excluding from each partner's deficit capital account
balance
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any amount that such partner is obligated to restore) will be allocated items of
income and gain for such year (and, if necessary, subsequent years) in the
amount and in the proportions needed to eliminate such deficits as quickly as
possible. The amount of partnership minimum gain is determined by computing the
amount of gain (of whatever character), if any, that would be realized by the
partnership if it disposed of the partnership property subject to the
nonrecourse liability in full satisfaction thereof. To the extent of a partner's
share of the partnership minimum gain, the partner is treated as if he were
obligated to restore any deficit capital account balance for purposes of
determining whether the partnership allocations meet the general economic effect
tests.
Generally, Net Profits and Net Loss will be allocated 99% to the Class A
Members and 1% to the Class B Members. In addition, the Class B Members will be
specially allocated income equal to the excess of cash distributions over the
Class B Members' share of Net Profits. Further, the Class B Members will be
specially allocated 100% of the Company's Organizational and Offering Expenses.
Nonrecourse deductions (if any) will be allocated 75% to the Class A Members and
25% to the Class B Members.
Each Operating Agreement prohibits Net Loss from being allocated to a Member
that would cause deficit Capital Account in excess of his share of partnership
minimum gain. Each Operating Agreement contains a minimum gain chargeback and a
qualified income offset that are intended to comply with the provisions of the
Regulations. Each Operating Agreement provides that Capital Accounts of the
Members will be maintained in accordance with the provisions of the Regulations
and proceeds on liquidation will be distributed in accordance with the positive
capital account balances of the Members. Therefore, counsel is of the opinion
that the allocations provided in each Operating Agreement should be in
conformity with the Regulations and each Class A Member's distributive share of
income, gain, loss and deduction (or item thereof) should be determined and
allocated substantially in accordance with the provisions of each Operating
Agreement.
Under the substantial economic effect requirement, the economic effect of a
Company's allocations also must be "substantial." Counsel notes that the meaning
and scope of the substantiality requirements are unclear at this time. Based on
the existing language of the Regulations, counsel does not believe each
Partnership's allocations present any material substantiality issues.
Consequently, as stated above, counsel is of the opinion that the tax
allocations to the Class A Members should be respected under Code Section
704(b). However, counsel cautions that no assurance can be given that the IRS
will not interpret the Regulations in a manner that could cause those
allocations to be treated as lacking substantiality. If the IRS were successful
in challenging a Com-
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pany's method of allocating profits and losses, then this may decrease the Class
A Members' shares of taxable loss or increase the Class A Members' shares of
taxable income without any corresponding increase in cash distributions from a
Company.
A Class A Member's distributive share of items of income, gain, loss,
deduction, and tax preference is generally required to reflect the period in
which the Class A Member holds his Class A Units. Thus, if, other than by reason
of a Class A Member's death, the Class A Member's interest is not uniform
throughout an entire taxable year of a Company, including by reason of the Class
A Member's sale, gift, or acquisition of Class A Units during the taxable year,
the Class A Member's allocable share of a Company's tax items will be determined
with reference to the portion of a Company's taxable year that the Class A
Member's interest in a Company was at any given level during the taxable year.
All items of income, gain, loss, deduction and tax preference will be
allocated to the Class A Members on a monthly basis. Each Company will close the
books monthly and allocate all such items for a given month to those persons who
are Class A Members on the fifteenth day of that month. While it is not clear
that a monthly interim closing of the books satisfies the general requirement
set forth above, counsel believes that, given the size of each Company, it is a
reasonable method of accounting for varying interests in each Company during the
course of the year and that, in any event, any adjustment which each Company
might be required to make would be insignificant. Counsel bases its opinion on
the Report of the Joint Committee on Taxation which followed the Tax Reform Act
of 1984 and states that the IRS will provide for such a monthly convention in as
yet unreleased regulations.
The Class A Members will be admitted as Members of the Company on different
admission dates. Each Class A Member will receive allocations of Net Profits and
Net Loss, and cash distributions, for the entire portion of the year following
such admission date of such Class A Member. Because allocations of Net Loss and
cash distributions will decrease the Capital Accounts of the Class A Members,
those Class A Members who acquire their Units early in the Offering Period may
receive less cash distributions upon liquidation of the Company than those Class
A Members who acquire their Units later in the Offering Period to the extent the
former Class A Members receive allocations of Net Loss, or cash distributions
that are returns of capital, for the period from their admission date to the
Company to the final admission date that Class A Members are admitted as Members
to the Company.
In order to eliminate this disparity among the Capital Accounts of Class A
Members, the Operating Agreements provide that the Manager will make special
allocations of Net Profits and Net Loss to the Class A Members in a manner which
will equalize their respective Capital Account balances. Such special
allocations
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will begin in the fiscal year that the last Class A Member is admitted as a
Member of the Company. However, the Manager will make such special allocations
only if such allocations are reasonably consistent with, and reasonably
supportable under, the Code.
In the case of the death of a Class A Member, all Company items allocable to
the Class A Member's Class A Units for a Company's entire taxable year are
required to be allocated to the Class A Member's estate or other
successor-in-interest: no Company tax items attributable to the taxable year in
which a Class A Member dies are allocable to the deceased Class A Member. This
rule could cause all taxable losses of a Company for a given taxable year to be
allocated to a Class A Member's estate, and thereby be unavailable to offset the
deceased Class A Member's other income, notwithstanding that the Class A Member
may have been alive for a substantial portion of the year. (See "Income Tax
Considerations: Limitations on Utilization of Losses -- Passive Activity Loss
Limitations.")
LIMITATIONS ON UTILIZATION OF LOSSES
Tax Basis. A Class A Member may not deduct losses in excess of the Class A
Member's "tax basis" in his Class A Units, but may carry forward the excess
losses to such time, if ever, as the Class A Member's basis is sufficient to
absorb them. A Class A Member's tax basis in his Class A Units also determines
the tax consequences of his distributions, as well as the amount of the gain or
loss he may realize upon any sale of Class A Units. (See "Income Tax
Considerations: Disposition of Class A Units.") Initially, the tax basis of a
Class A Member's Class A Units will be equal to the amount of cash contributed
by the Class A Member to a Company or the amount paid to a transferor Class A
Member, plus the Class A Member's share of a Company's nonrecourse liabilities,
if any. A Class A Member's initial tax basis will then be (i) increased by the
Class A Member's allocable share of any Net Profits for each year and (ii)
reduced by the Class A Member's allocable share of any Net Loss, the amount of
any distributions made to the Class A Member during the year, and any reduction
in his share of nonrecourse liabilities.
The IRS has ruled that a partner acquiring multiple interests in a
partnership in separate transactions at different prices must maintain an
aggregate adjusted tax basis in a single partnership interest consisting of the
partner's combined interests. Possible adverse tax consequences could result
from the application of this ruling upon a sale of some but not all of a Class A
Member's Class A Units of the same Company. (See "Income Tax Considerations:
Disposition of Class A Units.")
Amounts at Risk. Section 465 of the Code limits the deductions that an
individual (and any other noncorporate Class A
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Member), S corporation and a closely held corporation may claim with respect to
an activity to the amount of money, borrowed amounts and adjusted basis of
property of such taxpayer's at risk investment in the activity as of the close
of the taxable year.
Except as otherwise provided below, a Class A Member will be considered to
be at risk with respect to the amount of money the Class A Member contributes to
a Company. A Class A Member will be at risk with respect to borrowed amounts
contributed to a Company by the Class A Member only to the extent that the Class
A Member is personally liable for their repayment or the net fair market value
of the Class A Member's personal assets (other than Class A Units) that secure
the indebtedness. A Class A Member will not be considered at risk with respect
to any amounts that are protected against loss through guarantees or stop loss
arrangements.
Because the Class A Members will not be personally liable for a Company's
indebtedness, any such indebtedness will not augment the Class A Members'
amounts at risk. Further, although an argument could be made that the redemption
provisions of Section 6.10 of each Operating Agreement are a stop loss
arrangement under Section 465 of the Code, counsel is of the opinion that such
an argument would be unsuccessful because the ability of any Class A Member to
have his Class A Units repurchased will be limited by the fact that a Company's
discretionary redemption provision applies only to up to 2% of all outstanding
Class A Units in any given year.
A Class A Member's amount at risk will be reduced by (i) Net Loss which is
allowed as a deduction to the Class A Member under the at-risk rules and (ii)
cash distributions received by a Class A Member with respect to the Class A
Member's Class A Units, and increased by that Class A Member's distributive
share of Net Profits. Investors should note that a Net Loss that may be
allowable as a deduction under the at-risk rules may be disallowed currently
under the passive activity loss limitations. (See "Income Tax Considerations:
Limitations on Utilization of Losses -- Passive Activity Loss Limitations.") If
a Class A Member's at risk amount is reduced below zero (due to a cash
distribution to a Class A Member), the Class A Member must recognize income to
the extent of the deficit at risk amount. Losses of a Company that have been
disallowed as a deduction in any year because of the at-risk rules will be
allowable, subject to other limitations, as a deduction to the Class A Member in
subsequent years to the extent that the Class A Member's amount at risk has been
increased.
Passive Activity Loss Limitations. Section 469 of the Code prohibits the
current use of losses and credits from a business activity in which the taxpayer
does not materially participate, or a rental activity, to offset other income,
including salary and active
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business income as well as portfolio income (such as dividends, interest and
royalties, whether derived from property held directly or through a pass-through
entity such as a partnership). However, Section 469(l)(3) of the Code authorizes
the issuance of Regulations requiring net income or gain from a limited
partnership or other passive activity to be treated as not from a passive
activity. This regulatory authority could be broad enough to treat income of any
limited partnership as portfolio income.
Assuming that all leases entered into by each Company are considered "true
leases" for federal income tax purposes, counsel is of the opinion that a
Company's losses from leased Equipment allocated to the Class A Members will be
treated as passive losses and a Company's income from leased Equipment allocated
to the Class A Members will constitute passive income. However, there can be no
assurance that a Company's net leasing activities might not, under future
Regulations, be classified as portfolio activity. Interest income derived by a
Company from the interim investment of offering proceeds or reserves (and any
gain or income derived by a Company from an investment in the residual interests
of Equipment such as forward purchase contracts and residual value options) will
be treated as portfolio income and, thus, will not be offset for these purposes
by a Company's deductions such as depreciation or cost recovery deductions.
Losses from a passive activity that are not allowed currently will be
carried forward indefinitely and are allowed in subsequent years against passive
activity income or in full upon complete disposition of the taxpayer's interest
in that passive activity in a fully taxable transaction.
Code Section 469(k), as clarified by IRS Notice 88-75, prevents the
utilization of losses from a Company and other passive activities to offset
income from a publicly-traded partnership and further causes the income from a
publicly-traded partnership to be investment income. Class A Members therefore,
will be unable to use losses from a Company to offset passive income from
publicly-traded partnerships that are not taxed as corporations; income from a
Company cannot be offset by passive losses from publicly-traded partnerships
that are not taxed as corporations.
If a Class A Member incurs indebtedness in order to acquire or carry Class A
Units, interest paid by the Class A Member on the indebtedness will be subject
to the limitations for passive activity losses, except to the extent that the
indebtedness relates to "portfolio income," if any, of a Company. Interest
expense of a Class A Member attributable to "portfolio income" may be subject to
other limitations on its deductibility. (See "Income Tax Considerations:
Interest Deductions -- Excess Investment Interest.")
Hobby Losses. Section 183 of the Code limits deductions attributable to
"activities not engaged in for profit." The phrase
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"activities not engaged in for profit" means any activity other than one that
constitutes a trade or business, or one that is engaged in for the production or
collection of income or for the management, conservation or maintenance of
property held for the production of income. The Regulations provide that the
determination of whether an activity is engaged in for profit is to be made by
reference to objective standards, taking into account all of the facts and
circumstances in each case. The Regulations also provide that, although a
reasonable expectation of profit is not required, the facts and circumstances
must indicate that the taxpayer entered into the activity, or continued the
activity, with the objective of making a profit. The Regulations enumerate a
number of nonexclusive factors which should be taken into account in determining
whether an activity is engaged in for profit. The IRS has ruled that this test
will be applied at the partnership level.
Based upon these Regulations and the investment goals of each Company, and
certain representations made by the Manager, counsel believes that the proposed
activities of each Company will constitute an activity engaged in for profit
within the meaning of Section 183 of the Code. However, the test of whether an
activity is deemed to be engaged in for profit is based on the facts and
circumstances applicable from time to time including the motives of the
investors, and no assurance can be given that Code Section 183 may not be
applied in the future to disallow the deductions.
FEES AND REIMBURSEMENTS TO THE MANAGER AND AFFILIATES
General. There is no assurance that the IRS will not challenge the position
of each Company with respect to the amount, character, time of deduction or tax
treatment of any of the fees discussed herein or, if challenged, that the
position of each Company would be sustained. In any year such fees are incurred,
the disallowance of the deductibility of such fees would result in a
proportionate increase in the taxable income (or reduction in the loss) of the
Class A Members with no associated increase in cash distributions with which to
pay any resulting increase in tax liabilities.
Re-Lease Fee. The cost of Re-Lease Fees will be amortized over the term of
the leases to which they relate.
Equipment Management Fee. The Equipment Management Fee should be deductible
as an ordinary and necessary business expense under Section 162 of the Code, to
the extent that its amount is commercially reasonable.
Equipment Liquidation Fee. Equipment Liquidation Fees should be treated as
a cost of sale of the Equipment.
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OWNERSHIP OF EQUIPMENT
Lease versus Sale. The fact that each agreement between a Company and a
lessee will be denominated a "lease" may not be determinative of the character
for income tax purposes of the transaction which the agreement reflects. The IRS
may assert that any such lease constitutes an installment or conditional sale
for income tax purposes rather than a lease. If any of a Company's leases were
treated as sales for income tax purposes, the Class A Members would not be
entitled to depreciation or cost recovery deductions with respect to the items
of Equipment involved. On the other hand, a portion of the rental payments
(otherwise fully taxable) would be deemed to constitute a return of capital,
which would not be taxable to the Class A Members.
Whether a transaction is to be characterized as a lease rather than as a
sale for income tax purposes involves a determination based upon all of the
facts and circumstances involved. Section 162(a)(3) of the Code provides that a
deduction shall be allowed for "rentals or other payments required to be made as
a condition to the continued use or possession, for purposes of the trade or
business, of property to which the taxpayer has not taken or is not taking title
or in which he has no equity." The IRS has stated in Revenue Ruling 55-540,
1955-2 C.B.39, that the presence of any of the following six factors would be
significant evidence of a sale rather than a lease: (i) portions of the periodic
payments are made applicable to an equity interest to be acquired by the lessee;
(ii) the lessee will acquire title upon payment of a stated amount of rental
payments; (iii) the total amount which the lessee is required to pay for a
relatively short period of use constitutes an inordinately large proportion of
the total sum required to be paid to secure the transfer of title; (iv) the
agreed rental payments materially exceed the current fair rental value,
indicating that the payments include an element other than compensation for the
use of the property; (v) the property may be acquired under a purchase option at
a nominal price; and (vi) some portion of the periodic payments is specifically
designated as interest or is otherwise readily recognizable as the equivalent of
interest.
The presence of a purchase option at a price less than fair market value is
the most influential factor cited by the IRS to support a determination that a
transaction will not be treated as a lease. Even if a purchase option is not
present, a constructive transfer of ownership to the lessee may be found if the
lease term is for all or substantially all of the economic useful life of the
property and the rental payments merely reimburse the lessor for its equity
investment and financing costs and pay the lessor a guaranteed sum reflecting a
market rate of return.
In recent cases, the Tax Court has examined the lessor's profit motive in
entering into a lease. In general, the parties' characterization of a
transaction as a lease has been respected so long as the
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lessor retains significant and genuine attributes of a traditional lessor, while
the form of the transaction as a lease has been disregarded if it was entered
into without any economic purpose apart from tax motives. (See Estate of Thomas
v. Commissioner, 84 T.C. 412 (1985); Rice's Toyota World, Inc. v. Commissioner,
81 T.C. 184 (1983), aff'd in part and rev'd in part, 752 F.2d 89 (4th Cir.
1985); Mukerji v. Commissioner, 87 T.C. 926 (1986); James v. Commissioner, 87
T.C. 876 (1986); and Larsen v. Commissioner, 89 T.C. 1229 (1987).)
In Revenue Procedures 75-21, 1975-1 C.B. 715, 75-28, 1975-1 C.B. 752, 76-30,
1976-2 C.B. 647, and 79-48, 1979-2 C.B. 529, the IRS established those
requirements which must be satisfied in order for a lessor in a leveraged lease
transaction to receive an advance ruling that it is the owner of the property
subject to the lease. In brief, these requirements are: (i) the taxpayer must
anticipate a significant return on the lease apart from any tax benefits; (ii)
the estimated useful life of the property at the end of the lease term
(including fixed rate renewal options) must exceed 20% of the property's
estimated useful life at the beginning of the lease; (iii) the estimated value
of the property at the end of the lease term must exceed 20% of the taxpayer's
capitalized costs; (iv) any purchase options held by the lessee must be at fair
market value at the time of the option exercise; (v) none of the rental payments
may be credited against the option purchase price; (vi) the lease may not
contain put or abandonment clauses; and (vii) the property must not be limited
use property. Although Revenue Procedure 75-21 forbids an option price "at a
price less than its fair market value at the time the right is exercised," the
Tax Court has approved fixed price purchase options when the fixed price is the
expected fair market value upon exercise at the time the transaction is entered
into. (See Lockhart Leasing v. Commissioner, 54 T.C. 301 (1970), aff'd 446 F.2d
269 (10th Cir. 1971) and Northwest Acceptance Corp. v. Commissioner, 58 T.C. 836
(1972), aff'd per curiam, 500 F.2d 1222 (9th Cir. 1974).) The requirements of
these Revenue Procedures are not necessarily indicative of those standards which
would be applied by a court in seeking to determine whether a given transaction
constitutes a lease for federal income tax purposes, but the Revenue Procedures
provide a safe harbor for the characterization of a transaction as a lease, even
where, as in the case of leases to be entered into by each Company, the leases
are not highly leveraged.
Each Company intends to structure each lease transaction so that the lease
will be treated as a lease rather than a financing arrangement for federal
income tax purposes. Due to the factual nature of this determination, however,
neither the Manager, IMI, nor counsel can offer any assurance or guarantee in
this regard.
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TITLE TO AIRCRAFT
Single Beneficiary Trusts. Title to any aircraft owned by a Company may be
held by the trustee of a trust of which such Company will be the sole
beneficiary. The purpose of this method of holding title is to satisfy certain
registration requirements of the Federal Aviation Administration. Prior to
forming a trust, the Manager will obtain an opinion of counsel (such opinion of
counsel may include the opinion of attorneys who are employed by the Manager) to
the effect that (i) any such trust should be treated for tax purposes as a trust
and not as an association taxable as a corporation and (ii) such trust should be
a grantor trust and should not be treated as the owner of the aircraft for
federal income tax purposes.
If the IRS were to assert successfully that a trust utilized by a Company
should not be treated as a grantor trust and that the relationship between the
Company utilizing a trust and the trustee does not carry the normal incidents of
a principal-agency relationship, the trust (and not the Company) would be
treated as the owner of the aircraft for tax purposes, and the Company would not
be entitled to claim directly the items of income, gain, loss and deduction
attributable to ownership or operation of the aircraft. If the trust were
treated as an association taxable as a corporation and were also treated as the
owner of the aircraft, the net income attributable to the aircraft would be
taxable to the trust, and the Company would receive dividend income on deemed
distributions of such income from the trust to the extent of the trust's
earnings and profits. (See "Income Tax Considerations: Partnership Status.") In
addition, income deemed distributed by the trust to the Company would be treated
as portfolio income rather than income from a passive activity. (See "Income Tax
Considerations: Limitations on Utilization of Losses -- Passive Activity Loss
Limitations.")
Multiple Beneficiary Trusts. The Companies may participate in various joint
ventures, the identities of which are unknown and whose characteristics are, as
yet, undefined. The Manager anticipates that any joint venture in which a
Company would participate would be structured as a multiple beneficiary trust.
An entity organized under state law as a multiple beneficiary trust will be
taxed as a partnership or as a corporation, rather than as a trust, if it more
nearly resembles a partnership or a corporation under the rules of the
applicable Regulations; that is, an entity which has associates and is organized
to carry on a business for joint profit may not be characterized as a trust for
federal income tax purposes. Since any multiple beneficiary trust entered into
by a Company likely would be deemed to have associates and an objective to carry
on business for joint profit, such trust would not be treated as a trust for tax
purposes, but as a co-ownership
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arrangement, a partnership or an association taxable as a corporation.
The criteria which distinguish partnerships and co-ownership arrangements
from associations taxable as corporations are substantially similar to those
discussed in "Partnership Status" above. If the joint venture were taxable as a
partnership or as a co-ownership arrangement, then, among other things, items of
income, gain, loss, deduction and credit of the joint venture would be allocated
to the participants, including the Companies, in the manner set forth in the
governing instrument. If, conversely, the joint venture were taxable as an
association, then it, and not the participants, would be taxable on items of
income, gain, loss and deduction. The delivery of a favorable opinion of counsel
acceptable to the Manager (such opinion of counsel may include the opinion of
attorneys who are employed by the Manager) that any proposed joint venture will
not be characterized as an association for federal income tax purposes will be a
condition to the entry into such joint venture by the Companies.
In joint ventures, one or more third parties may hold 50% or more of the
interest in such a joint venture. (See "Business of the Companies -- Joint
Investments.") When and if such parties sell 50% or more of the total interest
in any such joint venture in any twelve-month period and assuming such joint
venture is classified as a partnership for federal income tax purposes, then
that partnership should terminate for federal income tax purposes. The possible
consequences of such a termination are discussed below under "Termination of a
Partnership for Tax Purposes."
TITLE TO MARINE VESSELS
General. Certain marine vessels may be owned directly or indirectly by a
limited partnership of which a Company as the sole limited partner with a 99%
capital and profits interest and a corporation (or a pass-through entity)
wholly-owned by such Company as the 1% general partner (see "Risk Factors:
Business Risks -- Tort Liability"). In addition, title to a marine vessel may be
held by the trustee of a trust of which the sole beneficiary is such a limited
partnership (which may hereinafter be referred to as a "subsidiary limited
partnership").
Any subsidiary limited partnership will be organized so as to enable it to
be treated as a partnership and not as an association taxable as a corporation.
(See "Income Tax Considerations: Partnership Status" with regard to the tax
consequences if a subsidiary limited partnership were treated as an association
taxable as a corporation.) Income or loss attributable to a Company's limited
partnership interest in a subsidiary limited partnership will be included in the
computation of such Company's Net Profits or Net Loss. 1% of a subsidiary
limited partnership's losses will not be passed through to the Company. 1% of a
subsidiary limited
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partnership's income will be subject to corporate income tax, the distribution
of which to the Company will be treated as dividend (i.e., "portfolio") income
to the extent of the earnings and profits of the subsidiary limited
partnership's corporate general partner.
With regard to those cases in which title to a marine vessel will be held by
a trustee, the Manager will obtain an opinion of counsel (such opinion of
counsel may include the opinion of attorneys who are employed by the Manager) to
the effect that (i) any such marine trust should be treated for federal tax
purposes as a trust and not as an association taxable as a corporation and (ii)
such trust should be a grantor trust and, therefore, should not be treated as
the owner of the marine vessel for federal income tax purposes.
Equipment Pools. Certain marine vessels and/or other Equipment may be
placed in Equipment pools together with like Equipment owned by third parties.
Such pools generally enable an owner of Equipment to diversify certain of the
risks associated with operation of the Equipment. Participants in an Equipment
pool customarily divide profits, with expenses and the costs of capital
improvements being borne solely by the owner of the Equipment involved, and
proceeds from the sale, or awards for the loss or destruction of Equipment,
being payable only to the owner of the Equipment involved. Decisions as to the
holding, repair, improvement, lease, or disposition of any item of Equipment are
generally within the sole discretion of the Equipment owner. Uninsured claims
for personal injury or property damage are generally also borne solely by the
owner of the item of Equipment which causes the liability.
Assuming that the terms and conditions of any such arrangement are
comparable to those outlined in the preceding paragraph, with each owner bearing
the costs and risks normally associated with the ownership of the Equipment, a
Company's participation in any such pool should not alter such Company's
treatment as the owner for federal income tax purposes of Equipment subject to
any such pool. No assurances can, however, be given in this regard, since any
such characterization would be dependent upon the terms and conditions of the
particular pooling arrangement.
Depending upon the structure and economic aspects of an Equipment pool, it
may be characterized for income tax purposes as (i) a partnership involving
merely the pooling of revenues (and perhaps expenses), (ii) a partnership to
which the Equipment subject to the pool has been contributed, (iii) a net lease
from the participants or the pool to the pool operator, or (iv) the creation of
an association taxable as a corporation.
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COST RECOVERY AND DEPRECIATION
General. Except in the case of certain used property (see "Antichurning
Rules," below), the cost of depreciable tangible personal property, whether new
or used, is generally recovered for federal income tax purposes under the
Accelerated Cost Recovery System, as modified by the Tax Reform Act of 1986 (the
"1986 Act") ("Modified ACRS"). Under Modified ACRS, the initial tax basis of
tangible personal property is generally recovered (deducted) over the recovery
period and at the rates provided for under Section 168 of the Code. It is
anticipated that all items of Equipment will be classified as five-, seven- or
twelve- and eighteen-year property. Code Section 168 permits the entire cost of
such property to be recovered over a five-, seven- or ten-year period, as the
case may be, using the 200% declining balance method, or if elected the 150%
declining balance method, switching to straight-line when necessary to maximize
the remaining deductions, or if elected the straight line method over the entire
cost recovery period. The salvage value of property is treated as zero;
therefore, the entire cost of Equipment may be recovered. Use of the 200%
declining balance method of cost recovery by a Company may increase the
likelihood that a Class A Member will incur alternative minimum tax liability.
(See "Income Tax Considerations: Taxes -- Alternative Minimum Tax.")
In general, Equipment placed in service during a taxable year is treated as
placed in service at the midpoint of the taxable year. If the taxable year in
which an asset is placed in service has less than twelve months (e.g., a
partnership is formed during a month other than the first month of its taxable
year), the cost recovery or depreciation deduction available in that taxable
year should be reduced accordingly. (See Revenue Procedure 89-15, 1989-1 C.B.
816.) Regulations under Code Section 168 provide that a taxable year will not be
considered to include any month prior to the month in which the taxpayer begins
"engaging in a trade or business or holding recovery or depreciable property for
the production of income."
The Manager does not intend to treat either Company as commencing to engage
in a trade or business until the month during which each Company acquires more
than a de minimis amount of Equipment. Each Company will claim the Modified ACRS
recovery allowance based upon a year which will be deemed to have commenced as
of that month.
Each Company will have a short taxable year for the year in which each
Company acquires its first Equipment. Therefore, the Modified ACRS deduction for
that year will be calculated as if the Equipment were placed in service on the
midpoint of that "short" taxable year. If a Company purchases an item of
Equipment through a joint venture or partnership, the first year Modified ACRS
deductions with respect to such Equipment would be based
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on the venture's short taxable year. (See "Business of the Companies.")
Section 168 of the Code provides that if over 40% of the aggregate basis of
property placed in service during a taxable year by the taxpayer is placed in
service during the last three months of the taxable year, the property placed in
service during that year will be depreciated using a mid-quarter convention
rather than the midyear convention described above, i.e., the cost recovery
deduction with respect to property placed in service during a quarter will be
calculated from the midpoint of the quarter. The determination of whether the
mid-quarter convention applies, however, remains dependent upon the amount of
property placed in service during the last three months of the taxable year.
All cost recovery and depreciation deductions with respect to the Equipment
are subject to recapture upon the disposition of the Equipment. (See "Income Tax
Considerations: Sale of Equipment.")
ANTICHURNING RULES
Pre-1981 Property. The Code provides that certain property will not be
eligible for Modified ACRS if, among other things, the property was (i) acquired
from a person who owned the property at any time during 1980 and, as part of the
transaction, the user (e.g., lessee) does not change or (ii) the property is
leased to a person who owned or used the property at any time during 1980. If
any Equipment is subject to these rules, its costs will be depreciated under the
Asset Depreciation Range "Class Life" ("ADR") system.
If the cost of any Equipment is recovered under the ADR system, the Manager
anticipates selecting the shortest allowable recovery period, using the 150%
declining balance method converting to straight-line when deductions are
maximized. Under the ADR system, the Companies will not be permitted to
depreciate the Equipment below its estimated salvage value. Salvage value will
be calculated by estimating the fair market value of each item of Equipment at
the time of its anticipated disposition, and then reducing this amount by 10% of
each Company's cost (in accordance with Section 167(f) of the Code). The
limitation imposed by the estimated salvage value may reduce or eliminate a
Company's depreciation deductions in the later years of the recovery period for
Equipment subject to pre-1981 property antichurning rules, particularly if the
salvage value is high. Furthermore, if the IRS were to assert that a Company had
understated the salvage value, a Company could be required further to reduce
these depreciation deductions in later years of the recovery period, thereby
increasing the amount of taxable income produced by a Company.
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Pre-1987, Post-1980 Property. Antichurning rules similar to those described
above under the caption "Pre-1981 Property" apply to property (i) acquired from
a person who owned the property at any time during 1986 and, as part of the
transaction, the user does not change or (ii) leased to a person who owned or
used the property at any time during 1986. (See Section 168(f)(5) of the Code.)
The antichurning rules apply to such property if the cost recovery deduction
allowable under Code Section 168 is greater than the deduction allowable under
prior law for the first taxable year in which such property is placed in
service.
If pre-1987, post-1980 property is subject to the antichurning rules, the
Accelerated Cost Recovery System, as it existed immediately prior to the 1986
Act, would apply to such property. Under that system, the cost of most types of
Equipment that the Companies are likely to acquire would be recovered under the
half-year convention over a five- or ten-year period according to tables
approximating the 150% declining balance method; if placed in service in a short
taxable year, the balance of the reduced first year cost recovery allowance
would be recoverable in the sixth or eleventh year, as the case may be.
Basis. The basis of the Equipment for cost recovery and depreciation
purposes includes reasonable costs payable in connection with the acquisition of
the Equipment.
Limitations on the Use of Modified ACRS. Under certain circumstances, in
addition to those set forth above, a taxpayer is required to recover the cost of
an asset over a period longer than its Modified ACRS recovery period. The more
relevant restrictions include the use of property predominantly outside the
United States, the use of Equipment for predominantly nonbusiness purposes and
the use of Equipment by a "tax-exempt entity." These three limitations are
described below.
Property Used Predominantly Outside the United States. The Modified ACRS
provisions of the Code contain special rules for recovering the cost of personal
property used predominantly outside the United States. The cost of such property
is to be recovered using the straight-line method over a period corresponding to
the property's ADR Class Life utilizing the half-year convention, and ignoring
salvage value. To the extent property used predominantly outside the United
States is subject to the ADR system of depreciation, the alternative
depreciation system of Code Section 168(g) is not applicable.
Section 168(g)(4) of the Code provides exceptions to the predominant use
limitation described above. Under this Section, certain types of property which
are used predominantly outside the United States qualify for the normal Modified
ACRS rules.
IMI has informed the Manager that some of the Equipment may be used
predominantly outside the United States and that the
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exceptions set forth in Section 168(g)(4) of the Code may not apply to such
Equipment with the result that a Company's cost recovery deductions will be
reduced. It should be noted that if the use of Equipment subject to Modified
ACRS were to change to predominantly outside the United States after its initial
lease, the subsequent cost recovery deductions with respect to such Equipment
would be calculated under the system described above, but would be further
reduced to take into account the excess of the cost recovery deductions
previously taken over those that would have been allocable had the Equipment's
initial use been predominantly foreign.
Property Not Used in a Trade or Business. Section 280F of the Code limits
the tax benefits available to owners of certain types of Equipment, generally
including property used as a means of transportation, if the Equipment is of a
type susceptible to personal use and is used 50% or more for nonbusiness
purposes. Transportation property which is used exclusively in the trade or
business in providing transportation services to unrelated parties is not
subject to Code Section 280F. Most, if not all, of the Equipment should be
within this exception. In addition, Section 280F of the Code will not apply to
property covered by that section ("listed property") that is leased or held for
leasing by any person regularly engaged in the business of leasing such
property. The IRS has issued temporary Regulations interpreting Code Section
280F. Under these Regulations, if the use of the listed property in a trade or
business does not exceed 50% of its total use, the cost recovery deductions are
limited to straight-line over a longer recovery term than is otherwise available
under Modified ACRS. Counsel is of the opinion that the Equipment will not be
subject to Code Section 280F, because (i) the Equipment will not be classified
as property subject to Code Section 280F, (ii) each Company will be treated as
"regularly engaged in the business of leasing listed property," or (iii) each
Company will be treated as using the Equipment in its trade or business, since
the IRS treats the rental of personal property as the conduct of a trade or
business.
Tax-Exempt Leasing. The Code provides reduced tax benefits to those who
lease property to "tax-exempt entities." In general, if property is leased to a
tax-exempt entity, the lessor must recover the cost of the property using the
straight-line method over a longer recovery period than would otherwise be
available under Modified ACRS.
Entities treated as tax-exempt for purposes of this restriction include
entities generally exempt from federal income tax, such as IRAs or Qualified
Plans, governmental units or instrumentalities, international organizations, and
foreign governments or foreign persons (as defined in Section 168(h)(2)(C) of
the Code).
Only the straight-line method of cost recovery is allowable with respect to
property leased to tax-exempt entities. The recovery
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period for tax-exempt use personal property is equal to the greater of the Class
Life of the property under ADR or 125% of the lease term. The term of a lease
includes all options to renew as well as certain successive leases. A use of
property by a tax-exempt entity at any point in a chain of use results in its
characterization as tax-exempt use property (e.g., a sublease by a
non-tax-exempt lessee to a tax-exempt sublessee).
An exception is provided for property leased to a tax-exempt entity under a
"short-term lease." "Short-term lease" means a lease which has a term less than
the greater of one year or 30% of the property's ADR Class Life (to the extent
that the Class Life does not exceed ten years -- i.e., less than three years).
IMI has informed the Manager that certain of the Equipment may be leased to
foreign persons not subject to federal income tax pursuant to leases that do not
qualify as short-term leases. In such a case, the tax-exempt leasing rules would
operate to reduce the rate at which a Company could recover the cost of such
Equipment.
If any property which is not otherwise tax-exempt use property is owned by a
partnership which has both a tax-exempt entity and a person who is not a
tax-exempt entity as a partner, the tax-exempt entity's proportionate share of
the property is not treated as tax-exempt use property if the income derived
from such share of the property is subject to the unrelated business tax. As
discussed below in "Investment by Qualified Plans, IRAs and Exempt Entities,"
income derived by such plans from a Company will be subject to the unrelated
business tax; thus, admission of such Qualified Plans, IRAs or other Exempt
Entities as Class A Members should not cause any of the Equipment to be treated
as tax-exempt use property.
Residual Interests; Lease In-Lease Out. A Company will not be entitled to
cost recovery or depreciation deductions with respect to its investment in the
residual interest of Equipment (such as forward purchase contracts, residual
value options) until such time that the Company acquires a direct economic
interest in such Equipment. Further, in those situations where a Company leases
in-leases out Equipment, a Company would not be entitled to cost recovery or
depreciation deductions. A Company would, however, be entitled to rent
deductions for the rent payments made under the lease between a Company, as
lessee, and the Equipment's owner, as lessor.
INTEREST DEDUCTIONS
Excess Investment Interest. Section 163(d) of the Code limits the amount of
"investment interest" which noncorporate taxpayers and corporations which are S
corporations may deduct for federal income tax purposes to the amount of such
taxpayers'
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investment income. In general, this provision will not apply to interest
deductions of a Company or to interest expense incurred by a Class A Member to
acquire Class A Units, because such deductions will be subject to and limited by
the passive activity loss limitations. (See "Income Tax Considerations: Certain
Principles of Partnership Taxation, Limitations on Utilization of Losses --
Passive Activity Loss Limitations.") Interest incurred by a Class A Member to
acquire Class A Units will be subject to the investment interest limitations to
the extent attributable to a Company's portfolio income, such as interest earned
on a Company's reserves.
Investment interest which cannot be deducted for federal income tax purposes
for any year because of the foregoing limitations may be carried over and
treated as investment interest incurred in succeeding years.
Interest Related to Tax-Exempt Obligations. Section 265(a)(2) of the Code
provides that interest on indebtedness incurred or continued to "purchase or
carry" tax-exempt bonds is not deductible. The IRS announced in Revenue
Procedure 72-18, 1972-1 C.B. 740 (clarified by Revenue Procedure 74-8, 1974-1
C.B. 419) that a "limited partnership interest will be considered as
representing portfolio investment." The IRS' position in the Revenue Procedure
is that a taxpayer who holds tax-exempt obligations and who borrows funds to
carry or purchase other portfolio investments will be presumed to have incurred
indebtedness to carry the tax-exempt obligations. Interest on indebtedness
incurred directly by a Class A Member to purchase or carry Class A Units may,
therefore, be viewed as incurred to enable the Class A Member to continue to
carry tax-exempt obligations, such that the Class A Member would not be allowed
to deduct the interest. This determination will depend upon the particular facts
or circumstances of each Class A Member.
CASH DISTRIBUTIONS
Cash distributions made to a Class A Member, other than those in exchange
for, or redemption of, all or part of his Class A Units, reduce a Class A
Member's adjusted basis in his Class A Units and may represent both a return of
capital and income. To the extent distributions of cash (including reductions in
a Class A Member's proportionate share of a Company's nonrecourse liabilities,
if any) reduce a Class A Member's adjusted basis in his Class A Units to zero,
such distributions will be treated as returns of capital which generally do not
result in any recognition of gain or loss for federal income tax purposes. To
the extent such distributions or reductions in liabilities exceed a Class A
Member's adjusted basis in his Class A Units immediately prior thereto, such
Class A Member will recognize gain to the extent of such excess. Such gain will
be treated as ordinary income to the extent of the Class A Member's share of a
Company's "substantially appreci-
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ated" inventory and "unrealized receivables" (which includes depreciation
recapture); any excess gain will be treated as capital gain. The gain that a
Class A Member will recognize as a result of a reduction of liabilities in
excess of such Class A Member's adjusted tax basis in his Class A Units
immediately prior thereto will result in a tax liability to the Class A Member
without any cash distribution to such Class A Member. To the extent a Class A
Member's federal tax liabilities exceed cash distributions, such excess would be
a nondeductible cost to such Class A Member.
SALE OF EQUIPMENT
General. Upon a sale or other disposition of an item of Equipment (a
"Sale"), a Company will realize gain or loss equal to the difference between the
tax basis of the Equipment at the time of the Sale and the amount realized upon
the Sale. The amount realized on Sale of an item of Equipment includes the sum
of cash and the fair market value of any other property received plus the amount
of any liabilities assumed by the purchaser or to which the property is taken
subject. Thus, under certain circumstances, the Sale of an item of Equipment may
not generate sufficient proceeds to satisfy tax liabilities created for the
Class A Members by virtue of the Sale.
Because the Equipment constitutes tangible personal property, upon a Sale of
an item of Equipment, in general, all of the depreciation or cost recovery
deductions (collectively, "depreciation") previously taken under Sections 167 or
168 of the Code (see "Income Tax Considerations: Cost Recovery and
Depreciation") will, to the extent of any gain, be subject to "recapture" under
Section 1245 of the Code and, as a result, be characterized as ordinary income.
If a Company were to sell an item of Equipment on an installment basis, all
depreciation recapture income would be recognized in the taxable year of the
Sale whether or not payments were to be made in succeeding taxable years.
If a Company were to sell an item of Equipment on an installment basis, the
"OID" rules, discussed below under the caption "Original Issue Discount," might
apply to the Sale.
Any gain in excess of the amount of recapture should constitute gain
described in Section 1231 of the Code, assuming the Equipment sold will have
been used in a Company's trade or business and held for more than one year and
that a Company is operated as set forth in this Prospectus. Under Section 1231
of the Code, if the sum of the gains on sale or exchange of certain assets
(generally, depreciable property used in a trade or business and held for more
than one year) and the gains from certain compulsory or involuntary conversions
exceed the losses on such sales, exchanges and conversions, all such gains and
losses will be characterized as capital gains and losses. (See "Income Tax
Considerations: Taxes -- Capital Gains and Losses.") If such
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losses exceed such gains, however, all such losses and gains will be
characterized as ordinary gains and losses.
There is a special rule under Section 1231 of the Code for casualty and
theft losses on depreciable business property and capital assets which either
are used in a taxpayer's trade or business and held for more than one year or
are capital assets which were held for more than one year. Such gains and losses
must be separately grouped together by each taxpayer (not at the level of a
partnership) and, if casualty gains equal or exceed casualty losses, then the
gains and losses are further grouped with other Code Section 1231 transactions
to determine whether there is an overall Code Section 1231 gain or loss. If the
casualty or theft losses exceed gains, the resulting net loss is not further
grouped with other Code Section 1231 transactions, but is instead excluded from
Code Section 1231 and characterized as an ordinary loss.
Net gains from a disposition of Code Section 1231 property will have the
character of ordinary income to the extent that the taxpayer recognized an
ordinary loss due to a net Code Section 1231 loss during the five previous tax
years. This rule generally applies at the partner level and, therefore, if a
Class A Member's distributive share of any gain from the disposition of an item
of Equipment is Code Section 1231 gain, the Class A Member would have to take
the Class A Member's other Code Section 1231 gains and losses, if any, into
account in determining the characterization of the net Section 1231 gain.
Each Company, at the election of the Manager, may reinvest any insurance
proceeds or other indemnity payments received by a Company as a result of a
casualty to an item of Equipment. Under Section 1033 of the Code, a Company
would not be required to report income from the receipt of such proceeds to the
extent the proceeds are reinvested in property similar or related in service to
the property destroyed.
If the Equipment were found to be held primarily for sale to customers in
the ordinary course of business ("dealer property"), any gain or loss would be
considered ordinary gain or loss. The Companies have not been organized to
operate as a "dealer" in Equipment and do not presently intend to hold any
Equipment as inventory, as stock in trade or primarily for sale to customers in
the ordinary course of their trade or business. Each Company intends to purchase
Equipment for investment only and to engage in the business of leasing such
Equipment and, accordingly, each Company does not anticipate that it will be
treated as holding any Equipment primarily for sale in the ordinary course of
its trade or business. However, the determination of whether the items of
Equipment are considered "dealer property" will be based upon all of the
surrounding facts and circumstances existing prior to and at the time the
Equipment is sold. Because this determination relates in significant part to
facts and circumstances at the time the
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Equipment is sold, as well as to a Company's purpose or intent in investing in
and holding the Equipment, which intent is subjective and subject to varying
interpretations, counsel is unable to render an opinion as to whether or not a
Company will ultimately be treated as a "dealer" with respect to the sale of the
Equipment. Thus, there can be no assurance that any gain or disposition of the
Equipment will not be treated entirely as ordinary income.
Original Issue Discount. The original issue discount ("OID") rules apply to
seller-provided financing furnished to a purchaser of property. If the interest
on such financing is not equal to a rate established under these rules, interest
will be imputed at that rate. In addition, the payee of deferred interest on
such an obligation is required to recognize the interest income ratably as it
accrues. The imputed rate is equal to the interest rate of U.S. government
securities of comparable maturity for seller-provided financing of more than
$2.8 million; for seller-provided financing of property other than new Section
38 property (as defined in Section 48(b) of the Code, as in effect on the day
before the date of enactment of the Omnibus Budget Reconciliation Act of 1990
(the "1990 Act")) in an amount of less than $2.8 million per transaction, the
applicable rate would not exceed 9%.
If a Company were to sell an item of Equipment and provide financing to the
buyer bearing interest at a rate less than the imputed rate, the Company's gain
on sale would be reduced by the application of that rate. Such a reduction in
gain on sale would be offset, in whole or in part, by interest income exceeding
the nominal interest received by the Company.
DISPOSITION OF CLASS A UNITS
General. Gain or loss realized by a Class A Member on the sale of Class A
Units that have been held for more than one year will generally have the
character of long-term capital gain or loss and any such gain will be subject to
tax at a maximum rate of 28%, as opposed to the maximum rate of 39.6% imposed on
ordinary income and short-term capital gains. (See "Income Tax Considerations:
Taxes -- Capital Gains and Losses.") However, that portion of a selling Class A
Member's gain allocable to a Company's "unrealized receivables" and
"substantially appreciated" inventory, as defined in Section 751 of the Code,
will be characterized as ordinary income. The term "unrealized receivables"
includes depreciation recapture as if a selling Class A Member's proportionate
share (through a Company) of the Equipment were sold at that time.
The amount of gain which a Class A Member might realize upon the sale or
other disposition of the Class A Member's Class A Units will equal the excess,
if any, of (i) the amount received by the Class A Member for the Class A Units
over (ii) the Class A Member's adjusted tax basis in the Class A Units. The
amount of
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any loss which a Class A Member might realize on the sale or other disposition
of the Class A Member's Class A Units would equal the excess, if any of (i) the
Class A Member's adjusted tax basis over (ii) the amount received for the Class
A Units. In computing the amount of gain recognized upon the sale or other
disposition by a Class A Member of his Class A Units, such Class A Member will
generally be deemed to have received, in addition to all amounts actually paid
to him, an amount equal to his allocable share of the outstanding balance of a
Company's liabilities. As a result, a sale or other disposition of Class A Units
by a Class A Member may result in a tax liability in excess of cash proceeds
received on the sale or other disposition of such Class A Units.
The IRS has ruled that a partner must maintain an aggregate adjusted tax
basis in a single partnership interest in a partnership, consisting of all
interests acquired in such partnership in separate transactions. (See "Income
Tax Considerations: Limitations on Utilization of Losses -- Tax Basis.") Upon a
sale of a portion of such aggregate interest, the partner will be required to
allocate his aggregate tax basis between the interest sold and the interest
retained in such partnership based on the relative fair market values of such
interests on the date of sale. If applicable, this process of aggregating the
tax basis of all Class A Units owned by a Class A Member in a Company will
effectively prohibit a Class A Member owning Class A Units which were purchased
at different prices from controlling the timing of the recognition of the gain
or loss inherent in other Class A Units by choosing the Class A Units he will
sell in such Company. A person purchasing Class A Units in this Offering and
considering the subsequent purchase of additional Class A Units in the same
Company therefore should consult his own tax advisor as to the possible
consequences of the IRS' position on this issue.
If all or a portion of a Class A Member's Class A Units are redeemed, the
payment to the Class A Member (including relief of that Class A Member's share
of any Company liabilities) will be treated as a Company distribution except to
the extent of the portion of the payment which is treated as payment for that
Class A Member's interest in a Company's "unrealized receivables" (which
includes depreciation recapture). In connection with the portion of the payment
treated as a Company distribution, a Class A Member will recognize gain (or
loss, if all of a Class A Member's Class A Units are redeemed) to the extent of
the difference between the cash received (plus such Class A Member's allocable
share of any Company liabilities) and the tax basis of such Class A Member's
Class A Units. Such gain (or loss) would be capital. In connection with the
portion of the payment attributable to "unrealized receivables," a Class A
Member will recognize ordinary income.
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Gifts of Class A Units. Generally, no gain or loss is recognized for income
tax purposes as a result of a gift of property. A gift of Class A Units may
result in an income tax liability to the donor of such Class A Units, because
the donor will be treated as realizing gain (taxable as ordinary income or
capital gain, according to the rules described above) to the extent that the
donor's share of any outstanding Company liabilities exceeds the donor's
adjusted basis for his Class A Units. In the event that the gift of Class A
Units is to a charity, the Class A Member must bifurcate the gift into a bargain
sale and a charitable contribution. The Class A Member's gain from the bargain
sale would be the excess of such Class A Member's share of a Company's
liabilities over that portion of the Class A Member's adjusted basis in his
Class A Units that bears the same ratio to his adjusted basis as the amount
realized (i.e., the Class A Member's share of a Company's liabilities) bears to
the fair market value of the Class A Units. A Class A Member may be entitled to
a deduction for a gift of the Class A Member's Class A Units to a charity equal
to the excess, if any, of the fair market value of the Class A Member's Class A
Units over the Class A Member's share of a Company's liabilities, subject to the
limitations under Section 170 of the Code. Noncharitable gifts of Class A Units
may be subject to a gift tax imposed pursuant to the rules generally applicable
to all noncharitable gifts of property. Gifts of Class A Units are treated as
exempt transfers for purposes of determining whether a Company is
publicly-traded under Section 7704 of the Code. (See "Income Tax
Considerations -- Partnership Status.")
Adjustment of Basis on Death. Property generally receives an adjustment in
basis for federal income tax purposes to its fair market value as of the date of
death of the property's owner, or the alternative valuation date (if such
alternate date is selected). Property which is owned by spouses as community
property receives an adjustment in basis as to both interests in the property.
Property owned by spouses in other forms of joint ownership generally receives a
basis adjustment with respect to the decedent's interest only. The heirs of a
Class A Member will generally not be taxed on any gain on the sale of the Class
A Member's Class A Units attributable to the difference between the Class A
Member's tax basis for Class A Units and their fair market value as of the date
of death, or the alternative evaluation date, as the case may be. Neither the
transfer at death to a successor owner nor a distribution by the deceased
owner's estate to a successor should be considered a sale or exchange giving
rise to a taxable event. Transfers which occur because of the death of a Class A
Member are exempt transfers for purposes of determining whether a Company is
publicly traded under Section 7704 of the Code. (See "Income Tax
Considerations -- Partnership Status.")
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TERMINATION OF A PARTNERSHIP FOR TAX PURPOSES
The Code provides that if 50% or more of the capital and profits interests
in a partnership is sold or exchanged within a single twelve-month period, the
partnership will terminate for tax purposes. Each Operating Agreement prohibits
the transfer of any Class A Unit if such transfer would result in the
termination of a Company for federal income tax purposes. However, involuntary
transfers (such as transfers by death, dissolution, etc.) could possibly result
in termination of a Company for federal income tax purposes.
If a Company should terminate for tax purposes, it would be deemed to have
distributed its assets to the Class A Members, who would then be deemed to have
contributed the assets to a new partnership. Some of the effects of a
termination of a Company for federal income tax purposes could include changes
in a Company's tax basis in its assets and the period over which such assets
could be depreciated.
A Class A Member may recognize gain to the extent, if any, that the Class A
Member's pro rata share of a Company's cash (and the reduction, if any, in the
Class A Member's share of any Company indebtedness) at the date of termination
exceeds the adjusted tax basis of his Class A Units. In addition, a Company's
taxable year would terminate. If the Class A Member's taxable year were other
than the calendar year, the inclusion of more than one year of a Company's
income in a single taxable year of the Class A Member could result. Because the
new partnership would be treated as a separate entity for federal income tax
purposes, no election of the prior partnership would remain valid. Thus, new
federal income tax elections would be required to be made.
SECTION 754 ELECTION
The Manager, in its sole discretion, has the authority under the Operating
Agreements to make any elections available to the Companies with respect to
federal, state and local tax matters. If the Company's status as a partnership
for federal income tax purposes is respected (see "Income Tax Considerations:
Partnership Status,") the Company will be entitled to make elections otherwise
available to partnerships only, and the mechanics of such elections will operate
by substituting the "Company" and its "Members" for a "partnership" and its
"partners" each time the same appear in the Code and Regulations. One factor
that the Manager will consider in deciding whether or not to make a Section 754
Election with respect to a transfer of Units is the burdensome and costly
recordkeeping requirements that a Section 754 Election entails.
In the event that the Manager, in its capacity as Initial Class B Member,
elects to transfer up to 99 of its Class B Units
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pursuant to Section 6.02 of the Operating Agreements, then the Manager
anticipates making an election under Section 754 of the Code for such transfer
and for transfers of Class A Units which occur in the fiscal year in which the
Class B Units are transferred and all subsequent fiscal years. Section 754 of
the Code provides for certain adjustments to the basis of Company property upon
certain distributions of such property to a Member (Section 734) and upon any
transfer of a Unit or upon the death of a Member (Section 743). (See "Income Tax
Considerations: Disposition of Class A Units -- Adjustment of Basis on Death.")
The general effect of a Section 754 Election would be that the transferee of an
interest in the Company is treated as though he had acquired a direct interest
in its assets (without regard to the basis at which the Company holds such
assets), and, upon certain distributions to Members, the Company is treated as
though it had newly acquired an interest in its assets, and, therefore, acquired
a new cost basis for such assets. Any such election, once made, is irrevocable
without the consent of the IRS.
A Section 754 Election is advantageous if the price paid by a transferee for
a Unit is higher than the transferor's "share" of the aggregate basis of the
Company's assets immediately prior to the transfer since, pursuant to the
election, the transferee would take a new stepped-up basis in his "share" of the
Company's assets. Conversely, a Section 754 Election is disadvantageous if the
price paid by a transferee for a Unit is lower than the transferor's "share" of
the aggregate basis of the Company's assets immediately prior to the transfer.
The Section 734 adjustments generally complement the Section 743 adjustments by
requiring a an entity taxed as a partnership to adjust the basis of retained
assets to reflect certain distributions to partners (in this case, Members) that
are treated for tax purposes as sales or exchanges. The amount that a Class A
Member will be able to obtain upon a sale or other disposition of his Class A
Units may be affected favorably or adversely by the Section 754 Election or the
absence thereof, depending upon whether the price of the Class A Unit is higher
or lower than the transferring Class A Member's "share" of the aggregate basis
of the Company's assets at the time of the sale or other disposition.
The calculations under Section 754 are highly complex, and there is little
legal authority dealing with the mechanics of the calculations, particularly in
the context of large, publicly-held entities taxed as partnerships. The IRS
might take the position that the adjustments made by the Company do not meet the
requirements of the Code or the Regulations. If the IRS were able to sustain
such a position, any increased depreciation deductions which are allowable to a
transferee of Class A Units as a result of the Section 754 Election might be
reduced, and any gain allocable to a transferee upon the sale of an item of
Equipment (or subsequent sale of his Class A Units) might be increased.
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If the Manager does not make a Code Section 754 Election with respect to a
transfer of Units, a subsequent Class A Member's share of gain or loss upon the
sale of a Company's assets will be determined by taking into account a Company's
tax basis in the assets and without reference to the cost associated with
acquiring the Class A Units. Thus, in the absence of a Code Section 754
Election, the transferee Class A Member's pro rata share of a Company's basis in
its assets will not reflect the transferee's cost for the Class A Units. Because
the failure of a Company to make a Code Section 754 Election may deny the
transferee of Class A Units the tax benefits associated with the election, the
absence of such an election may reduce the secondary marketability of Class A
Units.
INVESTMENT BY QUALIFIED PLANS, IRAS AND EXEMPT ENTITIES
The income earned by Qualified Plans, IRAs and corporations, community
chests, funds or foundations that qualify under Section 501(c)(3) of the Code
(collectively "Exempt Entities") is generally exempt from taxation. However,
"unrelated business taxable income" of Qualified Plans, IRAs and Exempt Entities
is subject to tax to the extent it exceeds $1,000 during any taxable year.
Unrelated business taxable income in excess of $1,000 in any taxable year will
be taxable at ordinary income rates and may be subject to the alternative
minimum tax. (See "Income Tax Considerations: Taxes -- Alternative Minimum
Tax.")
The leasing of tangible personal property is treated for purposes of the
Code as an unrelated trade or business. (See Revenue Rulings 78-144, 1978-1 C.B.
168, 69-278, 1969-1 C.B. 148, and 60-206, 1960-1 C.B. 201.) The IRS has ruled
that a partner's distributive share of income or gain from a partnership engaged
in the leasing of tangible personal property is treated in the same manner as if
such income or gain were realized directly by the limited partner. Therefore, in
counsel's opinion, Qualified Plans, IRAs or Exempt Entities that invest in a
Company will be subject to the tax on unrelated business taxable income for any
taxable year of the Qualified Plan, IRA or Exempt Entity to the extent a Company
generates income from the leasing of the Equipment and the total of the
Qualified Plan's, IRA's or Exempt Entity's share of that income for the taxable
year plus its unrelated business taxable income from all other sources for the
taxable year exceeds $1,000.
Income from property subject to acquisition indebtedness also will be
included in the unrelated business taxable income of a tax-exempt entity,
converting what might otherwise be portfolio income into unrelated business
taxable income. For this purpose, indebtedness will constitute acquisition
indebtedness if it was incurred directly or indirectly in connection with
acquisition or improvement of property.
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Except to the extent of gain or loss from the sale, exchange, or other
disposition of acquisition indebtedness property and except to the extent the
Equipment constitutes inventory or property held primarily for sale to customers
in the ordinary course of a trade or business, gains from the sale or exchange
of the Equipment generally will be excludable from the scope of unrelated
business taxable income. However, any gain on the disposition of Equipment that
is characterized as ordinary income as a result of the recapture of cost
recovery or depreciation deductions will constitute unrelated business taxable
income of Qualified Plans, IRAs and Exempt Entities.
Finally, interest income from the investment of a Company's cash balances
should not constitute unrelated business taxable income, unless such interest is
derived from acquisition indebtedness property.
If an IRA has unrelated business taxable income in excess of a specific
exemption of $1,000 for any taxable year, the IRA is subject to income tax on
this excess at the same tax rates applicable to trusts and estates. Even though
an IRA is not subject to tax for any year, if the gross income taken into
account in computing unrelated business taxable income exceeds $1,000, the IRA
customer is still obligated to file a tax return for such year on Form 990-T.
Generally, this tax return must be filed with the IRS by April 15th of the
following year.
Penalties may be imposed by the IRS for failing to file this tax return when
required, and, if tax is due, additional penalties and interest may be imposed
if the tax is not paid. In addition, any tax due should be paid from the IRA.
Direct payment of the tax by the IRA customer may have other adverse tax
consequences.
AN IRA CUSTOMER WHO MAKES AN INVESTMENT IN HIS IRA WHICH MAY RESULT IN THE
REALIZATION OF UNRELATED BUSINESS TAXABLE INCOME IS URGED TO OBTAIN THE ADVICE
OF A QUALIFIED TAX ADVISOR ON THE EFFECT OF REALIZING UNRELATED BUSINESS TAXABLE
INCOME IN HIS IRA AND ANY OBLIGATION TO FILE INCOME TAX RETURNS AND TO PAY TAX
ON SUCH UNRELATED BUSINESS TAXABLE INCOME. SEE "ERISA CONSIDERATIONS."
INVESTMENT BY NONRESIDENT ALIEN INDIVIDUALS AND FOREIGN CORPORATIONS
Nonresident alien individuals and foreign corporations that become Class A
Members will, like the Companies, be deemed to be engaged in the conduct of a
trade business within the United States. Under Sections 871(b) and 882(a) of the
Code, nonresident aliens individuals and foreign corporations, respectively,
will
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be subject to United States income tax on their allocable shares of a Company's
taxable income from United States sources. Nonresident alien individuals and
closely held foreign corporations that acquire Class A Units will also be
subject to the same limitations on the deduction of a Company's losses that
apply to domestic Class A Members. (See "Income Tax Considerations: Certain
Principles of Partnership Taxation, Limitations on Utilization of Losses.")
Foreign corporations may also be subject to the branch profits tax under
Section 884 of the Code. Such tax is equal to 30% of a foreign corporation's
earnings and profits effectively connected with a United States business that
are withdrawn (or deemed withdrawn) from investment in the United States. This
tax is payable in addition to the regular United States corporate tax. The
branch profits tax will generally not apply in cases inconsistent with United
States tax treaties.
Section 1446 of the Code requires partnerships (such as the Companies) with
foreign partners to withhold and pay over to the IRS federal income tax on
partnership income which is effectively connected with a United States trade or
business which is allocable to the foreign partner at the highest "applicable
percentage." The applicable percentage is equal to the highest appropriate tax
rate, currently 39.6% for individual foreign Class A Members and 35% for
corporate foreign Class A Members. (See "Income Tax Considerations: Taxes.") It
is anticipated that the Companies will have sufficient cash to effect such
withholding and amounts withheld will be treated as cash distributions to the
foreign Class A Members, reducing the amount of cash actually received by such
foreign Class A Members, as well as their Capital Accounts. Such withheld
amounts will be credited against the Class A Members' federal income tax
liabilities for the taxable year in which withheld, and any excess will be
refundable. Foreign Class A Members may be entitled to tax credits for United
States taxes in their countries of residence, and should consult with their
local and United States tax advisors with regard to the tax consequences of an
investment in Class A Units.
TAXES
General. The highest stated marginal individual tax rate is currently
39.6%. The deduction for personal exemptions is phased out for taxpayers with an
adjusted gross income over certain thresholds (adjusted for inflation). For
1994, the thresholds are $167,700 for married taxpayers filing jointly, $111,800
for single taxpayers and $83,850 for married filing separately. Further,
otherwise allowable itemized deductions (other than medical expenses, casualty
and theft losses and investment interest) are reduced by an amount equal to 3%
of a taxpayer's adjusted gross income in excess of certain thresholds (adjusted
for inflation). For 1994, the
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thresholds are $111,800 for single taxpayers and married taxpayers filing
jointly and $55,900 for married taxpayers filing separately. In no event,
however, are such deductions reduced by more than 80%.
Capital Gains and Losses. Net capital gains (i.e., the excess of net
long-term capital gains over short-term capital losses) of individuals are taxed
at a 28% maximum tax rate. Capital losses, whether long-term or short-term, are
only available to offset $3,000 of ordinary income in a given taxable year. Any
remaining capital loss may be carried forward indefinitely.
Two Percent Floor on Miscellaneous Itemized Deductions. Noncorporate Class A
Members may deduct expenses paid or incurred for (a) the production or
collection of income, (b) the management, conservation, or maintenance of
property held for the production of income, or (c) in connection with the
determination, collection or refund of a tax, only to the extent such expenses
exceed 2% of adjusted gross income. This rule is to apply with respect to
indirect deductions through pass-through entities (such as a Company) of amounts
that would not be allowable as a deduction if paid or incurred directly by an
individual. Although it is not anticipated that a Company will incur any
material expenses of this nature, the 2% limit described above may cause certain
expenses allocable to Class A Members to be nondeductible.
Alternative Minimum Tax. This discussion only addresses the alternative
minimum tax as it applies to noncorporate taxpayers (and to shareholders of an S
corporation). The first step in determining a taxpayer's alternative minimum tax
liability, if any, is calculation of the taxpayer's alternative minimum taxable
income. Alternative minimum taxable income is computed by adjusting the
taxpayer's taxable income in accordance with the rules set forth in Sections 56
and 58 of the Code, and by increasing the resulting amount by the taxpayer's
items of tax preference described in Code Section 57. Alternative minimum
taxable income is then reduced by a specified exemption amount and by the
taxpayer's alternative minimum tax foreign tax credit for the taxable year. The
exemption amounts are $45,000 for married couples filing joint returns, $33,750
for single individuals, and $22,500 for married persons filing separate returns.
The exemption is phased out above certain alternative minimum taxable income
levels: $150,000 for taxpayers filing joint returns, $112,500 for single
taxpayers, and $75,000 for married taxpayers filing separate returns. The
alternative minimum tax rate is 26% for alternative minimum taxable income not
in excess of $175,000 (over the exemption amount) and 28% for alternative
minimum taxable income in excess of $175,000 (over the exemption amount). A
taxpayer is only required to pay an alternative minimum tax liability to the
extent that the amount of that liability exceeds the liability which the
taxpayer would otherwise have for the regular federal income tax.
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One of the adjustments to taxable income established by Code Section 56
relates to the amount of cost recovery deductions claimed on personal property.
To derive a taxpayer's alternative minimum taxable income, the taxpayer's
taxable income must be adjusted by an amount equal to the difference between (i)
the amount of cost recovery deductions claimed by the taxpayer with respect to
personal property and (ii) the amount which would have been allowable over the
ADR class life of the property using the 150% declining balance method,
converting to straight-line when necessary to maximize the remaining deductions.
The adjustment results in a basis in the depreciated property for alternative
minimum tax purposes which may differ from its basis for regular tax purposes.
Thus, upon disposition of the property, the taxpayer will generally recognize
less gain (or a greater loss) for alternative minimum tax purposes than for
regular tax purposes. Items of tax preference also include other items which are
not anticipated to be generated by a Company, but may apply in the case of
certain Class A Members due to their particular facts and circumstances
unrelated to a Company.
COMPANY TAX RETURNS AND TAX INFORMATION
The Manager will file each Company's tax returns using the accrual method of
accounting and will adopt the calendar year as each Company's taxable year. (See
"Income Tax Considerations: Certain Principles of Partnership Taxation.") Each
Company will provide tax information to the Class A Members within 75 days after
the close of each taxable year. If a Class A Member is required to file its tax
return on or before March 15, it may be necessary for the Class A Member to
obtain an extension to file if the tax information referred to above is not
distributed until the end of the 75-day period.
Class A Members will be required to file their returns consistent with the
information provided on a Company's informational return or notify the IRS of
any inconsistency. A failure to notify the IRS of an inconsistent position
allows the IRS automatically to assess and collect the tax, if any, attributable
to the inconsistent treatment.
Under Section 6050K of the Code, a selling Class A Member is required to
inform a Company of the sale or exchange of the Class A Member's Class A Units
within 30 days of the transaction or, if earlier, January 15 of the calendar
year following the calendar year in which the transaction occurs. A Class A
Member who fails to inform a Company of a sale or exchange of the Class A
Member's Class A Units in accordance with the rules described in this paragraph
is liable under the Code for a penalty of $50 per unreported transfer with an
annual maximum penalty of $100,000. Once notified, a Company is required to
inform the IRS of each such transaction in connection with the filing of its tax
information
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return for the taxable year in which the transaction occurs. Failure to provide
this notice may result in a $50 penalty per unreported transfer with an annual
maximum penalty of $250,000. A Company is also required to inform both the
seller and the buyer of Class A Units of the proportionate interest of those
Class A Units in the unrealized receivables (including potential depreciation
recapture) and substantially appreciated inventory items of a Company. This
notification is required to be made prior to February 1 of the calendar year
following the calendar year in which the transaction occurs. These reporting
requirements may increase a Company's administrative costs. If a return is
required to be filed by a broker pursuant to Section 6045 of the Code with
respect to the transfer, no return is required under Code Section 6050K by
either a selling Class A Member or a Company. (See Regulations Section
1.6050K-1.)
Organizers of tax shelters are required (i) to register with the IRS certain
offerings, including those which are subject to federal and state securities
registration requirements, and (ii) to maintain or make available to the IRS a
list of investors. The Manager has determined that neither Company is required
to register as a tax shelter or to maintain an investor list under the standards
released by the IRS. If the proposed and temporary Regulations issued by the IRS
in connection with registration are modified to or are applied in a manner that
would require the registration of either Company, the Manager will obtain a tax
shelter registration identification number and provide such number to the Class
A Members; in such event, each Class A Member would be required to include the
number on Form 8271 and file it with his federal income tax return.
AUDIT OF A COMPANY
The tax return filed by each Company may be audited by the IRS. Adjustments,
if any, resulting from such audit may result in an audit of the Class A Members'
own returns. Any such audit of the Class A Members' tax returns could result in
adjustments of non-Company as well as Company items of income, gain, loss,
deduction and tax preference.
Audit proceedings are conducted at the partnership level and, if the IRS
initiates an administrative proceeding or makes a "final adjustment" at the
partnership level, it must notify each partner of the beginning and completion
of the partnership administrative proceedings. Notice need not be given,
however, to a partner who has less than a 1% interest in a partnership which has
more than 100 partners, although a group of such partners having at least a 5%
interest in partnership profits in the aggregate may designate a member of the
group to receive notice. Because each Company will have more than 100 Class A
Members, the IRS will not notify individual Class A Members of an audit of a
Company. The
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Manager is the "tax matters partner" who will normally have the authority to
negotiate with the IRS with respect to any Company tax matter; the Manager will
also have the right to initiate judicial proceedings. A Class A Member will thus
be unable to control either an audit of a Company or any subsequent litigation.
If, in such event, the Manager does not go to court, any Class A Member entitled
to receive notice of the proceedings may bring an action to challenge any
proposed audit findings by the IRS. A special statute of limitations exists in
connection with the IRS' right to audit matters at the partnership level.
INTEREST AND PENALTIES
With certain exceptions, a penalty will be assessed for each month or
fraction thereof (up to a maximum of five months) that a partnership return is
filed either late or incomplete. The monthly penalty is equal to $50 multiplied
by the number of partners in the partnership during the year for which the
return is due.
With certain exceptions, a penalty will be assessed if a Company fails to
furnish to the Class A Members a correct Schedule K-1 to the federal income tax
return for such Company on or before the prescribed due date (including any
extension thereof). The penalty is equal to $50 multiplied by the number of
partners not furnished a correct Schedule K-1 on or before the prescribed due
date (including any extension thereof), with a maximum penalty of $100,000 per
calendar year.
A nondeductible penalty may be imposed by the IRS in connection with an
underpayment of tax resulting from a taxpayer's negligent disregard of
applicable rules and regulations. This penalty is equal to 20% of the
underpayment.
Section 6662 of the Code establishes a penalty equal to 20% (40% in certain
gross valuation misstatements) on underpayment of tax attributable to
substantial valuation overstatements. This penalty applies only if (i) the value
or adjusted basis of any property as claimed on an income tax return exceeds
200% of the correctly determined amount of its value or adjusted basis and (ii)
the underpayment of tax attributable to the substantial overvaluation exceeds
$5,000 ($10,000 in the case of a corporation other than an S corporation or
personal holding company). All or any part of the penalty may be waived by the
IRS upon the taxpayer's showing that a reasonable basis existed for the
valuation claimed on the return and that the claim was made in good faith. If a
Company were to overstate the value of Equipment, a Class A Member might be
liable for this penalty.
There is a 20% penalty on the amount of an underpayment of tax attributable
to the "substantial understatement" of a tax liability. A substantial
understatement is defined as an understatement for the taxable year that exceeds
the greater of 10% of the
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required tax or $5,000 ($10,000 for corporations other than personal holding
companies and S corporations). The penalty can be avoided either by disclosing
the questionable item on the return or by showing that there was "substantial
authority" for taking the position on the return. If a questionable item is
related to a tax shelter the understatement penalty can only be avoided by
showing that the taxpayer reasonably believed that the treatment of the item was
"more likely than not" the proper treatment. Based upon the representations of
the Manager, counsel believes the Companies will not be characterized as a "tax
shelter" for these purposes. It should also be noted that the Manager will not
cause a Company to claim a deduction unless the Manager believes, based upon the
advice of its accountants or counsel, that substantial authority exists to
support the deduction.
All interest payable with respect to a deficiency is compounded daily.
Interest rates are redetermined quarterly and are based on the federal
short-term interest rate (the average rate of interest on Treasury obligations
maturing in less than three years) for the first month of the preceding quarter
plus 3%.
FOREIGN TAX CONSIDERATIONS
As noted above, a Company may acquire Equipment which is operated outside
the United States. As a consequence, Class A Members may be required to file
returns and pay taxes in foreign jurisdictions with respect to the foreign
source income of such Company. The income taxed by the foreign jurisdiction
would in such a case be calculated according to the tax laws of the foreign
jurisdiction, which may or may not correspond with applicable United States
standards.
Class A Members who have foreign tax liabilities as a result of a Company
may be entitled to a foreign tax credit or to a deduction for foreign taxes paid
which can be utilized to reduce their United States tax liabilities or taxable
income, respectively. The calculation of the foreign tax credit is quite complex
and no assurance can be given that a credit will be available in the amount of
any foreign tax paid. In particular, prospective Class A Members should be aware
that United States law does not generally allow a foreign tax credit greater
than the taxpayer's United States federal income tax liability with respect to
the foreign source income of the taxpayer calculated separately for certain
types of income including shipping income and passive rental income. Each
Company will earn these two types of income and, therefore, a Class A Member
must compute separately the foreign tax credit for each type of income. The
foreign source income of a taxpayer is calculated according to United States
rather than the foreign jurisdiction's tax law. It is possible that a foreign
country might impose a tax in an amount greater than the allowable foreign
credit under United States law. In such a case, Class A Members would be subject
to a higher
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effective rate of taxation than if no foreign tax had been imposed. To the
extent that all income taxes paid to a foreign country on a certain type of
income exceed the amount of foreign tax credit allowable in any year for such
type of income, the excess foreign tax credits generally may be carried back two
years or forward five years to offset United States income taxes on that certain
type of foreign source income in those tax years. If a Company were to suffer an
overall foreign loss in one year and incur foreign taxes in a subsequent year,
the amount of foreign tax credit allowable in that subsequent taxable year could
be reduced on account of the prior foreign loss, regardless of whether the loss
resulted in a United States tax benefit to the Class A Members. Each Class A
Member should consult his own tax advisor regarding the applicability of foreign
taxes to his own situation.
Prior to a Company entering into an arrangement which contemplates the use
of Equipment outside the United States, the Manager will consult with its
counsel and with special counsel located in the foreign jurisdiction concerning
the possibility of structuring the transaction in a manner which will enable the
Class A Members to avoid being required to file income tax returns in the
foreign jurisdiction. The Manager has discretion to cause a Company to enter
into any such arrangement.
FUTURE FEDERAL INCOME TAX CHANGES
Neither the Manager nor counsel can predict what further legislation, if
any, may be proposed by members of Congress, by the current administration, or
by any subsequent administration, nor can either predict which proposals, if
any, might ultimately be enacted. Neither the Manager nor counsel can predict
what changes may be made to existing Regulations, or what revisions may occur in
the IRS' ruling policy. Consequently, no assurance can be given that the income
tax consequences of an investment in a Company will continue to be as described
herein. Any changes adopted into law may have retroactive effect.
STATE TAXES
In addition to the federal income tax considerations described above,
prospective investors should consider applicable state and local taxes which may
be imposed by various jurisdictions. A Class A Member's distributive share of
the income or loss of a Company generally will be required to be included in
determining the Class A Member's reportable income for state or local tax
purposes in the jurisdiction in which the Class A Member is a resident.
Moreover, California and a number of other states in which a Company may do
business generally impose state income tax on a nonresident and foreign Class A
Member's distributive share of a Company's income which is derived from such
states. California and a number of other states have adopted a withholding tax
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procedure in order to facilitate the collection of taxes from nonresident and
foreign Class A Members on a Company's income derived from such states. Any
amounts withheld would be deemed distributed to the nonresident or foreign Class
A Member and would therefore reduce the amount of cash actually received by the
nonresident or foreign Class A Member as a result of such distribution.
Nonresidents may be allowed a credit for the amount so withheld against any
income tax imposed by their state of residency. The Companies cannot, at
present, estimate the percentage of their future income that will be from states
which have adopted such withholding tax procedures and they cannot therefore
estimate the required withholding tax, if any. In addition, while the Companies
intend to apply to the applicable taxing authority of such states for a waiver
(or a partial waiver), if any, of such withholding requirements, no assurance
can be given that such waiver will ultimately be granted.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT, IN COMPUTING THEIR TAXABLE INCOME
FOR PURPOSES OF DETERMINING THEIR STATE INCOME TAX LIABILITIES, THEY MAY BE
SUBJECT TO RULES WHICH ARE LESS FAVORABLE THAN THOSE UNDER FEDERAL INCOME TAX
LAWS.
The Companies may be required to file tax returns and pay state or local
taxes as a result of the operations of the Companies in states and localities.
The Companies' payment of such taxes and the costs associated with the filing of
any state or local tax returns will reduce the amount of cash available for
distribution to the Class A Members.
Although each Company should be treated as a partnership for federal income
tax purposes, in certain states, criteria for partnership classification of
limited liability companies (such as the Companies) for state and local purposes
may be substantially different from the criteria employed for federal income tax
purposes. Moreover, in Pennsylvania, limited liability companies will be taxed
as corporations with the result that a portion of cash distributions to
Pennsylvania investors will be treated as portfolio income (rather than passive
income) for Pennsylvania state income tax purposes. Accordingly, there can be no
assurance that each Company will be treated as a partnership for state and local
tax purposes.
ACCORDINGLY, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT HIS TAX ADVISOR WITH
RESPECT TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN THE
COMPANIES.
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NEED FOR INDEPENDENT ADVICE
The foregoing summary is not intended as a substitute for careful tax
planning, particularly since the income tax consequences associated with an
investment in a Company are complex and certain of them will not be the same for
all taxpayers. ACCORDINGLY, PROSPECTIVE PURCHASERS OF CLASS A UNITS ARE STRONGLY
URGED TO CONSULT THEIR OWN TAX ADVISORS WITH SPECIFIC REFERENCE TO THEIR OWN TAX
SITUATIONS.
ERISA CONSIDERATIONS
FIDUCIARIES UNDER ERISA
A fiduciary of a Qualified Plan is subject to certain requirements under the
Employee Retirement Income Security Act of 1974 ("ERISA"), including the
discharge of duties solely in the interests of, and for the exclusive purpose of
providing benefits to, the Qualified Plan's participants and beneficiaries. A
fiduciary is required to perform the fiduciary's duties with the skill,
prudence, and diligence of a prudent man acting in like capacity, to diversify
investments so as to minimize the risk of large losses, and to act in accordance
with the Qualified Plan's governing documents.
Fiduciaries with respect to a Qualified Plan include any persons who have
any power of control, management, or disposition over the funds or other
property of the Qualified Plan. An investment professional who knows or ought to
know that his advice will serve as one of the primary bases for the Qualified
Plan's investment decisions may be a fiduciary of the Qualified Plan, as may any
other person with special knowledge or influence with respect to a Qualified
Plan's investment or administrative activities.
It should be noted that while the beneficiary -- "owner" or "account
holder" -- of an Individual Retirement Account ("IRA") is treated as a fiduciary
of the IRA under the Code, IRAs generally are not subject to ERISA's fiduciary
duty rules. Also, if a participant in a Qualified Plan exercises control over
the participant's individual account in the Qualified Plan in a "self-directed
investment" arrangement, the participant is not deemed to be a fiduciary, and no
person who would otherwise be a fiduciary of the Qualified Plan may be held
responsible for the consequences of the participant's investment decisions.
Finally, certain Qualified Plans of sole proprietors or partnerships in which at
all times (before and after the investment) the only participant(s) is/are the
sole proprietor and his spouse or the partners and their spouses, and certain
Qualified Plans of corporations in which at all times (before and after the
investment) the only participant(s) is/are an individual or/and his spouse who
own(s) 100% of the corporation's stock are generally not subject to ERISA's
fiduciary standards,
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although they are subject to the Code's prohibited transaction rules explained
below.
A person subject to ERISA's fiduciary rules with respect to a Qualified Plan
should consider those rules in the context of the particular circumstances of
the Qualified Plan before authorizing an investment of a portion of the
Qualified Plan's assets in Class A Units.
PROHIBITED TRANSACTIONS UNDER ERISA AND THE CODE
Section 4975 of the Code (which applies to all Qualified Plans and IRAs) and
Section 406 of ERISA (which does not apply to IRAs or to certain Qualified Plans
that, under the rules explained above, are not subject to ERISA's fiduciary
rules), both prohibit Qualified Plans and IRAs from engaging in certain
transactions involving "plan assets" with parties that are "disqualified
persons" under the Code. "Disqualified persons" include fiduciaries of a
Qualified Plan or IRA, the company sponsoring a Qualified Plan, officers,
directors, shareholders, and other owners of a company sponsoring a Qualified
Plan, and natural persons and legal entities sharing certain family or ownership
relationships with other "disqualified persons," including, in the case of
Section 406 of ERISA (but not Section 4975 of the Code) an employee of a person
that is itself a disqualified person, such as an employee of a company
sponsoring a qualified plan.
"Prohibited transactions" include any direct or indirect transfer or use of
a Qualified Plan's or IRA's assets to or for the benefit of a disqualified
person, any act by a fiduciary that involves the use of a Qualified Plan's or
IRA's assets in the fiduciary's individual interest or for the fiduciary's own
account, and any receipt by a fiduciary of consideration for his own personal
account from any party dealing with a Qualified Plan or IRA. Under ERISA, a
disqualified person that engages in a prohibited transaction will be made to
disgorge any profits made in connection with the transaction and will be
required to compensate any Qualified Plan that was a party to the prohibited
transaction for any losses sustained by the Qualified Plan. Section 4975 of the
Code imposes excise taxes on a disqualified person that engages in a prohibited
transaction with a Qualified Plan or IRA.
In order to avoid the occurrence of a prohibited transaction under Section
4975 of the Code and/or Section 406 of ERISA, Class A Units may not be purchased
by a Qualified Plan or IRA as to which the Manager or any of its Affiliates have
investment discretion with respect to the assets used to purchase the Class A
Units, or with respect to which they regularly give individualized investment
advice that serves as the primary basis for the investment decisions made with
respect to such assets. Additionally, fiduciaries of, and other disqualified
persons with respect to, Qualified Plans and IRAs should be alert to the
potential for
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prohibited transactions to occur in the context of a particular Qualified Plan's
or IRA's decision to purchase Class A Units.
"PLAN ASSETS"
If a Company's assets were determined under ERISA or the Code to be "plan
assets" of Qualified Plan and/or IRA Class A Members, their fiduciaries might,
under certain circumstances, be subject to liability for actions taken by the
Manager or its Affiliates, and certain of the transactions described in this
Prospectus in which a Company might engage, including certain transactions with
Affiliates, might constitute prohibited transactions under the Code and ERISA
with respect to such Qualified Plans and IRAs, even if their acquisition of
Class A Units did not originally constitute a prohibited transaction.
Under the Department of Labor ("DOL") regulations governing the
determination of what constitutes the assets of a Qualified Plan or IRA in the
context of investment securities such as Class A Units, an undivided interest in
the underlying assets of a collective investment entity such as a Company will
be treated as "plan assets" of Qualified Plan or IRA investors if (i) the
securities are not publicly offered, (ii) 25% or more by value of any class of
equity securities of the entity is owned by Qualified Plans, IRAs, and certain
other employee benefit plans, (iii) the interests of the Qualified Plan and IRA
investors are "equity interests," and (iv) the entity is not an "operating
company." In order for securities to be treated as "publicly offered," they have
to be either (a) part of a class of securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934 or (b) sold as part of an offering
registered under the Securities Act of 1933, and must also meet certain other
requirements, including a requirement that they be "freely transferable."
Units will be sold as part of an offering registered under the Securities
Act of 1933. However, in counsel's view, whether a Company will be an "operating
company" and the effect of certain restrictions on transferability of Class A
Units (see "Transferability of Class A Units") on the determination of whether
Class A Units are "freely transferable" for purposes of the DOL's regulations
are unclear. Consequently, unless favorable clarification of such matters is
forthcoming from the DOL, in order to ensure that the assets of each Company
will not constitute "plan assets" of Qualified Plan and IRA Class A Members, the
Manager will take such steps as are necessary to ensure that ownership of Units
by Qualified Plans, IRAs, and certain other employee benefit plan investors is
at all times less than 25% of the total value of each class of the outstanding
Units of each Company. In calculating this limit, the Manager shall, as provided
in the DOL's regulations, disregard the value of any Units held by a person
(other than a Qualified Plan, IRA, or certain other employee benefit plans) who
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has discretionary authority or control with respect to the assets of a Company,
or any person who provides investment advice for a fee (direct or indirect) with
respect to the assets of a Company, or any affiliate of any such a person. (See
"Investor Suitability Standards.")
OTHER ERISA CONSIDERATIONS
In addition to the above considerations in connection with the "plan assets"
issue, a decision to cause a Qualified Plan or IRA to acquire Class A Units
should involve consideration, among other factors, of whether (i) the investment
is in accordance with the documents and instruments governing the Qualified Plan
or IRA, (ii) the purchase is prudent in light of the diversification of assets
requirement and the potential difficulties that may exist in liquidating Class A
Units, (iii) the investment will provide sufficient cash distributions in light
of the Qualified Plan's or IRA's required benefit payments or other
distributions, (iv) the evaluation of the investment has properly taken into
account the potential costs of determining and paying any amounts of federal
income tax that may be owed on unrelated business taxable income derived from a
Company, (v) in the case of a Qualified Plan, the investment, unless made for an
individually directed account under the Qualified Plan, is made solely in the
interests of the Qualified Plan's participants, and (vi) the fair market value
of Class A Units will be sufficiently ascertainable, and with sufficient
frequency, to enable the Qualified Plan or IRA to value its assets in accordance
with the rules and policies applicable to the Qualified Plan or IRA. Prospective
Qualified Plan investors should note that, with respect to the diversification
of assets requirement, the legislative history of ERISA and a DOL advisory
opinion indicate that the determination of whether the assets of a Qualified
Plan that has invested in an entity such as a Company are sufficiently
diversified may be made by looking through the Qualified Plan's interest in the
entity to the underlying portfolio of assets owned by the entity.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Companies have only recently been formed. Accordingly, the Companies
have no operating history. Each of the Companies intends to purchase (primarily
on an all cash basis), lease, charter, or otherwise invest in a diversified
equipment portfolio consisting primarily of used long-lived, low obsolescence
capital Equipment that is easily transportable by and among prospective users,
to lease or charter the Equipment to unaffiliated lessees or other operators or
to have the Equipment operated on behalf of the Companies by an Affiliate, and
to ultimately liquidate their ownership or investment in the Equipment. There
can be no assurances, however, that either of the Companies will achieve these
objectives.
OPERATIONS
Each of the Company's operating revenues will initially be generated
primarily from the leasing and otherwise entering into contracts for the use of
Equipment which will be utilized to pay Company expenses and provide cash
distributions to Members. In conducting its Equipment business, each Company
intends to purchase, lease, charter, purchase options to purchase, purchase
equity interests in equipment-owning entities or otherwise invest in Equipment,
to enter into contracts with lessees, sublessees, lessors, sublessors,
charterers, subcharterers, and other unaffiliated parties respecting the use of
the Equipment, to have Equipment operated on the behalf of such Company by an
Affiliate, to sell or otherwise dispose of Equipment and to engage in all
business activities related and incidental thereto, including, without
limitation, the borrowing and lending of funds. The Manager intends to reinvest
a portion of each Company's Cash Flow and Net Disposition Proceeds into the
acquisition of Equipment and capital improvements to Equipment during the first
six years of each Company's operations.
The Manager anticipates that all Company assets will be sold with a view
toward liquidation of each of the Companies by the end of the tenth year of its
respective program operations, subject to the Manager's discretion to extend the
liquidation process if in the Manager's discretion such extension will enable
each Company to dispose of its assets on more favorable terms. There can be no
assurances, however, that the Companies will achieve these objectives.
LIQUIDITY
The Companies intend to acquire Equipment primarily on an all cash basis;
however, in certain cases short-term and/or long-term borrowings may be used to
finance the purchase of Equipment. The Manager has entered into a joint
$25,000,000 credit
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facility (the "Committed Bridge Facility") on behalf of Growth Fund VII, for
which the Manager serves as general partner, and TEC AcquiSub, Inc. ("TECAI"),
an indirect wholly owned subsidiary of the Manager. The Committed Bridge
Facility is available to provide interim (not in excess of twelve months)
financing, secured by the equipment purchased by Growth Fund VII or TECAI using
such credit facility, and the maximum amount of such financing is determined
under different formulas for Growth Fund VII and TECAI. Growth Fund VII may
obtain financing under the Committed Bridge Facility of up to (i) 50% of the net
book value of equipment purchased by Growth Fund VII, including the equipment
purchased with the Committed Bridge Facility, less any equipment off-lease and
any equipment for which lease or rental payments are more than 90 days past due,
but only to the extent the net book value of such excluded equipment exceeds 15%
of all of Growth Fund VII's equipment, plus (ii) 50% of unrestricted cash held
by Growth Fund VII, minus any debt of Growth Fund VII. Outstanding borrowings by
Growth Fund VII and TECAI reduce the amounts available under the Committed
Bridge Facility. Individual borrowings may be outstanding for no more than 150
days with all advances due no later than June 30, 1995, when the Committed
Bridge Facility will expire.
It is anticipated that the Committed Bridge Facility will become available
to each of the Companies on the same or similar terms extended to Growth Fund
VII once each Company's minimum impound requirements are met. The Committed
Bridge Facility, if entered into by the Manager on behalf of the Companies,
would prohibit the Companies from accessing any additional indebtedness during
the initial offering period.
Assuming the Committed Bridge Facility is made available to the Companies on
its current terms, at the maturity of each advance to TECAI, either of the
Companies or Growth Fund VII, as determined in the discretion of the Manager,
will purchase any equipment then financed by TECAI under the Committed Bridge
Facility. Generally, TECAI will purchase equipment utilizing the Committed
Bridge Facility on an interim basis when a Company or Growth Fund VII does not
have adequate capital to purchase the equipment itself, and TECAI will hold
title until such time (generally less than six months) as either Company or
Growth Fund VII has raised adequate capital to purchase the equipment. In all
cases, the Companies and Growth Fund VII will purchase the Equipment from TECAI
at the same price paid by TECAI, and during the period that any equipment is
owned by TECAI on an interim basis, TECAI will be entitled to all earnings
generated from the equipment and will be responsible for all expenses, including
financing costs, of the equipment.
If the Companies become parties to the Committed Bridge Facility, to the
extent that the Companies are unable to raise
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sufficient capital through the sale of Class A Units to repay their portion of
the Committed Bridge Facility, the Companies will continue to be obligated under
the Committed Bridge Facility until the Companies generate proceeds from their
operations or the sale of Equipment sufficient for repayment. There can be no
assurance that the Companies will become parties to the Committed Bridge
Facility. (See "Risk Factors: Business Risks -- Leverage.") The Manager will
guarantee the repayment of all borrowings under the Committed Bridge Facility.
In addition, each of the Companies may borrow funds in the form of long-term
debt to enable a Company to acquire additional items of Equipment, when the
Manager determines that such financing is likely to enhance the overall return
to such Company. Where long-term borrowings are utilized they will be limited to
approximately 20% of the cost of all Equipment owned by such Company at the time
any such borrowing is originated. Such borrowings are nonrecourse to the Class A
Members. (See "Business of the Companies: Acquisition of Equipment -- Long-Term
Borrowings" and "Risk Factors: Investment Risks -- Liability of Class A Members
for Obligations of a Company.")
Each of the Companies will maintain a working capital reserve for operating
expenses, capital expenditures, normal repairs, replacements, contingencies and
other anticipated costs relating to the Equipment by retaining a portion of
Capital Contributions from Class A Members, rental revenues or sales proceeds as
determined by the Manager. The Manager will maintain a minimum cash reserve for
each of the Companies equal to the lesser of (i) 1% of Capital Contributions
from Class A Members or (ii) $750,000. The Manager, in its sole discretion, may
at any time increase the amount of such reserves to an amount which it
determines to be reasonable and necessary in connection with the operation of
each of the Company's business and affairs; provided, however, that the amount
of reserves may be decreased or eliminated during the liquidation stage of the
Companies.
SUMMARY OF THE OPERATING AGREEMENTS
The rights and obligations of the Members and the Manager of each of the
Companies will be governed by the Delaware Act and by the Operating Agreement
pursuant to which such Company was formed, as amended and restated. A copy of
the form of the Operating Agreement of each of the Companies is set forth in its
entirety as Exhibit A hereto, with the only variations in the Operating
Agreement for each Company indicated by brackets in the text. Prospective
investors should carefully study Exhibit A before submitting the Subscription
Agreement, Signature Page and Power of Attorney attached to this Prospectus as
Exhibit B, or in the case of investors purchasing Class A Units through certain
Selected Agents, a Letter of Suitability. The following statements,
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and other statements in this Prospectus, concerning the Operating Agreements and
related matters are merely an outline, do not purport to be complete, and in no
way modify or amend the Operating Agreements. (All sections and articles
referred to in this summary, unless otherwise indicated, refer to sections and
articles of the Operating Agreements.)
THE CLASS A UNITS
A maximum of 10,000,000 Class A Units are authorized for issuance and sale
in the Offerings, representing 5,000,000 Class A Units per Company. The
Offerings of Class A Units of the Companies will be conducted serially,
commencing with the Fund I Offering and concluding with the Fund II Offering
after the Fund I Offering is closed (assuming the Manager determines to proceed
with the Fund II Offering). (See "Plan of Distribution.")
Investment in Equipment by each Company shall equal 100% of all Capital
Contributions from the Original Class A Members of such Company.
Each Class A Unit evidences entitlement to a portion of a Company's
allocations and distributions, as determined in accordance with the Operating
Agreements. The voting rights of each holder of a Class A Unit will be the same.
Subscribers who are accepted as Class A Members by the Manager on or before
a Funding Date will be admitted to the Company in which they purchase Class A
Units as Class A Members within 15 days after the Funding Date for such Company.
Thereafter, Subscribers who are accepted as Class A Members by the Manager will
be admitted to the Company in which they purchase Class A Units as Class A
Members on or before the first day of the calendar month following the month in
which the date of such acceptance occurs. Upon the issuance of Class A Units, if
requested of the Manager by a Class A Member, the Manager shall cause the
applicable Company to issue a Certificate certifying that the Person named
therein is a Class A Member and the number of Class A Units of such Company held
by such Class A Member.
Subject to the consent of the Manager whose consent may be withheld in its
sole discretion, transfers of Class A Units will be recognized and permitted
transferees will be recognized as Substituted Class A Members on or before the
first day of the calendar month following the calendar month in which the
Manager receives the completed Transfer Application and approves the transfer
and admits the transferee as a Substituted Class A Member. (See Sections 1.07,
5.01 and 7.01.)
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THE CLASS B UNITS
Each Company is authorized to issue 105 Class B Units. As a Capital
Contribution to each of the Companies, the Manager, in its capacity as Initial
Class B Member, will pay all Organizational and Offering Expenses and all costs
associated with any Section 754 Election (other than any costs associated with
tax consequences to a Class A Member as a result of a Section 754 Election) on
behalf of each Company. The portion of the Initial Class B Member's Capital
Contribution attributable to Organizational and Offering Expenses incurred on
behalf of both Companies will be allocated as a Capital Contribution to Fund I
and Fund II pro rata based on the amount of capital raised in each Offering.
In exchange for such Capital Contributions, the Manager will receive 100
Class B Units in each Company, thereby becoming a Class B Member of each
Company. The Class B Members, including the Manager as Initial Class B Member,
assume liability to creditors of the Companies to the same extent that a general
partner of a limited partnership formed under the Delaware Limited Partnership
Act is liable (subject to certain specified limitations on a judgment creditor
proceeding against the assets of a general partner set forth in the Delaware
Limited Partnership Act). The Class B Members are initially entitled to a 15%
interest in each Company's cash distributions. When the cash distributions paid
on a Class A Unit equal or exceed the original Capital Contribution of $20.00
with respect to such Class A Unit, the Class B Members' interest in cash
distributions will increase to 25% with respect to the holder of such Class A
Unit. In addition, the Class B Members will receive a 1% interest in each
Company's items of income, gain, loss, deduction, credit and tax preference, and
certain special allocations of each Company's income and deductions. (See
"Allocations and Distributions.")
The Manager, or the last remaining successor or additional manager of a
Company, must at all times be a Class B Member and the holder of at least one
Class B Unit. (See Sections 1.08, 2.03, 3.03, 3.08 and 3.09.)
NONASSESSABILITY OF CLASS A UNITS
The Class A Units are nonassessable. When a Class A Unit has been paid for
in full, the holder of such Class A Unit has no obligation to make additional
contributions to a Company's capital. (See Section 3.04.)
LIABILITY OF CLASS A MEMBERS
Class A Members are not personally liable for the obligations of the Company
in which they purchase Class A Units, but their investments are subject to the
risks of such Company's business and the claims of its creditors. A Class A
Member, under certain
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circumstances, will be liable to return any distribution from a Company to the
extent that, immediately after giving effect to the distribution, all
liabilities of such Company (other than nonrecourse liabilities and liabilities
to Members on account of their interests in such Company) exceed the fair value
of such Company's assets (including, as to assets serving as security for
nonrecourse liabilities, that portion of the fair value of such assets which
exceeds the amount of such nonrecourse liabilities) or as otherwise provided by
applicable law. (See Section 3.14 and "Risk Factors: Return of Distributions by
Class A Members.") For a discussion regarding the possibility that the laws of
jurisdictions other than Delaware may be deemed applicable to a limited
liability company operating within such jurisdictions, which laws may not
recognize the limitations on the liability of members of a limited liability
company provided for by Delaware law, see "Risk Factors: Investment
Risks -- Liability of Class A Members for Obligations of a Company."
ALLOCATIONS AND DISTRIBUTIONS
The provisions of each Operating Agreement governing the allocation of tax
items and the apportionment of cash distributions are highly complex and are
summarized under the caption "Allocations and Distributions." As a general rule,
subject to the exceptions noted under "Allocations and Distributions," the Class
A Members will have a 99% interest in a Company's tax items. The Class B Members
will have a 1% interest in a Company's tax items subject to a special allocation
of Company income equal to any cash distributions made by the Company to the
Class B Members. The Class B Members will also be specially allocated 100% of
each Company's Organizational and Offering Expenses. In addition, the cash
distributions of each Company will be distributed initially 15% to the Class B
Members and 85% to the Class A Members. When the aggregate cash distributions
paid on a Class A Unit to the Original Class A Member or any permitted
transferee with respect to such Class A Unit equal or exceed the original
Capital Contribution of $20.00 for such Class A Unit, then cash distributions as
between a Class A Member holding such a Class A Unit and the Class B Members
will be distributed 25% to the Class B Members and 75% to such Class A Member.
(See Sections 3.08 and 3.09.)
TRANSFER OF CLASS A UNITS
No Class A Unit will be permitted to be transferred without the consent of
the Manager whose consent may be withheld in its sole discretion. (See
"Transferability of Units"). Any such approval will be granted only on the basis
of a completed Transfer Application, which a proposed transferee (or the
proposed transferee's broker, dealer, or nominee holder on the proposed
transferee's behalf) will be required to deliver to the Manager. A
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Transfer Application appears on the back of a Certificate evidencing ownership
of Class A Units, if one has been requested by the Class A Member, and also will
be furnished at no charge by the Manager upon request by a Class A Member. Upon
submission of a Transfer Application, a proposed transferee of a Class A Unit
will be deemed to have (i) agreed to be bound by the terms and conditions of the
applicable Operating Agreement, (ii) requested admission as a Substituted Class
A Member in accordance with the terms of such Operating Agreement, (iii) agreed
to execute any documents reasonably required by the Company in connection with
the transfer and such admission, and (iv) granted the Manager the Power of
attorney described below. The Transfer Application will require a proposed
transferee to designate whether the requested transfer is one of six types of
transfers that are considered exempt under the safe harbors imposed by IRS
Notice 88-75. The Transfer Application will also ask the proposed transferee to
indicate whether or not it is a Benefit Plan and whether or not it is a U.S.
Citizen. The Manager will rely on the Transfer Application to monitor compliance
with the safe harbors set forth in IRS Notice 88-75 and with other restrictions
on transfer. (See "Transferability of Class A Units.")
The admission of a proposed transferee as a Substituted Class A Member with
respect to a Class A Unit acquired by the proposed transferee becomes effective
upon the Manager giving its written consent, in its sole and absolute
discretion, to such admission and recording the proposed transferee as a Record
Holder on the Company's books. Until the transfer of a Class A Unit and
admission as a Substituted Class A Member has been registered on the books of
the Company, the Company and the Manager, notwithstanding any notice to the
contrary, will treat the Record Holder of the Class A Units as the absolute
owner of such Class A Units for all purposes.
A proposed transferee who does not execute a Transfer Application (either
himself or through the proposed transferee's broker, agent, or nominee on the
transferee's behalf), who does not obtain the Manager's consent to transfer and
who is not admitted as a Substituted Class A Member will not be treated as a
Record Holder of a Class A Unit and will not receive Company distributions,
income tax allocations, or reports furnished to Class A Members and will not be
entitled to voting rights. (See Articles VI and VII.)
TRANSFER OF CLASS B UNITS
Except as set forth below, the Manager shall not transfer its interest as
manager of a Company and no Class B Member shall transfer all or any portion of
its Class B Units or its Class B membership interest, except to a manager of the
applicable Company and with the approval of a Majority in Interest of such
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Company's Class A Members. The Manager, in its capacity as the Initial Class B
Member, and certain permitted transferees pursuant to Section 6.02 of the
Operating Agreements, are, however, permitted (but not required) to transfer up
to 99 Class B Units to any Affiliate of the Initial Class B Member which is a
U.S. Citizen and which is not a Benefit Plan without obtaining any approval of
the Class A Members. (See Section 6.02.) In the event the Manager makes such a
transfer, the Manager anticipates making a Section 754 Election for such
transfer, which election will apply to transfers of Class A Units which occur in
the same fiscal year and all subsequent fiscal years. (See "Income Tax
Distributions: Section 754 Election.")
CHANGE OF OWNERSHIP STATUS AND REPURCHASE OF CLASS A UNITS
In order to ascertain the citizenship status of a Class A Member, the
Manager may, from time to time, require the written certification of such Person
as to his or its citizenship status. If a Class A Member fails to furnish the
Manager with this certification within 30 days following the Manager's request,
or if the Manager otherwise in good faith determines that the Class A Member is
not a U.S. Citizen (and the Manager has not previously consented to ownership of
the Class A Units by such Person as an Alien), the Manager may substitute itself
as a Class A Member in the stead of the Class A Member until such Person
certifies to the satisfaction of the Manager that the Person is a U.S. Citizen.
During the term of this substitution, the Manager will vote all affected Class A
Units in the same ratio as all other outstanding Class A Units are voted on any
matter, and all distributions of Cash Available for Distribution and all
allocations of Net Profits and Net Loss will be made and effected as if the
Class A Units with respect to which the Manager has been substituted as a Class
A Member were not outstanding. Notwithstanding any such substitution, during the
term of such substitution, the Class A Member who or which has been substituted
for shall, nonetheless, be entitled to transfer the Class A Units of the Class A
Member to a Person who or which is a U.S. Citizen. (See Sections 6.07 and 6.08.)
If, in accordance with the preceding paragraph, the Manager has substituted
itself as a Class A Member in the stead of a Class A Member, the Manager, in its
sole discretion, may cause the respective Company to repurchase the Class A
Units of the Class A Member for cash in an amount equal to the Unrecovered
Principal of those Class A Units. Any such repurchase will terminate the
interest of the Class A Member in the affected Class A Units, including the
right of the Class A Member to transfer the Class A Units. (See Section 6.09.)
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RESPONSIBILITIES OF THE MANAGER
The Manager has the exclusive responsibility for the management and control
of all aspects of the business of the Companies. In the course of its
management, the Manager may, to the extent provided in the Operating Agreements,
in its absolute discretion, cause the Companies to purchase, own, charter,
lease, sell and/or make future commitments to purchase, charter, lease and/or
sell the Equipment and interests therein when and upon such terms as it
determines to be in the best interest of the Companies, and employ such persons
(including, under certain circumstances, Affiliates of the Manager) as it deems
necessary for the efficient operation of the Companies. All of the
aforementioned actions may be undertaken on behalf of the Companies by the
Manager acting alone. However, Class A Members holding more than 50% of the
outstanding Class A Units held by all Class A Members (a "Majority in Interest")
must approve the sale of substantially all of the assets of the Company in which
they own Class A Units in a single sale or in multiple sales in the same
twelve-month period, except in the orderly liquidation and winding up of the
business of such Company. (See Sections 2.01, 2.02, and 2.05.)
A Majority in Interest of the Class A Members of a Company may, at any time,
remove such Company's Manager. Written notice of such determination to remove
the Manager (setting forth an effective date therefor, which shall be no earlier
than 60 days from the date of such notice) must be served on the Manager and
will terminate, as of the effective date, all of the Manager's rights and powers
as a manager of such Company. (See Section 9.01.)
RECORDS AND REPORTS
The Manager will keep at the Companies' principal place of business adequate
books of account and records of the Companies. Each Member and the Member's
authorized representatives will have, upon request, at all times, during normal
business hours, free access to and the right, at the expense of the Class A
Member, to inspect and copy such books of account and records. If a Member
designates an authorized representative for this purpose, the Member must do so
in a writing delivered to the Company in which it owns Class A Units. A Company
will mail a complete list of the names, last known addresses and last known
business telephone numbers of all its Members, together with the number and type
of Units held, the Capital Contribution and the share of Net Profits and Net
Loss of each Member, to any Member requesting such a list in writing so long as
the requesting Member pays such Company its actual costs of postage and
duplication and subject to the Manager's determination that such list or copies
thereof will not be sold or otherwise provided to another party or used for a
commercial purpose other than in the interest of the requesting party relative
to his or its interest in such Company (such as
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matters relating to the requesting party's voting rights under the applicable
Operating Agreement and the exercise of the requesting party's rights under
federal proxy laws). (See Section 4.01.) See "Reports to Class A Members" for a
description of the reports and financial statements which the Manager will
provide to the Class A Members during the terms of the Companies.
MEETINGS OF THE CLASS A MEMBERS
A special meeting of the Class A Members of a Company may be called for any
purpose or purposes by the Manager or by written request, delivered in person or
by registered mail, of the Class A Members holding more than 10% of the Class A
Units. If Record Holders of more than 10% of the Class A Units request a
meeting, the Manager will, within ten days, notify all Record Holders of the
time and place of the meeting. The meeting will be held not less than 15 days
nor more than 60 days following the mailing of notice by the Manager. All
expenses of the meeting and notification will be borne by the Company for which
the meeting was called.
Any vote or action permitted to be taken at a meeting of the Class A Members
may be taken without a meeting if written consents to the action are (i) signed
by the Class A Members entitled to vote upon the action who hold the number of
Class A Units required to authorize the action and (ii) delivered to the
Manager. (See Article XV.)
VOTING RIGHTS
With regard to the Company in which they own Class A Units, the Class A
Members have the right to vote, acting by a Majority in Interest of the Class A
Members, upon the following specified matters:
(a) With the concurrence of all the Class B Members:
(i) Execution or delivery of an assignment for the benefit of the
creditors of the Company;
(ii) Except for a transfer of up to 99 Class B Units by the Initial
Class B Member and subsequent transferees of such Class B Units
discussed in "Transfer of Class B Units" above, approval of the sale,
transfer, encumbrance, assignment, or other disposition by the Manager
of all or any portion of its interest as a manager of the Company or by
a Class B Member of all or any portion of its Class B Units; and
(iii) Release, assignment, or transfer of a Company claim or other
asset without full and adequate consideration, and for this purpose,
any good faith settlement by
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the Manager will be deemed to be for full and adequate consideration.
(b) Without the concurrence of the Class B Members:
(i) Removal of the Manager;
(ii) Election of an additional or successor manager under certain
circumstances and the taking of certain other actions permitted by
Article IX of the Operating Agreement;
(iii) Termination and dissolution of the Company;
(iv) Amendment of the Operating Agreement, except as expressly
provided in Article XVIII of the Operating Agreement;
(v) Termination, upon 60 days' prior written notice, of contracts
for services or goods between the Company and a Manager or any of its
Affiliates; and
(vi) Sale of all or substantially all of the Company's assets in a
single sale, or in multiple sales in the same twelve-month period,
except in the orderly liquidation and winding up of the business of the
Company in anticipation of its termination and dissolution.
(See Sections 2.05, 6.02, 9.01, and 9.06.)
In addition, Class A Members are entitled to vote on any Roll-Up transaction
to be entered into by the Company in which they have invested, (see "Roll-Ups"
below and Section 2.07), and to elect a successor or additional manager after a
Terminating Event in order to continue the business of such Company (see
"Partnership Term" below and Section 9.04).
With respect to any Class A Units owned by the Manager or its Affiliates,
the Manager and its Affiliates may not vote or consent on matters submitted to
the Class A Members regarding removal of the Manager or any transaction between
the Companies and the Manager or its Affiliates. In determining the required
percentage in interest of Class A Units necessary to approve a matter on which
the Manager and its Affiliates may not vote or consent, any Class A Units owned
by the Manager or its Affiliates shall not be included.
ROLL-UPS
Without the approval of holders of at least 66 2/3% of all its outstanding
Class A Units, a Company shall not enter into any Roll-Up. A Roll-Up is defined
at Section 1.04 of each Operating Agreement to mean any transaction involving
the acquisition, merger, conversion, or consolidation, either directly or
indirectly, of a Company and the issuance of securities of a Roll-Up Entity
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unless such a transaction involves Class A Units which have been listed for at
least twelve months on a national securities exchange or traded through the
Nasdaq National Market, or the conversion to partnership, corporate, trust or
association form of a Company only if, as a consequence of the transaction,
there will be no significant adverse change in the Class A Members' voting
rights, the term of existence of such Company, the compensation of the Manager
or its Affiliates, or such Company's investment objectives. Certain Roll-Up
transactions are expressly prohibited under Section 2.07(c). Class A Members who
do not consent to the Roll-Up shall be given the option of (i) accepting the
securities of the Roll-Up Entity offered in the proposed Roll-Up; or (ii)
receiving cash in an amount equal to the non-consenting Class A Member's pro
rata share of the appraised value of the net assets of the Company involved in
the Roll-Up. The value of a Class A Member's pro rata share of the appraised
value of the net assets of the Company shall be established by means of an
appraisal of the net assets of the Company involved in the Roll-Up performed by
a competent independent expert engaged for the benefit of such Company and its
Class A Members. Such appraisal shall be made on the basis of an orderly
liquidation of the assets of the Company over a twelve-month period as of a date
immediately prior to the announcement of the proposed Roll-Up. If the appraisal
will be included in a prospectus used to offer the securities of a Roll-Up
Entity, the appraisal shall be filed with the SEC and the states as an exhibit
to the registration statement for the offering. A Company shall not reimburse
the sponsor of a proposed Roll-Up for the costs of an unsuccessful proxy contest
in the event the Roll-Up is not approved by the Class A Members. (See Section
2.07.)
POWER OF ATTORNEY
Pursuant to the terms of each Operating Agreement and the Subscription
Agreement, each purchaser of a Class A Unit and each transferee of a Class A
Unit appoints the Manager, acting alone, as the purchaser's or transferee's
Attorney-in-fact to make, execute, file, and/or record (i) documents relating to
the Company in which it owns Class A Units and such Company's business
operations requested by or appropriate under the laws of any appropriate
jurisdiction; (ii) instruments with respect to any amendment of the Operating
Agreement or Certificate of Formation; (iii) instruments or papers required to
continue the business of such Company pursuant to its Operating Agreement; (iv)
instruments relating to the admission of any Member to such Company; (v) a
master list in accordance with Section 6112 of the Code (or any successor
provision), relating to such Company's tax shelter registration (see "Income Tax
Considerations: Company Tax Returns and Tax Information"); and (vi) all other
instruments deemed necessary or advisable to carry out the provisions of its
Operating Agreement. The Power of attorney is irrevocable, will
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survive the death, incompetency, dissolution, disability, incapacity,
bankruptcy, or termination of the granting purchaser or transferee, and will
extend to such person's heirs, successors, and assigns. (See Section 11.01.)
COMPANY TERM
The term of Fund I will expire no later than December 31, 2010 and the term
of Fund II will expire no later than December 31, 2011, though either Company
may be terminated and dissolved earlier after any of the following events:
(i) A Majority in Interest of the Class A Members determines by vote or
written consent that a Company should be dissolved;
(ii) The dissolution of a Company by judicial decree;
(iii) The expiration of 90 days following the removal, withdrawal,
involuntary dissolution, or Bankruptcy (or, in the case of an individual,
the death or appointment of a conservator for the person or any of the
assets) of the last remaining manager of a Company, or whenever the last
remaining manager is not or will not become a Class B Member of such Company
("Terminating Event"), unless all Class A Members and any Class B Member
which is not a manager (a Majority in Interest of the Class A Members and
any Class B Member which is not a manager, if the Terminating Event is the
removal, Bankruptcy, or involuntary dissolution of the last remaining
manager) have elected a successor or additional manager who or which is
admitted as a Class B Member;
(iv) The condemnation of all or substantially all of the Equipment; or
(v) The determination by the Manager that it is necessary to commence
the liquidation of the Equipment in order for the liquidation of all the
Equipment to be completed in an orderly and business like fashion prior to
January 1, 2006 in the case of Fund I, and, in the case of Fund II, prior to
January 1, 2007 (provided, however, that the Manager may extend the
liquidation process for either or both Companies beyond such dates, if, in
the discretion of the Manager, such extension will enable the Company to
dispose of its assets upon more favorable terms).
(See Sections 1.03, 9.04 and 10.01 and Articles IX and X.)
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INVESTOR SUITABILITY STANDARDS
NET WORTH/INCOME
Except with respect to Qualified Plans (which are trusts established
pursuant to the terms of a pension, profit sharing or stock bonus plan,
including Keogh Plans, meeting the requirements of Section 401(a) of the Code)
and IRAs (which are individual retirement accounts meeting the requirements of
Section 408 of the Code), Class A Units will be sold during the Offerings only
to an investor who represents that he has either (i) a net worth (exclusive of
home, home furnishings and automobiles) of at least $45,000 (assets valued at
fair market value) and an annual gross income of at least $45,000, or (ii)
irrespective of annual gross income, a net worth (exclusive of home, home
furnishings and automobiles) of at least $150,000 (assets valued at fair market
value), or that he is purchasing in a fiduciary capacity for a person who meets
such conditions. Residents of Michigan, Missouri, New Hampshire and Pennsylvania
are subject to additional suitability standards as set forth below. If the
investor is a Qualified Plan or an IRA, such investor must represent (i) that
the IRA owner or the participant in the self-directed Qualified Plan satisfies
the foregoing standards, or (ii) if other than a self-directed Qualified Plan,
that the Qualified Plan satisfies the foregoing suitability standards. The
minimum number of Class A Units an investor may purchase is 125 ($2,500), unless
the investor is in Nebraska in which event the minimum subscription is $5,000,
and except that the minimum investment for Qualified Plans and IRAs is 50 Class
A Units ($1,000) unless the Qualified Plan or IRA investor is in Iowa, Minnesota
or Nebraska in which case the investor is subject to other minimum investment
amounts as set forth below. Each Company will apply these suitability standards
only with respect to investors who acquire Class A Units in its Offering.
Although the Manager believes that Class A Units may represent suitable
investments for individuals, Qualified Plans, IRAs, and many different types of
entities, due to tax rules of particular application to certain types of
entities, Class A Units may not be suitable investments for such entities. For
example, the Manager believes that Class A Units will generally not be a
suitable investment for charitable remainder trusts. The Companies will produce
unrelated business taxable income which, to the extent that it exceeds $1,000 in
any taxable year from all sources, is taxable to Qualified Plans, IRAs, and
other generally tax-exempt entities. (See "Income Tax Considerations: Investment
by Qualified Plans, IRAs and Exempt Entities.") Prospective investors should
consult their tax advisors with respect to the tax consequences of an investment
in Class A Units as it may affect their particular tax situations.
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Certain state securities commissions have established suitability standards
or minimum investment amounts for the offer and sale of securities which are
different than those set forth above. All states in which the Companies are
authorized to sell Class A Units have minimum investor suitability standards and
minimum investment amounts which are within the standards and amounts set by the
Companies except for those states listed below or in a supplement to this
Prospectus. Net worth in all cases excludes home, home furnishings and
automobiles.
Additional suitability standards or minimum investment amounts are as
follows:
Iowa: Minimum investment amount for IRAs and Keogh Plans is $2,500.
Michigan: In no event shall the aggregate purchase price of Class A Units
exceed 10% of net worth.
Minnesota: Minimum investment amount for Qualified Plans and IRAs is
$2,000.
Missouri: Net worth of at least $225,000 or current annual gross income of
at least $60,000 and a net worth of at least $60,000.
Nebraska: Minimum investment amount for all investors is $5,000 except that
the minimum investment amount for IRAs and Keogh Plans is $1,000.
New Hampshire: Investors must wait at least 48 hours after receiving this
Prospectus before completing and signing a Subscription Agreement. Investors
must have either (i) a net worth of at least $125,000 and $50,000 of annual
taxable income or (ii) a net worth of at least $250,000.
Pennsylvania: In no event shall the aggregate purchase price of Class A
Units exceed 10% of net worth.
In compliance with Sections 3(b) and 4(d) of Appendix F of Article III,
Section 34 of the NASD Rules of Fair Practice, each registered representative is
required to represent that he has reasonable grounds to believe, based on
information from the investor concerning investment objectives, other
investments, financial situation and needs, and any other information known by
him, that investment in a Company is suitable for such investor, and that he has
informed the investor of the lack of liquidity and marketability of the
investment and he must confirm that the investor's signature or the signature of
the authorized person appears on the subscribing document where required.
By executing the Subscription Agreement, an investor will represent to the
Manager, the Managing Placement Agent and the Selected Agent that the investor
meets the applicable suitability standards. (See "Plan of Distribution".) The
suitability standards
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imposed by the Companies will apply upon resale of an investor's units.
Broker/dealers and their registered representatives will have the duty to
determine whether an investment in a Company is suitable with respect to a
prospective investor.
PURCHASE OF CLASS A UNITS THROUGH CERTAIN SELECTED AGENTS
The Managing Placement Agent will permit certain Selected Agents to employ
Letters of Suitability, as described below, in lieu of Subscription Agreements
for purposes of enabling Persons to subscribe to purchase Class A Units. Such
Letters of Suitability will be provided only to customers of those Selected
Agents permitted by the Managing Placement Agent to employ Letters of
Suitability. An investor will be able to subscribe to the purchase of Class A
Units by authorizing such a Selected Agent to debit the investor's account
maintained with the Selected Agent in the full amount of the subscription
payment. Each investor must have the amount of the subscription payment in the
investor's account on the day on which the account is debited (but such funds
are not required to be in the account on any earlier date). The investor's funds
will be transferred to the Managing Placement Agent no later than the first
business day following the day on which the investor's account is debited.
Investors residing in Maine, Massachusetts, Minnesota, Missouri, Nebraska, North
Carolina, Oklahoma, Oregon, South Dakota, Texas and Washington may not utilize
the Letter of Suitability in investing in a Company.
An investor who purchases Class A Units in this manner will be deemed to
authorize the Manager to enter into the applicable Operating Agreement on behalf
of the investor as the investor's attorney-in-fact. An investor who purchases
Class A Units through a Selected Agent using a Letter of Suitability will be
required to confirm the investor's suitability in writing by signing and
returning the Letter of Suitability within 20 days following the date the
investor's account with his Selected Agent is debited.
With respect to investors purchasing through certain Selected Agents,
neither Subscription Agreements nor Letters of Suitability will be executed by
the investor. In these limited instances, an investor will be able to subscribe
to the purchase of Class A Units with the Selected Agent in the full amount of
the subscription amount and the Selected Agent will execute the Subscription
Agreement on behalf of the Subscriber provided that the Selected Agent has been
duly authorized to do so by the Subscriber.
Investors residing in the states of Maine, Massachusetts, Minnesota,
Missouri, Nebraska, North Carolina, Oklahoma, Oregon, South Dakota, Texas and
Washington may not utilize the Letter of Suitability and must personally execute
the Subscription Agreement. Investors residing in Iowa, Michigan, Mississippi,
Ohio and Tennessee must personally execute the Subscription Agreement or the
Letter of Suitability.
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SUBSCRIBERS' REPRESENTATIONS AND WARRANTIES
Each Subscriber will make certain representations and warranties to the
Manager by executing the Subscription Agreement or by paying for his Class A
Units purchased through a Selected Agent using a Letter of Suitability. In both
the Subscription Agreement and the Letter of Suitability, a Subscriber: (i)
represents that he has received this Prospectus, including the form of Operating
Agreement attached hereto as Exhibit A; (ii) represents that he meets
requirements as to investor suitability; (iii) accepts and adopts the provisions
of the applicable Operating Agreement; and (iv) authorizes the Manager, as his
attorney-in-fact, to execute the applicable Operating Agreement and such other
documents as may be required to carry out the business of the Company in which
he is subscribing. Each Subscriber is also instructed in the Subscription
Agreement that (a) he should not rely upon any information not specifically set
forth in this Prospectus or any supplements thereto in making a decision to
invest in the Company in which he is subscribing and the Manager, the Managing
Placement Agent and such Company accept no responsibility for information
provided to an investor that is not clearly marked as being prepared and
authorized by them for use with the public and (b) an investment in either of
the Companies involves certain risks including the matters set forth under the
captions "Risk Factors," "Conflicts of Interest," "Management" and "Income Tax
Considerations" in this Prospectus. In the Letter of Suitability, Subscribers
make a representation to the effect of the instruction described in the
immediately preceding sentence.
The representation whereby a Subscriber acknowledges that he has received
this Prospectus, and the instruction that he should rely on no information other
than that contained in this Prospectus, are required in order that the Manager
may make an informed judgment as to whether it should accept a Subscriber's
offer to subscribe for Class A Units. The Manager recognizes that in the sales
process of the Offerings a potential Subscriber will usually discuss the
Companies with his registered representative, and, in doing so, might be told
something in addition to that contained in this Prospectus. It is possible that
a Subscriber may misunderstand what he is told or that someone might tell him
something different from or contrary to the information contained in this
Prospectus. Additionally, a Subscriber might be relying on something he read or
heard from sources for which the Manager is not responsible, over which it has
no control and which contradicts the data and information contained in this
Prospectus. If a Subscriber becomes a Class A Member and later makes claims
against the Company in which he invested and/or the Manager alleging that he did
not receive a Prospectus for the Offerings or that he did receive a Prospectus,
but relied upon information that is contradictory to that disclosed in this
Prospectus, such Company and the Manager anticipate that they will rely upon the
representation and instruc-
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tion regarding the receipt of the Prospectus and the impropriety of relying upon
any information other than information disclosed in this Prospectus as evidence
that the Subscriber did, in fact, receive a Prospectus and that the Subscriber
was properly notified that he should not rely upon any information other than
the information disclosed in this Prospectus.
The instruction respecting the conflicts of interest faced by the Companies'
management, the risks involved in an investment in the Companies and that any
federal income tax benefits which may be available as a result of such purchase
may be adversely affected as set forth in this Prospectus under the captions
"Risk Factors," "Conflicts of Interest," "Management" and "Income Tax
Considerations" has been included because, since the investment involves
inherent conflicts of interest and risks as disclosed in this Prospectus, the
Manager does not intend to admit a Subscriber as a Class A Member unless it has
reason to believe that the investor is aware of the risks involved with an
investment in the Companies. If a Subscriber becomes a Class A Member and later
makes claims against the Company in which he invested and/or the Manager to the
effect that he was not aware that an investment in such Company involved the
inherent risks described in this Prospectus, the Company and the Manager
anticipate that they will rely upon this instruction as evidence that the
Subscriber had been aware of the degree of risks involved in an investment in
the Company for the reasons set forth in this Prospectus under the caption "Risk
Factors."
The representation that a Subscriber has satisfied the investor suitability
standards is included because Class A Units may not be sold to Subscribers who
do not satisfy such standards. Although each Selected Agent selling Class A
Units to a Subscriber must certify that it has obtained information from the
Subscriber sufficient to enable it to determine that the Subscriber has
satisfied the suitability standards, the Companies and the Manager will not have
had the opportunity to obtain such information directly from the Subscriber. The
effect of this representation and certification is that the Manager can rely on
the representation so as to determine whether to admit the Subscriber to a
Company as a Class A Member. If a Subscriber becomes a Class A Member and later
makes claims against the Company in which he invested and/or the Manager
alleging that the Class A Units sold to him were not a suitable investment for
him because he did not meet the financial requirements contained in the investor
suitability standards, the Company and the Manager anticipate that they will
rely upon this representation as evidence of the Subscriber's belief at the time
of the investment that he had met such financial requirements.
The representation that a Subscriber has agreed to all the terms and
conditions of the applicable Operating Agreement is necessary because the
Manager and each Class A Member are
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bound by all of the terms and conditions of such agreement, notwithstanding that
the Class A Members do not actually sign the agreement. Since an Operating
Agreement is not actually signed by the Subscribers but pursuant to powers of
attorney granted in the Subscription Agreement or in a Letter of Suitability,
the Manager thereby obligates the Subscriber to each of the terms and conditions
of such Operating Agreement. If a Subscriber becomes a Class A Member and later
makes claims against the Company and/or the Manager that he did not agree to be
bound by all of the terms of the applicable Operating Agreement for the Company
in which he invested, the Company in which he invested and the Manager
anticipate that they will rely upon such representation and powers of attorney
as evidence of the Subscriber's agreement to be bound by all the terms of such
agreement.
CITIZENSHIP
Federal law restricts the extent to which aircraft and marine vessels which
are to be registered in the United States may be owned or controlled by Persons
who are not U.S. Citizens. For these purposes, "U.S. Citizen", as used in this
Prospectus and in the Operating Agreements, is defined to meet the citizenship
requirements for registration of both aircraft and marine vessels, which
includes (i) individuals who are citizens of the United States or one of its
possessions, (ii) associations which, in the case of aircraft, are organized
under the laws of the United States or any state, territory or possession
thereof and in which the president and two-thirds or more of the board of
directors and other managing officers are U.S. Citizens and at least 75% of the
voting interest of which is owned or controlled by persons who are citizens of
the United States or one of its possessions, and associations in which, in the
case of vessels, all of its members are U.S. Citizens, (iii) partnerships in
which each partner is a U.S. Citizen, in the case of aircraft, or in which at
least 50% to 75% (depending upon the registry or endorsement sought) of the
equity in the partnership is held by U.S. Citizens and all of the general
partners are U.S. Citizens, in the case of vessels, (iv) certain trusts the
trustees of which are U.S. Citizens (provided that, in the case of aircraft, a
Resident Alien may be a trustee and Persons who are not U.S. Citizens or
Resident Aliens do not possess more than 25% of the aggregate power to direct or
remove the trustee, and in the case of vessels, each of the beneficiaries with
an enforceable interest in the trust is a U.S. Citizen), and (v) domestic
corporations of which the president (in the case of aircraft) or the chief
executive officer, by whatever title, and the chairman of the board of directors
(in the case of vessels) and two-thirds or more of the members of the board of
directors and other managing officers (in the case of aircraft) or a majority of
the number of directors necessary to constitute a quorum (in the case of
vessels) are U.S. Citizens and in which at least 75% of the voting interest (or,
in the case of
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certain vessels, a majority voting interest) is owned or controlled by Persons
who are U.S. Citizens.
As a consequence of these rules, a Company may cause title to certain
aircraft to be held by a trust of which such Company is the sole beneficiary or
by a limited partnership beneficially owned by such Company. In the event that a
Company admits, or intends to admit, any Member who is a non-U.S. Citizen, such
Company will not acquire any direct interest in a marine vessel which requires
U.S. registration. However, each Company will consult with maritime counsel
prior to investing in an entity which will acquire a U.S. registered vessel so
that the foregoing U.S. registration requirements are not violated. (See "Risk
Factors: Business Risks -- Loss of Equipment Registration" and "Business of the
Companies: Equipment Registration.") EACH INVESTOR WILL BE REQUIRED TO REPRESENT
AND WARRANT WHETHER OR NOT THE INVESTOR IS A U.S. CITIZEN, AND SUBSCRIPTIONS
WILL BE ACCEPTED FROM ONLY A LIMITED NUMBER OF PERSONS WHO ARE NOT U.S.
CITIZENS. (See "Plan of Distribution: Offering of Units.") The Manager will not
permit the transfer of Units by a Member to a Person who is not a U.S. Citizen
if the transfer would result in the possible invalidation of Equipment
registration. Any such Person who is not a U.S. Citizen who acquires Class A
Units will not have the right to receive any Company allocations and
distributions or to exercise any of the voting rights associated with Class A
Units. (See "Risk Factors: General -- Limited Transferability of Class A
Units.")
SPECIAL LIMIT ON OWNERSHIP OF UNITS BY BENEFIT PLANS
To avoid classification of a pro rata portion of a Company's underlying
assets as "plan assets" of investors which are Benefit Plans, each Company
intends to restrict the ownership of Units by Benefit Plans to less than 25% of
the total value of each class of the outstanding Units at all times. (See "ERISA
Considerations: 'Plan Assets'.") Benefit Plans include Qualified Plans, IRAs and
certain other entities included in the definition of Benefit Plans in each
Operating Agreement.
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PLAN OF DISTRIBUTION
GENERAL
The Class A Units are offered through PLM Securities as Managing Placement
Agent. PLM Securities is offering the Class A Units through other broker-dealers
who are members of the National Association of Securities Dealers, Inc.
("NASD"). The Class A Units are being offered on a "best efforts" basis, which
means that PLM Securities and the other broker-dealers are not obligated to
purchase any Class A Units and are only required to use their best efforts to
sell Class A Units to investors.
The Manager, in its capacity as Initial Class B Member, will pay to PLM
Securities a Managing Placement Agent Fee, which fee shall be no greater than
10% of the purchase price of Class A Units sold, in connection with the sale of
Class A Units of both Companies after and only if the required $4,000,000
minimum amount of Class A Units is sold for each Company. Such amounts paid by
the Initial Class B Member will be treated as a Capital Contribution to each
Company. In addition, the Manager, as Initial Class B Member, will reimburse PLM
Securities for its accountable expenses in connection with the sale and
distribution of the Class A Units, including overhead expenses such as rent,
remuneration of personnel of PLM Securities and its Affiliates, telephone,
travel, marketing and other expenses related to the Offerings. Out of the
Managing Placement Agent Fee, an amount equal to 8.5% of the purchase price of
Class A Units sold will be paid to other broker-dealers ("Selected Agents") who
sell Class A Units (the "Selected Agent Fee.") The Selected Agent Fee will be
paid in four installments of 7%, 0.5%, 0.5% and 0.5%, respectively, payable as
follows: (i) for Fund I, for subscriptions received between the Effective Date
and June 30, 1995, the payments will be made April 15, 1996 and each subsequent
April 15 until all four payments have been made, and, for subscriptions received
between July 1, 1995 and December 31, 1995, the payments will be made on October
15, 1996 and each subsequent April 15 until all four payments have been made;
and (ii) for Fund II, for subscriptions received between the date Class A Units
in Fund II are first offered and June 30, 1996, the payments will be made on
April 15, 1997 and each subsequent April 15 until all four payments have been
made, and, for subscriptions received between July 1, 1996 and December 31,
1996, the payments will be made on October 15, 1997 and each subsequent April 15
until all four payments have been made. The payment schedule is subject to
change in the discretion of the Manager based on the actual periods of the Fund
I and Fund II Offerings. All or any portion of the Managing Placement Agent Fee
may be waived by the Managing Placement Agent and all or any portion of the
Selected Agent Fee may be waived by any Selected Agent participating in the
Offerings.
The Managing Placement Agent may offer desk-top gift items not exceeding
$100.00 (or other limit as may be allowed pursuant
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to Appendix F to Article III of the Rules of Fair Practice of the NASD) in value
as a sales incentive to registered representatives who sell a certain number of
Class A Units. The Managing Placement Agent intends to comply with the
provisions of Appendix F to Article III of the Rules of Fair Practice of the
NASD with respect to any incentive sales and bonus programs which it offers.
Broker-dealers registered with the Commonwealth of Massachusetts may participate
in any sales incentive program conducted by the Managing Placement Agent
pursuant to conditions set forth by the Massachusetts Securities Division. The
total payments made to all broker-dealers in connection with the offering of
Class A Units, including the Managing Placement Agent and the Selected Agent
Fees, the value of gift items to registered representatives under incentive
programs and the payment of any other public offering expenses of broker-dealers
for each Company, will not exceed an amount equal to 10% of the purchase price
of Class A Units sold for such Company, except that an amount equal to up to an
additional 0.5% of the purchase price of Class A Units sold for each Company may
be paid by the Manager, as Initial Class B Member, to PLM Securities in
connection with its due diligence activities.
The Managing Placement Agent Agreement, which is terminable without penalty
by any party on 30 days' notice, contains cross-indemnity clauses with respect
to certain liabilities between the Manager and PLM Securities, including
liabilities under the Securities Act. All of the indemnities of the Manager may
inure to the benefit of Selected Agents participating in the offering other than
PLM Securities. Selected Agents participating in the offering may be deemed to
be "underwriters" as that term is defined in the Securities Act.
OFFERING OF CLASS A UNITS
The Offering of Class A Units of Fund I will commence on the Effective Date
of the Registration Statement of which this Prospectus is a part. The Offering
of Class A Units of Fund II will commence upon the termination of the Offering
of Class A Units in Fund I (assuming the Manager determines to proceed with the
Fund II Offering). Provided the Manager does not terminate the Offerings of
Class A Units earlier, the Offerings may continue until the full 5,000,000 Class
A Units in each of the Companies are sold, or until the first anniversary of the
Effective Date of this Prospectus (unless the Offering Period is extended by the
Manager, but not beyond the second anniversary of the Effective Date and only
after obtaining regulatory approval wherever necessary). In the event the
Minimum Subscription Amount has not been received for Fund I by June 1, 1995,
or, for Fund II, by June 1, 1996 (which dates may be extended to any date that
is within one year from the date the Company begins to offer Class A Units and
in no event later than two years of the Effective Date if the escrow agent,
Sanwa Bank California, receives notice in writing extending the
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date), the investors' funds will be released from the applicable Escrow Account
and returned to the investors, together with any interest actually earned
thereon. (See "Plan of Distribution: Escrow Arrangements and Funding.")
THE CLASS A UNITS ARE BEING OFFERED SUBJECT TO ACCEPTANCE, PRIOR SALE AND
WITHDRAWAL, CANCELLATION OR MODIFICATION OF THE OFFER AT ANY TIME WITHOUT
NOTICE.
The minimum subscription by an investor is 125 Class A Units ($2,500),
unless the investor is in Nebraska in which event the minimum subscription is
$5,000, and unless the investor is a Qualified Plan or an IRA, in which event
the minimum subscription is 50 Class A Units ($1,000), unless the Qualified Plan
or IRA investor is in Iowa, Minnesota or Nebraska in which case the investor is
subject to other minimum investment amounts. (See "Investor Suitability
Standards: Net Worth/Income.") Class A Units sold in connection with each
Offering may be sold only to a limited number of Aliens. The Manager will not
accept subscriptions from Persons who are not U.S. Citizens or consent to
transfers to such Persons if such subscriptions or transfer would result in more
than 25% of each class of the Units being owned by Aliens. In addition, the
Manager intends to restrict the ownership of each class of Units by Benefit
Plans to less than 25% of each class of the outstanding Units. (See "Investor
Suitability Standards" and "Risk Factors: Business Risks -- Loss of Equipment
Registration.") An investor will have the right to cancel his or her
subscription for five business days after subscriber's submission of the
executed Subscription Agreement through the broker-dealer through which the
Class A Units are sold.
Any purchase of Class A Units in connection with the Offerings must be
accompanied by tender of the sum of $20 per Class A Unit, which is the full
purchase price of a Class A Unit. An investor who purchases Class A Units
through a Selected Agent using a Letter of Suitability rather than a
Subscription Agreement may subscribe for such Class A Units by authorizing such
Selected Agent to debit the investor's account maintained with the Selected
Agent in the full amount of the subscription payment. (With respect to investors
purchasing through certain other duly authorized Selected Agents, neither
Subscription Agreements nor Letters of Suitability will be executed by the
investor.) (See "Investor Suitability Standards.") An investor's account will be
debited once this authorization has been given. The investor's funds will be
transferred to the Managing Placement Agent no later than the first business day
following the day on which the investor's account was debited. Each investor
must have the amount of the subscription payment in the investor's account on
the day on which the account is debited (but such funds are not required to be
in the account on any earlier date). An investor who purchases Class A Units
through a Selected Agent using a Letter
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of Suitability will be required to confirm the investment in writing by signing
and returning the Letter of Suitability within 20 days following the date the
investor's account with his Selected Agent is debited. Subscriptions will be
accepted or rejected by the Manager within 30 days after their receipt. If a
subscription is rejected, all funds received from the investor will be promptly
returned.
Investors residing in the states of Maine, Massachusetts, Minnesota,
Missouri, Nebraska, North Carolina, Oklahoma, Oregon, South Dakota, Texas and
Washington may not utilize the Letter of Suitability and must personally execute
the Subscription Agreement. Investors residing in Iowa, Michigan, Mississippi,
Ohio and Tennessee must personally execute the Subscription Agreement or the
Letter of Suitability.
SUBJECT TO ACCEPTANCE BY THE MANAGER OF THE INVESTOR'S SUBSCRIPTION FOR
CLASS A UNITS, EXECUTION OF THE SUBSCRIPTION AGREEMENT OR PAYMENT FOR THE CLASS
A UNITS PURCHASED SHALL CONSTITUTE THE INVESTOR'S AGREEMENT TO THE TERMS AND
CONDITIONS OF THE SUBSCRIPTION AGREEMENT OR A LETTER OF SUITABILITY, THE
OPERATING AGREEMENT, AND THE AUTHORITY OF THE MANAGER TO EXECUTE THE OPERATING
AGREEMENT, AND WITH RESPECT TO AN INVESTOR PURCHASING CLASS A UNITS THROUGH A
SELECTED AGENT USING A LETTER OF SUITABILITY, THE LETTER OF SUITABILITY, ON
BEHALF OF THE INVESTOR.
ESCROW ARRANGEMENTS AND FUNDINGS
All investor funds will be held in an Escrow Account at Sanwa Bank
California until such funds equal to the Minimum Subscription Amount have been
received for the Company for which Class A Units are then being offered. The
calculation of the Minimum Subscription Amount will not include any investor
funds from Pennsylvania investors. Subscriptions received from Pennsylvania
residents will be held in escrow until the Company for which Class A Units are
then being offered receives aggregate subscriptions of $5,000,000 from all
investors, including Pennsylvania residents; provided, however, that each
Pennsylvania resident will have the opportunity to rescind his investment in the
Company if his subscription is held in escrow for more than 120 days. While held
in escrow, the funds will be invested in the escrow agent's Market Value Savings
Account, or a similar account, for the benefit of the investors.
The Companies will be funded serially, commencing with Fund I and concluding
with Fund II (assuming the Manager determines to proceed with the Fund II
Offering). A Company will not be funded until the Minimum Subscription Amount
for such Company has been received. Once the Minimum Subscription Amount has
been deposited in the Escrow Account, the funds,
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exclusive of funds from Pennsylvania investors, will be released to the Company.
Investor funds received from Pennsylvania investors will be released to the
applicable Company when such Company receives $5,000,000 in aggregate
subscriptions from all investors, including Pennsylvania residents. Any interest
earned on the funds while in impound will be distributed directly to the
investors promptly following the funding, allocated in accordance with the
amount of funds held for each investor and the length of time such funds were
held.
Once the funds have been released from the Escrow Account to a Company, the
Escrow Account will close, and all funds received will be deposited in a
collection account in the name of such Company, which account will be accessible
to the Company at any time. The disposition of investor funds by Sanwa Bank
California will be made strictly in accordance with the terms of this Prospectus
and the escrow instructions. Sanwa Bank California does not warrant the
sufficiency of this Prospectus or the advisability of the investments made
hereunder. Upon the close of the Escrow Account, all funds deposited to the
account of a Company will be the funds of such Company, and Sanwa Bank
California will exercise no control over the account for the benefit of the
investors.
At any given time, Class A Units will only be offered in one of the
Companies. The Offering of Class A Units in a Company may be terminated, in the
Manager's discretion, at any time after the Minimum Subscription Amount has been
received and accepted by the Manager on behalf of such Company. The Manager also
has the discretion to terminate the Offering of Class A Units in a Company prior
to receiving the Minimum Subscription Amount. In such event, the Company would
be dissolved and the funds held in escrow, together with any interest actually
earned thereon, would be returned to the investors. It is anticipated that the
Offerings of Class A Units will terminate no later than the second anniversary
of the Effective Date of the Prospectus (assuming the Offering Period is
extended by the Manager beyond the first anniversary date). In the event the
Minimum Subscription Amount has not been received by June 1, 1995 for Fund I,
or, for Fund II, by June 1, 1996 (which date may be extended to any date that is
within two years of the Effective Date if Sanwa Bank California receives notice
in writing extending the date), the investors' funds will be released from the
applicable Escrow Account and returned to the investors together with any
interest actually earned thereon.
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SUBSCRIPTION FOR CLASS A UNITS
Each prospective investor who satisfies the qualifications described under
"Investor Suitability Standards" and desires to purchase Class A Units must:
(a) Review the Subscription Agreement, Signature Page and Power of
Attorney attached as Exhibit B to this Prospectus, or with respect to
investors purchasing Class A Units through Selected Agents using Letters of
Suitability, review the Letter of Suitability, to insure that the investor
is aware of the representations and warranties the investor will be deemed
to have made by subscribing for Class A Units; and
(b) Deliver to PLM Securities or the investor's broker or registered
representative a check made payable to "Sanwa Bank fbo PLM Fund," in the
amount of $20.00 for each Class A Unit that the investor is seeking to
purchase. Certain Selected Agents participating in the sale of Class A Units
may request that the investor authorize a debit to the investor's account
maintained with the Selected Agent in the full amount of the subscription
payment in lieu of having the investor make out a check payable as described
above.
The minimum permitted subscription is 125 Class A Units ($2,500), unless the
investor is in Nebraska in which event the minimum subscription is $5,000, and
unless the investor is a Qualified Plan or an IRA, in which event the minimum
permitted subscription is 50 Class A Units ($1,000), unless the Qualified Plan
or IRA investor is in Iowa, Minnesota or Nebraska in which case the investor is
subject to other minimum investment amounts. (See "Investor Suitability
Standards: Net Worth/Income.")
Prospective investors that are not natural persons may be required to
deliver evidence of their authority to subscribe for Class A Units, or opinions
of counsel as to their authority to subscribe for Class A Units and the binding
effect of their subscriptions. Investors who submit subscriptions will not be
permitted to terminate or withdraw their subscriptions without the prior consent
of the Manager.
The Manager has the right to reject an investor's subscription for any
reason whatsoever, including the investor's failure to satisfy the suitability
standards described under "Investor Suitability Standards."
SALES MATERIAL
Sales material may be used in connection with the Offerings only when
accompanied or preceded by the delivery of this Prospectus. Only sales material
which indicates that it is distributed by the Manager may be distributed to
prospective investors. Currently, the Manager intends to distribute a sales
brochure entitled "Professional Lease Management Income Fund I, L.L.C. and
Professional Lease Management Income Fund II, L.L.C." which
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will contain certain information regarding, and answer certain questions
respecting, the Manager and the Companies. Additional material regarding an
investment in the Companies may include a question and answer sales booklet, a
flip chart, a speech for public seminars, an invitation to attend public
seminars, slide and video presentations, prospecting letters, mailing cards and
tombstone advertisements; all of which would provide information regarding the
Manager and the Companies. In certain jurisdictions, such sales material will
not be available. Use of any materials will be conditioned on filing with, and
if required, clearance by, appropriate regulatory authorities. Such clearance
does not mean, however, that the agency allowing use of the sales literature has
passed on the merits of this offering or the accuracy of the material contained
in such literature. The Offerings are made only by this Prospectus.
Although the information contained in such sales material does not conflict
with any of the information contained in this Prospectus, such material does not
purport to be complete and should not be considered as part of this Prospectus
or the Registration Statement of which this Prospectus is a part, or as
incorporated in this Prospectus or the Registration Statement by reference, or
as forming the basis of the Offerings. Other than as described herein, the
Companies have not authorized the use of sales material.
REPORTS TO CLASS A MEMBERS
The Manager will deliver to each Class A Member, within 120 days after the
end of each year, a balance sheet of the Company in which such Class A Member
has invested dated as of December 31 of such year, together with statements of
operations, Members' equity, and the cash flows of such Company for such year,
prepared in accordance with generally accepted accounting principles and
accompanied by an auditor's report from such Company's independent certified
public accountants. The Manager will within such period also furnish a report of
the activities of the Company in which such Class A Member has invested for the
year, which will include for each item of Equipment acquired by such Company
which individually represents at least 10% of the total investment in Equipment,
certain information relevant to the value or utilization of the Equipment, a
report on distributions to the Class A Members during the year and their source,
and a report on any costs incurred by the Manager and its Affiliates in
performing administrative services which are reimbursed by such Company during
the year, containing a breakdown of such costs including a review of the time
records of individual employees of the Manager or its Affiliates (the cost of
whose services were reimbursed) and a review of the specific nature of the work
performed by each such employee. Within 60 days after the end of each calendar
quarter, the Manager will also furnish a report of all services rendered and all
fees received by the Manager and its Affiliates from the applicable Company, an
unaudited balance
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sheet, a statement of income, and a report on the activities of such Company.
Until the Proceeds of the Offering of Class A Units of a Company are fully
invested, the Manager will furnish to the Class A Members, within 60 days after
the end of each calendar quarter, a report of Equipment acquisitions during the
quarter, including the type and manufacturer of each item of Equipment, the
purchase price of the Equipment, and any other material terms of purchase, a
statement of the total amount of cash expended by the Company in which such
Class A Members have invested to acquire the Equipment (including an itemization
of all commissions, fees, and expenses and the name of each payee), and a
statement of the amount of net Proceeds in such Company which remain unexpended
or uncommitted at the end of the quarter.
The Manager will also furnish to all Class A Members within 75 days after
the end of the year other information regarding the Company in which they have
invested to aid them in the preparation of their tax returns.
LEGAL MATTERS
Legal matters in connection with the Class A Units offered hereby will be
passed upon for the Manager and the Companies by Potter, Anderson & Corroon, 350
Delaware Trust Building, Wilmington, Delaware 19899, special Delaware counsel to
the Companies, and by Jackson, Tufts, Cole & Black, 650 California Street, San
Francisco, California 94108, counsel to the Manager and special counsel to the
Companies.
EXPERTS
The balance sheet of each of the Companies, at August 22, 1994 and the
consolidated balance sheet of the Manager at December 31, 1993, appearing in
this Prospectus and Registration Statement, have been audited by KPMG Peat
Marwick LLP, independent auditors, as set forth in their reports appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
FURTHER INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto which the Manager has
filed with the Securities and Exchange Commission, Washington, D.C., under the
Securities Act of 1933, as amended, and to which reference is hereby made.
Copies of the Registration Statement and the exhibits are on file at the offices
of the Securities and Exchange Commission in Washington, D.C., and may be
obtained upon payment of the fee prescribed by the SEC, or may be examined
without charge at the offices of the SEC.
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GLOSSARY
The following terms used in this Prospectus shall (unless otherwise
expressly provided herein or unless the context otherwise requires) have the
meanings set forth below. Capitalized terms not otherwise defined herein or
elsewhere in the Prospectus shall have the meanings as set forth in the
Operating Agreements.
"AAR" means the Association of American Railroads, a private, voluntary
trade association of major U.S. railroads.
"Adjusted Basis" means the basis, as defined in Section 1011 of the Code,
for determining gain or loss for federal income tax purposes from the sale,
transfer, or other disposition of property.
"ADR" means Asset Depreciation Range.
"Affiliate" means, when used with reference to a specified Person, (i) any
Person, that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, or
(ii) any Person that is an executive officer of, partner in, or serves in a
similar capacity to, the specified Person, or any Person of which the specified
Person is an executive officer or partner or with respect to which the specified
Person serves in a similar capacity, or (iii) any Person owning or controlling
10% or more of the outstanding voting securities of such specified Person.
"Airport Act" means The Airport Noise and Capacity Act of 1990.
"Alien" means a Person who or which is not a U.S. Citizen.
"Attorney-in-fact" means a Person authorized by another to act in his place
and stead, either for some particular purpose, as to do a particular act, or for
the transaction of business in general.
"Bankrupt" or "Bankruptcy" means, when used with reference to a specified
Person, (i) if such Person (a) makes an assignment for the benefit of creditors,
(b) files a voluntary petition in bankruptcy, (c) is adjudged a bankrupt or
insolvent, or has entered against such Person an order for relief, in any
bankruptcy or insolvency proceeding, (d) files a petition or answer seeking for
such Person any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any statute, law or regulation,
(e) files an answer or other pleading admitting or failing to contest the
material allegations of a petition filed against such Person in any proceeding
of this nature, or (f) seeks, consents to, or acquiesces in, the appointment of
a trustee, receiver or liquidator of such Person or all or any substantial part
of such Persons properties, or (ii) if 120 days after the commencement of any
proceeding against such Person seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any statute, law
or regulation, the proceeding
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has not been dismissed, or if within 90 days after the appointment without such
Person's consent or acquiescence of a trustee, receiver or liquidator of such
Person or all or any substantial part of such Person's properties, the
appointment is not vacated or stayed, or within 90 days after the expiration of
any such stay, the appointment is not vacated.
"Bankruptcy Code" means the United States Bankruptcy Code.
"Basic Equipment Management Services" means those equipment management
services required and necessary to negotiate and administer a Net Lease. Such
services will generally be limited to identifying and negotiating Net Lease
contracts with prospective lessees and operators for medium-term Operating
Leases (generally more than one year), administering and, to the extent
necessary, enforcing the lessee's or operator's obligations to use, maintain,
repair, insure and return the Equipment in accordance with the terms of the
lease or other contract, and billing to and collecting from the lessee or
operator amounts due under the lease or other contract and taking appropriate
action in the event of a lessee or operator default.
"Benefit Plan" means any of the following:
(i) Qualified Plans;
(ii) IRAs;
(iii) Employer-sponsored retirement annuity plans that are or ever were
determined by the Secretary of the Treasury to be qualified under Section
403(a) of the Code;
(iv) Other employee benefit plans described in Section 3(3) of ERISA;
and
(v) Entities whose assets include assets of entities described in
paragraphs (i) through (iv) above by virtue of investment in such entities
by the types of entities described in paragraphs (i) through (iv).
"Board" means the Board of Directors of PLM International.
"CAA" means the United Kingdom Civil Aviation Authority.
"Capital Account" means a bookkeeping account maintained by a Company for
each Member in accordance with Section 1.704-1(b)(2)(iv) of the Treasury
Regulations.
"Capital Contribution(s)" means, with respect to the Class A Members, the
total amount of money contributed to a Company by all the Class A Members or any
one Class A Member, as the case may be; and means, with respect to the Initial
Class B Member, the total amount of money paid on behalf of the Company in
accordance with Section 3.03 of each Operating Agreement.
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"Cash Available for Distribution" means Cash Flow plus Net Disposition
Proceeds plus cash funds available for distribution from Company reserves, and
less such amounts as the Manager, in its sole discretion, determines should be
set aside as Retained Proceeds and/or for the restoration or enhancement of
Company reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for a Company, but not including Net Disposition Proceeds, minus (ii)
all cash expenses and costs incurred and paid in connection with the ownership,
lease, management, use and/or operation of the Equipment, including, but not
limited to, fees for handling and storage; all interest expenses paid and all
repayments of principal regarding borrowed funds; maintenance; repair costs;
insurance premiums; accounting and legal fees and expenses; debt collection
expenses; charges, assessments or levies imposed upon or against the Equipment;
ad valorem, gross receipts and other property taxes levied against the
Equipment; and all costs of repurchasing Class A Units in accordance with
Sections 6.09 and 6.10 of each of the Operating Agreements; but not including
depreciation or amortization of fees or capital expenditures, or provisions for
future expenditures.
"Certificate" means a certificate, substantially in the form attached to
each Operating Agreement as Schedule I, issued by a Company upon request of a
Class A Member to evidence a Class A Member's ownership of Class A Units. No
certificate shall be issued to evidence the ownership of Class B Units.
"Certificate of Formation" means the certificate referred to in Section
18-201 of the Delaware Act filed with the Secretary of State of the State of
Delaware on behalf of a Company, as amended.
"CFCs" means chlorofluorocarbons.
"Class action" means an action instituted by a Class A Member on behalf of
himself and all other similarly situated Class A Members.
"Class A Member" means a Person who acquires Class A Units and who is
admitted to a Company as a Class A Member in accordance with the terms of each
Operating Agreement.
"Class A Unit" means a membership interest in a Company held by a Class A
Member. The only acceptable consideration for Class A Units shall be cash.
"Class B Member" means a Person who acquires a Class B Unit or Class B
Units.
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"Class B Unit" means a membership interest in a Company held by a Class B
Member.
"Clean Air Act" means the Clean Air Act Amendments of 1990.
"Closing Date" means, for each Company, the date, as designated by the
Manager, as of which the Class A Units shall cease being offered to the public
pursuant to the Offering, and shall be no later than the first anniversary of
the Effective Date, unless the Offering is extended by the Manager, but in no
event later than the second anniversary of the Effective Date.
"Code" means the Internal Revenue Code of 1986, as amended and in effect on
the date of the Operating Agreements.
"Company" means either Fund I or Fund II. Fund I and Fund II are referred to
collectively as the "Companies."
"Company Assets" means all assets of a Company, whether tangible or
intangible and whether real, personal or mixed, including, but not limited to,
equipment, equipment leases, and other contractual rights.
"Competitive Equipment Sales Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the equipment.
"Contribution Account" means a bookkeeping account maintained for each Class
A Member which shall be credited with the Capital Contribution of the Class A
Member and shall be debited with all Cash Available for Distribution distributed
to the Class A Member at any time at which the Preference Account balance of the
Class A Member is zero, such that the distribution does not reduce the Class A
Member's Preference Account. Only for purposes of computing the Contribution
Account and Preference Account balances of each Class A Member, the Capital
Contribution of the Class A Member shall be treated as having been made on the
last day of the calendar quarter in which it is made. All direct and indirect
permitted transferees of a Class A Member shall, upon admittance to a Company as
a Substituted Class A Member, succeed to the Contribution Account balance of the
transferor Class A Member attributable to the Class A Units transferred.
"Delaware Act" means the Delaware Limited Liability Company Act, 6 Del. C.
sec. 18-101 et seq., as amended from time to time, and any successor statute.
"Delaware Limited Partnership Act" means the Delaware Revised Uniform
Limited Partnership Act, 6 Del. C sec. 17-101 et seq., as amended from time to
time, and any successor statute.
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"De minimis" means very small.
"Derivative action" means an action instituted by a Class A Member on behalf
of a Company.
"DOL" means the U.S. Department of Labor.
"DOT" means the U.S. Department of Transportation.
"DWT" means dead weight tons.
"ECAC" means the European Civil Aviation Conference.
"Effective Date" means the date as of which the Registration Statement is
declared effective by the SEC.
"Equipment" means each item of and all of the capital equipment and other
personal property purchased, owned, operated, and/or leased by a Company or in
which such Company has acquired a direct or indirect interest, as more fully
described at Section 1.05 of the Operating Agreement of such Company, together
with all appliances, parts, instruments, appurtenances, accessories,
furnishings, or other equipment included therein (including any and all engines
originally installed thereon), and all substitutions, renewals, or replacements
of, and all additions, improvements, and accessions to, any and all thereof.
"Equipment Liquidation Fee" means the fee payable by a Company in accordance
with Section 2.06(c) of the Operating Agreements.
"Equipment Management Agreement" means that certain Equipment Management
Agreement entered into on behalf of a Company by the Manager with IMI to provide
certain management services with respect to the Equipment pursuant to Section
2.02(k) of each Operating Agreement.
"Equipment Management Fee" means all fees payable by a Company to IMI for
providing Equipment management services, as set forth in Section 2.06(a) of each
Operating Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means, for each Company, the account at Sanwa Bank
California where Subscriptions will be held for each Company until the Minimum
Subscription Amount of $1,500,000 is achieved for each Company.
"EU" means the European Union (formerly, the European Community), the
twelve-nation organization of European nations which may mandate legislative
action by its members.
"Event of Dissolution" means the first to occur of the events described in
Section 10.01 of each Operating Agreement.
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"Exempt Entities" means corporations, community chests, funds or foundations
that qualify under Section 501(c)(3) of the Code.
"FAA" means the U.S. Federal Aviation Administration.
"Fiduciary duty" means the duty of one who undertakes to manage money or
property for another to act primarily for another's benefit in matters connected
with such undertaking.
"FSI" means PLM Financial Services, Inc., a Delaware corporation, the
Manager and Initial Class B Member.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancellable rental payments due (and which can be calculated at
the commencement of the Net Lease) during the initial non-cancellable fixed term
(not including any renewal or extension period) of the lease (including
charters) or other contract for the use of the Equipment are at least sufficient
to recover the Purchase Price of the subject Equipment.
"Fund I" means Professional Lease Management Income Fund I, L.L.C., a
Delaware limited liability company.
"Fund II" means Professional Lease Management Income Fund II, L.L.C., a
Delaware limited liability company.
"Funding Date" means, for each Company, the date on which Capital
Contributions of the Class A Members are released to such Company from the
Escrow Account established by the Manager in connection with such Company's
Offering.
"Gross Income" means the gross income of a Company within the meaning of
Section 61(a) of the Code.
"Gross Lease Revenues" means Company gross receipts from leasing (including
chartering) or other operation of the Equipment, except that, to the extent a
Company has leased or chartered the Equipment from an unaffiliated party, it
shall mean such receipts less any lease or charter expense.
"HCFCs" mean hydrochlorofluorocarbons.
"ICAO" means the International Civil Aviation Organization, an agency of the
United Nations.
"IMI" means PLM Investment Management, Inc., an Affiliate of the Manager,
its successors and assigns.
"Indemnified Party" means the Manager, the Initial Class B Member and each
of their Affiliates (when acting within the scope of authority of the Manager
and Initial Class B Member and performing services on behalf of a Company) which
manage or participate in the management of a Company or render other services to
such Company.
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"Initial Class A Member" means Denise M. Kirchubel, her heirs, legal
representatives, and assigns.
"Initial Class B Member" means PLM Financial Services, Inc., a Delaware
corporation.
"Intermodal" means containers which can be moved via various modes of
transportation, including by ship, by truck and by rail.
"Investment in Equipment" means, for a Company, the amount of Capital
Contributions from Original Class A Members actually paid or allocated to the
purchase of Equipment acquired by the Company, including the purchase of
Equipment, working capital reserves allocable thereto (except that working
capital reserves in excess of 3% of Capital Contributions from Original Class A
Members shall not be included), and other cash payments such as interest and
taxes but excluding Front-End Fees as defined below. Investment in Equipment for
a Company shall equal 100% of the Capital Contributions from its Original Class
A Members. For the purposes of the definition of "Investment in Equipment",
"Front-End Fees" means fees and expenses paid by any party for any services
rendered during the Company's organizational or acquisition phase (including
acquisitions made with Retained Proceeds), including Organizational and Offering
Expenses, Lease Negotiation Fees, Acquisition Fees, Acquisition Expenses, and
any other similar fees, however designated by the Manager. The Initial Class B
Member is paying Front-End Fees, from its own funds, on behalf of the Companies.
For purposes of the definitions of "Investment in Equipment" and "Purchase
Price" below, "Acquisition Expenses" means expenses including but not limited to
legal fees and expenses, travel and communication expenses, costs of appraisals,
accounting fees and expenses, and miscellaneous expenses relating to the
selection and acquisition of Equipment, whether or not acquired. For purposes of
the definitions of "Investment in Equipment" and "Purchase Price" below,
"Acquisition Fees" means the total of all fees and commissions paid by any party
in connection with the initial purchase or manufacture of Equipment acquired by
a Company. Included in the computation of such fees or commissions shall be any
commission, selection fee, financing fee, non-recurring management fee, or any
fee of a similar nature, however designated. No such fee is being paid to the
Manager. For purposes of the definitions of "Investment in Equipment" and
"Purchase Price" below, "Lease Negotiation Fees" means the total of all fees
paid by any party in connection with the initial lease of Equipment acquired by
a Company. No such fee is being paid to the Manager.
"IRA" means an Individual Retirement Account as described in Section 408 of
the Code.
"IRS" means the Internal Revenue Service.
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"Letter of Suitability" means an agreement which may be used by investors in
lieu of a Subscription Agreement to subscribe to purchase Class A Units through
certain Selected Agents and to authorize Subscriber's Selected Agent to debit
the Subscriber's securities account.
"Liquidating Trustee" means as follows:
(i) If the Manager is a manager of a Company, the Manager;
(ii) If the Manager is not a manager of a Company, and a Company has one
manager, such last remaining manager;
(iii) If the Manager is not a manager of a Company, and a Company has
more than one manager, the manager appointed by such managers; and
(iv) If a Company has no managers, the Person receiving the most votes
and/or written consents by the Class A Members at a meeting duly held or
upon a vote duly taken within 60 days following the Event of Dissolution.
"Majority in Interest" means, with respect to a Company, Class A Members
holding more than 50% of the outstanding Class A Units held by all Class A
Members at the Record Date for any vote or consent of the Class A Members.
"Manager" means PLM Financial Services, Inc., a Delaware corporation, and
when used with a lower case "m," means the Manager (if the Manager is still
acting as a manager of a Company) and any successor or additional manager of a
Company within the meaning of the Delaware Act or as provided in an Operating
Agreement.
"Managing Placement Agent" means PLM Securities Corp., an Affiliate of the
Manager.
"Managing Placement Agent Fee" means the fee payable by the Initial Class B
Member to PLM Securities Corp. as Managing Placement Agent in connection with
the Offering, which fee shall be equal to no more than 10% of the purchase price
of the Class A Units sold. From this amount, the Managing Placement Agent shall
pay the Selected Agent Fee to any broker-dealer participating in the Offerings.
All or any portion of the Managing Placement Agent Fee may be waived by the
Managing Placement Agent and all or any portion of the Selected Agent Fee may be
waived by a Selected Agent. Neither the Manager, the Initial Class B Member, nor
a Company shall pay, directly or indirectly, any compensation to any Person
engaged by a potential investor for investment advice other than this Managing
Placement Agent Fee.
"Member(s)" means any one or more of the Class A Members and the Class B
Members. For purposes of the Delaware Act,
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the Class A Members and the Class B Members shall constitute separate classes or
groups of members.
"Minimum Subscription Amount" means, for each Company, an aggregate of
$1,500,000 in subscriptions, exclusive of subscriptions from Pennsylvania
residents.
"Modified ACRS" means the Accelerated Cost Recovery System, as modified by
the 1986 Act.
"Montreal Protocol" means the Montreal Protocol on Substances that Deplete
the Ozone Layer (a protocol to the Vienna Convention for the Protection of the
Ozone Layer).
"NASD" means the National Association of Securities Dealers, Inc.
"Net Disposition Proceeds" means the net (less related costs and expenses)
proceeds realized by a Company from the financing, refinancing, sale, or other
disposition of Equipment, including insurance proceeds or lessee indemnity
payments arising from the loss or destruction of Equipment, less such amounts as
are used to satisfy Company liabilities.
"Net Lease" means a lease (including a charter) or other contract under
which the owner provides equipment to a lessee or other operator in return for a
payment, and the lessee assumes all or substantially all obligations and pays
for all or substantially all of the operation, repair, maintenance and insuring
of the equipment.
"Net Profits" or "Net Loss" shall be computed in accordance with Treasury
Regulations Section 1.704-1(b)(2)(iv) and Section 703(a) of the Code (including
all items of income, gain, loss or deduction required to be stated separately
pursuant to Section 703(a)(1) of the Code) for each taxable year of such Company
or shorter period prior or subsequent to an interim closing of a Company's books
with the following adjustments: (i) any income of such Company that is exempt
from federal income tax and not otherwise taken into account in computing Net
Profits and Net Loss pursuant to this definition shall be added to such taxable
income or shall reduce such taxable loss; and (ii) any expenditure of such
Company described in Code Section 705(a)(2)(B) or treated as Code Section
705(a)(2)(B) expenditures pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(i) and not otherwise taken into account in computing Net
Profits and Net Loss pursuant to this definition shall be subtracted from such
taxable income or loss. Notwithstanding the foregoing, items of income, gain,
loss and deduction specially allocated pursuant to Sections 3.08(b) and 3.17 of
each Operating Agreement shall not be included in the computation of Net Profits
or Net Loss.
"Net worth" means the total assets of a Person less the total liabilities.
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"1986 Act" means the Tax Reform Act of 1986.
"1990 Act" means the Omnibus Budget Reconciliation Act of 1990.
"OCSLA" means the Outer Continental Shelf Land Act, as amended.
"Offering" means, for each Company, the initial public offering of Class A
Units in a Company, as described in this Prospectus.
"Offering Period" means, for Fund I, the period commencing the Effective
Date and ending the last day of the calendar month in which the Closing Date
occurs, and, for Fund II, the period commencing on such date as the Manager
determines to begin offering Class A Units in Fund II to the public (but in no
event earlier than the Closing Date of Fund I) and ending the last day of the
calendar month in which the Closing Date occurs.
"OID" means Original Issue Discount.
"Oil Pollution Act" means the U.S. Oil Pollution Act of 1990.
"Operating Agreement" means the Fifth Amended and Restated Operating
Agreement of Fund I, or the Fifth Amended and Restated Operating Agreement of
Fund II, both entered into as of January 24, 1995, as set forth as Exhibit A to
this Prospectus, and referred to collectively as the "Operating Agreements."
"Operating Lease" means a lease, charter or other contractual arrangement
under which an unaffiliated party agrees to pay a Company, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of a Company and in connection with the
Offerings, including but not limited to the Managing Placement Agent Fee, due
diligence expenses and advertising expenses specifically incurred in connection
with the distribution of the Class A Units, with such expenses being paid by the
Initial Class B Member of such Company, from its own funds, pursuant to Section
3.03 of the applicable Operating Agreement.
"Original Class A Members" means, for each Company, each and all of those
Class A Members who purchase Class A Units in the Offering for such Company.
"Person" means an individual, limited liability company, partnership, joint
venture, corporation, trust, estate or other entity.
"PLM Equipment Growth Funds" means PLM Equipment Growth Fund, PLM Equipment
Growth Fund II, PLM Equipment Growth Fund III, PLM Equipment Growth Fund IV, PLM
Equipment Growth Fund V, PLM Equipment Growth Fund VI and PLM Equipment Growth &
Income Fund VII.
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"PLM International" means PLM International, Inc.
"Power of attorney" means an instrument authorizing another to act as one's
Attorney-in-fact.
"Preference Account" means a bookkeeping account established for each Class
A Member which shall be credited at the rate of 9% per annum, cumulative
compounded daily on the sum of the balances existing, from time to time, in the
Class A Member's Contribution Account (beginning upon the end of the calendar
quarter in which the Class A Member's Capital Contribution was made) and the
Class A Member's Preference Account, and shall be debited, but not below zero,
by all cash distributions to the Class A Member. Any cash distributions made to
the Class A Member, once the Preference Account has been reduced to zero, shall
be debited to the Class A Member's Contribution Account. All direct and indirect
permitted transferees of a Class A Member shall, upon admittance to the Company
as a Substituted Class A Member, succeed to the Preference Account balance of
the transferor Class A Member attributable to the Class A Units transferred.
"Preliminary Return Amount" means the smallest amount of Cash Available for
Distribution which, when distributed to the Class A Members in accordance with
the applicable Operating Agreement, causes the Contribution Account balance and
the Preference Account balance of each Class A Member to be zero.
"Proceeds" means proceeds from the sale of the Class A Units.
"Program" means a limited or general partnership, limited liability company,
joint venture, unincorporated association or similar organization, other than a
corporation formed or operated for the primary purpose of investment in and the
operation of or gain from an interest in equipment.
"Private program" means a Program, the interests in which are offered for
sale without such offer or sale being the subject of a registration statement
filed with, and declared effective by, the SEC pursuant to the Securities Act.
"Public program" means a Program, the interests in which are offered for
sale pursuant to a registration statement filed with, and declared effective by,
the SEC pursuant to the Securities Act.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (i) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of a
Company, and (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of a Company in connection with its purchase of the Equipment.
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"Qualified Plan" means a trust established pursuant to the terms of a
pension, profit sharing or stock bonus plan, including Keogh Plans, meeting the
requirements of Section 401(a) of the Code.
"Record Date" means, for purposes of meetings of, or actions by, the Class A
Members pursuant to Article XV of each Operating Agreement, the close of
business on the business day preceding the date on which the written notice
referred to in that Article is given and, for purposes of distributions pursuant
to Sections 3.09 and 3.10 of each Operating Agreement, means the close of
business on the date the Manager determines the time and amount thereof pursuant
to Sections 2.02(l) and 3.12 of each Operating Agreement.
"Record Holder" means the holder of Class A Units as recorded on the books
of a Company as of the close of business on a particular day.
"Registration Statement" means the registration statement on Form S-1 filed
by the Companies with the SEC under the Securities Act to register the offer and
sale of the Class A Units, as the same may be amended from time to time.
"Regulations" or "Treasury Regulations" means the income tax regulations
promulgated under the Code, whether in final or temporary form, as such
regulations may be amended from time to time (including corresponding provisions
of succeeding regulations).
"Re-Lease Fee" means all fees payable by a Company to the Manager for
providing Equipment re-leasing services, as set forth in Section 2.06(b) of each
Operating Agreement.
"Resident Alien" means a resident alien of the United States.
"Responsible Parties", within the context of the Oil Pollution Act, means,
among others, owners and operators of tanker vessels.
"Retained Proceeds" means the amount which, in the Manager's discretion and
subject to certain limitations set forth in Section 2.02(q) of the Operating
Agreements, is retained by a Company from Cash Flow plus Net Disposition
Proceeds plus cash funds available for distribution from such Company's reserves
less such amounts as the Manager, in its sole discretion, determines should be
set aside for the restoration or enhancement of such Company's reserves for the
purpose of acquiring or investing in Equipment.
"Retiring Manager" means a manager of a Company who or which has been
removed or withdrawn as such or is Bankrupt, which has been involuntarily
dissolved, or who has died or had a conservator appointed for the Person or any
of the property of such manager.
181
<PAGE> 191
"Roll-Up" means a transaction involving the acquisition, merger, conversion,
or consolidation, either directly or indirectly, of a Company and the issuance
of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving Class A Units which have been listed for at
least twelve months on a national securities exchange or traded through the
Nasdaq National Market; or
(ii) a transaction involving the conversion to partnership, corporate,
trust or association form of only the Company if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following:
(a) the Class A Members' voting rights;
(b) the term of existence of such Company;
(c) compensation of the Manager or its Affiliates; or
(d) such Company's investment objectives.
"Roll-Up Entity" means the partnership, corporation, trust, or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up.
"Sale-leaseback" means a transaction where an asset is sold to a vendee who
immediately leases such asset back to the vendor.
"SEC" means the U.S. Securities and Exchange Commission.
"Section 754 Election" shall mean an election under Section 754 of the Code
relating to the Adjusted Basis of Company Assets, as provided for under Sections
734 and 743 of the Code.
"Securities Act" means the Securities Act of 1933, as amended.
"Selected Agents" members of NASD who will be engaged by the Managing
Placement Agent to sell the Class A Units.
"Selected Agent Fee" means commissions of 8.5% of the purchase price of
Class A Units sold by the Selected Agents, payable out of the Managing Placement
Agent Fee.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include a Person whose only relation with the Program
is that of an independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation
182
<PAGE> 192
is for professional services rendered in connection with the offering of Program
interests.
"Subscribers" refers to those Persons who have tendered monies to a Company
for the purchase of Class A Units, but have not been accepted as Class A Members
as provided for in Section 1.07(b) of each Operating Agreement.
"Subscription" means money tendered to a Company for the purchase of Class A
Units.
"Subscription Agreement" means an agreement whereby a Subscriber becomes
bound to purchase Class A Units.
"Substituted Class A Member" means any Person admitted to a Company as a
Class A Member pursuant to the provisions of Section 7.01 of each Operating
Agreement.
"Supplemental Equipment Management Services" means those services, in
addition to Basic Equipment Management Services which may, from time to time, be
required for the management of the Equipment as determined by the Manager. Such
services include, but are not limited to, frequent and active remarketing of the
Equipment, such as the marketing on a per-diem, voyage charter, contract of
affreightment or short-term lease (generally less than one year) basis or the
performance of additional services such as providing crewing for the Equipment
or planning and managing the maintenance or repair of the Equipment.
"Supplemental Sales Material" means sales material distributed by the
Manager for use in connection with the Offering including, but not limited to, a
sales brochure entitled "Professional Lease Management Income Fund" a question
and answer sales booklet, a flip chart, a speech for public seminars, an
invitation to attend public seminars, slide and video presentations, prospecting
letters, mailing cards and tombstone advertisements.
"TEC" means PLM Transportation Equipment Corporation, an Affiliate of the
Manager, its successors and assigns.
"TECAI" means TEC AcquiSub, Inc., an Affiliate of the Manager, its
successors and assigns.
"TEI" means Transportation Equipment Indemnity Company, Ltd., an Affiliate
of the Manager, its successors and assigns.
"Terminating Event" means the first to occur of the withdrawal, removal,
Bankruptcy, involuntary dissolution, death, or appointment of a conservator for
the Person or any of the assets, of the last remaining manager of a Company, or
whenever the last remaining manager of a Company is not or will not become a
Class B Member in accordance with Sections 9.01(a), 9.02(a) or 9.03(a) of each
Operating Agreement.
183
<PAGE> 193
"Transfer Application" means an application and agreement for transfer of
Class A Units in the form prescribed by the Manager by which a transferee (or
the transferee's broker, agent, or nominee holder) identifies the transferee as
a U.S. Citizen or an Alien, identifies the transferee as a Benefit Plan or not
as a Benefit Plan, and identifies any category of exempt transfer within which
the transfer falls under Internal Revenue Service Notice 88-75 or any
superseding pronouncement, ruling or regulation under Section 7704 of the Code;
requests admission to a Company as a Substituted Class A Member; agrees to be
bound by the terms and conditions of the applicable Operating Agreement; grants
a Power of attorney to the Manager and/or its successors, if any; and takes such
other actions as provided in Section 6.04(b) of the Operating Agreements.
"Treaty" means the Income Tax Treaty between the United Kingdom and the
United States.
"Trust Agreement" means that certain form of trust agreement pursuant to
which title to any aircraft owned by a Company may be held by the trustee of a
trust of which such Company will be the sole beneficiary.
"U.S. Citizen" means any of the following Persons: (i) an individual who is
a citizen of the United States or one of its possessions, (ii) an association
organized under the laws of the United States or any state, territory or
possession of the United States if all of its members are (and at least 75% of
the voting interests are owned by) U.S. Citizens and the president and two-
thirds or more of the board of directors and other managing officers are U.S.
Citizens, (iii) a partnership in which each partner is a U.S. Citizen, (iv) a
trust of which each trustee and all of the beneficiaries are U.S. Citizens
(provided that Persons who are not U.S. Citizens do not possess more than 25% of
the aggregate power to direct or remove the trustee), and (v) a corporation
incorporated in the United States or one of its possessions of which the
president/chief executive officer, chairman of the board of directors and
two-thirds or more of the members of the board of directors and other managing
officers are U.S. Citizens and in which at least 75% of the voting interest is
owned or controlled by U.S. Citizens.
"Unit(s)" means any one or more of the Class A Units and the Class B Units.
"Unrecovered Principal" means, with respect to a Class A Unit, the excess of
(i) the Capital Contribution allocable to the Class A Unit over (ii) the
distributions from any source paid by a Company with respect to the Class A
Unit.
"VAT" means value added tax.
184
<PAGE> 194
FINANCIAL STATEMENTS
The audited balance sheets of each of the Companies at August 22, 1994
(audited), and at September 30, 1994 (unaudited), the consolidated balance sheet
of the Manager at December 31, 1993 (audited) and at September 30, 1994
(unaudited), all with related notes and reports of independent public
accountants, are included on the following pages of this Prospectus. A Company
will not have any operating history until it purchases Equipment.
F-1
<PAGE> 195
REPORT OF INDEPENDENT AUDITORS
The Members
Professional Lease Management Income Fund I, L.L.C.
We have audited the accompanying balance sheet of Professional Lease
Management Income Fund I, L.L.C., a Delaware Limited Liability Company, as of
August 22, 1994. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
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 balance sheet is free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Professional Lease Management
Income Fund I, L.L.C. as of August 22, 1994, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
August 22, 1994
F-2
<PAGE> 196
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER AUGUST
30, 22,
1994 1994
------------ ---------
(UNAUDITED)
<S> <C> <C>
Assets
Cash............................ $100 $ 100
============== ===========
Member's Equity
Class A Member (5 Units held by
an officer of the Manager).... $100 $ 100
============== ===========
</TABLE>
See accompanying notes to the balance sheet.
F-3
<PAGE> 197
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
NOTES TO BALANCE SHEET
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
1. BASIS OF PREPARATION
Organization
Professional Lease Management Income Fund I, L.L.C., a Delaware Limited
Liability Company ("Fund I" or the "Company") was formed on August 22, 1994 to
purchase, lease, charter, or otherwise invest in, a diversified portfolio of
long-lived, low obsolescence capital equipment that is easily transportable by
and among prospective users (the "Equipment"). The securities offered hereby
represent limited liability company interests (the "Class A Units") which will
be offered to the public. PLM Financial Services, Inc. is the Manager of the
Company and will be the Initial Class B Member. The purchase price of the Class
A Units will be $20.00 per Class A Unit. A minimum of 75,000 Class A Units and
an anticipated maximum of 5,000,000 Class A Units will be offered. As of August
22, 1994, five Class A Units had been purchased in the Company by an officer of
the Manager for which $100 was paid.
The Manager manages and controls the affairs of the Company. The Manager
will pay out of its own corporate funds (as a capital contribution to the
Company in return for its interest as the Initial Class B Member) all
Organizational and Offering Expenses incurred in connection with the offering;
therefore, 100% of the cash proceeds received by the Company from the sale of
Class A Units will initially be used to purchase Equipment and establish any
required cash reserves. For its contribution, the Manager will receive a 15%
interest in the Company's cash distributions until the investors receive a
return equal to their original capital contributions and a 25% interest
thereafter. As each Class A Member receives cash distributions in an amount
equal to each Class A Member's Capital Contribution, then cash distributions as
between such Class A Member and the Class B Members will be distributed 25% to
the Class B Members and 75% to such Class A Member. Generally, Net Profits and
Net Losses will be allocated 99% to the Class A Members and 1% to the Class B
Members. However, the Class B Members will be specially allocated Company income
each year in an amount which will be equal to the excess of cash distributions
to the Class B Members over the Class B Members' 1% share of Net Profits. The
effect on the Class A Members of this special income allocation will be to
increase the Net Loss or decrease the Net Profits allocable to the Class A
Members.
F-4
<PAGE> 198
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
NOTES TO BALANCE SHEET -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
Operations
The equipment of the Company will be managed, under a management agreement,
by PLM Investment Management, Inc. ("IMI"), a wholly owned subsidiary of the
Manager. Subject to certain reductions, the monthly management fee will be equal
to the lesser of (i) the fees which would be charged by an independent third
party for similar services for similar equipment or (ii) the sum of (A) for that
Equipment for which IMI provides only Basic Equipment Management Services (a) 2%
of the Gross Lease Revenues attributable to Equipment which is subject to Full
Payout Net Leases, and (b) 5% of the Gross Lease Revenues attributable to
Equipment which is subject to Operating Leases, and (B) for that Equipment for
which IMI provides Supplemental Equipment Management Services, 7% of the Gross
Lease Revenues attributable to such Equipment. The Manager is also the general
partner in a series of limited partnerships which own and lease transportation
and related equipment. The Manager, in conjunction with its subsidiaries, also
sells transportation equipment to these partnerships and manages transportation
equipment under management agreements with the partnerships. As of September 30,
1994, the Company has not commenced operations.
2. OTHER TRANSACTIONS WITH AFFILIATES
In certain circumstances, the Manager will be entitled to a monthly re-lease
fee for re-leasing services following expiration of the initial lease, charter
or other contract for certain Equipment equal to the lesser of (a) the fees
which would be charged by an independent third party for comparable services for
comparable equipment or (b) 2% of Gross Lease Revenues derived from such
re-lease, provided however, that no re-lease fee shall be payable if such
re-lease fee would cause the combination of the equipment management fee paid to
IMI (see Note 1) and the re-lease fees with respect to such transaction to
exceed 7% of Gross Lease Revenues.
F-5
<PAGE> 199
REPORT OF INDEPENDENT AUDITORS
The Members
Professional Lease Management Income Fund II, L.L.C.
We have audited the accompanying balance sheet of Professional Lease
Management Income Fund II, L.L.C., a Delaware Limited Liability Company, as of
August 22, 1994. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
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 balance sheet is free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Professional Lease Management
Income Fund II, L.L.C. as of August 22, 1994, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
August 22, 1994
F-6
<PAGE> 200
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND II, L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
BALANCE SHEET
Assets
<TABLE>
<CAPTION>
SEPTEMBER AUGUST
30, 22,
1994 1994
------------ ---------
(UNAUDITED)
<S> <C> <C>
Cash............................ $100 $ 100
============== ===========
Member's Equity
Class A Member (5 Units held by
an officer of the Manager).... $100 $ 100
============== ===========
</TABLE>
See accompanying notes to the balance sheet.
F-7
<PAGE> 201
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND II, L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
NOTES TO BALANCE SHEET
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
1. BASIS OF PREPARATION
Organization
Professional Lease Management Income Fund II, L.L.C., a Delaware Limited
Liability Company ("Fund II" or the "Company") was formed on August 22, 1994 to
purchase, lease, charter, or otherwise invest in, a diversified portfolio of
long-lived, low obsolescence capital equipment that is easily transportable by
and among prospective users (the "Equipment"). The securities offered hereby
represent limited liability company interests (the "Class A Units") which will
be offered to the public. PLM Financial Services, Inc. is the Manager of the
Company and will be the initial Class B Member. The purchase price of the Class
A Units will be $20.00 per Class A Unit. A minimum of 75,000 Class A Units and
an anticipated maximum of 5,000,000 Class A Units will be offered. As of August
22, 1994, five Class A Units had been purchased in the Company by an officer of
the Manager for which $100 was paid.
The Manager manages and controls the affairs of the Company. The Manager
will pay out of its own corporate funds (as a capital contribution to the
Company in return for its interest as the Initial Class B Member) all
Organizational and Offering Expenses incurred in connection with the offering;
therefore, 100% of the cash proceeds received by the Company from the sale of
Class A Units will initially be used to purchase Equipment and establish any
required cash reserves. For its contribution, the Manager will receive a 15%
interest in the Company's cash distributions until the investors receive a
return equal to their original capital contributions and a 25% interest
thereafter. As each Class A Member receives cash distributions in an amount
equal to each Class A Member's Capital Contribution, then cash distributions as
between such Class A Member and the Class B Members will be distributed 25% to
the Class B Members and 75% to such Class A Member. Generally, Net Profits and
Net Losses will be allocated 99% to the Class A Members and 1% to the Class B
Members. However, the Class B Members will be specially allocated Company income
each year in an amount which will be equal to the excess of cash distributions
to the Class B Members over the Class B Members' 1% share of Net Profits. The
effect on the Class A Members of this special income allocation will be to
increase the
F-8
<PAGE> 202
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND II, L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
NOTES TO BALANCE SHEET -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
Net Loss or decrease the Net Profits allocable to the Class A Members.
Operations
The equipment of the Company will be managed, under a management agreement,
by PLM Investment Management, Inc. ("IMI"), a wholly owned subsidiary of the
Manager. Subject to certain reductions, the monthly management fee will be equal
to the lesser of (i) the fees which would be charged by an independent third
party for similar services for similar equipment or (ii) the sum of (A) for that
Equipment for which IMI provides only Basic Equipment Management Services (a) 2%
of the Gross Lease Revenues attributable to Equipment which is subject to Full
Payout Net Leases, and (b) 5% of the Gross Lease Revenues attributable to
Equipment which is subject to Operating Leases, and (B) for that Equipment for
which IMI provides Supplemental Equipment Management Services, 7% of the Gross
Lease Revenues attributable to such Equipment. The Manager is also the general
partner in a series of limited partnerships which own and lease transportation
and related equipment. The Manager, in conjunction with its subsidiaries, also
sells transportation equipment to these partnerships and manages transportation
equipment under management agreements with the partnerships. As of September 30,
1994, the Company has not commenced operations.
2. OTHER TRANSACTIONS WITH AFFILIATES
In certain circumstances, the Manager will be entitled to a monthly re-lease
fee for re-leasing services following expiration of the initial lease, charter
or other contract for certain Equipment equal to the lesser of (a) the fees
which would be charged by an independent third party for comparable services for
comparable equipment or (b) 2% of Gross Lease Revenues derived from such
re-lease, provided however, that no re-lease fee shall be payable if such
re-lease fee would cause the combination of the equipment management fee paid to
IMI (see Note 1) and the re-lease fees with respect to such transaction to
exceed 7% of Gross Lease Revenues.
F-9
<PAGE> 203
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
PLM Financial Services, Inc.
We have audited the accompanying consolidated balance sheet of PLM Financial
Services, Inc. and subsidiaries as of December 31, 1993. This consolidated
balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated balance sheet based
on our audit.
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 consolidated balance sheet is free of
material misstatement. An audit of a balance sheet includes examining, on a test
basis, evidence supporting the amounts and disclosures in that balance sheet. An
audit of a balance sheet also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the consolidated
balance sheet provides a reasonable basis for our opinion.
As more fully described in Notes 1 and 8, the Company is one of several
subsidiaries of PLM International, Inc. and has significant transactions with
its parent and affiliates.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of PLM Financial
Services, Inc. and subsidiaries as of December 31, 1993, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
March 25, 1994
F-10
<PAGE> 204
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents...... $ 906 $ 6,046
Receivables (net of allowance
for doubtful accounts of $59
at September 30, 1994, and
$74 at December 31, 1993).... 736 529
Receivables-net, from
affiliated entities.......... 6,132 7,281
Assets held for resale......... 5,912 --
Equity interest in
affiliates................... 17,024 17,652
Property and equipment, net.... 1,584 1,813
Other.......................... 2,610 2,824
------------- ------------
Total assets............... $34,904 $ 36,145
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Long-term secured debt....... $ 1,412 $ 1,524
Payables and other
liabilities................ 2,036 1,963
Payable to parent............ 1,830 --
Deferred income taxes........ 7,695 7,695
------------- ------------
Total liabilities.......... 12,973 11,182
Shareholder's Equity:
Common stock, $.01 par value,
1,000 shares authorized,
100 shares issued and
outstanding at paid-in
amount..................... 10,556 4,611
Retained earnings............ 11,375 20,352
------------- ------------
Total shareholder's
equity.................. 21,931 24,963
------------- ------------
Total liabilities and
shareholder's
equity................ $34,904 $ 36,145
============= ============
</TABLE>
See accompanying notes to these balance sheets.
F-11
<PAGE> 205
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheets include the accounts of PLM
Financial Services, Inc. and its wholly owned subsidiaries ("FSI" or the
"Company"). The subsidiaries are: PLM Securities Corp. ("SEC"); a registered
broker-dealer; PLM Transportation Equipment Corporation ("TEC") and its
subsidiaries, PLM Rental, Inc. ("PLMR") and TEC AcquiSub, Inc. ("TEC AcquiSub");
PLM Investment Management, Inc. ("IMI"); and several other smaller companies.
All significant intercompany accounts and transactions among the consolidated
group have been eliminated.
On February 1, 1988, the capital stock of FSI, PLM Railcar Management
Services, Inc., Transportation Equipment Management, Inc., and the
transportation equipment and other assets, subject to related liabilities, of 21
public partnerships (PLM Transportation Equipment Partners I through VIIA and
VIII) sponsored by FSI were acquired by PLM International, Inc., ("PLM
International") a newly formed Delaware corporation, in return for its stock,
cash, and contingent cash rights to additional cash. As a result of this
exchange ("Consolidation"), FSI became a wholly owned subsidiary of PLM
International.
Operations
FSI engages principally in the organization, sale, and management of
transportation equipment leasing investment programs, which are mainly limited
partnerships, from which it receives for its services an equity interest in the
partnerships and equity placement, equipment acquisition, lease negotiation,
debt placement, and equipment management fees from these affiliated investment
programs and limited partnerships. In addition, FSI receives a reimbursement of
organization and offering costs incurred. Generally, FSI or one of its
subsidiaries is the general partner in these programs.
Fees are recognized as revenue at the time the related services are
performed. Placement fees, generally 9% of equity raised, are earned upon the
purchase by investors of partnership units. Equipment acquisition, lease
negotiation, and debt placement fees are earned through the purchase, initial
lease, and financing of equipment, and are generally recognized as revenue when
the Company has completed substantially all of the services required to earn the
fee, generally when binding commitment agreements are signed.
F-12
<PAGE> 206
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
Management fees are earned for managing the equipment portfolio and
administering investor programs as provided for in various agreements and are
recognized as revenue over time as they are earned.
As compensation for organizing a partnership, FSI is generally granted an
interest (between 1% and 5%) of the earnings and cash distributions of the
program for which FSI is the general partner. The Company recognizes as
management fees and partnership interests its equity interest in the earnings of
the partnerships after adjusting such earnings to reflect the use of
straight-line depreciation and the effect of special allocations of the
program's gross income allowed under the respective partnership agreements.
The Company also recognizes as income its interest in the estimated net
residual interest in the assets of the partnerships as they are purchased. The
amounts recorded are based on management's estimate of the net proceeds to be
distributed upon disposition of the partnership's equipment at the end of the
respective partnerships. These residual value interests are recorded in
commissions and other fees at the present value of the Company's share of
estimated disposition proceeds as assets are purchased by the partnerships. As
required by FASB Technical Bulletin 1986-2, the discount on the Company's
residual value interests is not accreted over the holding period. The Company
reviews the carrying value of its residual interests at least annually in
relation to expected future market values for the underlying equipment in which
it holds residual interests for the purpose of assessing recoverability of
recorded amounts. When a limited partnership is in the liquidation phase, all
distributions received by the Company will be treated as recoveries of its
equity interest in the partnership.
In addition, FSI, through its subsidiary PLMR, operates ten trailer rental
facilities. As of September 30, 1994, these rental facilities managed a fleet of
approximately 5,000 trailers owned by FSI, PLM International, and various
investment programs. FSI owns 740 of the trailers managed by the rental
facilities. Rental income earned and operations support expenses, including
sales and administrative expenses incurred, are allocated to the owners of the
trailers. Generally, these indirect expenses are allocated using a proportional
revenue basis. Direct operating expenses are specifically identified and charged
to the appropriate trailer owner.
F-13
<PAGE> 207
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
Organization and Offering Costs
In accordance with certain investment program and partnership agreements,
FSI receives reimbursement for organization and offering costs incurred during
the offering period. The reimbursement is between 1.5% and 3.0% of equity
raised. The investment program reimburses FSI ratably over the offering period
of the investment program based on equity raised. In the event organizational
and offering costs incurred by FSI as defined by the partnership agreement
exceed amounts allowed, the excess costs are capitalized as an additional
investment in the related partnership and amortized over the estimated life of
the partnership. These additional investments are reflected as equity interest
in affiliates in the accompanying consolidated balance sheet.
Assets Held for Sale
Assets held for sale to affiliated partnerships are generally subject to
operating leases. The lease revenue is recorded over the period earned.
Depreciation is not recorded on assets committed to be sold to affiliated
partnerships at the Company's original cost within a specified time, no longer
than 150 days.
Property and Equipment
Property and equipment are stated at the lower of depreciated cost, or
estimated net realizable value. Depreciation is computed using the straight-line
method based on estimated useful lives of 3-18 years.
Income Taxes
FSI is included in the consolidated federal and certain combined state
income tax returns of PLM International. FSI provides income tax expense using a
combined federal and state tax rate applied to pre-tax earnings. FSI's tax
provision is calculated on a separate return basis. The provisions of $4,449,000
in 1993, and $937,000 through September 1994, have been paid to PLM
International. As of January 1, 1993, the Company has adopted Statement of
Financial Accounting Standards No. 109 ("Accounting for Income Taxes") ("SFAS
109"). SFAS No. 109 continues to require the liability method of accounting for
income taxes as under SFAS No. 96. No additional tax assets were recorded and no
valuation allowances or additional liability was required upon adoption of SFAS
No. 109.
F-14
<PAGE> 208
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
Under the liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Deferred income taxes arise primarily because of differences in the timing
of reporting transportation equipment depreciation, partnership income, and
certain reserves for financial statement and income tax reporting purposes.
Cash and Cash Equivalents
The Company considers highly liquid investments that are readily convertible
into known amounts of cash with original maturities of ninety days or less as
cash equivalents.
Reclassification
Certain amounts in the 1993 financial statements have been reclassified to
conform to the 1994 presentation.
2. ASSETS HELD FOR SALE
At times during 1993 and 1994, assets held for sale consisted of
transportation equipment purchased by FSI for resale to an affiliated
partnership. This equipment may be financed through a credit facility (See Note
5) available to TEC AcquiSub or through the Company's working capital or an
advance from the parent. At December 31, 1993, there was no equipment held for
resale to an affiliated partnership. At September 30, 1994, the Company owned
trailers which cost $5.9 million which were classified as held for sale to
affiliated partnerships.
3. EQUITY INTEREST IN AFFILIATES
As of December 31, 1993 and September 30, 1994, FSI was the general partner
in seventeen equipment limited partnerships. TEC was the general partner for six
partnerships. The general partner holds partnership interests of primarily 1% to
5% in most of these partnerships. Net earnings and distributions of the
partnerships are generally allocated 99% to the limited partners and 1% to the
general partner, except for PLM Equipment Growth Funds II, III, IV, V, VI and
PLM Equipment Growth and Income Fund VII, which are allocated 95% to the limited
partners and 5% to the general partner.
F-15
<PAGE> 209
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
Summarized financial data as of December 31, 1993, for these partnerships,
adjusted to reflect straight line depreciation, are as follows (in thousands and
unaudited):
Financial position at December 31, 1993:
<TABLE>
<S> <C>
Cash and other assets...................... $ 94,005
Transportation equipment and other assets,
net of accumulated depreciation of
$289,488................................. 978,103
----------
Total Assets............................. 1,072,108
Less liabilities, primarily long term
financing................................ 258,768
----------
Partners' equity........................... $ 813,340
===========
FSI's share thereof, recorded as equity in
affiliates:
Equity interest............................ $ 5,310
Estimated residual value interests in
equipment................................ 12,342
----------
Equity interest in affiliates.............. $ 17,652
===========
</TABLE>
Most of the limited partnership agreements contain provisions for special
allocations of the partnerships' gross income. These special allocation
provisions, in effect, allow the Company to record income equivalent to the cash
distributions received from the partnerships.
While none of the partners are directly liable for partnership borrowings
and while the general partner maintains insurance against liability for bodily
injury, death and property damage for which a partnership may be liable, the
general partner may be contingently liable for claims against the partnership
that exceed net asset values.
As of September 30, 1994, FSI's share of the partner's equity recorded as
equity interests was approximately $5,088,000 while the residual value interest
in equipment was approximately $11,936,000.
F-16
<PAGE> 210
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
<S> <C> <C>
Trailers held for lease............ $ 2,441 $ 2,483
Office equipment................... 943 820
Other.............................. 517 478
------------- ------------
3,901 3,781
Less accumulated depreciation...... (2,317) (1,968)
------------- ------------
Net property and equipment......... $ 1,584 $ 1,813
============ ===========
</TABLE>
5. SECURED DEBT
Long-term secured debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
<S> <C> <C>
Note payable, bearing interest at
13.5%, due in monthly principal
and interest installments of $24
through September 1994, secured
by lease proceeds and a security
interest in equipment with a net
book value of $451 at December
31, 1993......................... $ -- $ 208
Notes payable, bearing interest at
10%, maturing between 1997 and
2001 secured by property and
equipment with a net book value
of $1,123 at September 30, 1994,
and December 31, 1993............ 1,412 1,316
------------- ------------
$ 1,412 $ 1,524
============ ===========
</TABLE>
As of September 30, 1994, principal payments on the long-term secured debt
for the remainder of 1994 and future years are approximately (in thousands):
$237 in 1997; and $1,175 for 1999 and thereafter.
A wholly owned subsidiary of the Company has a $25.0 million equipment
acquisition warehousing facility to acquire assets to be held on an interim
basis of up to 150 days prior to placement with affiliated partnerships. The
facility was amended on June 28,
F-17
<PAGE> 211
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
1994. The amendment extended the facility to June 30, 1995, and provides for a
$5.0 million letter of credit facility as part of the $25.0 million facility.
The facility bears interest at 1% over prime. The facility may be used for up to
80% of the purchase price of the equipment. Borrowings under the facility are
secured by the equipment and any associated lease. The facility is shared with
PLM Equipment Growth and Income Fund VII ("EGF VII") so that either party may
take advances against the maximum available under the line. Borrowings by EGF
VII are guaranteed by the Company. As of December 31, 1993, the Company had no
outstanding borrowings and EGF VII had borrowed $5.1 million under this
facility. As of September 30, 1994, the Company had no outstanding borrowings
and EGF VII had borrowed $8.5 million under this facility.
6. DEFERRED INCOME TAX
As discussed in Note 1, the Company adopted SFAS 109 as of January 1, 1993.
No additional tax assets were recorded and no valuation allowances or additional
liability was required upon the adoption SFAS 109.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1993, are:
<TABLE>
<S> <C>
Deferred Tax Assets:
Federal tax credits.................................. $ 716
State tax credits.................................... 483
Federal benefit of state taxes....................... 328
------
Total deferred tax assets.......................... 1,527
------
Deferred Tax Liabilities:
Transportation equipment, principally differences in
depreciation....................................... 477
Partnership interests................................ 8,287
Other................................................ 458
------
Total deferred tax liabilities..................... 9,222
------
Net deferred tax liabilities................... $7,695
======
</TABLE>
The Company believes a valuation allowance for its deferred tax assets is
not necessary because it expects the tax benefits will be realized by the
recognition of future taxable amounts.
F-18
<PAGE> 212
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
The components of deferred income taxes are substantially the same at
September 30, 1994, as at December 31, 1993.
7. COMMITMENTS AND CONTINGENCIES
At December 31, 1993, FSI guaranteed $25 million of the senior loan facility
of PLM International. These guarantees were unconditional, absolute, and
irrevocable. The senior loan agreement required FSI to declare and pay annual
dividends in amounts equal to available liquid assets with respect to its common
stock so that FSI's retained earnings was the lesser of $15 million or the sum
of such other amounts that may have been necessary to comply with certain
regulatory requirements plus additional amounts as may have been reasonably
necessary for the operations of FSI as more fully described in the agreement. In
April of 1993, and 1994, FSI declared a dividend of $10 million to meet this
commitment. On June 30, 1994, PLM repaid the existing senior loan and entered
into a new senior loan agreement which no longer limits the Company's retained
earnings. FSI is not a guarantor of the new PLM senior loan.
The Company has leases for office space and for rental yard operations. As
of September 30, 1994, annual lease rental commitments under FSI's leases for
the remainder of 1994 and through 1998 total $187,000, $536,000, $354,000,
$150,000, and $39,000, respectively. The Company's rent expense (including
allocated rent) was $1,648,000 in 1993, and $1,360,000 through September in
1994.
8. TRANSACTIONS WITH AFFILIATES
PLM International and its various subsidiaries including FSI incur costs
associated with management, accounting, legal, and other general and
administrative activities. These direct and indirect costs are allocated among
FSI, PLM International, and other subsidiaries of PLM International, using an
incremental cost allocation method, which management believes is reasonable to
business activities. FSI employees participate in PLM's Employees Stock
Ownership Plan (ESOP). Commencing in 1994, FSI is charged for its share of PLM's
ESOP compensation expense and has recorded a capital contribution from PLM in
the amount of $0.9 million for the compensation charge, net of the current tax
benefit.
PLM Railcar Management Services, Inc. ("RMSI"), a wholly owned subsidiary of
PLM International, performed certain
F-19
<PAGE> 213
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
management and equipment acquisition services on behalf of FSI as equipment
manager. Fees paid to RMSI by FSI totalled $857,000 in 1993, and $585,000
through September of 1994.
PLMR allocates a portion of its indirect operating expenses to PLM
International and to investment programs for their trailers managed by PLMR
using the proportional revenue basis (see Note 1). For 1993, these allocations
totaled $2,592,000 and were $2,173,000 through September of 1994.
In addition to various fees and the PLMR allocation, (see Notes 1 and 3),
FSI charged the investment programs for certain other reimbursable expenses
allowed for in the partnership agreements. FSI was reimbursed approximately
$3,000,000 during 1993, and $2,243,000 through September of 1994 for these
expenses.
Organizational and offering costs related to the investment programs during
1993 totaled $3,827,000 and $2,442,000 through September of 1994. These costs
will either be recovered ratably over the offering period of the investment
programs based on equity raised or are capitalized as an additional investment
in the related partnership (see Note 1).
FSI directs cash transfers to and from PLM International and affiliates to
reimburse expenses paid by one member of the group for the benefit of another.
Cash in excess of minimum funding requirements is transferred to PLM
International. During the nine months ended September 30, 1994, PLM
International made a $5.9 million capital contribution to FSI which included the
previously mentioned ESOP compensation related contribution. Income taxes,
general and administrative expense allocations, and cash advances between PLM
International and FSI also affect the net receivable/payable from parent and
affiliated entities.
Outstanding amounts are generally paid within normal business terms.
9. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Off-Balance Sheet Risk: As of December 31, 1993, and September 30, 1994,
management believes the Company had no significant off-balance sheet risk.
Concentrations of Credit Risk: Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
temporary cash investments and transactions with affiliated entities.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers
F-20
<PAGE> 214
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, IS UNAUDITED)
and their dispersion across different businesses and geographic areas.
10. THE COMPANY'S 401(K) SAVINGS PLAN AND EMPLOYEE STOCK
OWNERSHIP PLAN
The Company participates in the PLM International Employers Profit Sharing
and Tax-Advantage Savings Plan effective as of February 1, 1988. The plan
provides for a deferred compensation arrangement as described in 401(k) of the
Internal Revenue Code. The 401(k) Plan is a non-contributing plan and is
available to substantially all full-time employees of the Company. In 1994,
employees of the Company who participated in the 401(k) Plan can elect to defer
and contribute to the trust established under the 401(k) Plan up to $9,240 of
pre-tax salary or wages. Substantially all full-time employees of the Company
also participate in the PLM International ESOP Plan. The Company makes no
contributions to the 401(k) Plan or the ESOP.
F-21
<PAGE> 215
APPENDIX I
PRIOR PERFORMANCE TABLES
SELECTED DATA REGARDING PREVIOUS PUBLIC
DIVERSIFIED EQUIPMENT LEASING PARTNERSHIP PROGRAMS
Over the last 23 years, the Manager and its Affiliates have managed capital
equipment for themselves and approximately 145,000 investors from whom a total
of approximately $2.3 billion has been raised. The Manager and its Affiliates
currently have under management approximately $2.1 billion of equipment. The
Offering is the Manager's fifty-fifth investment program offering and its
seventeenth program involving diversified portfolios of long-lived, low
obsolescence capital equipment.
The following tables present information in connection with the prior PLM
Equipment Growth Funds and certain other public diversified equipment leasing
programs sponsored by the Manager and its Affiliates. These tables are provided
solely to enable prospective investors to evaluate the experience, with respect
to prior programs sponsored by the Manager or its Affiliates. Because of the
"No-Load" nature of the Offering, certain fees discussed in these tables may not
apply to an investment in the Companies. Purchasers of Class A Units in the
Companies will have no interest in the programs described below unless they are
also investors in those programs. The tables consist of:
<TABLE>
<S> <C> <C>
Table A -- Experience in Raising and Investing Funds
Table B -- Acquisition of Equipment by Prior Public
Programs
Table C -- Operating Results of Prior Programs
Table D -- Sales or Dispositions of Equipment by Prior
Public Programs
Table E -- Compensation to the Manager and Affiliates
</TABLE>
The information in the following tables is discussed, in part, under "Prior
Performance". The Companies will provide, upon request and without charge,
copies of the annual reports for such programs which were prepared on a Form
10-K are available from the Manager for review by potential investors. Exhibits,
if any, to each such report will be provided upon request and payment to the
Companies of a fee equal to the cost of copying and mailing such exhibits.
THE INFORMATION SET FORTH IN THE FOLLOWING PRIOR PERFORMANCE TABLES IS
INCLUDED HEREIN SOLELY TO INFORM INVESTORS OF THE PRIOR AND NOT FUTURE
PERFORMANCE OF SIMILAR EQUIPMENT LEASING PROGRAMS PREVIOUSLY SPONSORED BY THE
MANAGER AND ITS AFFILIATES AND SHOULD NOT BE CONSIDERED AS INDICATIVE
I-1
<PAGE> 216
OF POSSIBLE CAPITALIZATION OR OPERATIONS OF THE COMPANIES. MOREOVER, THE TEP
VII AND TEP IX PROGRAMS (INCLUDED IN TABLE D) ARE DISSIMILAR TO THE COMPANIES
IN THAT THEIR PRIMARY EMPHASIS WAS ON THE OWNERSHIP OF NEW EQUIPMENT, THEIR
EQUIPMENT WAS ACQUIRED SOLELY ON AN ALL-CASH BASIS, AND THEY DID NOT INVOLVE
EQUIPMENT OTHER THAN TRANSPORTATION AND TRANSPORTATION-RELATED EQUIPMENT.
PURCHASERS OF CLASS A UNITS OFFERED HEREBY WILL HAVE NO INTEREST IN THE PROGRAMS
DESCRIBED ON THE FOLLOWING TABLES UNLESS THEY ARE ALSO INVESTORS IN THOSE
PROGRAMS.
I-2
<PAGE> 217
TABLE A
EXPERIENCE IN RAISING AND INVESTING FUNDS
(ON A PERCENTAGE BASIS)
PROGRAM INCEPTION TO DECEMBER 31, 1993
The following table sets forth certain information about the experience of
the Manager in raising and investing funds for prior public programs which
closed in the most recent seven years. A percentage analysis of the application
of the amounts raised is presented for offering and organization expenses. A
percentage analysis of the application of amounts raised, reinvestments and debt
proceeds is presented for equipment acquisition costs. It is expected that the
PLM Equipment Growth Funds ("EGF's") will continue to purchase additional
equipment.
<TABLE>
<CAPTION>
EGF I EGF II EGF III EGF IV
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
EQUITY PROCEEDS
Amount offered(1)............................................ $120,000,000 $150,000,000 $200,000,000 $175,000,000
Amount raised................................................ $119,999,499 $149,976,814 $199,674,056 $174,767,000
Offering and organization expenses as percentage of amount
raised:
Selling Commissions(2)...................................... 9.0% 8.9% 9.0% 8.9%
Syndication and organizational costs(3)..................... 2.9% 2.4% 2.0% 2.2%
Reserve for working capital................................. 0.6% 0.5% 0.4% 0.5%
----------- ----------- ----------- -----------
Percent Available for investment.......................... 87.5% 88.2% 88.6% 88.4%
Equipment purchased through reinvestments
or financings(4)............................................ $107,240,526 $95,814,951 $85,118,690 $59,569,086
Amount raised, reinvestments and debt proceeds............... $227,240,025 $245,791,765 $284,792,746 $234,336,086
Equipment acquisition costs percentage of amount raised,
reinvestments or financing:
Purchase price and additional capitalized costs(5).......... 88.3% 87.9% 87.2% 86.6%
Acquisition and Lease Negotiation Fees(6)................... 5.1% 4.9% 4.8% 4.7%
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
EGF V EGF VI EGF VII(8)
----------- ----------- -----------
<S> <<C> <C> <C>
EQUITY PROCEEDS
Amount offered(1)............................................ $200,000,000 $175,000,000 $150,000,000
Amount raised................................................ $184,265,550 $166,138,556 $35,942,890
Offering and organization expenses as percentage of amount
raised:
Selling Commissions(2)...................................... 8.9% 8.9% 8.9%
Syndication and organizational costs(3)..................... 2.2% 2.4% 2.5%
Reserve for working capital................................. 0.4% 0.5% 1.0%
----------- ----------- -----------
Percent Available for investment.......................... 88.5% 88.2% 87.6%
Equipment purchased through reinvestments
or financings(4)............................................ $49,812,460 $31,592,506 $ 6,167,692
Amount raised, reinvestments and debt proceeds............... $234,078,010 $197,731,062 $42,110,582
Equipment acquisition costs percentage of amount raised,
reinvestments or financing:
Purchase price and additional capitalized costs(5).......... 86.2% 85.4% 84.8%
Acquisition and Lease Negotiation Fees(6)................... 4.7% 4.4% 4.6%
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
EGF I EGF II EGF III EGF IV
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Percent invested.......................................... 93.4% 92.8% 92.0% 91.3%
Percent leverage at December 31, 1993(7)..................... 20.3% 22.3% 19.0% 19.2%
</TABLE>
<TABLE>
<CAPTION>
EGF V EGF VI EGF VII(8)
----------- ----------- -----------
<S> <<C> <C> <C>
Percent invested.......................................... 90.9% 89.8% 89.4%
Percent leverage at December 31, 1993(7)..................... 18.4% 16.9% 13.4%
</TABLE>
I-3
<PAGE> 218
<TABLE>
<CAPTION>
EGF I EGF II EGF III EGF IV
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Effective Date of offering................................... May 86 Jun. 87 Mar. 88 May 89
Closing Date of offering..................................... May 87 Mar. 88 May 89 Mar. 90
Duration of offering, in months.............................. 12 9 14 10
Months from Effective Date to invest 90% of amount available
for investment.............................................. 16 12 12 10
Months from Closing Date to invest 90% of amount available
for investment.............................................. 4 3 0 0
<CAPTION>
EGF V EGF VI EGF VII(8)
----------- ----------- -----------
<S> <<C> <C> <C>
Effective Date of offering................................... Apr. 90 Dec. 91 May 93
Closing Date of offering..................................... Dec. 91 May 93 N/A
Duration of offering, in months.............................. 20 17 N/A
Months from Effective Date to invest 90% of amount available
for investment.............................................. 17 23 N/A
Months from Closing Date to invest 90% of amount available
for investment.............................................. 0 0 N/A
</TABLE>
- ----------
(1) Includes option of $20,000,000, $30,000,000, $50,000,000, $50,000,000,
$50,000,000, $50,000,000 and $50,000,000 for EGF I, EGF II, EGF III, EGF IV,
EGF V, EGF VI and EGF VII, respectively.
(2) PLM Securities, an affiliate of the Manager, received a fee from each EGF of
up to 9% of equity raised, out of which up to 8% was paid to Selected
Agents. With regard to the Companies, the Manager, and not the Companies,
will be paying this fee.
(3) Includes legal, accounting, printing, registration, filing, other expenses,
and reimbursements to the Manager and its Affiliates, related to the
organization and formation of the program, and the offering of the Units,
paid by each EGF. With regard to the Companies, the Manager, and not the
Companies, will be paying these expenses.
(4) Cost of equipment up to the amount available for investment is considered to
be purchased using original proceeds. Additional equipment is considered to
be purchased from debt proceeds and/or reinvestments, including equipment
purchased using net proceeds from the sale of equipment.
(5) Total purchases and additional capitalized costs as a percentage of amount
raised, reinvestments and debt proceeds. Since equipment was purchased
primarily on an all-cash basis, the purchase price is substantially
equivalent to the cash down payment.
(6) Acquisition Fees of 4.5% (EGF II, EGF III, EGF IV, EGF V, EGF VI and EGF
VII) or 5% (EGF I) of the Equipment Purchase Price and Lease Negotiation
Fees of 1% of the Equipment Purchase Price are paid to the Manager or its
Affiliates by each EGF. With regard to the Companies, the Manager and its
Affiliates are foregoing these fees.
(7) Percent leverage at December 31, 1993 is calculated as the principal amount
of indebtedness outstanding at December 31, 1993, as a percentage of the
total equipment acquisition costs for all equipment owned by the partnership
at December 31, 1993.
(8) As of December 31, 1993, EGF VII's offering has not been completed.
I-4
<PAGE> 219
TABLE B
ACQUISITION OF EQUIPMENT BY PRIOR PUBLIC PROGRAMS
PROGRAM INCEPTION TO DECEMBER 31, 1993
The following table sets forth acquisition of equipment by prior public
programs which closed in the most recent seven years. It is anticipated that the
EGF's will periodically purchase additional equipment.
<TABLE>
<CAPTION>
EGF I EGF II EGF III
--------------------- --------------------- ---------------------
EQUIPMENT EQUIPMENT EQUIPMENT
ACQUISITION % OF ACQUISITION % OF ACQUISITION % OF
TYPE OF EQUIPMENT COST(1) TOTAL COST(1) TOTAL COST(1) TOTAL
------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Rail Equipment..................................... $ 54,522,076 25.9% $ 45,286,024 20.0% $ 55,509,093 21.4%
Aircraft........................................... 59,693,197 28.4 66,568,106 29.5 78,782,854 30.4
Containers......................................... 14,952,775 7.1 23,607,336 10.5 24,485,416 9.4
Trailers........................................... 14,931,920 7.1 21,314,224 9.4 5,231,453 2.0
Vessels............................................ 51,662,432 24.6 52,913,258 23.4 83,702,820 32.2
Mobile Offshore Drilling Unit...................... 14,537,696 6.9 16,313,111 7.2 11,837,838 4.6
------------ ----- ------------ ----- ------------ -----
$210,300,096 100.0% $226,002,059 100.0% $259,549,474 100.0%
===== ===== =====
Lease Negotiation Fees(2).......................... 1,939,992 2,092,442 2,480,430
------------ ------------ ------------
Total...................................... $212,240,088 $228,094,501 $262,029,904
============ ============ ============
</TABLE>
I-5
<PAGE> 220
<TABLE>
<CAPTION>
EGF IV EGF V EGF VI EGF VII
--------------------- --------------------- --------------------- --------------------
EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
ACQUISITION % OF ACQUISITION % OF ACQUISITION % OF ACQUISITION % OF
TYPE OF EQUIPMENT COST(1) TOTAL COST(1) TOTAL COST(1) TOTAL COST(1) TOTAL
------------ ----- ------------ ----- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rail Equipment........... $ 30,406,181 14.4% $ 14,004,022 6.6% $ 5,283,144 3.0% $ 634,333 1.7%
Aircraft................. 65,480,471 30.9 23,060,273 10.9 39,105,605 22.2 10,236,480 27.4
Aircraft
engines/components..... -- -- -- -- 17,992,038 10.2 -- --
Containers............... 24,133,355 11.4 41,799,981 19.8 19,137,106 10.8 -- --
Trailers................. 1,121,390 .5 5,368,511 2.6 20,319,720 11.5 6,693,773 18.0
Vessels.................. 76,392,822 36.0 88,308,758 41.9 51,707,572 29.3 19,731,558 52.9
Mobile Offshore Drilling
Units.................. 14,485,628 6.8 38,265,387 18.2 22,899,480 13.0 -- --
------------ ----- ------------ ----- ------------ ----- ----------- -----
$212,019,847 100.0% $210,806,932 100.0% $176,444,665 100.0% $37,296,144 100.0%
===== ===== ===== =====
Lease Negotiation
Fees(2)................ 2,022,344 2,011,272 1,682,047 357,607
------------ ------------ ------------ -----------
Total............ $214,042,191 $212,818,204 $178,126,712 $37,653,751
============ ============ ============ ===========
</TABLE>
- ----------
(1) Equipment acquisition cost represents the purchase price and additional
capitalized costs for equipment purchased using the proceeds of the offering
as well as reinvestments and/or debt proceeds. Acquisition Fees of 4.5% (EGF
II, EGF III, EGF IV, EGF V, EGF VI and EGF VII) or 5% (EGF I) of the
Equipment Purchase Price paid to the Manager or its Affiliates by each EGF,
are included in the equipment acquisition cost. With regard to the
Companies, the Manager and its Affiliates are foregoing this fee. Related to
the equipment acquisition cost is financing of $28,000,000 for EGF I,
$35,000,000 for EGF II, $41,911,800 for EGF III, $33,000,000 for EGF IV,
$38,000,000 for EGF V, $30,000,000 for EGF VI and $5,123,000 for EGF VII.
The financing for EGF III and EGF V is secured by a portion of the
respective partnership's portfolio of equipment.
(2) With regard to the Companies, the Manager and its Affiliates are foregoing
this fee.
I-6
<PAGE> 221
TABLE C
OPERATING RESULTS OF PRIOR PROGRAMS
PROGRAM INCEPTION TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
EGF I
------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991
--------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Months of operations................... 5 12 12 12 12 12
Gross Revenues......................... $ 590,724 $16,828,011 $25,358,721 $30,901,749 $35,345,102 $35,639,972
Gain (loss) on disposal of equipment... -- 242,210 3,588,585 2,858,141 870,306 8,955,648
Less: Operating expenses(11)........... 113,433 2,689,018 4,475,847 7,327,551 10,645,578 14,922,096
Management Fees................... 66,926 1,428,306 2,137,630 2,667,844 2,672,949 2,142,145
Interest expense.................. -- 105,033 96,095 1,331,016 2,556,282 2,487,125
Depreciation and
Amortization.................... 1,038,384 10,841,263 14,608,442 16,708,409 16,942,491 15,840,158
--------- ----------- ----------- ----------- ----------- -----------
Net income (loss)--GAAP basis(1)....... $(628,019) $ 2,006,601 $ 7,629,292 $ 5,725,070 $ 3,398,108 $ 9,204,096
========= =========== =========== =========== =========== ===========
Federal taxable income (loss):
from operations...................... $(395,632) $(1,590,066) $(1,530,626) $(1,102,975) $ 3,092,121 $ 1,104,112
from gain (loss) on disposal of
equipment.......................... -- 235,137 3,588,585 3,318,419 2,021,572 7,168,914
--------- ----------- ----------- ----------- ----------- -----------
Federal taxable income (loss).......... $(395,632) $(1,354,929) $ 2,057,959 $ 2,215,444 $ 5,113,693 $ 8,273,026
========= =========== =========== =========== =========== ===========
Cash generated from operations(2).... $ 870,375 $12,713,907 $18,246,034 $22,550,797 $18,334,923 $16,772,732
Cash generated from disposal of
equipment.......................... -- 725,904 8,575,029 5,491,484 3,290,194 25,431,536
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
1992 1993
----------- -----------
<S> <C> <C>
Months of operations................... 12 12
Gross Revenues......................... $27,663,981 $23,440,270
Gain (loss) on disposal of equipment... (193,751) 837,868
Less: Operating expenses(11)........... 17,575,453 8,297,151
Management Fees................... 1,820,206 1,742,201
Interest expense.................. 1,521,965 1,325,268
Depreciation and
Amortization.................... 14,044,738 11,188,214
----------- -----------
Net income (loss)--GAAP basis(1)....... $(7,492,132) $ 1,725,304
=========== ===========
Federal taxable income (loss):
from operations...................... $ 4,181,303 $ 2,906,029
from gain (loss) on disposal of
equipment.......................... (4,258,186) (1,972,136)
----------- -----------
Federal taxable income (loss).......... $ (76,883) $ 933,893
=========== ===========
Cash generated from operations(2).... $13,129,352 $13,787,282
Cash generated from disposal of
equipment.......................... 9,212,655 3,760,573
----------- -----------
</TABLE>
I-7
<PAGE> 222
<TABLE>
<CAPTION>
EGF I
------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991
--------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash generated from operations and
disposal........................... 870,375 13,439,811 26,821,063 28,042,281 21,625,117 42,204,268
Less: Cash reinvested and additions
or (deletions) to reserve(3)......... 833,698 6,121,245 14,693,050 15,237,558 8,006,172 28,319,467
--------- ----------- ----------- ----------- ----------- -----------
Cash distributions to investors(4)..... $ 36,677 $ 7,318,566 $12,128,013 $12,804,723 $13,618,945 $13,884,801
========= =========== =========== =========== =========== ===========
INVESTMENT DATA PER $1,000
INVESTMENT(8)
Net income (loss)--GAAP
basis(1)(5).......................... $ (26.71) $ 19.82 $ 62.94 $ 47.35 $ 28.03 $ 75.79
Federal taxable income (loss):
from operations(5)................... $ (16.83) $ (15.71) $ (12.63) $ (9.12) $ 25.51 $ 8.65
from gain (loss) on sale............. $ -- $ 2.32 $ 29.61 $ 27.45 $ 16.68 $ 59.42
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income.................. $ -- $ 19.82 $ 62.94 $ 47.35 $ 28.03 $ 75.79
Return of capital.................. $ 1.56 $ 52.47 $ 37.12 $ 58.55 $ 84.33 $ 39.21
Source (on a cash basis)
Sales.............................. $ -- $ -- $ -- $ -- $ -- $ --
Refinancing........................ $ -- $ -- $ -- $ -- $ -- $ --
Operations......................... $ 1.56 $ 72.29 $ 100.06 105.90 $ 112.36 $ 115.00
Other.............................. $ -- $ -- $ -- $ -- $ -- $ --
<CAPTION>
1992 1993
----------- -----------
<S> <C> <C>
Cash generated from operations and
disposal........................... 22,342,007 17,547,855
Less: Cash reinvested and additions
or (deletions) to reserve(3)......... 8,511,783 3,788,698
----------- -----------
Cash distributions to investors(4)..... $13,830,224 $13,759,157
=========== ===========
INVESTMENT DATA PER $1,000
INVESTMENT(8)
Net income (loss)--GAAP
basis(1)(5).......................... $ (63.74) $ 13.48
Federal taxable income (loss):
from operations(5)................... $ 34.82 $ 24.58
from gain (loss) on sale............. $ (35.83) $ (16.68)
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income.................. $ -- $ 13.48
Return of capital.................. $ 115.00 $ 101.52
Source (on a cash basis)
Sales.............................. $ -- $ --
Refinancing........................ $ -- $ --
Operations......................... $ 115.00 $ 115.00
Other.............................. $ -- $ --
</TABLE>
I-8
<PAGE> 223
<TABLE>
<CAPTION>
EGF II
-----------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Months of operations................... 6 12 12 12 12 12 12
Gross Revenues......................... $2,835,371 $25,591,695 $38,355,443 $42,659,834 $39,345,607 $34,837,769 $30,197,123
Gain (loss) on disposal of equipment... -- -- 1,000,598 1,535,166 5,173,584 (329,176) 6,703,518
Less: Operating expenses(11)........... 124,105 4,855,877 8,877,331 13,269,786 17,180,168 24,351,592 14,569,658
Management Fees................... 96,713 1,236,450 1,943,884 2,104,590 1,949,260 1,668,090 1,523,147
Interest expense.................. 29,549 -- 2,089,959 3,429,599 3,459,991 2,224,897 1,707,631
Depreciation and Amortization..... 3,003,874 18,481,863 22,623,320 23,676,055 20,482,356 16,752,957 13,503,623
---------- ---------- ---------- ---------- ---------- ----------- ----------
Net income (loss)--GAAP basis(1)....... $ (418,870) $1,017,505 $3,821,547 $1,714,970 $1,447,416 $(10,488,943) $5,596,582
============ ============ ============ ============ ============ ============= ============
Federal taxable income (loss):
from operations...................... $(1,557,445) $(1,961,979) $ 306,072 $ (878,851) $(1,198,661) $ (843,442) $1,835,036
from gain (loss) on disposal of
equipment.......................... -- -- 841,554 2,288,267 5,610,484 248,144 (4,051,058)
---------- ---------- ---------- ---------- ---------- ----------- ----------
Federal taxable income (loss).......... $(1,557,445) $(1,961,979) $1,147,626 $1,409,416 $4,411,823 $ (595,298) $(2,216,022)
============ ============ ============ ============ ============ ============= ============
Cash generated from
operations(2)(10).................... $2,146,831 $21,546,458 $24,377,133 $23,443,824 $10,918,019 $19,704,799 $11,580,956
Cash generated from disposal of
equipment.......................... -- -- 3,417,185 4,976,290 18,109,060 763,237 21,229,219
---------- ---------- ---------- ---------- ---------- ----------- ----------
Cash generated from operations and
disposal........................... 2,146,831 21,546,458 27,794,318 28,420,114 29,027,079 20,468,036 32,810,175
Less: Cash reinvested and additions or
(deletions) to reserve(3)............ 1,779,586 9,250,872 12,007,761 11,647,711 11,657,750 3,097,436 20,144,795
---------- ---------- ---------- ---------- ---------- ----------- ----------
Cash distributions to investors(4)..... $ 367,245 $12,295,586 $15,786,557 $16,772,403 $17,369,329 $17,370,600 $12,665,380
============ ============ ============ ============ ============ ============= ============
</TABLE>
I-9
<PAGE> 224
<TABLE>
<CAPTION>
EGF II
-----------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT DATA PER $1,000
INVESTMENT(8)
Net income (loss)--GAAP basis(1)(5).... $ (9.17) $ 6.62 $ 24.20 $ 10.86 $ 1.64 $ (76.40) $ 29.84
Federal taxable income (loss):
from operations(5)................... $ (34.11) $ (20.83) $ 1.94 $ (5.57) $ (7.59) $ (9.05) $ 12.24
from gain (loss) on sale............. $ -- $ -- $ 5.33 $ 14.49 $ 35.53 $ -- $ (27.03)
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income.................. $ -- $ 6.62 $ 24.20 $ 10.86 $ 1.64 $ -- $ 29.84
Return of capital.................. $ 8.04 $ 73.40 $ 75.79 $ 95.33 $ 108.37 $ 110.02 $ 50.46
Source (on a cash basis)
Sales.............................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Refinancing........................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operations......................... $ 8.04 $ 80.02 $ 99.99 $ 106.19 $ 110.01 $ 110.02 $ 80.30
Other.............................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
EGF III
---------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Months of operations......................... 8 12 12 12 12 12
Gross Revenues............................... $5,007,271 $37,148,477 $49,416,036 $49,452,052 $42,640,970 $40,442,314
Gain (loss) on disposal of equipment......... -- 52,366 119,974 5,837,536 1,080,513 1,707,180
</TABLE>
I-10
<PAGE> 225
<TABLE>
<CAPTION>
EGF III
---------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Less: Operating expenses(11)................. 1,947,553 8,524,469 17,826,425 22,353,596 27,353,627 19,317,037
Management Fees......................... 244,789 1,806,350 2,501,889 2,434,705 2,145,457 1,988,568
Interest expense........................ 148,630 1,093,791 3,629,825 3,514,852 2,460,486 2,493,191
Depreciation and Amortization........... 4,255,546 26,520,070 29,498,007 27,019,052 23,010,712 18,591,330
---------- ---------- ---------- ---------- ----------- ----------
Net income (loss)--GAAP basis(1)............. $(1,589,247) $ (743,837) $(3,920,136) $ (32,617) $(11,248,799) $ (240,632)
============ ============ ============ ============ ============= ============
Federal taxable income (loss):
from operations............................ $(2,323,872) $4,847,286 $ 94,988 $(4,523,892) $ 1,813,788 $2,780,188
from gain (loss) on disposal of
equipment................................ -- 48,370 269,180 3,176,136 (898,318) (1,614,494)
---------- ---------- ---------- ---------- ----------- ----------
Federal taxable income (loss)................ $(2,323,872) $4,895,656 $ 364,168 $(1,347,756) $ 915,470 $1,165,694
============ ============ ============ ============ ============= ============
Cash generated from operations(2)............ $2,012,524 $25,502,204 $25,160,299 $22,304,451 $25,761,743 $16,602,615
Cash generated from disposal of
equipment................................ -- 71,087 529,789 15,537,147 4,241,580 10,808,121
---------- ---------- ---------- ---------- ----------- ----------
Cash generated from operations and
disposal................................. 2,012,524 25,573,291 25,690,088 37,841,598 30,003,323 27,410,736
Less: Cash reinvested and additions or
(deletions) to reserve(3).................. 1,118,187 9,776,923 4,637,604 16,263,049 7,897,161 10,581,712
---------- ---------- ---------- ---------- ----------- ----------
Cash distributions to investors(4)........... $ 894,337 $15,796,368 $21,052,484 $21,578,549 $22,106,162 $16,829,024
============ ============ ============ ============ ============= ============
</TABLE>
I-11
<PAGE> 226
<TABLE>
<CAPTION>
EGF III
---------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT DATA PER $1,000 INVESTMENT(8)
Net income (loss)--GAAP basis(1)(6).......... $ (32.60) $ (3.85) $ (18.62) $ (16.56) $ (61.77) $ (5.42)
Federal taxable income (loss):
from operations(6)......................... $ (47.67) $ 25.06 $ 0.45 $ (21.49) $ 8.62 $ 13.92
from gain (loss) on sale................... $ -- $ 0.25 $ 1.28 $ 1.67 $ (9.60) $ (8.08)
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income........................ $ -- $ -- $ -- -- $ -- $ --
Return of capital........................ $ 18.34 $ 81.66 $ 100.00 $ 102.50 $ 105.00 $ 80.07
Source (on a cash basis)
Sales.................................... $ -- $ -- $ -- $ -- $ -- $ --
Refinancing.............................. $ -- $ -- $ -- $ -- $ -- $ --
Operations............................... $ 18.34 $ 81.66 $ 100.00 $ 102.50 $ 105.00 $ 80.07
Other.................................... $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
EGF IV
---------------------------------------------------------------
1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Months of operations.......................................... 8 12 12 12 12
Gross revenues................................................ $5,335,138 $30,028,101 $35,470,369 $33,622,408 $27,745,901
Gain (loss) on disposal of equipment.......................... -- 610 1,847,493 47,119 179,395
</TABLE>
I-12
<PAGE> 227
<TABLE>
<CAPTION>
EGF IV
---------------------------------------------------------------
1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Less: Operating expenses(11).................................. 1,116,786 7,285,711 10,402,940 13,183,890 11,536,474
Management Fees.......................................... 180,481 1,447,047 1,804,931 1,668,206 1,381,847
Interest expense......................................... 1,050,135 1,385,092 3,209,577 3,222,367 3,289,855
Depreciation and Amortization............................ 5,386,070 24,287,022 27,359,537 22,748,354 18,097,347
---------- ---------- ---------- ---------- -----------
Net income (loss)--GAAP basis(1).............................. $(2,398,334) $(4,376,161) $(5,459,123) $(7,153,290) $(6,380,227)
============ ============ ============ ============ =============
Federal taxable income (loss):
from operations............................................. $(1,034,723) $1,669,570 $(1,406,878) $ (697,319) $(3,351,199)
from gain (loss) on disposal of equipment................... -- 794 1,676,487 248,570 (8,516,852)
---------- ---------- ---------- ---------- -----------
Federal taxable income (loss)................................. $(1,034,723) $1,670,364 $ 269,609 $ (448,749) $(11,868,051)
============ ============ ============ ============ =============
Cash generated from operations(2)............................. $4,467,333 $20,586,369 $20,001,500 $16,176,728 $14,587,059
Cash generated from disposal of equipment................... -- 37,200 13,011,058 615,029 14,657,639
---------- ---------- ---------- ---------- -----------
Cash generated from operations and disposals................ 4,467,333 20,623,569 33,012,558 16,791,757 29,244,698
Less: Cash reinvested and additions or (deletions) to
reserve(3).................................................. 3,831,085 5,188,496 14,088,311 (2,644,892) 14,616,749
---------- ---------- ---------- ---------- -----------
Cash distributions to investors(4)............................ $ 636,248 $15,435,073 $18,924,247 $19,436,649 $14,627,949
============ ============ ============ ============ =============
INVESTMENT DATA PER $1,000 INVESTMENT(8)
Net income (loss)--GAAP basis(1),(7).......................... $ (44.77) $ (31.03) $ (36.59) $ (46.40) $ (41.02)
Federal taxable income (loss):
from operations(7).......................................... $ (18.24) $ 5.51 $ (7.64) $ (3.79) $ (19.15)
from gain (loss) on sale.................................... $ -- $ -- $ 9.10 $ 1.35 $ (48.67)
</TABLE>
I-13
<PAGE> 228
<TABLE>
<CAPTION>
EGF IV
---------------------------------------------------------------
1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income......................................... $ -- $ -- $ -- $ -- $ --
Return of capital......................................... $ 11.14 $ 88.52 $ 102.74 $ 105.54 $ 80.06
Source (on a cash basis)
Sales..................................................... $ -- $ -- $ -- $ -- $ --
Refinancing............................................... $ -- $ -- $ -- $ -- $ --
Operations................................................ $ -- $ 88.52 $ 102.74 $ 105.54 $ 80.06
Other..................................................... $ 11.14 $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
EGF V
-------------------------------------------------------
1990 1991 1992 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Months of operations................................................. 9 12 12 12
Gross revenues....................................................... $4,751,306 $25,091,399 $38,770,302 $39,060,379
Gain (loss) on disposal of equipment................................. -- (38,779) (272,974) (583,632)
Less: Operating expenses(11)......................................... 869,573 5,710,778 9,071,641 17,938,497
Management Fees................................................. 216,009 1,220,624 1,905,611 1,951,961
Interest expense................................................ 1,527,019 1,701,380 2,178,506 1,869,435
Depreciation and Amortization................................... 5,179,071 20,944,953 29,460,465 25,159,958
---------- ---------- ---------- ----------
Net income (loss)--GAAP basis(1)..................................... $(3,040,366) $(4,525,115) $(4,118,895) $(8,443,104)
============ ============ ============ ============
</TABLE>
I-14
<PAGE> 229
<TABLE>
<CAPTION>
EGF V
-------------------------------------------------------
1990 1991 1992 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal taxable income (loss):
from operations.................................................... $(2,172,375) $ (240,010) $(2,866,210) $ 454,266
from gain (loss) on disposal of equipment.......................... -- (9,822) (131,574) (175,087)
---------- ---------- ---------- ----------
Federal taxable income (loss)........................................ $(2,172,375) $ (249,832) $(2,997,784) $ 279,179
============ ============ ============ ============
Cash generated from operations(2).................................... $2,424,345 $15,585,039 $26,218,000 $22,063,582
Cash generated from disposal of equipment.......................... -- 181,088 1,253,356 2,286,013
---------- ---------- ---------- ----------
Cash generated from operations and disposals....................... 2,424,345 15,766,127 27,471,356 24,349,595
Less: Cash reinvested and additions or (deletions) to reserve(3)..... 1,826,059 3,466,354 8,291,654 4,919,397
---------- ---------- ---------- ----------
Cash distributions to investors(4)................................... $ 598,286 $12,299,773 $19,179,702 $19,430,198
============ ============ ============ ============
INVESTMENT DATA PER $1,000 INVESTMENT(8)
Net income (loss)--GAAP basis(1),(7)................................. $ (102.74) $ (37.98) $ (27.50) $ (51.05)
Federal taxable income (loss):
from operations(7)................................................. $ (69.51) $ (6.08) $ (14.77) $ 2.47
from gain (loss) on sale........................................... $ -- $ (0.07) $ (0.68) $ (.95)
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income................................................ $ -- $ -- $ -- $ --
Return of capital................................................ $ 19.82 $ 87.23 $ 98.85 $ 100.11
Source (on a cash basis)
Sales............................................................ $ -- $ -- $ -- $ --
Refinancing...................................................... $ -- $ -- $ -- $ --
Operations....................................................... $ 19.82 $ 87.23 $ 98.85 $ 100.11
Other............................................................ $ -- $ -- $ -- $ --
</TABLE>
I-15
<PAGE> 230
<TABLE>
<CAPTION>
EGF VI EGF VII
-------------------------- ---------
1992 1993 1993
---------- ---------- ---------
<S> <C> <C> <C>
Months of operations.............................................................. 12 12 12
Gross revenues.................................................................... $6,453,570 $20,185,562 $ 694,534
Gain (loss) on disposal of equipment.............................................. (55,237) (113,210) --
Less: Operating expenses(11)...................................................... 2,009,954 5,569,966 324,030
Management Fees.............................................................. 305,300 978,682 33,519
Interest expense............................................................. 260,552 294,796 996
Depreciation and Amortization................................................ 5,762,224 16,494,938 1,197,679
---------- ---------- ---------
Net income (loss)--GAAP basis(1).................................................. $(1,939,697) $(3,266,030) $(861,690)
============ ============ ==========
Federal taxable income (loss):
from operations................................................................. $ 134,389 $ (866,435) $ 174,454
from gain (loss) on disposal of equipment....................................... (72,747) (117,242) --
---------- ---------- ---------
Federal taxable income (loss)..................................................... $ 61,642 $ (983,677) $ 174,454
============ ============ ==========
Cash generated from operations(2)................................................. $3,551,916 $17,209,947 $ 824,182
Cash generated from disposal of equipment....................................... 168,007 464,446 --
---------- ---------- ---------
Cash generated from operations and disposals.................................... 3,719,923 17,674,393 824,182
Less: Cash reinvested and additions or (deletions) to reserve(3).................. 479,896 2,846,402 458,076
---------- ---------- ---------
Cash distributions to investors(4)................................................ $3,240,027 $14,827,991 $ 366,106
============ ============ ==========
</TABLE>
I-16
<PAGE> 231
<TABLE>
<CAPTION>
EGF VI EGF VII
-------------------------- ---------
1992 1993 1993
---------- ---------- ---------
<S> <C> <C> <C>
INVESTMENT DATA PER $1,000 INVESTMENT(8)
Net income (loss)--GAAP basis(1),(7).............................................. $ (46.25) $ (26.10) $ (44.75)
Federal taxable income (loss):
from operations(7).............................................................. $ 0.27 $ (11.06) $ 8.56
from gain (loss) on sale........................................................ $ (1.55) $ (.73) $ --
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income............................................................. $ -- $ -- $ --
Return of capital............................................................. $ 70.13 $ 93.15 $ 18.41
Source (on a cash basis)
Sales......................................................................... $ -- $ -- $ --
Refinancing................................................................... $ -- $ -- $ --
Operations.................................................................... $ 70.13 $ 93.15 $ 18.41
Other......................................................................... $ -- $ -- $ --
</TABLE>
I-17
<PAGE> 232
Notes to Table C:
(1) "GAAP" is generally accepted accounting principles.
(2) "Cash generated from operations" is calculated by adding non-cash expenses
to "net income (loss) GAAP basis" and adjusting for changes in certain
working capital accounts.
(3) "Cash reinvested and additions or (deletions) to reserves" represents
undistributed cash from operations and disposals. The amount does not
represent the effect, if any, of debt proceeds or debt principal
repayments.
(4) Because cash is generally distributed in the quarter following the period
in which it was generated, "cash distributions to investors" for the
periods ended December 31 generally covers operations from the fourth
quarter of the prior year through September 30th for the current year
presented. All cash distributions to investors are from operating cash
flow.
(5) After the following special allocations of income to the Manager resulting
from an amendment to the limited partnership agreement. (The amendment did
not change the allocation of cash distributions to the partners.)
<TABLE>
<CAPTION>
EGF I EGF II
---------------------- -----------------------
PER PER
SPECIAL $1,000 SPECIAL $1,000
ALLOCATION INVESTMENT ALLOCATION INVESTMENT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1993:
GAAP basis............................................................... $127,772 $ 1.09 $ 845,069 $ 5.64
Federal income tax basis................................................. 127,025 1.08 845,209 5.64
1992:
GAAP basis............................................................... 157,837 1.33 1,494,957 9.97
Federal income tax basis................................................. 44,357 0.37 791,957 5.28
1991:
GAAP basis............................................................... 59,608 0.50 1,129,623 7.53
Federal income tax basis................................................. 59,608 0.50 1,129,623 7.53
</TABLE>
I-18
<PAGE> 233
(6) After the following special allocations of income to the Manager related to
the gain on sale of assets. (These special allocations are in accordance
with the limited partnership agreement and did not change the allocation of
cash distributions to partners.)
<TABLE>
<CAPTION>
EGF III
-----------------------
PER
SPECIAL $1,000
ALLOCATION INVESTMENT
---------- ----------
<S> <C> <C>
1993:
GAAP basis........................................................................................ $ 853,561 $ 4.27
Federal income tax basis.......................................................................... 783,244 3.92
1992:
GAAP basis........................................................................................ 1,159,529 5.80
Federal income tax basis.......................................................................... 1,066,473 5.33
1991:
GAAP basis........................................................................................ 3,280,291 16.40
Federal income tax basis.......................................................................... 2,682,741 13.41
</TABLE>
In addition, the Manager received a special allocation of income in 1992 of
$508,166 ($2.54 per $1,000 investment) on a GAAP basis and $0 on a federal
income tax basis, resulting from a 1991 amendment to the limited partnership
agreement. (This amendment did not change the allocation of cash
distributions to the partners.)
I-19
<PAGE> 234
(7) After the following special allocations of income to the Manager to
increase the Manager's capital account to zero. (These special allocations
are in accordance with the limited partnership agreement and did not change
the allocation of cash distributions to the partners.)
<TABLE>
<CAPTION>
EGF IV EGF V EGF VI
------------------------ ------------------------ ------------------------
SPECIAL PER $1,000 SPECIAL PER $1,000 SPECIAL PER $1,000
ALLOCATION INVESTMENT ALLOCATION INVESTMENT ALLOCATION INVESTMENT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1993:
GAAP basis............................ $1,055,625 $ 6.08 $1,392,674 $ 7.55 $857,947 $ 5.16
Federal income tax basis.............. 1,330,016 7.67 956,550 5.18 743,830 4.47
1992:
GAAP basis............................ 1,324,769 7.57 1,157,168 6.28 215,718 4.85
Federal income tax basis.............. 989,541 5.65 801,335 4.35 115,751 2.60
1991:
GAAP basis............................ 1,217,034 6.95 804,607 5.99 -- --
Federal income tax basis.............. 930,598 5.32 590,843 4.40 -- --
1990:
GAAP basis............................ 984,522 5.94 161,849 5.45 -- --
Federal income tax basis.............. 679,740 4.10 115,892 3.90 -- --
1989:
GAAP basis............................ 151,629 2.79 -- -- -- --
Federal income tax basis.............. 83,448 1.54 -- -- -- --
</TABLE>
(8) Prior to the first full year after the closing of the offering, "Investment
data per $1,000 investment" is calculated based on the weighted average
amount of investment in the partnership during each year.
I-20
<PAGE> 235
(9) Cash distributions to investors from investment income on a GAAP basis per
$1,000 limited partner investment represents the limited partners' share of
distributions on a GAAP basis, but not in excess of the limited partners'
share of net income for each period presented, divided by total capital
contributed by the limited partners based on a $1,000 investment.
Cash distributions from return of capital on a GAAP basis per $1,000
limited partner investment represents the amount by which the limited
partners' share of each year's distributions on a GAAP basis exceeds the
limited partners' share of net income on a GAAP basis for each period
presented divided by total capital contributed by the limited partners
based on a $1,000 investment. In cases where a net loss exists, all
distributions for the period are presented as a return of capital.
Cash distributions from return of capital for each period are presented
herein in accordance with the foregoing formula and may or may not reflect
the actual amount of capital returned to the limited partners as determined
upon liquidation of the partnerships. A final accounting of return of
capital and yield on investment is dependent upon collection of all rents
and residual sale proceeds resulting from the lease, re-lease and
disposition of all assets within the partnerships' equipment portfolios.
These amounts are realized over the entire life of each partnership and
accrue from several types and quantities of equipment. Accordingly, the
accumulation of all amounts necessary to compute the true investment yield,
if any, and return of capital is possible only at final liquidation of each
partnership. At such time, these amounts will be determined and may be
different from the amounts reported herein.
(10) The decrease from prior periods is due primarily to severe damage to one of
EGF II's vessels experienced during heavy weather conditions in December
1990. This marine vessel returned to service in mid-1991 and is insured for
both damage to the hull and lost revenues on the charter hire. The damage
to this vessel and the resultant lost revenues have not had an adverse
effect on operating results of EGF II due to insurance coverages.
(11) The decrease in operating expenses in 1993 versus 1992 is due primarily to
revaluation of equipment. The loss on revaluation of equipment amounted to
approximately $7.9 million for EGF I in 1992 v. $1.4 million in 1993; $6.8
million for EGF II in 1992 v. $0.2 million in 1993; $8.3 million for EGF
III in 1992 v. $0.1 million in 1993; $3.4 million for EGF IV in 1992 and
none in 1993; and approximately $4.1 million for EGF V in 1993. There were
no significant revaluations in years prior to 1992. This decrease in
operating expenses is offset by an increase in marine operating expenses
due to a move from bareboat charters in 1992 to voyage charters in 1993.
With bareboat charters all operating costs are borne by the lessee while on
voyage charters some operating costs are borne by the lessor.
I-21
<PAGE> 236
TABLE D
SALES OR DISPOSITIONS OF EQUIPMENT BY PRIOR PUBLIC PROGRAMS
FIVE YEAR PERIOD ENDED DECEMBER 31, 1993
The following table sets forth the sales and other dispositions of equipment
by prior programs through December 31, 1993.
<TABLE>
<CAPTION>
TOTAL FEDERAL
TYPE OF YEAR OF YEAR OF ACQUISITION NET BOOK NET GAAP TAXABLE
PARTNERSHIP EQUIPMENT ACQUISITION DISPOSITION COST(1) VALUE(2) PROCEEDS(3) GAIN/(LOSS) GAIN/(LOSS)
- ---------- --------------- ----------- ----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TEP
VII(4)... Containers 1985 1987 $ 3,426 $ 2,541 $ 3,593 $ 1,052 $ 925
Trailers 1985 1987 41,808 34,356 44,595 10,239 $ 12,022
Trailers 1985 1988 55,898 34,870 45,464 10,594 14,182
Trailers 1985 1989 2,239,348 932,792 629,162 (303,630 ) (237,874 )
Containers 1985 1989 3,426 1,771 688 (1,083 ) (453 )
Aircraft 1985 1989 500,018 243,804 240,000 (3,804 ) 73,681
Containers 1985 1990 2,040 849 1,515 666 1,229
Trailers 1985 1990 217,076 125,199 101,036 (24,163 ) 76,872
Containers 1985 1991 2,040 836 1,695 859 1,695
Trailers 1985 1991 857,538 250,633 287,122 36,489 287,122
Trailers 1985 1992 366,837 99,448 66,000 (33,448 ) 66,000
Containers 1985 1992 37,057 11,376 23,574 12,198 23,574
Aircraft 1985 1992 1,365,000 200,000 213,842 13,842 213,842
Trailers 1985 1993 1,897,469 551,819 384,700 (167,119 ) 273,648
Containers 1985 1993 71,506 17,400 37,002 19,602 37,002
------------ ------------ ------------ ----------- -----------
$ 7,660,487 $ 2,507,694 $ 2,079,988 $ (427,706 ) $ 843,467
TEP
IX(4)... Trailers 1986 1987 $ 15,435 $ 11,624 $ 15,582 $ 3,958 $ 1,613
Trailers 1986 1989 1,443,033 595,442 480,931 (114,511 ) 281,480
Containers 1986 1989 6,458 3,651 5,349 1,698 1,973
</TABLE>
I-22
<PAGE> 237
<TABLE>
<CAPTION>
TOTAL FEDERAL
TYPE OF YEAR OF YEAR OF ACQUISITION NET BOOK NET GAAP TAXABLE
PARTNERSHIP EQUIPMENT ACQUISITION DISPOSITION COST(1) VALUE(2) PROCEEDS(3) GAIN/(LOSS) GAIN/(LOSS)
- ---------- --------------- ----------- ----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rail equipment 1986 1989 40,425 22,972 38,502 15,530 15,963
Tractors 1986 1990 812,652 412,712 213,500 (199,212 ) 158,276
Containers 1986-1987 1991 28,134 12,072 33,930 21,858 33,214
Trailers 1986 1991 333,220 130,863 79,000 (51,863 ) 79,000
Trailers 1986-1987 1992 914,729 272,988 180,919 (92,069 ) 180,919
Containers 1986-1987 1992 32,614 11,456 22,136 10,680 22,136
Aircraft 1986-1987 1992 368,550 136,077 214,633 78,556 146,298
Trailers 1986 1993 1,084,110 272,673 272,155 (518 ) 272,155
Containers 1986-1987 1993 96,454 31,939 77,130 45,191 77,130
------------ ------------ ------------ ----------- -----------
$ 5,175,814 $ 1,914,469 $ 1,633,767 $ (280,702 ) $1,270,157
EGF I..... Containers 1986 1987 $ 58,021 $ 50,970 $ 66,887 $ 15,917 $ 17,279
Rail equipment 1986 1987 448,652 432,724 659,017 226,293 217,858
Rail equipment 1986 1988 5,926,119 4,974,638 8,561,785 3,587,147 3,581,802
Trailers 1987 1988 13,924 11,806 13,244 1,438 6,783
Rail equipment 1986 1989 106,972 83,933 18,837 (65,096 ) (41,697 )
Containers 1986 1989 115,817 79,312 135,330 56,018 95,026
Vessels 1987 1989 2,514,957 1,588,484 4,433,626 2,845,142 2,760,081
Aircraft 1986 1989 1,419,810 881,614 903,691 22,077 505,009
Rail equipment 1987 1990 2,483,971 1,956,287 2,823,340 867,053 1,830,665
Containers 1986 1990 195,581 106,596 227,804 121,208 198,769
Trailers 1987 1990 606,872 357,005 239,050 (117,955 ) 106,801
Rail equipment 1986-1989 1991 13,469,021 9,184,707 13,228,493 4,043,786 3,646,986
Containers 1986 1991 378,888 188,242 384,419 196,177 320,531
Trailers 1987 1991 326,017 142,101 69,470 (72,631 ) 31,659
Aircraft 1987 1991 2,730,467 1,264,349 624,787 (639,562 ) (107,108 )
</TABLE>
I-23
<PAGE> 238
<TABLE>
<CAPTION>
TOTAL FEDERAL
TYPE OF YEAR OF YEAR OF ACQUISITION NET BOOK NET GAAP TAXABLE
PARTNERSHIP EQUIPMENT ACQUISITION DISPOSITION COST(1) VALUE(2) PROCEEDS(3) GAIN/(LOSS) GAIN/(LOSS)
- ---------- --------------- ----------- ----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vessels 1987 1991 11,650,972 5,492,657 10,920,535 5,427,878 3,276,846
Rail equipment 1986 1992 25,360 11,460 2,009 (9,451 ) (13,171 )
Containers 1986 1992 619,862 271,226 347,191 75,965 316,720
Trailers 1987 1992 2,551,150 978,206 483,195 (495,011 ) 315,299
Aircraft 1986 1992 6,809,250 800,345 895,000 94,655 (1,448,212 )
Vessels 1990 1992 11,964,582 7,345,170 7,485,260 140,090 (3,428,822 )
Vessels 1989 1993 2,729,600 1,086,299 1,519,042 432,743 (452,318 )
Containers 1987-1989 1993 905,615 327,963 850,789 522,826 494,067
Trailers 1988 1993 738,496 228,375 185,751 (42,624 ) 185,751
Rail equipment 1989 1993 5,159,614 1,280,068 1,204,991 (75,077 ) (2,199,636 )
------------ ------------ ------------ ----------- -----------
$ 73,949,590 $ 39,124,537 $ 56,283,543 $17,159,006 $10,216,968
EGF II.... Rail equipment 1987 1989 $ 2,227,133 $ 1,843,853 $ 2,943,149 $1,099,296 $ 729,019
Trailers 1988 1989 667,275 572,734 474,036 (98,698 ) 112,535
Rail equipment 1987 1990 2,975,614 2,222,633 3,527,315 1,303,682 1,877,403
Containers 1987 1990 1,780,562 1,144,071 1,340,104 197,033 327,804
Trailers 1987 1990 138,798 74,420 108,871 34,451 83,060
Rail equipment 1987-1989 1991 12,404,980 8,666,915 14,993,032 6,326,117 5,257,210
Containers 1989 1991 1,275,564 772,826 830,984 58,158 167,838
Trailers 1988 1991 913,709 544,224 335,411 (208,813 ) 20,814
Aircraft 1987 1991 6,374,035 2,951,511 1,949,633 (1,001,878 ) 164,612
Rail equipment 1987 1992 106,226 54,576 92,452 37,877 52,392
Containers 1987-1989 1992 1,224,372 569,733 431,635 (138,099 ) 30,624
Trailers 1988 1992 1,011,030 468,104 239,150 (228,954 ) 165,128
Rail equipment 1987 1993 3,277,121 3,086,474 5,416,162 2,329,688 4,496,606
Containers 1987-1989 1993 788,253 401,837 536,397 134,560 276,630
</TABLE>
I-24
<PAGE> 239
<TABLE>
<CAPTION>
TOTAL FEDERAL
TYPE OF YEAR OF YEAR OF ACQUISITION NET BOOK NET GAAP TAXABLE
PARTNERSHIP EQUIPMENT ACQUISITION DISPOSITION COST(1) VALUE(2) PROCEEDS(3) GAIN/(LOSS) GAIN/(LOSS)
- ---------- --------------- ----------- ----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aircraft 1987 1993 10,255,404 4,469,112 4,648,230 179,118 (2,341,051 )
Trailers 1988 1993 2,475,736 969,385 432,361 (537,024 ) 412,215
Vessels 1987 1993 23,451,839 6,364,858 10,962,034 4,597,176 (6,895,458 )
------------ ------------ ------------ ----------- -----------
$ 71,347,651 $ 35,177,266 $ 49,260,956 $14,083,690 $4,937,381
EGF III... Rail equipment 1988 1989 $ 24,350 $ 19,441 $ 71,807 $ 52,366 $ 48,370
Rail equipment 1988 1990 181,395 140,208 232,829 92,621 135,335
Containers 1988-1989 1990 356,355 269,607 296,959 27,352 133,843
Rail equipment 1988 1991 5,669,370 3,736,355 8,170,598 4,434,243 4,224,036
Containers 1988-1990 1991 1,466,845 950,254 1,035,019 84,765 427,584
Vessels 1989 1991 9,006,181 5,388,014 6,706,542 1,318,528 (1,475,484 )
Rail equipment 1989 1992 2,249,249 1,346,185 2,262,526 916,341 1,425,182
Containers 1988-1991 1992 1,321,236 764,882 829,054 64,172 436,183
Aircraft 1988 1992 6,531,250 1,050,000 1,150,000 100,000 (2,759,683 )
Rail equipment 1988 1993 5,990,323 3,665,004 2,325,319 (1,339,685 ) (301,460 )
Containers 1988-1991 1993 2,017,117 1,060,421 1,168,859 108,438 861,183
Vessels 1988 1993 12,422,353 4,375,514 7,313,941 2,938,427 (2,174,217 )
------------ ------------ ------------ ----------- -----------
$ 47,236,024 $ 22,765,885 $ 31,563,453 $8,797,568 $ (980,872 )
EGF IV.... Rail equipment 1990 1990 $ 39,247 $ 36,590 $ 37,200 $ 610 $ 794
Rail equipment 1989 1991 13,282,868 10,713,269 12,762,868 2,049,599 1,794,895
Containers 1990-1991 1991 529,191 450,296 248,190 (202,106 ) (118,408 )
Rail equipment 1990 1992 39,715 30,098 43,752 13,654 23,351
Containers 1989-1991 1992 799,831 537,812 571,277 33,465 225,219
Rail equipment 1989 1993 2,583,125 2,583,125 2,433,500 (149,625 ) (2,317,825 )
Containers 1989-1990 1993 1,911,455 1,203,122 737,975 (465,147 ) 140,512
Aircraft 1989 1993 8,381,160 3,767,861 3,803,099 35,238 (2,085,055 )
</TABLE>
I-25
<PAGE> 240
<TABLE>
<CAPTION>
TOTAL FEDERAL
TYPE OF YEAR OF YEAR OF ACQUISITION NET BOOK NET GAAP TAXABLE
PARTNERSHIP EQUIPMENT ACQUISITION DISPOSITION COST(1) VALUE(2) PROCEEDS(3) GAIN/(LOSS) GAIN/(LOSS)
- ---------- --------------- ----------- ----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vessels 1989 1993 14,555,541 6,924,136 7,683,065 758,929 (4,254,484 )
------------ ------------ ------------ ----------- -----------
$ 42,122,133 $ 26,246,309 $ 28,320,926 $2,074,617 $(6,591,001)
EGF V..... Containers 1990-1991 1991 $ 242,388 $ 219,867 $ 181,088 $ (38,779 ) $ (9,822 )
Rail equipment 1990-1991 1992 79,795 64,983 102,153 37,170 59,614
Containers 1990-1991 1992 1,737,814 1,461,347 1,151,203 (310,144 ) (191,188 )
Rail equipment 1990 1993 87,752 59,591 66,879 7,288 11,854
Containers 1990-1991 1993 4,017,186 2,810,054 2,219,134 (590,920 ) (186,941 )
------------ ------------ ------------ ----------- -----------
$ 6,164,935 $ 4,615,842 $ 3,720,457 $ (895,385 ) $ (316,483 )
EGF VI.... Rail equipment 1992 1992 $ 22,208 $ 21,463 $ 7,597 $ (13,866 ) $ (14,401 )
Containers 1992 1992 220,938 201,781 160,410 (41,371 ) (58,446 )
Rail equipment 1992 1993 21,997 18,665 15,815 (2,850 ) (346 )
Containers 1992 1993 677,096 558,991 448,631 (110,360 ) (116,896 )
------------ ------------ ------------ ----------- -----------
$ 942,239 $ 800,900 $ 632,453 $ (168,447 ) $ (190,089 )
------------ ------------ ------------ ----------- -----------
Total........................................... $254,598,873 $133,152,902 $173,495,543 $40,342,641 $9,189,528
=========== =========== =========== =========== ===========
</TABLE>
- ---------------
(1) Acquisition cost includes Acquisition Fees. With regard to the Companies,
the Manager and its Affiliates are foregoing these fees.
(2) Represents total acquisition cost less accumulated depreciation calculated
on a GAAP basis.
(3) Net proceeds received at disposition less any direct selling costs.
(4) Acquired only new equipment. EGF's I through VI acquired primarily used
equipment.
I-26
<PAGE> 241
TABLE E
COMPENSATION TO THE MANAGER AND AFFILIATES
PROGRAM INCEPTION TO DECEMBER 31, 1993
The following table sets forth certain information concerning the
compensation earned by the Manager and its Affiliates for the prior PLM
Equipment Growth Fund programs. Amounts are from two sources: proceeds of the
offering and gross revenues. Amounts from operations are cumulative.
<TABLE>
<CAPTION>
EGF I EGF II EGF III EGF IV EGF V EGF VI EGF VII(6)
----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Effective Date of offering........ May-86 June-87 March-88 May-89 April-90 Dec.-91 May-93
Amount raised..................... $119,999,499 $149,976,814 $199,674,056 $174,767,000 $184,265,550 $166,138,556 $35,942,990
Equipment Purchased from Original
Proceeds(1)..................... $104,999,562 $132,279,550 $176,911,214 $154,473,105 $163,005,744 $146,534,208 $31,486,059
Equipment Purchased with debt
and/or from reinvestment(1)..... $107,240,526 $95,814,951 $85,118,690 $57,569,086 $49,812,460 $31,592,506 $6,167,692
Amounts paid from the proceeds of
offering, reinvestment and/or
debt:
Selling Commissions(2)........ $ 1,205,300 $ 1,523,580 $ 1,981,947 $ 1,735,384 $ 1,833,239 $ 1,651,112 $ 358,578
Acquisition and Lease
Negotiation Fees(3)......... $11,508,067 $11,936,460 $13,810,204 $10,756,191 $11,061,996 $ 7,583,861 $ 748,000
Debt Placement Fees(4).......... $ 396,730 $ 377,631 $ 428,320 $ 330,000 $ 380,000 $ -- $ --
Cash generated from operations
before deducting payments to the
Manager and Affiliates.......... $134,737,403 $130,233,518 $134,860,163 $86,483,155 $74,904,115 $23,188,138 $ 901,286
Amount paid to the Manager and
Affiliates from operations:
Equipment Management Fees..... $14,678,207 $10,522,134 $11,121,758 $ 6,482,512 $ 5,294,205 $ 1,283,982 $ 33,519
Reimbursements(5)............. $ 3,653,794 $ 5,993,364 $ 6,394,569 $ 4,181,654 $ 3,318,944 $ 1,142,293 $ 43,585
Dollar amount of equipment sales
and refinancing before deducting
payments to the Manager and
Affiliates:
Cash.......................... $56,283,543 $48,494,991 $31,187,724 $28,320,926 $ 3,720,457 $ 632,453 $ --
Notes......................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Amount paid to the Manager and
Affiliates from equipment sales
and refinancing................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
I-27
<PAGE> 242
- ----------
(1) Includes Acquisition and Lease Negotiation Fees. With regard to the
Companies, the Manager and its Affiliates are foregoing these fees.
Equipment purchased from reinvestment proceeds includes equipment purchased
using net proceeds from the sale of equipment.
(2) PLM Securities, an Affiliate of the Manager, received a fee from each EGF of
up to 9% of equity raised, of which approximately 8% was paid to Selected
Agents. Represents the amounts retained by the Affiliate. With regard to the
Companies, the Manager, and not the Companies, will be paying these fees.
(3) Acquisition Fees of 4.5% (EGF II, EGF III, EGF IV, EGF V, EGF VI and EGF
VII) or 5% (EGF I) of the Equipment Purchase Price, and Lease Negotiation
Fees of 1% of the Equipment Purchase Price are paid to the Manager or its
Affiliates by each EGF. With regard to the Companies, the Manager and its
Affiliates are foregoing these fees.
(4) Debt Placement Fees equal to 1% of the Equipment Purchase Price paid to the
Manager or its Affiliates. The fee is assumed to be paid by the EGF out of
the proceeds of the offering. With regard to the Companies, the Manager and
its Affiliates are foregoing these fees.
(5) Includes reimbursements of expenses such as marine vessel insurance, legal,
accounting, data processing, and other services.
(6) As of December 31, 1993, EGF VII's offering has not been completed.
I-28
<PAGE> 243
EXHIBIT A
=========================================================================
FIFTH AMENDED AND RESTATED
OPERATING AGREEMENT
OF
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C.,
[PROFESSIONAL LEASE MANAGEMENT
INCOME FUND II, L.L.C.,]
A DELAWARE LIMITED LIABILITY COMPANY
[THE VARIATIONS IN THE FIFTH AMENDED AND RESTATED OPERATING
AGREEMENT FOR PROFESSIONAL LEASE MANAGEMENT INCOME FUND II, L.L.C.
ARE INDICATED BY BRACKETS IN THE TEXT.]
=========================================================================
<PAGE> 244
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
I FORMATION OF THE COMPANY................... A-1
1.01 Formation and Operating
Agreement......................... A-1
1.02 Name and Principal Place of
Business.......................... A-1
1.03 Term of Company................... A-1
1.04 Definitions....................... A-1
1.05 Purpose of Company and Investment
Objectives........................ A-8
1.06 Names and Addresses of Manager
and Members....................... A-9
1.07 Public Offering of Class A
Units............................. A-9
1.08 Class B Units..................... A-10
1.09 Registered Agent and Office....... A-10
II MANAGEMENT OF THE COMPANY.................. A-10
2.01 Management and Duties of the
Manager........................... A-10
2.02 Authority and Powers of the
Manager........................... A-10
2.03 Liability of Manager and
Members........................... A-13
2.04 Indemnification................... A-13
2.05 Powers and Duties of the
Members........................... A-14
2.06 Compensation of Manager........... A-15
2.07 Roll-Up Transactions.............. A-16
III FINANCING OF THE COMPANY................... A-17
3.01 Capital Contribution of the
Initial Class A Member............ A-17
3.02 Capital Contributions of the
Original Class A Members.......... A-17
3.03 Capital Contribution of the
Initial Class B Member............ A-17
3.04 Additional Contributions.......... A-17
3.05 Interest.......................... A-17
3.06 Time for Return of
Contributions..................... A-17
3.07 Loans by the Members.............. A-17
3.08 Allocation of Net Profits and Net
Loss.............................. A-17
3.09 Distributions of Cash Available
for Distribution.................. A-18
3.10 Allocations and Distributions
Among Class A Members............. A-19
</TABLE>
i
<PAGE> 245
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
3.11 Allocations and Distributions
Among Class B Members............. A-20
3.12 Timing of Distributions........... A-20
3.13 Section 704(c).................... A-20
3.14 Return of Distributions........... A-20
3.15 Company Expenses.................. A-20
3.16 Certain Taxes and Fees............ A-21
3.17 Saving Clause -- Intended Cash
Deal.............................. A-21
IV BOOKS OF ACCOUNT, FINANCIAL STATEMENTS AND
FISCAL MATTERS............................. A-21
4.01 Books of Account and Records...... A-21
4.02 Reports and Financial
Statements........................ A-22
4.03 Fiscal Year of the Company........ A-23
4.04 Bank Accounts, Funds, and
Assets............................ A-23
4.05 Tax Elections..................... A-23
4.06 Reserves.......................... A-23
4.07 Loans to or by the Manager........ A-23
4.08 Transactions with the Manager..... A-23
V ISSUANCE OF CERTIFICATES................... A-24
5.01 Certificates...................... A-24
5.02 Lost, Destroyed, or Stolen
Certificates...................... A-24
5.03 Record Holder..................... A-24
VI TRANSFERS OF UNITS AND CERTAIN REDEMPTIONS
OF CLASS A UNITS........................... A-24
6.01 General Restriction on
Transfers......................... A-24
6.02 Transfer of Manager's Interest and
Class B Units..................... A-24
6.03 Legends........................... A-25
6.04 Transfer of Class A Units......... A-25
6.05 Permitted Transfers............... A-26
6.06 Restrictions on Transfer.......... A-26
6.07 Change of Status.................. A-27
6.08 Eligibility Certificates.......... A-27
6.09 Repurchase of Class A Units....... A-27
6.10 Redemption Provision.............. A-27
VII ADMISSION OF SUBSTITUTED CLASS A MEMBERS... A-28
7.01 Substituted Class A Members....... A-28
7.02 Withdrawal of a Class A Member.... A-28
</TABLE>
ii
<PAGE> 246
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
7.03 Death of a Class A Member......... A-28
VIII RIGHT OF CLASS A MEMBERS TO RECEIVE
PROPERTY OTHER THAN CASH................... A-28
IX REMOVAL, WITHDRAWAL, DEATH, BANKRUPTCY, OR
INCOMPETENCY OF MANAGER.................... A-29
9.01 Removal of a Manager.............. A-29
9.02 Withdrawal of a Manager........... A-29
9.03 Termination of a Manager Other
Than by Removal or Withdrawal..... A-29
9.04 Election of Successor or
Additional Manager; Continuation
of Company Business............... A-29
9.05 Admission of Successor or
Additional Manager................ A-29
9.06 Retiring Managers................. A-30
9.07 Election of Additional Manager.... A-31
X TERMINATION, LIQUIDATION, AND DISSOLUTION
OF THE COMPANY............................. A-31
10.01 Events of Dissolution............. A-31
10.02 Death, Bankruptcy, Dissolution,
Etc. of Class A Members........... A-31
10.03 Liquidation, Allocations, and
Distributions..................... A-31
10.04 Compliance With Timing
Requirements of Regulations....... A-32
10.05 Dissolution....................... A-32
XI CERTIFICATES AND OTHER DOCUMENTS........... A-32
11.01 Manager as Attorney for Members... A-32
11.02 Filing of Documents............... A-33
XII NOTICES.................................... A-33
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
XIII CONVEYANCES, CONTRACTS, AND DOCUMENTS...... A-33
XIV DISPUTES AND ARBITRATION................... A-34
XV MEETINGS OF, OR ACTIONS BY, THE CLASS A
MEMBERS.................................... A-34
XVI CAPTIONS -- PRONOUNS....................... A-35
XVII BINDING EFFECT............................. A-35
XVIII AMENDMENTS................................. A-35
XIX ENTIRE AGREEMENT, SEPARABILITY OF
PROVISIONS AND GOVERNING LAW............... A-35
XX TAX CONTROVERSIES.......................... A-36
XXI COUNTERPARTS AND EXECUTION................. A-36
</TABLE>
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FIFTH AMENDED AND RESTATED
OPERATING AGREEMENT
OF
PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C.,
[PROFESSIONAL LEASE MANAGEMENT
INCOME FUND II, L.L.C.,]
A DELAWARE LIMITED LIABILITY COMPANY
THIS FIFTH AMENDED AND RESTATED OPERATING AGREEMENT (the "Agreement") of
Professional Lease Management Income Fund I, L.L.C. [Professional Lease
Management Income Fund II, L.L.C.] (the "Company") is entered into as of January
24, 1995, by and among PLM FINANCIAL SERVICES, INC., a Delaware corporation, as
the manager (the "Manager") and the initial Class B Member (the "Initial Class B
Member"), Denise M. Kirchubel as the initial Class A Member (the "Initial Class
A Member"), and the persons signing this Agreement as Class A Members on the
other signature pages hereto who are accepted as such by the Manager
(collectively, with the Initial Class A Member, the "Class A Members" and, with
the Class B Members, the "Members").
I
FORMATION OF THE COMPANY
1.01 Formation and Operating Agreement. The Company has previously been
formed pursuant to the Delaware Act. The original Operating Agreement of the
Company entered into as of August 22, 1994 was amended and restated by the First
Amended and Restated Operating Agreement of the Company entered into as of
November 18, 1994, by the Second Amended and Restated Operating Agreement
entered into as of December 6, 1994, by the Third Amended and Restated Operating
Agreement entered into as of December 20, 1994, and by the Fourth Amended and
Restated Operating Agreement entered into as of January 18, 1995, which is
hereby amended and restated in its entirety. To the extent the rights or
obligations of the Manager or any Member are different by reason of any
provision of this Agreement than they would be in the absence of such provision,
this Agreement shall, to the extent permitted by the Delaware Act, control.
1.02 Name and Principal Place of Business. The name of the Company is
"PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C." ["PROFESSIONAL LEASE
MANAGEMENT INCOME FUND II, L.L.C."] and its office and principal place of
business shall be One Market, Steuart Street Tower, Suite 900, San Francisco,
California 94105-1301, and thereafter such other place or places as the Manager
may from time to time determine.
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1.03 Term of Company. The Company was formed as of August 22, 1994 and
shall continue until December 31, 2010 [December 31, 2011], or until earlier
terminated in accordance with the provisions of Article X.
1.04 Definitions. The following terms used in this Agreement shall (unless
otherwise expressly provided herein or unless the context otherwise requires)
have the following respective meanings:
"Adjusted Basis" means the basis, as defined in Section 1011 of the Code,
for determining gain or loss for federal income tax purposes from the sale,
transfer, or other disposition of property.
"Adjusted Capital Account Deficit" shall mean, with respect to any Member,
the deficit balance, if any, in such Member's Capital Account as of the end of
the relevant fiscal year, after giving effect to the following adjustments: (a)
crediting to such Capital Account any amounts which such Member is obligated to
restore or is deemed to be obligated to restore pursuant to Regulations Sections
1.704-2(g) (1) and 1.704-2 (i) (5); and (b) debiting from such Capital Account
the items described in Regulations Section 1.704-1(b) (2) (ii) (d) (4), (5) and
(6). This definition is intended to comply with the provisions of Section
1.704-1(b) (2) (ii) (d) of the Regulations and shall be interpreted consistently
therewith.
"Affiliate" means, when used with reference to a specified Person, (i) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, or
(ii) any Person that is an executive officer of, partner in, or serves in a
similar capacity to, the specified Person, or any Person of which the specified
Person is an executive officer or partner or with respect to which the specified
Person serves in a similar capacity, or (iii) any Person owning or controlling
10% or more of the outstanding voting securities of such specified Person.
"Agreement" means this Fourth Amended and Restated Operating Agreement of
the Company entered into as of January 18, 1995.
"Alien" means a Person who or which is not a U.S. Citizen.
"Bankrupt" or "Bankruptcy" means, when used with reference to a specified
Person, (i) if such Person (a) makes an assignment for the benefit of creditors,
(b) files a voluntary petition in bankruptcy, (c) is adjudged a bankrupt or
insolvent, or has entered against such Person an order for relief, in any
bankruptcy or insolvency proceeding, (d) files a petition or answer seeking for
such Person any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any statute, law or regulation,
(e) files an answer or other pleading admitting or
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failing to contest the material allegations of a petition filed against such
Person in any proceeding of this nature, or (f) seeks, consents to, or
acquiesces in, the appointment of a trustee, receiver or liquidator of such
Person or all or any substantial part of such Person's properties, or (ii) if
120 days after the commencement of any proceeding against such Person seeking
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation, the proceeding has not
been dismissed, or if within 90 days after the appointment without such Person's
consent or acquiescence of a trustee, receiver or liquidator of such Person or
all or any substantial part of such Person's properties, the appointment is not
vacated or stayed, or within 90 days after the expiration of any such stay, the
appointment is not vacated.
"Basic Equipment Management Services" means those equipment management
services required and necessary to negotiate and administer a Net Lease. Such
services will generally be limited to identifying and negotiating Net Lease
contracts with prospective lessees and operators for medium-term Operating
Leases (generally more than one year), administering and, to the extent
necessary, enforcing the lessee's or operator's obligations to use, maintain,
repair, insure and return the Equipment in accordance with the terms of the
lease or other contract, and billing to and collecting from the lessee or
operator amounts due under the lease or other contract and taking appropriate
action in the event of a lessee or operator default.
"Benefit Plan" means any of the following:
(i) Qualified Plans;
(ii) IRAs;
(iii) Employer-sponsored retirement annuity plans that are or ever were
determined by the Secretary of the Treasury to be qualified under Section
403(a) of the Code;
(iv) Other employee benefit plans described in Section 3(3) of ERISA;
and
(v) Entities whose assets include assets of entities described in
paragraphs (i) through (iv) above by virtue of investment in such entities
by the types of entities described in paragraphs (i) through (iv).
"Capital Account" means a bookkeeping account maintained by the Company for
each Member in accordance with Section 1.704-1(b)(2)(iv) of the Treasury
Regulations.
"Capital Contribution(s)" means, with respect to the Class A Members, the
total amount of money contributed to the Company by all the Class A Members or
any one Class A Member, as the case may be; and means, with respect to the
Initial Class B
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Member, the total amount of money paid on behalf of the Company in accordance
with Section 3.03 hereof.
"Cash Available for Distribution" means Cash Flow plus Net Disposition
Proceeds plus cash funds available for distribution from Company reserves, and
less such amounts as the Manager, in its sole discretion, determines should be
set aside as Retained Proceeds and/or for the restoration or enhancement of
Company reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Company, but not including Net Disposition Proceeds, minus
(ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Class A Units in accordance with
Sections 6.09 and 6.10; but not including depreciation or amortization of fees
or capital expenditures, or provisions for future expenditures.
"Certificate" means a certificate, substantially in the form attached hereto
as Schedule I, issued by the Company upon request of a Class A Member to
evidence a Class A Member's ownership of Class A Units. No certificate shall be
issued to evidence the ownership of Class B Units.
"Certificate of Formation" means the certificate referred to in Section
18-201 of the Delaware Act filed with the Secretary of State of the State of
Delaware on behalf of the Company, as amended.
"Class A Member" means a Person who acquires Class A Units and who is
admitted to the Company as a Class A Member in accordance with the terms of this
Agreement.
"Class A Unit" means a membership interest in the Company held by a Class A
Member. The only acceptable consideration for Class A Units shall be cash.
"Class B Member" means a Person who acquires a Class B Unit or Class B
Units.
"Class B Unit" means a membership interest in the Company held by a Class B
Member.
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"Closing Date" means the date, as designated by the Manager, as of which the
Class A Units shall cease being offered to the public pursuant to the Offering,
and shall be no later than the first anniversary of the Effective Date, unless
the Offering is extended by the Manager, but in no event later than the second
anniversary of the Effective Date.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Company" means Professional Lease Management Income Fund I, L.L.C.,
[Professional Lease Management Income Fund II, L.L.C.,] a Delaware limited
liability company.
"Company Assets" means all assets of the Company, whether tangible or
intangible and whether real, personal or mixed, including, but not limited to,
equipment, equipment leases, and other contractual rights.
"Company Minimum Gain" shall have the meaning set forth in Regulations
Section 1.704-2(d)(1).
"Competitive Equipment Sales Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the equipment.
"Contribution Account" means a bookkeeping account maintained for each Class
A Member which shall be credited with the Capital Contribution of the Class A
Member and shall be debited with all Cash Available for Distribution distributed
to the Class A Member at any time at which the Preference Account balance of the
Class A Member is zero, such that the distribution does not reduce the Class A
Member's Preference Account. Only for purposes of computing the Contribution
Account and Preference Account balances of each Class A Member, the Capital
Contribution of the Class A Member shall be treated as having been made on the
last day of the calendar quarter in which it is made. All direct and indirect
permitted transferees of a Class A Member shall, upon admittance to the Company
as a Substituted Class A Member, succeed to the Contribution Account balance of
the transferor Class A Member attributable to the Class A Units transferred.
"Controlling Person" means any person, regardless of title, who performs
executive or senior management functions for the Manager similar to those of
directors, executive management and senior management, or any person who either
holds a 5% or more equity interest in the Manager or has the power to direct or
cause the direction of the Manager, whether through the ownership of voting
securities, by contract, or otherwise, or, in the absence of a specific role or
title, any person having the power to direct or cause
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the direction of the management-level employees and policies of the Manager. It
is not intended that every person who carries a title such as vice president,
senior vice president, secretary, or treasurer be included in the definition of
Controlling Person, and the terms "executive management" and "senior management"
as used above do not include those individuals who provide Equipment management
services to the Company and who are not involved in executive policy-making
decisions, regardless of title.
"Covered Person" means (i) any Affiliate of a Class B Member or any
officers, directors, shareholders, partners, members, employees, representatives
or agents of a Class B Member or its respective Affiliates, (ii) any Class A
Member, any Affiliate of a Class A Member or any officers, directors,
shareholders, partners, members, employees, representatives or agents of a Class
A Member or its respective Affiliates, (iii) any manager, any Affiliate of a
manager or any officers, directors, shareholders, partners, members, employees,
representatives or agents of a manager or its respective Affiliates, and (iv)
any employee, representative or agent of the Company or its Affiliates.
"Delaware Act" means the Delaware Limited Liability Company Act, 6 Del. C.
sec. 18-101 et seq., as amended from time to time, and any successor statute.
"Delaware Limited Partnership Act" means the Delaware Revised Uniform
Limited Partnership Act, 6 Del. C. sec. 17-101 et seq., as amended from time to
time, and any successor statute.
"Early Return Class A Unit" means, as of a particular Record Date, and with
respect to a particular Class A Unit, any Class A Unit whose holders, including
the Original Class A Member holding such Class A Unit and any subsequent
permitted transferee with respect to such Class A Unit, have received, in the
aggregate, distributions under this Agreement in an amount equal to $20.00 with
respect to such Class A Unit.
"Effective Date" means the date as of which the Registration Statement is
declared effective by the Securities and Exchange Commission.
"Eligibility Certificate" means a written instrument containing the
certification set forth in Section 6.08.
"Equipment" means each item of and all of the capital equipment and other
personal property purchased, owned, operated and/or leased by the Company, or in
which the Company has acquired a direct or indirect interest, as more fully
described in Section 1.05, together with all appliances, parts, instruments,
appurtenances, accessories, furnishings, or other equipment included therein
(including any and all engines originally installed thereon), and all
substitutions, renewals, or replacements of, and all additions, improvements,
and accessions to, any and all thereof.
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"Equipment Liquidation Fee" means the fee payable by the Company in
accordance with Section 2.06(c).
"Equipment Management Agreement" means that certain Equipment Management
Agreement entered into on behalf of the Company by the Manager with IMI to
provide certain management services with respect to the Equipment pursuant to
Section 2.02(k).
"Equipment Management Fee" means the fee payable by the Company in
accordance with Section 2.06(a).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Dissolution" means the first to occur of the events described in
Section 10.01.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancellable payments due (and which can be calculated at the
commencement of the Net Lease) during the initial non-cancellable fixed term
(not including any renewal or extension period) of the lease (including
charters) or other contract for the use of the Equipment are at least sufficient
to recover the Purchase Price of the subject Equipment.
["Fund I" means Professional Lease Management Income Fund I, L.L.C., a
Delaware limited liability company.]
"Fund II" means Professional Lease Management Income Fund II, L.L.C., a
Delaware limited liability company.
"Funding Date" means the date on which Capital Contributions of the Class A
Members are released to the Company from the impound account established by the
Manager in connection with the Offering.
"Gross Income" means the gross income of the Company within the meaning of
Section 61(a) of the Code.
"Gross Lease Revenues" means Company gross receipts from leasing (including
chartering) or other operation of the Equipment, except that, to the extent the
Company has leased or chartered the Equipment from an unaffiliated party, it
shall mean such receipts less any lease or charter expense.
"IMI" means PLM Investment Management, Inc., an Affiliate of the Manager,
its successors and assigns.
"Indemnified Party" means the Manager, the Initial Class B Member and each
of their Affiliates (when acting within the scope of authority of the Manager or
Initial Class B Member and performing services on behalf of the Company) which
manage or participate in the management of the Company or render other services
to the Company.
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"Initial Class A Member" means Denise M. Kirchubel, her heirs, legal
representatives, and assigns.
"Initial Class B Member" means PLM Financial Services, Inc., a Delaware
corporation.
"Investment in Equipment" means the amount of Capital Contributions from
Original Class A Members actually paid or allocated to the purchase of Equipment
acquired by the Company, including the purchase of Equipment, working capital
reserves allocable thereto (except that working capital reserves in excess of 3%
of Capital Contributions from Original Class A Members shall not be included),
and other cash payments such as interest and taxes but excluding Front-End Fees
as defined below. As provided in Section 3.02 hereof, Investment in Equipment
shall equal 100% of the Capital Contributions from the Original Class A Members.
For the purposes of the definition of "Investment in Equipment", "Front-End
Fees" means fees and expenses paid by any party for any services rendered during
the Company's organizational or acquisition phase (including acquisitions made
with Retained Proceeds), including Organizational and Offering Expenses, Lease
Negotiation Fees, Acquisition Fees, Acquisition Expenses, and any other similar
fees, however designated by the Manager. The Initial Class B Member is paying
Front-End Fees, from its own funds, on behalf of the Company. For purposes of
the definitions of "Investment in Equipment" and "Purchase Price" below,
"Acquisition Expenses" means expenses including but not limited to legal fees
and expenses, travel and communication expenses, costs of appraisals, accounting
fees and expenses, and miscellaneous expenses relating to the selection and
acquisition of Equipment, whether or not acquired. For purposes of the
definitions of "Investment in Equipment" and "Purchase Price" below,
"Acquisition Fees" means the total of all fees and commissions paid by any party
in connection with the initial purchase or manufacture of Equipment acquired by
a Company. Included in the computation of such fees or commissions shall be any
commission, selection fee, financing fee, non-recurring management fee, or any
fee of a similar nature, however designated. No such fee is being paid to the
Manager hereunder. For purposes of the definitions of "Investment in Equipment"
and "Purchase Price" below, "Lease Negotiation Fees" means the total of all fees
paid by any party in connection with the initial lease of Equipment acquired by
a Company. No such fee is being paid to the Manager hereunder.
"IRA" means an Individual Retirement Account as described in Section 408 of
the Code.
"Liquidating Trustee" means as follows:
(i) If the Manager is a manager of the Company, the Manager;
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(ii) If the Manager is not a manager of the Company, and the Company has
one manager, such last remaining manager;
(iii) If the Manager is not a manager of the Company, and the Company
has more than one manager, the manager appointed by such managers; and
(iv) If the Company has no managers, the Person receiving the most votes
and/or written consents by the Class A Members at a meeting duly held or
upon a vote duly taken within 60 days following the Event of Dissolution.
"Majority in Interest" means, with respect to the Company, Class A Members
holding more than 50% of the outstanding Class A Units held by all Class A
Members at the Record Date for any vote or consent of the Class A Members.
"Manager" means PLM Financial Services, Inc., a Delaware corporation, and
when used with a lower case "m," means the Manager (if the Manager is still
acting as a manager of the Company) and any successor or additional manager of
the Company within the meaning of the Delaware Act or as provided in this
Agreement.
"Managing Placement Agent" means PLM Securities Corp., an Affiliate of the
Manager.
"Managing Placement Agent Fee" means the fee payable by the Initial Class B
Member to PLM Securities Corp. for acting as Managing Placement Agent in
connection with the Offering, which fee shall be equal to no more than 10% of
the purchase price of the Class A Units sold. From this amount, the Managing
Placement Agent shall pay a sales commission to any broker-dealer participating
in the Offering of 8.5% of the purchase price of the Class A Units sold by such
broker-dealer. All or any portion of the Managing Placement Agent Fee may be
waived by the Managing Placement Agent and all or any portion of sales
commission paid out of the Managing Placement Agent Fee may be waived by any
broker-dealer participating in the Offering. Neither the Manager, the Initial
Class B Member, nor the Company shall pay, directly or indirectly, any
compensation to any Person engaged by a potential investor for investment advice
other than this Managing Placement Agent Fee.
"Member(s)" means any one or more of the Class A Members and the Class B
Members. For purposes of the Delaware Act, the Class A Members and the Class B
Members shall constitute separate classes or groups of members.
"Member List" shall have the meaning set forth in Section 4.01 hereof.
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"Net Disposition Proceeds" means the net (less related costs and expenses)
proceeds realized by the Company from the financing, refinancing, sale, or other
disposition of Equipment, including insurance proceeds or lessee indemnity
payments arising from the loss or destruction of Equipment, less such amounts as
are used to satisfy Company liabilities.
"Net Lease" means a lease (including a charter) or other contract under
which the owner provides equipment to a lessee or other operator in return for a
payment, and the lessee assumes all or substantially all obligations and pays
for all or substantially all of the operation, repair, maintenance and insuring
of the equipment.
"Net Profits" or "Net Loss" shall be computed in accordance with Treasury
Regulations Section 1.704-1(b)(2)(iv) and Section 703(a) of the Code (including
all items of income, gain, loss or deduction required to be stated separately
pursuant to Section 703(a)(1) of the Code) for each taxable year of the Company
or shorter period prior or subsequent to an interim closing of the Company's
books with the following adjustments: (i) any income of the Company that is
exempt from federal income tax and not otherwise taken into account in computing
Net Profits and Net Loss pursuant to this definition shall be added to such
taxable income or shall reduce such taxable loss; and (ii) any expenditure of
the Company described in Code Section 705(a)(2)(B) or treated as Code Section
705(a)(2)(B) expenditures pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(i) and not otherwise taken into account in computing Net
Profits and Net Loss pursuant to this definition shall be subtracted from such
taxable income or loss. Notwithstanding the foregoing, items of income, gain,
loss and deduction specially allocated pursuant to Sections 3.08(b) and 3.17
shall not be included in the computation of Net Profits or Net Loss.
"Offering" means the initial public offering of Class A Units in the
Company, as more fully described in the Registration Statement.
"Offering Period" means the period commencing the Effective Date and ending
the last day of the calendar month in which the Closing Date occurs.
"Operating Lease" means a lease, charter or other contractual arrangement
under which an unaffiliated party agrees to pay the Company, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Company and in preparation of and in
connection with the Offering, including but not limited to the Managing
Placement Agent Fee, due diligence expenses and advertising expenses
specifically incurred in connection with the distribution of the Class A Units,
with such expenses
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being paid by the Initial Class B Member, from its own funds, pursuant to
Section 3.03 hereunder.
"Original Class A Members" means each and all those Class A Members who
purchases Class A Units in the Offering.
"Person" means an individual, limited liability company, partnership, joint
venture, corporation, trust, estate, or other entity.
"Preference Account" means a bookkeeping account established for each Class
A Member which shall be credited at the rate of 9% per annum, cumulative
compounded daily on the sum of the balances existing, from time to time, in the
Class A Member's Contribution Account (beginning upon the end of the calendar
quarter in which the Class A Member's Capital Contribution was made) and the
Class A Member's Preference Account, and shall be debited, but not below zero,
by all cash distributions to the Class A Member. Any cash distributions made to
the Class A Member, once the Preference Account has been reduced to zero, shall
be debited to the Class A Member's Contribution Account. All direct and indirect
permitted transferees of a Class A Member shall, upon admittance to the Company
as a Substituted Class A Member, succeed to the Preference Account balance of
the transferor Class A Member attributable to the Class A Units transferred.
"Preliminary Return Amount" means the smallest amount of Cash Available for
Distribution which, when distributed to the Class A Members in accordance with
this Agreement, causes the Contribution Account balance and the Preference
Account balance of each Class A Member to be zero.
"Proceeds" means proceeds from the sale of the Class A Units.
"Program" means a limited or general partnership, limited liability company,
joint venture, unincorporated association or similar organization, other than a
corporation formed or operated for the primary purpose of investment in and the
operation of or gain from an interest in equipment.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (i) the invoice cost of such Equipment or any such other amount paid
to the seller, (ii) any closing, delivery or installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Company, and (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Company in connection with its purchase of the Equipment.
"Qualified Plan" means a trust established pursuant to the terms of a
pension, profit sharing or stock bonus plan, including Keogh Plans, meeting the
requirements of Section 401(a) of the Code.
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"Record Date" means, for purposes of meetings of, or actions by, the Class A
Members pursuant to Article XV of this Agreement, the close of business on the
business day preceding the date on which the written notice referred to in
Article XV is given and, for purposes of distributions pursuant to Sections 3.09
and 3.10, means the close of business on the date the Manager determines the
time and amount thereof pursuant to Sections 2.02(l) and 3.12.
"Record Holder" means the holder of Units as recorded on the books of the
Company as of the close of business on a particular day.
"Registration Statement" means the registration statement on Form S-1 filed
by the Company and Fund II [Fund I] with the Securities and Exchange Commission
under the Securities Act to register the offer and sale of the Class A Units, as
the same may be amended from time to time.
"Regulations" or "Treasury Regulations" means the income tax regulations
promulgated under the Code, whether in final or temporary form, as such
regulations may be amended from time to time (including corresponding provisions
of succeeding regulations).
"Re-Lease Fee" means the fee payable by the Company in accordance with
Section 2.06(b).
"Retained Proceeds" means the amount which, in the Manager's discretion and
subject to the limitations set forth in Section 2.02(q) hereof, is retained by
the Company from Cash Flow plus Net Disposition Proceeds plus cash funds
available for distribution from Company reserves less such amounts as the
Manager, in its sole discretion, determines should be set aside for the
restoration or enhancement of Company reserves for the purpose of acquiring or
investing in Equipment.
"Retiring Manager" means a manager of the Company who or which has been
removed or withdrawn as such or is Bankrupt, which has been involuntarily
dissolved, or who has died or had a conservator appointed for the Person or any
of the property of such manager.
"Roll-Up" means a transaction involving the acquisition, merger, conversion,
or consolidation, either directly or indirectly, of the Company and the issuance
of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving Class A Units which have been listed for at
least twelve months on a national securities exchange or traded through the
Nasdaq National Market; or
(ii) a transaction involving the conversion to partnership, corporate,
trust or association form of only the Company if, as
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a consequence of the transaction, there will be no significant adverse
change in any of the following:
(a) the Class A Members' voting rights;
(b) the term of existence of the Company;
(c) compensation of the Manager or its Affiliates; or
(d) the Company's investment objectives.
"Roll-Up Entity" means the partnership, corporation, trust, or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up.
"Section 754 Election" shall mean an election under Section 754 of the Code
relating to the Adjusted Basis of Company Assets, as provided for under Sections
734 and 743 of the Code.
"Securities Act" means the Securities Act of 1933, as amended.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, a Program or any Person who will manage or
participate in the management of a Program, and any Affiliate of any such
Person. Sponsor does not include a Person whose only relation with the Program
is that of an independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of Program
interests.
"Subscribers" refers to those Persons who have tendered monies to the
Company for the purchase of Class A Units, but have not been accepted as Class A
Members as provided for in Section 1.07(b).
"Substituted Class A Member" means any Person admitted to the Company as a
Class A Member pursuant to the provisions of Section 7.01 hereof.
"Supplemental Equipment Management Services" means those services, in
addition to Basic Equipment Management Services which may, from time to time, be
required for the management of the Equipment as determined by the Manager. Such
services include, but are not limited to, frequent and active remarketing of the
Equipment, such as the marketing on a per-diem, voyage charter, contract of
affreightment or short-term lease (generally less than one year) basis or the
performance of additional services such as providing crewing for the Equipment
or planning and managing the maintenance or repair of the Equipment.
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"Target Final Balances" has the meaning set forth in Section 3.17 hereof.
"TEC" means PLM Transportation Equipment Corporation, an Affiliate of the
Manager, its successors and assigns.
"TEI" means Transportation Equipment Indemnity Company, Ltd., an Affiliate
of the Manager, its successors and assigns.
"Terminating Event" means the first to occur of the withdrawal, removal,
Bankruptcy, involuntary dissolution, death, or appointment of a conservator for
the Person or any of the assets, of the last remaining manager of the Company,
or whenever the last remaining manager of the Company is not or will not become
a Class B Member in accordance with Sections 9.01(a), 9.02(a) or 9.03(a) hereof.
"Third Party Creditor(s)" has the meaning set forth in Section 2.03(a)
hereof.
"Transfer Agent" means any bank, trust company, or other Person (including
the Manager or any of its Affiliates) appointed by the Manager to act as
transfer agent for the Class A Units.
"Transfer Application" means an application and agreement for transfer of a
Class A Unit in the form prescribed by the Manager by which a transferee (or the
transferee's broker, agent, or nominee holder) identifies the transferee as a
U.S. Citizen or an Alien, identifies the transferee as a Benefit Plan or not as
a Benefit Plan, and identifies any category of exempt transfer within which the
transfer falls under Internal Revenue Service Notice 88-75 or any superseding
pronouncement, ruling or regulation under Section 7704 of the Code; requests
admission to the Company as a Substituted Class A Member; agrees to be bound by
the terms and conditions of this Agreement; grants a power of attorney to the
Manager and/or its successors, if any; and takes such other actions as provided
in Section 6.04(b) of this Agreement.
"U.S. Citizen" means any of the following Persons: (i) an individual who is
a citizen of the United States or one of its possessions, (ii) an association
organized under the laws of the United States or any state, territory or
possession of the United States if all of its members are (and at least 75% of
the voting interests are owned by) U.S. Citizens and the president and two-
thirds or more of the board of directors and other managing officers are U.S.
Citizens, (iii) a partnership in which each partner is a U.S. Citizen, (iv) a
trust of which each trustee and all of the beneficiaries are U.S. Citizens
(provided that Persons who are not U.S. Citizens do not possess more than 25% of
the aggregate power to direct or remove the trustee), and (v) a corporation
incorporated in the United States or one of its possessions of which the
president/chief executive officer, chairman of the board of directors and
two-thirds or more of the members of the board of
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directors and other managing officers are U.S. Citizens and in which at least
75% of the voting interest is owned or controlled by U.S. Citizens.
"Unit(s)" means any one or more of the Class A Units and the Class B Units.
"Unrecovered Principal" means, with respect to a Class A Unit, the excess of
(i) the Capital Contribution allocable to the Class A Unit over (ii) the
distributions from any source paid by the Company with respect to the Class A
Unit.
1.05 Purpose of Company and Investment Objectives. The principal purpose of
the Company is to invest 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 "Equipment"). The portfolio of
the Equipment may include commercial, corporate or commuter aircraft (including
spare and rotable parts, components or engines), intermodal ("piggyback") and
over-the-road trailers and highway tractors, marine vessels, mobile offshore
drilling units, marine and domestic cargo containers and chassis, railroad
rolling stock, and other ancillary transportation-related equipment or other
similar long-lived, low obsolescence capital equipment. In conducting its
Equipment business, the Company intends to purchase, lease, charter, purchase
options to purchase, purchase equity interests in equipment-owning entities or
otherwise invest in Equipment, to enter into contracts with lessees, sublessees,
lessors, sublessors, charterers, subcharterers and other unaffiliated parties
respecting the use of the Equipment, to have Equipment operated on behalf of the
Company by an Affiliate, to sell or otherwise dispose of Equipment and to engage
in all business activities related and incidental thereto, including, without
limitation, the borrowing and lending of funds. The Company may engage in any
one or combination of the foregoing Equipment transactions.
Until invested in Equipment, the Company may temporarily invest all or a
part of the Capital Contributions from the Original Class A Members and other
funds in bank accounts, including the Sanwa Bank California Market Value Savings
Account, bank money market accounts, short-term bank certificates of deposit or
short-term securities issued or guaranteed by the United States government or in
a bank money market account which invests in such instruments. If any of the net
Proceeds received from the Offering (except for working capital reserves
determined to be necessary in the sole discretion of the Manager) have not been
invested or committed to investment in Equipment within two years from the
Effective Date, such Proceeds shall be distributed to the Class A Members on a
pro rata basis.
The Manager intends to reinvest a portion of the Company's Cash Flow and Net
Disposition Proceeds into the acquisition of,
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and capital improvements to, Equipment during the six years after the year which
includes the Closing Date.
If two or more Affiliates of the Manager, including but not limited to PLM
Equipment Growth Fund, PLM Equipment Growth Fund II, PLM Equipment Growth Fund
III, PLM Equipment Growth Fund IV, PLM Equipment Growth Fund V, PLM Equipment
Growth Fund VI, PLM Equipment Growth & Income Fund VII, PLM International, Inc.,
and the Company, are in a position to acquire the same equipment, the Manager
will determine which program or entity will purchase the equipment based upon
the objectives of each and the suitability of the acquisition in light of those
objectives. The Manager will generally afford priority to the program or entity
that has had funds available to purchase equipment for the longest period of
time. If two or more investor programs or entities, including the Company, are
in a position to enter into leases, charters, or other contracts for the use of
the equipment with the same lessee or other operator or to sell equipment to the
same purchaser, the Manager will generally afford priority to the equipment
which has been available for lease, use or sale for the longest period of time.
The Manager shall be under a fiduciary duty and obligation to conduct the
affairs of the Company in the best interests of the Company, subject to and as
limited by all of the terms and provisions of this Agreement. In carrying out
its fiduciary duty, the Manager shall at all times act with integrity and good
faith and exercise due diligence in all activities relating to the conduct of
the business of the Company and in resolving conflicts of interest. The
Manager's ability to purchase Equipment and operate it on a short-term basis
prior to transferring it to the Company as set forth in Sections 2.02(n) and
4.08 hereof in no way alters either (i) the Manager's fiduciary duty to act at
all times with integrity and to exercise due diligence in all matters relating
to the Company, and (ii) the Manager's general policy, in instances where
Equipment is suitable for two or more programs or entities under the control of
the Manager, of placing the Equipment with the program or entity that has had
funds available to purchase Equipment the longest.
1.06 Names and Addresses of Manager and Members.
(a) Manager and Initial Class B Member. The name and place of business
of the Manager and the Initial Class B Member are as follows:
PLM Financial Services, Inc.
One Market, Steuart Street Tower, Suite 900
San Francisco, California 94105-1301
(b) Initial Class A Member. The name and place of business of the
Initial Class A Member are as follows:
Denise M. Kirchubel
One Market, Steuart Street Tower, Suite 900
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San Francisco, California 94105-1301
(c) Class A Members. The Class A Members shall consist of the Initial
Class A Member, the Original Class A Members and those transferees who are
admitted as Substituted Class A Members.
(d) Class B Members. The Class B Members shall consist of the Initial
Class B Member, any permitted transferee pursuant to Section 6.02 hereof and
any successor or additional manager to whom at least one Class B Unit has
been issued in accordance with this Agreement.
1.07 Public Offering of Class A Units.
(a) Class A Members and Public Offering. Simultaneously with the
execution of this Agreement, five Class A Units have been issued to the
Initial Class A Member. The Company intends initially to make a public
offering of up to 5,000,000 additional Class A Units and to admit as
Original Class A Members the Persons whose subscriptions for such Class A
Units are accepted by the Manager. All Original Class A Members must be U.S.
Citizens or, if not, the Manager must consent to such Person becoming an
Original Class A Member; provided, however, that the Manager shall not admit
an Alien as an Original Class A Member if, as a result of such admission,
(i) more than 25% of the outstanding Units would be held by Aliens or (ii)
the Manager determines in good faith that the admission may result in the
invalidation of the registration of any Equipment. The Manager shall not
admit a Benefit Plan as an Original Class A Member if, as a result of such
admission, 25% or more of any class of the outstanding Units would be held
by Benefit Plans.
(b) Admission of Class A Members. The Initial Class A Member is
admitted to the Company upon execution of this Agreement and shall be
reflected on the Company's books as a Record Holder. Subscribers who are
accepted as Class A Members by the Manager on or before the Funding Date
shall be admitted to the Company as Original Class A Members within 15 days
after the Funding Date, whereupon they shall be reflected on the Company's
books as Record Holders; thereafter, Subscribers who are accepted as Class A
Members by the Manager shall be admitted to the Company as Original Class A
Members on or before the first day of the calendar month following the month
in which the date of such acceptance occurs, whereupon they shall be
reflected on the Company's books as Record Holders. Admission of Substituted
Class A Members shall be as provided in Section 7.01(b) hereof.
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1.08 Class B Units.
(a) Class B Members. The Company is authorized to issue 105 Class B
Units. Simultaneously with execution of this Agreement, 100 Class B Units
have been issued to the Initial Class B Member. The remaining five Class B
Units can only be issued, as necessary, to a successor or additional manager
of the Company which is a U.S. Citizen and which is not a Benefit Plan
pursuant to Sections 9.01(a), 9.02(a), 9.03(a) and 9.04 hereof. The Manager,
or any successor or additional manager if such successor or additional
manager is the last remaining manager of the Company, must at all times be
the owner of at least one Class B Unit.
(b) Admission of Class B Members. The Initial Class B Member is
admitted to the Company upon execution of this Agreement and shall be
reflected on the Company's books as a Record Holder. Additional or successor
managers shall be admitted as Class B Members when, and if, they are issued
one or more Class B Units pursuant to Sections 9.01(a), 9.02(a), 9.03(a) and
9.04 hereof, whereupon they shall be reflected on the Company's books as
Record Holders. A permitted transferee of the Initial Class B Member or of
any other Class B Member shall be admitted as a Class B Member only as
provided in Section 6.02 hereof.
1.09 Registered Agent and Office. The Company's registered agent and office
in Delaware shall be The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, New Castle County, Delaware 19801. At any time,
the Manager may designate another registered agent and/or registered office,
provided that such change is filed with the Secretary of State of the State of
Delaware pursuant to Section 18-202 of the Delaware Act.
II
MANAGEMENT OF THE COMPANY
2.01 Management and Duties of the Manager. The Manager shall have full and
complete charge of all affairs of the Company, and the management and control of
the Company's business shall rest exclusively with the Manager subject to the
terms and conditions of this Agreement. The Manager shall have the rights,
powers, and authority granted to the Manager hereunder, and, except as otherwise
expressly provided herein, to managers of limited liability companies under the
Delaware Act, to obligate and bind the Company and, on behalf and in the name of
the Company, to take such action as the Manager deems necessary or advisable
including, without limitation, making, executing, and delivering purchase and
sale, installment sale, participation, co-tenancy, partnership, management,
purchase option, put option,
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call and other agreements; leases, charters, subleases, subcharters,
assignments, and other transfers and conveyances; agreements to purchase, sell,
lease, or otherwise deal with personal property; promissory notes, checks,
drafts, and other negotiable instruments; and all other documents and agreements
which the Manager deems reasonable or necessary in connection with the
development of the Company's business and the Equipment and the operation and
management thereof. The execution and delivery of any such instrument executed
by the Manager, acting alone, shall be sufficient to bind the Company.
2.02 Authority and Powers of the Manager. Subject to and without limiting
Section 2.01, the Manager shall have the full power to:
(a) Purchase, own, charter, lease, sell and/or make future commitments
to purchase, charter, lease and/or sell the Equipment and interests therein
and to otherwise make investments in Equipment, including equity or debt
securities backed by Equipment, at such purchase prices, charter or lease
rates and upon such terms as the Manager deems, in its sole discretion, to
be in the best interests of the Company, and to execute any and all
documents associated with the foregoing; provided, that neither the Manager
nor any Affiliate shall have an exclusive right to sell Equipment for the
Company;
(b) Enter into leases, charters and other contracts for the use of the
Equipment with unaffiliated lessees, charterers, sublessees, sublessors, or
other operators or lessors, and agreements or arrangements for the
maintaining, repairing, moving, operating and insuring of the Equipment and
the selling or otherwise disposing of the Equipment or interests in the
Equipment and operating the Equipment by unaffiliated third parties or on
behalf of the Company, all at such times and prices and upon such terms as
the Manager deems, in its sole discretion, to be in the best interests of
the Company and to execute any and all documents associated with the
foregoing;
(c) Borrow money and issue evidences of indebtedness in the ordinary
course of business of the Company and to secure the same by mortgage,
pledge, security interest, or other lien on any of or all the Equipment or
other assets of the Company, all on such terms and in such amounts as the
Manager, in its sole discretion, deems to be in the best interests of the
Company and to execute any and all documents associated with the foregoing;
provided, however, that where long-term borrowings are utilized by the
Company they will be limited to approximately 20% of the aggregate cost of
all Equipment owned by the Company at the time any such borrowing is
originated and they will be nonrecourse to the Class A Members;
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(d) Acquire or enter into any contract of insurance (subject to the
limitations set forth in Section 2.04(b)), which the Manager deems necessary
or appropriate for the protection of the Company and/or the conservation of
the Company's assets or for any purpose convenient or beneficial to the
Company;
(e) Prepay, in whole or in part, refinance, increase, modify, or extend
any loans or mortgages affecting the Equipment, and in connection with such
actions, execute any extensions or renewals of loans or mortgages on any of
the Equipment, all on such terms as the Manager, in its sole discretion,
deems to be in the best interests of the Company;
(f) Place record title to, or the right to use, Company Assets in the
name or names of a nominee or nominees or a trustee or trustees for any
purpose convenient or beneficial to the Company;
(g) Cause to be formed such corporations, limited partnerships, limited
liability companies, trusts and/or other entities as the Manager deems
convenient or appropriate to own Equipment, cause ownership interests in
such entities to be acquired by the Company, and cause beneficial ownership
of, and/or legal title to, such Equipment to be acquired by such entities;
(h) Extend, or cause an Affiliate of the Manager to extend, temporary
financing to the Company and to pay interest in connection therewith, all
subject to and in accordance with the provisions of Section 4.07;
(i) Execute and deliver the Certificate of Formation and such other
documents and agreements, without limitation, on behalf of the Company as
the Manager may deem necessary or desirable for the Company's formation,
business and affairs;
(j) Perform, or cause to be performed, all of the Company's obligations
under any document or agreement to which the Company or any nominee of the
Company is a party;
(k) Employ on behalf of the Company, to the extent that the Manager, in
its sole judgment, shall deem advisable, managerial, sales, maintenance,
administrative or secretarial personnel, agents, or other persons, including
any of its Affiliates, necessary for the maintenance of any Company property
and/or the operation of the business of the Company, engage or retain
attorneys, accountants, or brokers to the extent that, in the judgment of
the Manager, their professional services are required during the term of the
Company, employ the services of Affiliates to assist the Manager in its
managerial duties, and compensate such persons from the assets of the
Company at rates which it, in its sole judgment, deems fair and reasonable;
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provided that no compensation payable to any Affiliate of the Manager shall
exceed an amount which is competitive in price and terms with compensation
charged by a non-Affiliate rendering comparable services which could reasonably
be made available to the Company and the fees and other terms of such
arrangements shall be fully disclosed in the annual report described in Section
4.02(a) hereof; provided further, that (i) any such Affiliate of the Manager
(other than PLM Securities Corp., TEC, TEI, and IMI) which provides services to
the Company or other Affiliates of the Manager will not derive more than 25% of
its revenues from such services and (ii) the terms and conditions of any
agreement to provide goods or services by the Manager or an Affiliate to the
Company shall be disclosed in the Prospectus as of the Effective Date of the
Registration Statement and be set forth in this Agreement or in a written
contract, terminable by either party without penalty upon 60 days' prior notice,
if the Manager or such Affiliate is to receive compensation as a result thereof.
In connection therewith, the Manager is specifically authorized to execute an
Equipment Management Agreement with its Affiliate, IMI, pursuant to which IMI
(or its Affiliates) will provide Basic Equipment Management Services, and may,
at the Manager's discretion, provide Supplemental Equipment Management Services
and for such services shall be compensated in accordance with Section 2.06(a);
(l) Subject to the requirements of Section 2.02(q), determine the time
and amount of distributions to the Members;
(m) Open and maintain bank accounts and accounts with daily income funds
for the deposit of Company funds, with withdrawals to be made upon such
signature or signatures as the Manager designates, or invest Company funds
in bank accounts, including the Sanwa Bank California Market Value Savings
Account, bank money market accounts, short-term bank certificates of deposit
or short-term securities issued or guaranteed by the United States
government or in a bank money market account which invests in such
instruments;
(n) Subject to the requirements of Section 4.08, purchase or otherwise
make investments in Equipment in its own name, an Affiliate's name, the name
of a nominee or nominees, or a trustee or trustees or otherwise temporarily
(generally not more than six months) hold title thereto for the purpose of
facilitating the acquisition of such Equipment by the Company; provided,
however, that the Company will not acquire Equipment from a Program in which
the Manager or any of its Affiliates has an interest;
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(o) Solicit and accept Capital Contributions in such amounts and at such
times as the Manager may determine in connection with the sale of Class A
Units (consistent with the provisions of Sections 3.02 and 3.04 hereof),
admit new Class A Members and Substituted Class A Members to the Company and
accept the Capital Contribution of the Initial Class B Member in the form of
payment of expenses on behalf of the Company;
(p) In accordance with and subject to the limitations set forth in
Section 4.06 hereof, set aside such amounts as it determines in its sole
discretion is necessary or advisable for the reasonable restoration or
enhancement of Company reserves;
(q) Retain Retained Proceeds for reinvestment in additional Equipment
for six years after the year which includes the Closing Date; provided that,
subject to any mandatory limitations on distributions set forth in Sections
18-607 and 18-804 of the Delaware Act, sufficient distributions are made
from Cash Flow plus Net Disposition Proceeds plus cash funds available for
distribution from Company reserves (less such amounts as the Manager, in its
sole discretion, determines should be set aside for the restoration or
enhancement of Company reserves) to enable each Member to pay any state and
federal income taxes arising from the sale or refinancing of Equipment
(assuming each Member is in a combined federal and state marginal income tax
bracket of 39.6%) prior to retaining any Retained Proceeds;
(r) Enter into participation, co-tenancy, and other agreements with
other limited liability companies, partnerships or other entities formed by
the Manager or its Affiliates, or with any other Person, for the purpose of
participating, on a joint basis, in the purchase, ownership, management,
operation, and lease of certain types of equipment with substantial purchase
prices, but only if (i) the venture owns and operates specific equipment;
(ii) the Company acquires the controlling interest in such entity; (iii) the
Company, as a result of the form of such ownership of equipment, is not
charged directly or indirectly more than once for the same service; (iv) the
joint investment agreement does not authorize the Company to do anything as
a co-investor with respect to the equipment which the Company or the Manager
could not do directly because of the policies set forth in this Agreement;
and (v) the Manager and its Affiliates are prohibited from receiving any
compensation, fees, or expenses which are not permitted to be paid under the
terms of this Agreement; provided, however, that the Company shall not
invest in limited liability company or limited partnership interests of any
other Program. Notwithstanding the foregoing, the Company shall be
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permitted to invest in joint venture arrangements with Programs formed by the
Manager, even if all the foregoing conditions are not satisfied, if the
following conditions are met: (A) such Affiliate has investment objectives
substantially similar to those of the Company; (B) there are no duplicate fees;
(C) the compensation for equipment management of the Manager and the manager or
general partner of such Affiliate is substantially identical; (D) the Company
has a right of first refusal to buy the equipment if such Affiliate wishes to
sell the equipment held by the venture; (E) the investment of the Company and
the Affiliate in the venture is on substantially the same terms and conditions;
and (F) the venture is done either for the purpose of effecting appropriate
diversification for the Company or for the purpose of relieving the Manager or
its Affiliates or nominees from a commitment entered into pursuant to Section
2.02(n). Notwithstanding the foregoing, the Company (x) may enter into pooling
and similar arrangements with respect to its Equipment with comparable equipment
owned by other parties for the purpose of operating and managing the Equipment,
provided there are no duplicate fees and the Company retains title to the
Equipment; and (y) may purchase interests in residual values or remarketing
proceeds revenue and similar interests as long as such interests do not exceed
10% of the total assets of the Company;
(s) Exercise all rights and powers permitted to the "tax matters
partner" under Subchapter C of Chapter 63 of the Code (the Manager being
hereby designated as the "tax matters partner" of the Company within the
meaning of Section 6231(a)(7) of the Code);
(t) Take all such actions, including the prohibition of certain types of
transfers of Units and/or the restriction of the number of Units that may be
transferred, to the extent necessary to protect the tax status of the
Company as a partnership rather than an association taxable as a
corporation;
(u) Take such action, including without limitation, amending this
Agreement and/or restricting the number of each class of Units that may be
owned by Benefit Plans, to the extent necessary to prevent the assets of the
Company from being characterized as "plan assets" (within the meaning of
ERISA) of Benefit Plan Members;
(v) Cause the Company to repurchase or redeem Class A Units in
accordance with Sections 6.09 and 6.10;
(w) Take any action that the Manager determines in its sole discretion
to be necessary or appropriate to cause the Company to comply with any
withholding requirements established under the Code, including electing to
withhold a portion
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of any distribution or allocation made to Class A Members who are "foreign
persons" or who fail to provide to the Company an appropriate certificate or
other documentation in accordance with the applicable provisions of the Code
and the Regulations requested by the Manager from such Class A Member;
(x) Take any action that the Manager determines in its sole discretion
to be necessary or appropriate, including, without limitation, amending this
Agreement, to prevent the deregistration or decertification of Equipment by
the Federal Aviation Administration or any other entities, or to reduce the
risk of deregistration or decertification of such Equipment; and
(y) Do any act that is necessary and incidental to carrying out the
foregoing.
Any persons dealing with the Company or its properties shall be entitled to
rely fully upon any lease agreement, charter party, mortgage, security
agreement, bill of sale, contract, guarantee, note, or other written instrument
signed by the Manager in the name and on behalf of the Company.
2.03 Liability of Manager and Members.
(a) Liability of Class B Members. Class B Members are liable to
creditors of the Company (hereinafter referred to each as a "Third Party
Creditor," and collectively as the "Third Party Creditors") to the same
extent that a general partner of a limited partnership formed under the
Delaware Limited Partnership Act is liable under Section 17-403(b) of the
Delaware Limited Partnership Act to creditors of the limited partnership
(subject to the limitations on proceeding against the assets of a general
partner set forth in Sections 17-403(d) and 17-211(j) of the Delaware
Limited Partnership Act), as if the Company were a limited partnership
formed under the Delaware Limited Partnership Act and the Class B Members
were general partners of the limited partnership. In furtherance but not in
limitation of the generality of the foregoing, the Class B Members are
liable for any and all debts, obligations and other liabilities of the
Company, whether arising from contract or by tort, statute, operation of law
or otherwise, enforceable directly and absolutely against the Class B
Members by each Third Party Creditor. Except as otherwise provided by this
Section 2.03(a), the debts, obligations and liabilities of the Company,
whether arising in contract, tort or otherwise, shall be solely the debts,
obligations and liabilities of the Company and no Covered Person shall be
obligated personally for any such debt, obligation or liability of the
Company solely by reason of being a Covered Person.
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There shall always be at least one Class B Member, as set forth in Section
1.08 hereof.
(b) Liability of Manager and Class A Members. Except as otherwise
required by law, the Manager and the Class A Members, in their capacity as
such, shall have no liability in excess of (i) the amount of their Capital
Contributions, if any, (ii) their share in any assets and undistributed
proceeds of the Company, and (iii) the amount of any distributions wrongly
distributed.
2.04 Indemnification.
(a) Except in the case of negligence or misconduct, an Indemnified Party
shall not be liable, responsible or accountable in damages or otherwise to
the Members or the Company for the doing of any act or the failure to do any
act, the effect of which may cause or result in loss or damage to the
Company, if the Manager determines, in good faith, that the act or omission
was in the best interests of the Company. Each Indemnified Party shall be
entitled to be indemnified by the Company from the assets of the Company, or
as an expense of the Company, but not by the Members, against any liability
or loss, as a result of any claim or legal proceeding relating to the
performance or nonperformance of any act concerning the activities of the
Company (except in the case where such Indemnified Party is negligent or
engages in misconduct) if the Manager determines, in good faith, that the
act or omission was in the best interests of the Company. The
indemnification authorized by this Section 2.04 shall include the payment of
reasonable attorneys' fees and other expenses (not limited to "taxable
costs") incurred in settling or defending any claim, threatened action, or
finally adjudicated legal proceedings.
(b) Notwithstanding anything to the contrary in Section 2.04(a), the
Manager and its Affiliates (when acting within the scope of authority of the
Manager) and any Person acting as a broker-dealer shall not be indemnified
for any losses, liabilities or expenses arising from or out of an alleged
violation of federal or state securities laws unless (i) there has been a
successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee and the court
approves indemnification of the litigation costs, or (ii) such claims have
been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee and the court approves
indemnification of the litigation costs, or (iii) a court of competent
jurisdiction approves a settlement of the claims against a particular
indemnitee and finds that indemnification of the settlement and related
costs should be made. In any claim for indemnification for federal or state
securities law violations,
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the party seeking indemnification shall place before the court the position
of the Securities and Exchange Commission, the Massachusetts, Oklahoma and
Tennessee Securities Divisions, and any other applicable regulatory
authority with respect to the issue of indemnification for securities law
violations. The Company shall not incur the cost of that portion of any
liability insurance which insures any Indemnified Party for any liability as
to which the Indemnified Party is prohibited from being indemnified under
this Section 2.04.
(c) The Company may advance funds to the Manager and its Affiliates for
legal expenses and other costs incurred as a result of legal action
initiated against the Manager or its Affiliates only if the following
conditions are satisfied: (i) the legal action relates to the performance of
duties or services by the Manager or its Affiliates on behalf of the
Company; (ii) the legal action is initiated by a third party who is not a
Member; and (iii) the Manager or its Affiliates undertake to repay the
advanced funds, including interest at a rate equal to that which would be
charged by third party financing institutions if such advanced funds were
loaned by such financing institutions, but in no event in excess of 1% above
the annual rate of interest then publicly announced by Bank of America, N.T.
& S.A., as its reference rate, to the Company in cases in which they would
not be entitled to indemnification pursuant to Section 2.04(a).
2.05 Powers and Duties of the Members. The Class A Members shall not
participate in the control of the business affairs of the Company, transact any
business on behalf of the Company, or have any power or authority to bind or
obligate the Company.
The Class A Members shall have the right, acting by a Majority in Interest
of the Class A Members (except as otherwise provided in this Agreement,
including, without limitation, the vote required by Sections 2.07 and 9.04
hereof) pursuant to Article XV, to vote upon or consent in writing to the
following matters:
(a) With the concurrence of all the Class B Members:
(i) Execution or delivery of any assignment for the benefit of the
creditors of the Company;
(ii) Except as otherwise provided in Section 6.02 hereof, approval
of the sale, transfer, encumbrance, assignment, or other disposition by
the Manager of its interest as a manager in the Company or by any Class
B Member of all or any portion of its Class B Units; and
(iii) Release, assignment, or transfer of a Company claim or other
asset without full and adequate consideration, and for this purpose,
any good faith settlement by
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the Manager shall be deemed to be for full and adequate consideration.
(b) Without the concurrence of the Class B Members:
(i) Removal of the Manager as provided in Section 9.01;
(ii) Election of a successor or additional manager and the taking
of certain other actions permitted by Article IX;
(iii) Termination and dissolution of the Company as provided in
Section 10.01(a);
(iv) Amendment of this Agreement, except as otherwise expressly
provided in Article XVIII;
(v) Termination, on 60 days' prior written notice, of contracts for
services or goods between the Company and a Manager or any of its
Affiliates; and
(vi) Sale of all or substantially all of the Company Assets in a
single sale, or in multiple sales in the same twelve-month period,
except in the orderly liquidation and winding up of the business of the
Company in anticipation of its termination and dissolution.
The matters described in subsections (a) and (b) above and expressly set forth
in Sections 2.07 and 9.04 hereof are the only matters with respect to which the
Class A Members shall have the right to vote upon and upon the requisite
affirmative vote of the Class A Members with respect to any such matter and the
concurrence of the Class B Members, if required, the Manager shall have the
power and authority to do all things reasonably necessary to carry out the
transactions contemplated. The Class A Members shall not have, and to the
fullest extent permitted by law hereby waive, any voting rights under the
Delaware Act, unless (x) specifically granted by this Agreement or (y) waiver of
such rights is expressly prohibited under the Delaware Act or other applicable
law.
The Manager and its Affiliates will not collectively acquire for investment
5% or more of the Class A Units and the Class A Units acquired for investment by
the Manager and/or its Affiliates shall have restricted voting rights in any
matter where the interests of the Company and/or the Class A Members' interests
directly conflict with those of the Manager or its Affiliates. With respect to
any Class A Units owned by the Manager or its Affiliates, the Manager and its
Affiliates may not vote or consent on matters submitted to the Class A Members
regarding removal of the Manager or any transaction between the Company and the
Manager or its Affiliates. In determining the required percentage in interest of
Class A Units necessary to approve a matter on which
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the Manager and its Affiliates may not vote or consent, any Class A Units owned
by the Manager or its Affiliates shall not be included.
2.06 Compensation of Manager. Other than the Managing Placement Agent Fee
which shall be paid by the Initial Class B Member in accordance with Section
3.03 hereof and reimbursement for Company expenses as provided in Section 3.15
hereof and except as expressly set forth in this Section 2.06, the Manager and
its Affiliates shall not be entitled to receive any compensation for services
rendered to the Company, including without limitation services rendered in
connection with the offering of Class A Units, the acquisition of Equipment, and
initial lease negotiations. Subject to the limitations set forth in this Section
2.06, the Manager and/or its Affiliates shall be entitled to receive, as a cost
of the Company, each and all of the following amounts (in addition to and not in
limitation of any amounts to which any Class B Member, in its capacity as such,
is entitled under this Agreement):
(a) Equipment Management Fee. As compensation for providing equipment
management services, IMI shall receive from the Company, on a monthly basis,
as soon as reasonably practical following the close of each calendar month,
an Equipment Management Fee equal to the lesser of (i) the fees which would
be charged by an independent third party for similar services for similar
equipment or (ii) the sum of (A) for that Equipment for which IMI provides
only Basic Equipment Management Services (1) 2% of the Gross Lease Revenues
attributable to Equipment which is subject to Full Payout Net Leases, and
(2) 5% of Gross Lease Revenues attributable to Equipment which is subject to
Operating Leases, and (B) for that Equipment for which IMI provides
Supplemental Equipment Management Services, 7% of the Gross Lease Revenues
attributable to such Equipment. No Equipment Management Fee will be earned
in connection with the transactions described in Section 2.02(r)(y).
(b) Re-Lease Fee. As compensation for providing Equipment re-leasing
services for any Equipment for which the Manager or any Affiliate has,
following the expiration of the current or most recent lease, charter or
other contract for the Equipment, arranged a subsequent lease, charter or
other contract for the use of such Equipment to a lessee or other third
party, other than the current or most recent lessee or other operator of
such Equipment, the Manager or any Affiliate shall receive, on a monthly
basis, a Re-Lease Fee equal to the lesser of (i) the fees which would be
charged by an independent third party for comparable services for comparable
equipment or (ii) 2% of Gross Lease Revenues derived from such re-lease;
provided, however, that no Re-Lease Fee shall be payable if such Re-Lease
Fee would cause the combination of Equipment Management Fees and the Re-
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Lease Fees with respect to such Equipment to exceed 7% of Gross Lease
Revenues.
(c) Equipment Liquidation Fee. TEC shall receive as compensation for
the sale of items of Equipment, a fee equal to the lesser of (i) 50% of the
Competitive Equipment Sales Commission or (ii) 3% of the sales price of
Equipment which it sells on behalf of the Company; provided, however, that
such amount shall not be paid until the Class A Members have received
distributions equal to the Preliminary Return Amount. Until the Preliminary
Return Amount is so distributed, the amount of such fee shall accrue without
interest. All such accrued Equipment Liquidation Fees shall be paid to TEC
in accordance with this paragraph (c) immediately following such
distribution of the Preliminary Return Amount; provided, however, that such
amounts shall be paid to TEC only if the Net Disposition Proceeds from the
sale of such Equipment are actually distributed to the Members. The
Equipment Liquidation Fee, with respect to any sale of Equipment, shall be
reduced by the amount of any resale fees paid to any third parties with
respect to such sale.
(d) Insurance Premiums and Commissions. For providing insurance and
risk management services to the Company, TEI shall, subject to the
provisions of this subparagraph (d), be entitled to receive premiums,
commissions, and fees from the Company. Until such time as 75% or more of
TEI's gross revenue is derived from the provision of insurance, insurance
brokerage, and risk management services other than to the Manager, the
Company, and their Affiliates, TEI may provide such services to the Company
only at TEI's cost and with no profit to TEI. Once at least 75% of TEI's
gross revenue from the provision of insurance, insurance brokerage, and risk
management services is derived from sources other than the Manager, the
Company, and their Affiliates, TEI may derive a profit from the provision of
insurance and insurance brokerage services to the Company. In all events,
the premiums, commissions, and any other compensation paid by the Company to
TEI shall be comparable and competitive with the charges of any other Person
which provides comparable coverage or services that could reasonably be made
available to the Company and such premiums, commissions and any other
compensation shall not exceed that quoted to the Company by at least two
persons who are not Affiliates of the Manager.
(e) Limitation on Compensation. The Manager shall provide to the
Company, on an annual basis, a comparison, prepared in accordance with
generally accepted accounting principles consistently applied, of (i) the
maximum aggregate fees, compensation and promotional interest which may be
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paid by the Company to, and Interim Ownership Income or Loss (as defined
below) received by, the Manager and its Affiliates under Section IV of the
North American Securities Administrators Association, Inc. Statement of
Policy Regarding Equipment Programs ("NASAA Guidelines") as in effect on the
Effective Date (such amount being hereinafter referred to as the "NASAA
Compensation Amount") with (ii) the aggregate fees, compensation and
promotional interest paid by the Company to the Manager and its Affiliates
under the terms of this Agreement (such amount being hereinafter referred to
as the "Company Compensation Amount"). If such comparison demonstrates that
the Company Compensation Amount exceeds the NASAA Compensation Amount, the
Manager shall promptly contribute cash to the capital of the Company in the
amount of such excess, plus interest not in excess of 2% above the annual
rate of interest then publicly announced by the Bank of America, N.T. & S.A.
as its reference rate, calculated from the point in time, if apparent, in
which the excess occurred, which sum shall then, in its entirety, be
distributed to the Class A Members in accordance with the number of Class A
Units held by each. For purposes of this paragraph, "Interim Ownership
Income or Loss" means interim income or loss derived from entitlement to
rents and obligations for expenses and liabilities with respect to any
Equipment held by the Manager or an Affiliate until the Company acquires
such Equipment. Specifically in connection with subsection (i) above, NASAA
Guideline IV.C.2 is to be applied for purposes of determining the minimum
amount of proceeds that would normally be required to be utilized for
Investment in Equipment and for purposes of performing the comparative
compensation analysis dictated by this Section 2.06(e). Under the NASAA
Guidelines, a program must commit a percentage of Capital Contributions to
Investment in Equipment which is equal to the greater of (i) 80% of Capital
Contributions reduced by .0625% for each 1% of indebtedness encumbering
equipment or (ii) 75% of Capital Contributions.
The following are examples of the formula set forth above.
A) No indebtedness: 80% of Capital Contributions must be committed
to Investment in Equipment.
B) Percent Indebtedness Encumbering Equipment = 20%
20 X .0625% = 1.25%
80% - 1.25% = 78.75% of Capital Contributions must be committed
to Investment in Equipment
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Additionally, for purposes of the comparison, NASAA Guidelines Section
IV.C.3(b) which states "The Sponsor may take a fully participating Carried
Interest equal to 1% for the first 2.5% of additional Investment in
Equipment, 1% for the next 2% of additional Investment in Equipment, and 1%
for each 1% additional Investment in Equipment thereafter" and IV.D.1(a)
which states "An interest in the Program will be allowed as a promotional
interest provided that the amount or percentage of such interest is
reasonable. Such an interest will be presumed reasonable if it is within the
limitations expressed below: An interest equal to: 5% of all distributions
from Cash Available for Distribution and 1% of all distributions from Net
Disposition Proceeds until such time as the Participants have received a
return of the Capital Contributions plus an amount equal to 8% of Capital
Contributions per annum cumulative; thereafter the Sponsor's interest in all
distributed Cash Available for Distribution plus distributed Net Disposition
Proceeds may increase to 15%. For each 1% less taken in the unsubordinated
Cash Available for Distribution under subparagraph 1.a., the subordinated
interest may increase by 1%" will specifically be applicable as well as
Sections IV.E.(1-4); IV.F.(1-2); IV.G.1-5.
2.07 Roll-Up Transactions.
(a) Consent Required. Without the approval of all Class B Members and
the approval of Class A Members holding at least 66 2/3% of all outstanding
Class A Units, the Company shall not enter into any Roll-Up. Class A Members
who do not consent to a Roll-Up shall be given the option of (i) accepting
the securities of the Roll-Up Entity offered in the proposed Roll-Up; or
(ii) receiving cash in an amount equal to the non-consenting Class A
Member's pro rata share of the appraised value of the net assets of the
Company. The Company shall not reimburse the sponsor of a proposed Roll-Up
for the costs of an unsuccessful proxy contest in the event the Roll-Up is
not approved by the Class A Members as required by the first sentence of
this Section 2.07(a).
(b) Appraisal. The "appraised value of the net assets of the Company"
as used in Section 2.07(a) shall be established by means of an appraisal of
the net assets of the Company by a competent independent expert, engaged for
the benefit of the Company and the Class A Members, with no current material
or prior business or personal relationship with the Manager or its
Affiliates. Such independent expert must be engaged to a substantial extent
in the business of rendering opinions regarding the value of assets of the
type held by the Company, and must be qualified to perform such work. The
appraisal shall be based on an evaluation of all relevant information and
shall indicate the value of the Company's
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assets, assuming an orderly liquidation of such assets over a twelve-month
period, as of a date immediately prior to the date of the proposed Roll-Up. A
summary of the independent appraisal, including all material assumptions
underlying the appraisal, shall be included in a report to the Class A Members
in connection with a proposed Roll-Up. If the appraisal will be included in a
prospectus used to offer the securities of a Roll-Up Entity, the appraisal shall
be filed with the Securities and Exchange Commission and the states as an
exhibit to the registration statement for the offering.
(c) Prohibited Roll-Ups. Notwithstanding Section 2.07(a), the Company
shall not participate in any proposed Roll-Up:
(i) which would result in the Class A Members having voting rights
and rights to hold meetings which are less than those rights provided
for under Section 2.05(b)(i), (ii), (iii), (iv) and (vi) and the first
three sentences of the first paragraph of Article XV hereof;
(ii) which includes provisions which would operate to materially
impede or frustrate the accumulation of shares by any purchaser of the
securities of the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity);
(iii) which would limit the ability of a Class A Member to exercise
the voting rights of its securities of the Roll-Up Entity on the basis
of the number of Class A Units held by that Class A Member; and
(iv) in which the Class A Members' rights of access to the records
of the Roll-Up Entity will be less than those rights provided for under
Section 4.01 hereof.
III
FINANCING OF THE COMPANY
3.01 Capital Contribution of the Initial Class A Member. Simultaneously with
the execution of this Agreement, the Initial Class A Member has contributed $100
cash to the capital of the Company for which she has received five Class A
Units.
3.02 Capital Contributions of the Original Class A Members. The Original
Class A Members shall contribute to the capital of the Company $20 in cash for
each Class A Unit subscribed for. The Original Class A Members shall be subject
to a minimum purchase requirement of 125 Class A Units each; provided, however,
that the minimum purchase requirement for a Qualified Plan or an IRA shall be 50
Class A Units. Investment in Equipment by
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the Company shall equal 100% of all Capital Contributions from the Original
Class A Members.
3.03 Capital Contribution of the Initial Class B Member. In exchange for
100 Class B Units, the Initial Class B Member shall pay on behalf of the Company
(a) all Organizational and Offering Expenses, including the Managing Placement
Agent Fee, and (b) any costs associated with any Section 754 Election, in the
event that the Manager, in its sole discretion, elects to make a Section 754
Election (other than any costs associated with tax consequences to a Class A
Member as a result of a Section 754 Election). These payments shall be treated
as a Capital Contribution to the Company, without regard to whether such
payments constitute "contributions" within the meaning of Section 18-501 of the
Delaware Act. The portion of those organizational and offering expenses paid by
the Initial Class B Member on behalf of both the Company and Fund II [Fund I]
will be allocated between the Company and Fund II [Fund I] pro rata based on the
amount of capital raised by each.
3.04 Additional Contributions. Except as provided in Section 2.03(a) with
respect to the Class B Members, in no event shall a Member be required to make
any contributions to the capital of the Company in excess of those set forth in
Sections 3.01, 3.02, 3.03 and 3.14.
3.05 Interest. No interest shall be paid by the Company on any Capital
Contribution.
3.06 Time for Return of Contributions. None of the Members shall be
entitled to a return of any of the Capital Contributions made by any of them
other than to the extent net proceeds exist following the full and complete
winding up and liquidation of the business and affairs of the Company.
3.07 Loans by the Members. None of the Members shall be required to make
loans to the Company.
3.08 Allocation of Net Profits and Net Loss.
(a) General Allocation. After giving effect to the special allocations
set forth in Sections 3.08(b) and 3.17, Net Profits and Net Loss shall be
allocated 1% to the Class B Members and 99% to the Class A Members.
(b) Special Allocations. Notwithstanding anything in this Agreement to
the contrary, the following items of Company income and loss shall be
specially allocated to the Members in the manner described below:
(i) Items arising out of the Initial Class B Member's payment on
behalf of the Company of expenditures classified as Organizational and
Offering Expenses shall be specially allocated to the Class B Members.
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(ii) Except as provided in Section 3.08(b)(iii), in the event any
Member unexpectedly receives any adjustments, allocations or
distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6)
of the Regulations, items of Company gross income and gain shall be
allocated to such Member in an amount and manner sufficient to
eliminate, to the extent required by the Regulations, the Adjusted
Capital Account Deficit of such Member as quickly as possible. This
Section 3.08(b)(ii) is intended to comply with the qualified income
offset requirement in Section 1.704-1(b)(2)(ii)(d) of the Regulations
and shall be interpreted consistently therewith.
(iii) If there is a net decrease in Company Minimum Gain during any
Company fiscal year, each Member who would otherwise have an Adjusted
Capital Account Deficit at the end of such year shall be specially
allocated items of Company income and gain for such year (and, if
necessary, subsequent years) in an amount and manner sufficient to
eliminate such Adjusted Capital Account Deficit as quickly as possible.
The items to be so allocated shall be determined in accordance with
Section 1.704-2(f)(6) of the Regulations. This Section 3.08(b)(iii) is
intended to comply with the minimum gain chargeback requirement in such
Section of the Regulations and shall be interpreted consistently
therewith.
(iv) After giving effect to all other special allocations in this
Section 3.08, all or a portion of the remaining items of Company income
(including gross income) or gain for the fiscal year, if any, shall be
specially allocated to the Class B Members in an amount equal to the
excess, if any, of (A) the cumulative cash distributions received by a
particular Class B Member pursuant to Section 3.09 hereof from the
commencement of the Company to a date 30 days after the end of such
fiscal year, over (B) the sum of the cumulative Net Profit allocated
pursuant to Section 3.08(a) hereof for the current and all previous
fiscal years and the cumulative income (including gross income) or gain
allocated pursuant to this Section 3.08(b)(iv) for all previous fiscal
years.
(v) In the event any fee to which the Manager or an Affiliate
thereof is entitled is treated as a Company distribution by the
Internal Revenue Service, a special allocation of Gross Income shall be
made annually to the Manager or an Affiliate thereof in an amount equal
to any such recharacterized fee for that taxable year.
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(vi) Net Loss shall not be allocated to any Class A Member if such
allocation would cause or increase an Adjusted Capital Account Deficit
for such Class A Member at the end of any fiscal year, and any such Net
Loss shall be allocated to the Class B Members. This limitation shall
be applied on a Class A Member by Class A Member basis so as to
allocate the maximum permissible Net Loss to each Class A Member under
Section 1.704-1(b)(2)(ii)(d) of the Regulations.
(vii) To the extent an adjustment to the adjusted tax basis of any
Company asset pursuant to Code Section 734(b) or Code Section 743(b) is
required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be
taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain
(if the adjustment increases the basis of the asset) or loss (if the
adjustment decreases such basis) and such gain or loss shall be
specially allocated to the Members in a manner consistent with the
manner in which their Capital Accounts are required to be adjusted
pursuant to such Section of the Regulations.
(viii) The Company's nonrecourse deductions (as defined in
Regulations Section 1.704-2(c)) shall be allocated 25% to the Class B
Members and 75% to the Class A Members.
(ix) In the event any Member who has a deficit Capital Account at
the end of any fiscal year which is in excess of the sum of (A) the
amount such Member is obligated to restore, and (B) the amount such
Member is deemed to be obligated to restore pursuant to the penultimate
sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each
such Member shall be specially allocated items of Company income and
gain in the amount of such excess as quickly as possible, provided that
an allocation pursuant to this Section 3.08(b)(ix) shall be made if and
only to the extent that such Member would have a deficit Capital
Account in excess of such sum after all other allocations provided for
in this Article III have been tentatively made as if this Section
3.08(b)(ix) and Section 3.08(b)(ii) hereof were not in the Agreement.
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3.09 Distributions of Cash Available for Distribution. Subject to any
mandatory limitations on distributions set forth in Sections 18-607 and 18-804
of the Delaware Act, when Cash Available for Distribution is distributed to
Members, such distributions shall be allocated and distributed as follows:
(a) With respect to Class A Units which are not Early Return Class A
Units as of the applicable Record Date, the portion of Cash Available for
Distribution as of the applicable Record Date determined by multiplying Cash
Available for Distribution by a fraction, the numerator of which is the
number of Class A Units which are not Early Return Class A Units as of the
applicable Record Date, and the denominator of which is the total number of
Class A Units held by all Class A Members as of the applicable Record Date,
shall be allocated and distributed 15% to the Class B Members and 85% to the
Class A Members holding Class A Units which are not Early Return Class A
Units; and
(b) With respect to Class A Units which are Early Return Class A Units
as of the applicable Record Date, the portion of Cash Available for
Distribution as of the applicable Record Date determined by multiplying Cash
Available for Distribution by a fraction, the numerator of which is the
number of Early Return Class A Units as of the applicable Record Date, and
the denominator of which is the total number of Class A Units held by all
Class A Members as of the applicable Record Date, shall be allocated and
distributed 25% to the Class B Members and 75% to the Class A Members
holding Early Return Class A Units.
3.10 Allocations and Distributions Among Class A Members.
(a) Net Profit and Net Loss.
(i) Subject to the provisions of subparagraph (ii) below, Net
Profits and Net Loss allocable to Class A Members shall be apportioned
among the Class A Members based upon a fraction, the numerator of which
is the number of Class A Units held by each Class A Member and the
denominator of which is the total number of Class A Units held by all
Class A Members.
(ii) The provisions of this subparagraph (ii) shall govern the
allocation of Net Profits and Net Loss among Class A Members
attributable to the failure of each Class A Member to own a constant
number of Class A Units throughout each taxable year of the Company.
During the Offering Period, Net Profits and Net Loss allocable to Class
A Members shall be apportioned among the Class A Members in the ratio
which the product of the number of Class A Units owned by a Class A
Member multiplied by the number of days in which
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the Class A Member owns such Class A Units during the Offering Period
bears to the sum of such products for all Class A Members. The Company
shall conduct an interim closing of its books as of the close of each
calendar month subsequent to the Offering Period. Net Profits and Net
Loss allocable to Class A Members during each such month shall be
apportioned among them solely with reference to the Class A Members who
hold Class A Units as of the fifteenth day of the month.
(iii) Notwithstanding anything to the contrary contained in this
Agreement, the Members agree that the Manager, beginning in the fiscal
year that the last Class A Member is admitted to the Company as a
Member, shall allocate Net Profits and Net Loss to any Class A Member
in such amount and in such manner so as to equalize the Capital Account
balances of the Class A Members; provided, however, that such
allocation is reasonably consistent with, and reasonably supportable
under, the Code. Any such reallocation notwithstanding, the percentage
of Cash Available for Distribution otherwise allocated to the Class B
Members in accordance with Section 3.09 hereof shall not be affected.
(b) Distributions.
(i) Except during the Offering Period, (A) distributions of Cash
Available for Distribution allocable to the Early Return Class A Units
pursuant to Section 3.09(a) hereof shall be apportioned pro rata among
the Class A Members holding Early Return Class A Units as of each
Record Date based upon a fraction, the numerator of which is the number
of Early Return Class A Units held by each such Class A Member as of
the Record Date, and the denominator of which is the total number of
Early Return Class A Units held by all Class A Members holding Early
Return Class A Units as of the Record Date, and (B) distributions of
Cash Available for Distribution allocable to the Class A Units which
are not Early Return Class A Units pursuant to Section 3.09(b) hereof
shall be apportioned pro rata among the Class A Members as of each
Record Date based upon a fraction, the numerator of which is the number
of Class A Units which are not Early Return Class A Units held by each
such Class A Member as of the Record Date, and the denominator of which
is the total number of Class A Units which are not Early Return Class A
Units held by all such Class A Members as of the Record Date.
(ii) During the Offering Period, (A) distributions of Cash
Available for Distribution allocable to the Early Return Class A Units
pursuant to Section 3.09(a) hereof
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shall be apportioned pro rata among the Class A Members holding Early
Return Class A Units as of each Record Date in the ratio which the
product of the number of Early Return Class A Units owned by each Class
A Member as of the Record Date multiplied by the number of days in
which such Class A Member has owned such Early Return Class A Units
since the previous Record Date (or, if none, since the commencement of
the Offering Period) bears to the sum of all such products for all
Class A Members holding Early Return Class A Units as of the Record
Date, and (B) distributions of Cash Available for Distribution
allocable to the Class A Units which are not Early Return Class A Units
pursuant to Section 3.09(b) hereof shall be apportioned pro rata among
the Class A Members holding Class A Units which are not Early Return
Class A Units as of each Record Date in the ratio which the product of
the number of Class A Units which are not Early Return Class A Units
owned by each Class A Member as of the Record Date multiplied by the
number of days in which such Class A Member has owned such Class A
Units since the previous Record Date (or, if none, since the
commencement of the Offering Period) bears to the sum of all such
products for all Class A Members holding Class A Units which are not
Early Return Class A Units as of the Record Date.
3.11 Allocations and Distributions Among Class B Members. Net Profits, Net
Loss and all items thereof allocable to Class B Members shall be apportioned
among them based upon a fraction, the numerator of which is the number of Class
B Units held by each Class B Member and the denominator of which is the total
number of Class B Units held by all Class B Members; provided, however, that in
the event that Class B Units are transferred pursuant to Section 6.02 hereof,
then Net Profits, Net Loss and all items thereof allocated to the Class B
Members for each fiscal year shall be allocated to the Class B Members in
proportion to the number of Class B Units each holds from time to time during
such fiscal year in accordance with Code Section 706 and the Regulations
thereunder, using any convention permitted by law and selected by the Manager.
Distributions of Cash Available for Distribution allocable to Class B Members
shall be apportioned among the Class B Members as of each Record Date based upon
a fraction, the numerator of which is the number of Class B Units held by each
Class B Member as of the Record Date, and the denominator of which is the total
number of Class B Units held by all Class B Members as of the Record Date.
3.12 Timing of Distributions. The Manager shall establish the amount of
Cash Available for Distribution to be distributed to the Members with respect to
each month on the fifteenth day of
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the following month. To the extent the Manager determines to distribute Cash
Available for Distribution, the Manager shall cause the Company to make monthly
distributions of Cash Available for Distribution to all Members who have elected
to receive monthly distributions and the Manager shall cause the Company to make
quarterly distributions of Cash Available for Distribution to all Members who
have not elected to receive monthly distributions. In December of each year,
each Member shall have the opportunity to change its distribution election.
3.13 Section 704(c). Income, gain, loss, and deduction with respect to
Company property which has a variation between its adjusted tax basis computed
in accordance with Treasury Regulations Section 1.704-1(b) and its adjusted tax
basis computed for federal income tax purposes shall be shared among the Members
for federal income tax purposes so as to take account of such variation in a
manner consistent with the principles of Section 704(c) of the Code.
3.14 Return of Distributions. In accordance with Section 18-607 of the
Delaware Act, a Member will be obligated to return any distribution from the
Company as provided by applicable law or to the extent that such Member knew at
the time of the distribution that, immediately after giving effect to the
distribution, all liabilities of the Company, other than liabilities to Members
on account of their interest in the Company and liabilities as to which recourse
of creditors is limited to specified property of the Company, exceed the fair
value of the Company's assets, except that the fair value of any property that
is subject to a liability as to which recourse of creditors is so limited shall
be included in the assets of the Company only to the extent that the fair value
of the property exceeds this liability.
3.15 Company Expenses. All of the Company's expenses shall be billed
directly to and paid by the Company; provided, however, that the Initial Class B
Member, as its Capital Contribution to the Company, shall pay all Organizational
and Offering Expenses, including reimbursable expenses of the Managing Placement
Agent and the Managing Placement Agent Fee, and any costs associated with any
Section 754 Election as provided in Section 3.03; provided further, however,
that payment for the Company's expenses (other than Organizational and Offering
Expenses and any costs associated with any Section 754 Election as provided in
Section 3.03) may be made by the Manager or an Affiliate which shall be
reimbursed therefor by the Company. The Manager or its Affiliates shall not be
reimbursed for services for which they are entitled to compensation by way of a
separate fee.
The Manager and its Affiliates may be reimbursed by the Company for any
Company expenses (other than Organizational and Offering Expenses and any costs
associated with any Section 754 Election as provided in Section 3.03) paid by
them, such
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expenses including (i) the actual cost of goods, services and materials used for
or by the Company or related to the operation, maintenance, repair, insurance or
re-marketing of its Equipment and obtained from unaffiliated parties; (ii)
salaries and related salary expenses for services which could be performed
directly for the Company by independent parties but are performed by the Manager
or its Affiliates, such as legal, accounting, leasing agent, data processing,
operations, communications, duplicating, and other such services; (iii)
preparing Company reports and communications to the Class A Members; and (iv)
performing administrative services; provided, however, that no reimbursement
shall be permitted under clauses (i) through (iv) hereof unless the items for
which reimbursement is being sought are necessary to the prudent operation of
the Company; provided further, that no reimbursement under clauses (i) through
(iv) hereof shall be permitted for the salaries, fringe benefits, travel
expenses and equipment, or other administrative items incurred by any
Controlling Person of the Sponsor, or for rent or depreciation, utilities,
capital equipment, or other similar administrative items. Expenses reimbursed
pursuant to this Section 3.15 must be reimbursed in an amount equal to the lower
of the actual cost to the Manager or its Affiliates or the amount the Company
would be required to pay to independent parties for comparable services in the
same geographic locations. The Manager and Affiliates shall not be reimbursed
for services for which any of them are entitled to compensation by way of a
separate fee; provided, however, the Manager and its Affiliates shall be
reimbursed for their out-of-pocket expenses incurred by employees and other
Persons (other than Controlling Persons) in acquiring and re-marketing
Equipment. Except as otherwise provided herein, all other Company expenses shall
be billed directly to and paid by the Company.
3.16 Certain Taxes and Fees.
(a) In the event the Company pays to any federal, state or local
government authority any amount of tax, penalty, interest, fee or other
expenditure which is attributable to the particular status of one or more
Members including, without limitation, the status of a Member as a
nonresident alien, foreign corporation or other foreign entity or as a
nonresident of California or any other state imposing such a charge, the
Manager shall treat such tax, penalty, interest or fee, and in its
discretion may treat other related Company expenditures, as a distribution
of Cash Available for Distribution, as appropriate, to such Members. Such a
distribution shall reduce the amount of Cash Available for Distribution
otherwise payable by the Company to such Members. Such Members shall be
distributed any refund of any such tax, penalty, interest or other amounts
received by the Company; provided, however, that the distribution due such
Members shall be reduced by any expenses (such expenses shall be specially
allocated to such
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Members) of the Company incurred in connection with the payment or obtaining
of the refund of such taxes, penalties, interest or other amounts and the
Company shall have no duty or obligation to seek to obtain or collect any
such refund or expend any amount to reduce the amount of any withholding,
penalty, interest or other amount otherwise payable to any government
authority. The Manager may require from a Member the appropriate
documentation with respect to any distribution hereunder.
(b) As security for any withholding tax or other amount referred to in
Section 3.16(a) or other liability or obligation to which the Company may be
subject as a result of any act or status of any Member, the Company shall
have (and each Member hereby grants to the Company) a security interest in
all Cash Available for Distribution distributable to such Member to the
extent of the amount of such withholding tax or other liability or
obligation. The Company shall have a right of set-off against any such
distributions of Cash Available for Distribution in the amount of such
withholding tax or other liability or obligation.
3.17 Saving Clause -- Intended Cash Deal. The tax allocation provisions of
this Agreement are intended to produce final Capital Account balances that are
at levels ("Target Final Balances") which permit liquidating distributions that
are made in accordance with such final Capital Account balances to be equal to
the distributions that would occur under Section 3.09 hereof if said liquidating
proceeds were distributed pursuant to said Section 3.09. To the extent that the
tax allocation provisions of this Agreement would not produce the Target Final
Balances, the Members agree that the Manager shall take such actions as are
necessary to amend such provisions to produce such Target Final Balances.
Notwithstanding the other provisions of this Agreement, allocations of the
Company gross income and deductions shall be made prospectively as necessary to
provide such Target Final Balances.
IV
BOOKS OF ACCOUNT, FINANCIAL STATEMENTS
AND FISCAL MATTERS
4.01 Books of Account and Records. The Manager shall, for income tax
purposes, keep or cause to be kept on the accrual basis adequate books of
account and records of the Company wherein shall be recorded and reflected all
of the contributions to the capital of the Company and all of the income,
expenses, gains, losses, and transactions of the Company. The Company's books of
account and records shall also include the following:
(a) A current list of the full name, last known business or residence
address and last known business telephone num-
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ber of the Manager and each Member set forth in alphabetical order together
with the number and type of Units held, the Capital Contribution and the
share in Net Profits and Net Loss of each Member and the date on which each
Member became a Member (the "Member List");
(b) A copy of the Certificate of Formation and all certificates of
amendment thereto, together with executed copies of any powers of attorney
pursuant to which any certificate has been executed;
(c) Copies of the Company's federal, state and local income tax or
information returns and reports, if any, for the six most recent taxable
years;
(d) This Agreement and all amendments hereto, together with any executed
copies of any powers of attorney pursuant to which this Agreement and any
amendment hereto has been executed;
(e) Financial statements of the Company for the six most recent fiscal
years; and
(f) The Company's books and records for at least the current and past
three fiscal years.
Such books of account and records shall be kept at the principal place of
business of the Company. Upon request each Member and the Member's authorized
representatives shall have, at all times during normal business hours, free
access to and the right to inspect and copy at their expense such books of
account and all records of the Company required to be maintained by this Section
4.01, including the Member List. If a Member designates an authorized
representative for this purpose, the Member must designate such authorized
representative in writing and deliver such designation to the Company. The
Company shall mail the Member List, printed on white paper, in a readily
readable type size (in no event smaller than 10-point type), to any Member
requesting such a list in writing within ten days of such request so long as the
requesting Member pays the Company its actual costs of postage and duplication.
If (i) the Company neglects or refuses to permit access to and the right to
inspect and copy or to mail a copy of the Member List as requested and (ii) the
Manager has not determined that the actual purpose and reason for the request is
to sell the Member List or any copy thereof or otherwise to provide the Member
List to another party or use it for a commercial purpose other than in the
interest of the requesting party relative to his interest in the Company (such
as matters relating to the requesting party's voting rights under this Agreement
and the exercise of the requesting party's rights under federal proxy laws), the
Manager shall be liable to the requesting party for the costs, including
attorneys' fees, incurred by the requesting party for compelling the production
of the Member List and for actual
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damages suffered by the requesting party by reason of such refusal or neglect
and such remedy shall not in any way limit other remedies available to the
requesting party under federal or state law. Subject to Section 4.03, all books
and records of the Company shall be kept on the basis of an annual accounting
period ending December 31 or such other annual accounting period as the Manager
may determine; provided, however, that the Member List shall be updated on at
least a quarterly basis. All references herein to a "year of the Company" are to
such an annual accounting period. The Manager shall cause the Company to
maintain Capital Accounts. Use of the straight-line or any permitted accelerated
method of depreciation with respect to Company properties and other elections
available to the Company may be utilized by the Company for purposes of
reporting federal or state income taxes.
4.02 Reports and Financial Statements. The Manager shall provide the
following reports and financial statements to the Members and, upon request, to
the official or agency administering the securities laws of any state:
(a) Annual Report. Within 120 days after the end of each year of the
Company (i) a balance sheet as of the end of such year, together with
statements of operations, Members' equity, and cash flows for such year;
(ii) a report of the activities of the Company for such year (which shall
include for each piece of Equipment acquired by the Company which
individually represents at least 10% of the Company's total investment in
Equipment, a status report to indicate (A) the condition of the Equipment,
(B) how the Equipment is being utilized as of the end of such year (leased,
operated, held for lease, repair, or sale), (C) the remaining term of any
Equipment lease or other agreement related thereto, (D) the projected use of
Equipment for the next year (renew lease, lease, operate, retire, or sell),
and (E) such other information relevant to the value or utilization of the
Equipment as the Manager deems appropriate, including the method used or
basis for valuation); (iii) a report on distributions to the Members for
such year separately identifying distributions from (A) Cash Flow, (B) Net
Disposition Proceeds and, in each case, (C) the extent, if any, to which the
distributions are attributable to reserves from the proceeds of the sale of
Class A Units or reserves from prior years' operations; and (iv) a report on
any costs incurred by the Manager or its Affiliates in performing
administrative services necessary to the prudent operation of the Company
which are reimbursed by the Company during such year, containing a breakdown
of such costs including (A) a review of the time records of individual
employees of the Manager or its Affiliates, the cost of whose services were
reimbursed, and (B) a review of the specific nature of the work performed by
each such employee. The financial statements shall be prepared in accordance
with
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generally accepted accounting principles and shall be accompanied by an
auditor's report by the Company's independent public accountants.
(b) Quarterly Report. Within 60 days after the end of each calendar
quarter, a financial report of the Company containing a balance sheet and
statements of operations and cash flows for such quarter, prepared and
certified by the Manager as being true and correct, which report shall also
include:
(i) The results of operations of the Company during such quarter;
(ii) A detailed statement setting forth all compensation paid to
the Manager and/or its Affiliates for services rendered and the nature
of the services rendered; and
(iii) Such other matters as the Manager may deem material to the
operations of the Company.
(c) Equipment Acquisition Reports. Until the Proceeds of the Offering
are fully invested or set aside as reserves in accordance with Section 4.06,
within 60 days after the end of each calendar quarter, a report of Equipment
acquisitions during such quarter, including the type and manufacturer of the
Equipment, the purchase price thereof and any other material terms of
purchase, a statement of the total amount of cash expended by the Company to
acquire such Equipment (including and itemizing all commissions, fees, and
expenses and the name of each payee), and a statement of the amount of net
Proceeds in the Company which remain unexpended or uncommitted at the end of
such quarter.
(d) Tax Information. Within 75 days after the end of each year of the
Company, all information regarding the Company necessary for the preparation
of the Members' federal and state income tax returns.
4.03 Fiscal Year of the Company. The Manager intends to elect the calendar
year as the fiscal year of the Company, but the Manager, in its sole discretion,
may elect a different fiscal year for the Company and may change the fiscal year
of the Company from time to time following its initial election.
4.04 Bank Accounts, Funds, and Assets. The funds of the Company shall be
deposited in such bank(s) or other financial institution(s) as the Manager shall
deem appropriate. Such funds shall be withdrawn only by the Manager or its duly
authorized agents. The Manager shall have a fiduciary responsibility for the
safekeeping and use of all funds and assets of the Company, whether or not in
its immediate possession or control, and it shall not employ or permit another
to employ such funds or assets in any
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manner except for the exclusive benefit of the Company. The Manager shall not
commingle or permit the commingling of the funds of the Company with the funds
of any other Person; provided, however, nothing herein shall be construed so as
to prohibit the Manager from establishing master fiduciary accounts to
facilitate the collection of revenues and payments of expenses or distributions
so long as there shall be a separate accounting in subaccounts for all funds of
the Company and all other Persons participating in such master fiduciary
accounts, the funds of the Company maintained in the master fiduciary accounts
shall not be lent or used to satisfy the obligation of any such other Person and
such funds are appropriately protected against claims by creditors of any such
other Persons; provided further, that the Manager will place any funds received
as mileage allowances with respect to any railcars owned by the Company in a
separate bank account in which it shall also place mileage allowances received
with respect to other railcars managed by the Manager and its Affiliates. All
such funds (whether or not attributable to the Company's railcars) will be used
to make payments of mileage allowances due to lessees with respect to the
Company's railcars and the other railcars managed by the Manager and its
Affiliates. No rebates or give-ups may be received by the Manager, nor may the
Manager participate in any reciprocal business arrangements.
4.05 Tax Elections. The Company shall be treated as a partnership for
United States federal income tax purposes. The Manager, in its sole discretion,
shall have the right to make any elections available to the Company with respect
to any federal, state, or local tax matters including a Section 754 Election and
those elections described in Sections 4.01 and 4.03 of this Agreement.
4.06 Reserves. The Manager shall establish and maintain reserves equal to
the lesser of (a) 1% of Capital Contributions attributable to the sale of Class
A Units or (b) $750,000. The Manager, in its sole discretion, may at any time
increase the amount of the Company's reserves to an amount which it determines
to be reasonable and necessary in connection with the operation of the Company's
business and affairs; provided, however, that the amount of reserves may be
decreased or eliminated during the liquidation stage of the Company.
4.07 Loans to or by the Manager. Except as otherwise provided in Section
2.04(c) hereof, the Company will not loan money to the Manager or its
Affiliates. The Company will not borrow money from the Manager or any of its
Affiliates with a term in excess of twelve months. Interest will be paid on
loans or advances (in the form of deposits with manufacturers or vendors of
Equipment or otherwise) from the Manager or its Affiliates from their own funds
at a rate equal to that which would be charged by third party financing
institutions on comparable loans for the same
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purpose in the same geographic area, but in no event in excess of the Manager's
or Affiliate's own cost of funds. In addition, if the Manager or its Affiliates
borrow money and loan or advance it on a short-term basis to or on behalf of the
Company, the Manager or such Affiliates shall receive no greater interest rate
and financing charges from the Company than that which the Manager or such
Affiliates are paying.
4.08 Transactions with the Manager. The Manager and its Affiliates
(including investor programs sponsored by the Manager or its Affiliates) will
not buy or lease Equipment from, or sell or lease Equipment to, the Company
except as provided by this Section 4.08 and by Section 2.02(n). The Manager and
its Affiliates (other than investor programs sponsored by the Manager or its
Affiliates) shall be permitted to make acquisitions of Equipment for the Company
(and assume loans in connection therewith), provided that (a) such acquisitions
are in the best interests of the Company, (b) no benefit arises out of such
acquisitions to the Manager or its Affiliates (other than the interim income or
loss derived from rent or other payments received and expenses incurred until
the Equipment acquired is purchased by the Company), (c) such Equipment
generally is not held by the Manager or any such Affiliate for more than six
months (provided, however, that with respect to unspecified Equipment, the
Manager or its Affiliates shall not intend to hold such Equipment for more than
one hundred and twenty (120) days (but in no event for more than six months)
prior to the transfer to the Company), and (d) there is no difference in
interest terms of the loans secured by the Equipment at the time acquired by the
Manager or any such Affiliate and at the time acquired by the Company. The
Manager or any Affiliate thereof (other than investor programs sponsored by the
Manager or its Affiliates) may sell such Equipment to the Company at a price
equal to the sum of its cost for such Equipment and any acquisition costs
relating to the prospective selection and acquisition of or investment in such
Equipment (including, but not limited to, legal fees and expenses, travel and
communication expenses, costs of appraisal, commissions, accounting fees and
other related costs) paid by it with respect to such Equipment.
V
ISSUANCE OF CERTIFICATES
5.01 Certificates. Upon the issuance of Class A Units, if requested of the
Manager by a Class A Member, the Manager shall cause the Company to issue a
Certificate substantially in the form of the Certificate attached hereto as
Schedule I in the name of the Class A Member certifying that the Class A Member
named therein is a Class A Member in the Company as provided in the Company's
books and records, and stating the number of Class A
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Units into which the Class A Member's interest in the Company is divided. Upon
the transfer of a Class A Unit in accordance with the terms of this Agreement,
if requested, the Manager shall cause the Company to issue a replacement
Certificate according to such procedures as the Manager may establish in its
sole and absolute discretion.
5.02 Lost, Destroyed, or Stolen Certificates. The Company shall issue a
Certificate in place of any previously issued Certificate if the Record Holder
of the Certificate:
(a) Makes proof by affidavit, in form and substance satisfactory to the
Manager, that such previously issued Certificate has been lost, destroyed,
or stolen;
(b) Requests the issuance of a new Certificate before the Company has
notice that such previously issued Certificate has been acquired by a
purchaser for value in good faith and without notice of an adverse claim;
(c) If requested by the Manager, delivers a bond, in form and substance
satisfactory to the Manager, to indemnify the Company and the Manager; and
(d) Satisfies any other reasonable requirements imposed by the Manager
with respect to such issuance.
When a previously issued Certificate has been lost, destroyed, or stolen, and
the Class A Member fails to notify the Company within a reasonable time after
the Class A Member has notice of such event, and the transfer of the Class A
Units represented by the Certificate is registered before the Company receives
such notification, the Class A Member shall be precluded from making any claim
against the Company or the Manager with respect to such transfer or for a new
Certificate.
5.03 Record Holder. The Company shall be entitled to treat each Record
Holder of any Class A Units as the Class A Member in fact with respect to such
Class A Units, and, accordingly, shall not be required to recognize any
equitable or other claim or interest in or with respect to such Class A Units on
the part of any other Person, regardless of whether it shall have actual or
other notice thereof, except as otherwise required by law or any applicable
rule, regulation or guideline.
VI
TRANSFERS OF UNITS AND CERTAIN REDEMPTIONS
OF CLASS A UNITS
6.01 General Restriction on Transfers. No Unit or other interest in the
Company shall be transferred, in whole or in part, except in accordance with the
terms and conditions set forth in this
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Article VI. Any transfer or purported transfer of any Unit not made in
accordance with this Article VI shall be null and void. The terms "transfer" and
"transferred," when used in this Article VI with respect to Units or any other
interest in the Company or in its capital, earnings, assets, or property, shall
include any sale, transfer, assignment, gift, pledge, hypothecation, grant of a
security interest (other than pursuant to Section 3.16(b) hereof), lien or other
encumbrance in or against, mortgage, exchange, or other disposition, including a
transfer by operation of law.
6.02 Transfer of Manager's Interest and Class B Units. Except as otherwise
provided in this Section 6.02, the Manager shall not transfer its interest as
manager of the Company and no Class B Member shall transfer all or any portion
of its Class B Units or its interest in the Company's capital, earnings, assets,
or property (except in connection with the pledge of the Manager's assets or
rights in connection with loans or other indebtedness) except to a manager of
the Company in a transfer permitted under Section 6.06 hereof and with the
approval of a Majority in Interest of the Class A Members. Notwithstanding
anything to the contrary in this Agreement, the following transfers of Class B
Units shall be permitted, even though such transfers are not made to a manager
of the Company, and without obtaining any approval from any Member or manager of
the Company:
(a) The Initial Class B Member, shall be permitted (but not required) to
transfer up to ninety-nine (99) Class B Units to any Affiliate of the
Initial Class B Member which is a U.S. Citizen and which is not a Benefit
Plan (any permitted transferee of the Initial Class B Member pursuant to
this Section 6.02(a) shall be considered an "Initial Class B Member" for
purposes of this Section 6.02(a)); and
(b) Any repurchase of Class B Units by the Company from a Retiring
Manager or its Affiliates pursuant to Section 9.06(b).
When a transfer of Class B Units permitted in accordance with the foregoing has
occurred, the permitted transferee (other than the Company following a
repurchase of Class B Units) shall be considered a Class B Member for all
purposes under this Agreement, including Section 2.03(a), and shall be reflected
on the Company's books as a Record Holder.
6.03 Legends. All Class A Units are subject to, and all Certificates shall
bear and be subject to, legend conditions as follows:
(a) "NO SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR
RECEIPT OF ANY CONSIDERATION THEREFOR, MAY OCCUR WITHOUT THE PRIOR APPROVAL
OF THE MANAGER."
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(b) "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY,
OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE
OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
(c) "ASSIGNEES OF THIS SECURITY MAY BECOME SUBSTITUTED CLASS A MEMBERS
ONLY WITH THE CONSENT OF THE MANAGER."
(d) "ANY UNAUTHORIZED ASSIGNMENT OR TRANSFER SHALL BE VOID AB INITIO."
6.04 Transfer of Class A Units. Except as otherwise provided in Section
6.06, a Class A Member may transfer the whole or any part of the Class A Units
of the Class A Member only in accordance with this Section 6.04 and, if
Certificates have been requested and issued pursuant to Section 5.01 hereof,
only upon the transfer of Certificates.
(a) No transfer of Class A Units will be recorded or recognized by the
Company until the proposed transferee has delivered a properly executed
Transfer Application to the Company and the Manager has determined that such
proposed transferee shall be admitted to the Company as a Substituted Class
A Member.
(b) A proposed transferee who has properly completed and delivered a
Transfer Application to the Company shall be deemed to have (i) applied to
be admitted to the Company as a Substituted Class A Member pursuant to
Article VII with respect to the Class A Units transferred; (ii) agreed to
comply with and be bound by this Agreement, whether or not the proposed
transferee is admitted as a Substituted Class A Member with respect to the
Class A Units transferred; (iii) appointed the Manager as attorney-in-fact
of the proposed transferee, being authorized to execute, acknowledge, and
file any document that the Manager may deem necessary or appropriate to have
executed in connection with the proposed transferee becoming a party to this
Agreement and the proposed transferee's admission as a Substituted Class A
Member pursuant to Section 7.01; (iv) approved the consents and waivers
contained in this Agreement; and (v) agreed to execute any document that the
Manager may reasonably require to be executed in connection with such
transfer or with the admission of the proposed transferee as a Substituted
Class A Member pursuant to Article VII with respect to the Class A Units
transferred. Unless and until a proposed transferee is admitted as a
Substituted Class A Member pursuant
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to Article VII with respect to Class A Units transferred pursuant to this
Section 6.04, the Record Holder of a transferred Class A Unit shall continue
to be treated as the absolute owner of the Class A Unit by the Transfer
Agent, the Company and the Manager.
(c) Each distribution in respect of a Class A Unit shall be paid by the
Company, directly or through any other Person or agent, only to the Record
Holder of the Class A Unit as of the Record Date set for such distribution.
Such payment shall constitute full payment and satisfaction of the Company's
liability in respect of such distribution, regardless of any claim of any
Person who may have an interest in or with respect to such distribution by
reason of any transfer, assignment or otherwise.
(d) Notwithstanding anything to the contrary herein, the Company shall
not recognize for any purpose any purported transfer by a Class A Member of
all or any part of a Class A Unit held by the Class A Member until the
Company shall have received, in the case of a Class A Unit held by the same
nominee for the transferor and the transferee, the receipt of written
notification from the nominee holder of the date of the transfer of such
Class A Unit.
(e) Any holder of a Certificate (including a proposed transferee
thereof) conclusively shall be deemed to have agreed to comply with and be
bound by all of the terms and conditions of this Agreement with the same
effect as if the holder had executed a Transfer Application, whether or not
the holder has in fact executed a Transfer Application.
6.05 Permitted Transfers. Pursuant to Internal Revenue Service Notice
88-75, the six categories of transfers listed below in this Section 6.05 are
exempt transfers for purposes of determining whether transfers of Class A Units
are within certain volume limitation safe harbors under Section 7704 of the
Code. Provided that the provisions of Sections 6.06(b) and (c) hereof are
complied with, the Manager will generally permit such transfers or any other
transfers which the Treasury Department or the Internal Revenue Service
determines are not to be taken into account for purposes of determining whether
a partnership is "publicly-traded" within the meaning of Section 7704 of the
Code.
(a) Transfers in which the basis of the Class A Units in the hands of
the transferee is determined by reference to its basis in the hands of the
transferor, or is determined under Section 732 of the Code;
(b) Transfers at death;
(c) Transfers between members of a family bearing the relationships
specified in Section 267(c)(4) of the Code;
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(d) Transfers resulting from the issuance of Class A Units by the
Company in exchange for cash, property, or services;
(e) Transfers resulting from distributions from Qualified Plans;
(f) Any block transfer. A block transfer is a transfer by a Class A
Member in one or more transactions during any 30-day period of Class A Units
representing in the aggregate more than 5% of the total outstanding
interests in capital or profits of the Company.
6.06 Restrictions on Transfer.
(a) General. Notwithstanding any other provision of this Article VI or
this Agreement, no transfer of any Unit shall be made if the transfer would
violate the then applicable federal and state securities laws or the rules
and regulations of the Securities and Exchange Commission, any state
securities commission, or any other governmental authority with jurisdiction
over the transfer.
(b) Restrictions. Notwithstanding any other provision of this Article
VI, no transfer of any Class A Unit shall be recognized or effective for any
purpose to the extent that it is determined by the Manager to be effectuated
through an "established securities market" or a "secondary market (or the
substantial equivalent thereof)," within the meaning of Section 7704 of the
Code, so as to adversely affect the tax status of the Company as a
partnership. The Manager will also prohibit any transfer which, in the good
faith judgment of the Manager, will cause the Company to fall outside the 5%
safe harbor of I.R.S. Notice 88-75 or any safe harbor which supersedes such
5% safe harbor. The Manager shall make any such determinations within 30
days following its receipt of a Transfer Application relative to the
transfer. In addition, no transfer of any Unit shall be made other than in
compliance with the following requirements:
(i) The proposed transferee shall obtain such governmental
approval(s) as may reasonably be required by the Manager, including,
without limitation, the written consent of the California Commissioner
of Corporations and of any other state securities agency or commission
having jurisdiction over the transfer;
(ii) No transfer of Units shall be made if the transfer, when
considered with all other transfers during the same applicable
twelve-month period, would in the opinion of counsel for the Company
cause a termination of the Company for federal income tax purposes;
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(iii) No transfer of Units shall be made if, in the good faith
determination of the Manager, the transfer would result in the possible
invalidation of the registration of any Equipment.
(c) Transfers to Benefit Plans. No transfer of Units shall be permitted
to a Benefit Plan, if such transfer would cause Benefit Plans to own 25% or
more of any class of the outstanding Units.
(d) Attempted Impermissible Transfers. Any attempted transfer of any
Unit in contravention of any of the requirements of this Section 6.06 shall
be void ab initio. In the event the Company is required by law to recognize
the validity of a transfer otherwise violating the provisions of this
Agreement, the transferee shall only be entitled to the distributions of the
transferor (in which case the transferor shall no longer be entitled to such
distributions notwithstanding the provisions of Section 6.04(c) hereof), and
shall not be entitled to any voting rights or any other rights as a Class A
Member unless and until admitted as a Substituted Class A Member hereunder.
6.07 Change of Status. If the Manager has not received a duly executed
Eligibility Certificate requested from a Class A Member in accordance with
Section 6.08, or if the Manager otherwise determines in good faith that a Class
A Member or a Person for whom or which a Class A Member is acting as nominee, is
not a U.S. Citizen, and the Manager has not previously consented to the
ownership of the Class A Units in question by such Person as an Alien, the
Manager may cause itself to be substituted in the stead of such Person as a
Class A Member in respect of such Class A Units, and shall immediately notify
such Person (or the Person's nominee) by registered or certified mail, postage
prepaid, that such substitution has taken place. Any Class A Units with respect
to which the Manager has so substituted itself as a Class A Member shall be
subject to being repurchased by the Company pursuant to Section 6.09. The
Manager shall, in exercising voting rights in respect of any Class A Units for
which it is so substituted as a Class A Member, distribute the votes in the same
ratio as the votes of the other Class A Members are cast, either for, against,
or abstaining as to the matter being considered. During the time the Manager is
so substituted as a Class A Member, all distributions of Cash Available for
Distribution and all allocations of Net Profits and Net Loss shall be made and
effected as if the Class A Units with respect to which the substitution has
taken place were not issued and outstanding, notwithstanding any subsequent
readmittance. At any time after a Person for whom the Manager has been
substituted as a Class A Member under this Section 6.07 certifies, to the
satisfaction of the Manager, that the Person (or the former Class A Member for
whom or which the Person is a nominee) is a
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U.S. Citizen, the Person (or the Person's nominee) shall be readmitted as a
Substituted Class A Member. In such case, the Manager shall thereupon cease to
be substituted for the Person in respect of such Class A Units.
6.08 Eligibility Certificates. At any time and from time to time a Class A
Member shall, within 30 days after a written request therefor by the Manager,
furnish to the Manager an executed certification to the Manager's satisfaction
of the status of the Class A Member (or the Person for whom or which the Class A
Member is a nominee) as a U.S. Citizen.
6.09 Repurchase of Class A Units. If, in accordance with Section 6.07, the
Manager has substituted itself as a Class A Member in the stead of a Class A
Member, the Manager may cause the Company to repurchase the Class A Units of
such Class A Member as follows:
(a) The Manager shall, not later than the 30th day before the date fixed
for repurchase (the "repurchase date"), give notice of the repurchase to the
Class A Member, at such Person's last address designated on the records of
the Company, by registered or certified mail, postage prepaid. The notice
shall be deemed to have been given when so mailed. The notice shall specify
the Class A Units to be repurchased, the repurchase date, the place of
payment, and that payment of the repurchase price will be made upon
surrender to the Manager of the Certificate, if any, evidencing such Class A
Units.
(b) The repurchase price (the date of determination of which shall be
the repurchase date) shall be the Unrecovered Principal attributable to the
Class A Units repurchased. The repurchase price shall be paid in cash at the
time of repurchase or, if later, upon surrender to the Manager of the
Certificate, if any, evidencing such Class A Units.
(c) If a Certificate has been requested and issued pursuant to Section
5.01 hereof, upon surrender by or on behalf of the Class A Member, at the
place specified in the notice of repurchase, of the Certificate evidencing
the repurchased Class A Units, duly endorsed in blank or accompanied by an
assignment duly executed in blank, or, if no Certificate has been requested
and issued, on the repurchase date, the former Class A Member or such
Person's duly authorized representative shall be entitled to receive the
payment therefor. No interest will be paid on amounts of cash set aside for
payment hereunder.
(d) After the repurchase date, provided that the purchase price had been
paid to the applicable Class A Member or put in escrow by the Company on
their behalf, the
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repurchased Class A Units shall be deemed redeemed and cancelled and no
longer shall be issued or outstanding.
Nothing in this Section 6.09 shall prevent the recipient of a notice of
repurchase from transferring such Person's Class A Units before the repurchase
date if the transfer is otherwise permitted under this Agreement. Upon receipt
of notice of such a transfer, the Manager shall withdraw the notice of
repurchase, provided the transferee of the Class A Units certifies in the
Transfer Application that the transferee, and, if the transferee is a nominee
holding for the account of another Person, that to the best of the transferee's
knowledge such other Person, is a U.S. Citizen. If the transferee fails to make
such certification, the repurchase shall be effected on the original repurchase
date.
6.10 Redemption Provision. Upon the conclusion of the 30-month period
following the termination of the Offering, the Company may, at the sole and
absolute discretion of the Manager, repurchase up to 2% of the then outstanding
Class A Units. On a quarterly basis, the Manager will establish an amount for
redemption, generally not to exceed 2% of the outstanding Class A Units per year
and, subject to the Manager's sole and absolute discretion and its good faith
determination that such redemptions should not (i) cause the Company to be taxed
as a corporation under Section 7704 of the Code or (ii) impair the capital or
operations of the Company. (At the sole and absolute discretion of the Manager,
the Company may redeem Class A Units in excess of the 2% limitation.) The
redemption price for Class A Units will be 105% of the selling Class A Member's
Unrecovered Principal attributable to the Class A Units for sale. Following the
determination of the annual redemption amount, redemptions will occur on a
quarterly basis, and all requests for redemption, which must be made in writing
and accompanied by the Certificate(s), if any, applicable to the Class A Units,
must be on file as of the quarterly Record Date in which the redemption is to
occur. The Manager will maintain a master list of requests for redemption with
priority being given to Class A Units owned by estates, followed by IRAs and
Qualified Plans. All other Class A Members will be treated on a first come,
first serve basis. Redemption requests made by or on behalf of unaffiliated
Class A Members will be given priority over those made by an Affiliated Class A
Member. All redemption requests will remain in effect until and unless
cancelled, in writing, by the requesting Class A Member(s). Redeemed Class A
Units shall be deemed cancelled and no longer shall be issued or outstanding.
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VII
ADMISSION OF SUBSTITUTED CLASS A MEMBERS
7.01 Substituted Class A Members.
(a) Substitution. Upon the request for transfer of one or more Class A
Units of a Class A Member in accordance with Article VI by executing and
delivering a Transfer Application, the proposed transferee (including any
Person, such as a broker, dealer, bank, trust company, clearing corporation,
other nominee holder, or an agent of any of the foregoing, acquiring the
Class A Units for the account of another Person) shall be deemed to have
applied to become a Substituted Class A Member with respect to the Class A
Units so transferred.
(b) Admission to Company. No Person shall be entitled to become a
Substituted Class A Member with respect to any Class A Units except in
accordance with this Article VII. The admission of a proposed transferee as
a Substituted Class A Member with respect to a Class A Unit acquired by
transfer shall become effective on the date that or as of which the Manager
gives its written consent (it being understood that such consent may be
withheld or granted in the Manager's sole and absolute discretion, whether
or not such Person is a Class A Member with respect to other Class A Units)
to such admission and the Company records the proposed transferee as a
Record Holder on the Company's books. The Company shall not be dissolved by
the admission of Class A Members in accordance with the terms of this
Agreement.
(c) Termination. Any Class A Member who, in accordance with this
Agreement, transfers all of the Class A Member's Class A Units with respect
to which the Class A Member has been admitted as a member shall (i) cease to
be a Class A Member of the Company upon the transfer of such Class A Units
in accordance with Article VI and the recordation on the books of the
Company of the transfer to the Class A Member's proposed transferee and (ii)
have no further rights as a Class A Member in or with respect to the Company
(whether or not such proposed transferee is admitted to the Company as a
Substituted Class A Member). If a proposed transferee is not admitted to the
Company as a Substituted Class A Member with respect to any Class A Units
under such circumstances, the Manager shall vote such Class A Units, and, in
exercising voting rights in respect of any such Class A Units, the Manager
shall distribute the votes in the same ratio as the votes of the other Class
A Members are cast, either for, against, or abstaining as to the matter
being considered.
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7.02 Withdrawal of a Class A Member. No Class A Member shall be entitled to
withdraw or resign from the Company except in accordance with this Article VII.
7.03 Death of a Class A Member. Upon the death of a Class A Member, the
personal representative of the deceased Class A Member shall have the rights to
distributions and the allocations of Net Profits and Net Loss to the extent of
the deceased Class A Member's interest therein, and the estate of the Class A
Member shall be liable for all of the Class A Member's liabilities as a Class A
Member of the Company, as well as for the execution of all documents required to
effect, subject to the terms of Section 7.01 and Article VI, the designation of
the decedent's estate or beneficiary as a Substituted Class A Member.
VIII
RIGHT OF CLASS A MEMBERS TO RECEIVE PROPERTY OTHER THAN CASH
No right is given to a Class A Member to demand and receive property other
than cash in return for the Class A Member's contribution. Each Class A Member
waives any and all rights that it may have to maintain an action for partition
of the Company's property. The Company is not required to make distributions in
kind.
IX
REMOVAL, WITHDRAWAL, DEATH, BANKRUPTCY, OR
INCOMPETENCY OF MANAGER
9.01 Removal of a Manager. A Majority in Interest of the Class A Members
may at any time remove a Person as a manager of the Company. Written notice of
such determination of removal, setting forth an effective date therefor which
shall be no earlier than 60 days from the date of such notice, shall be served
by a representative authorized by the Class A Members upon the Person so to be
removed and, as of the effective date, shall terminate all of such Person's
rights and powers as a manager of the Company, whereupon the following shall
occur:
(a) If another Person is then an additional manager of the Company, the
Company issues at least one Class B Unit to such additional manager and such
additional manager thereby becomes a Class B Member of the Company within 60
days from the effective date of such removal, the Company and its business
shall continue with such other Person as the sole manager and a Class B
Member of the Company; or
(b) If no other Person is then a manager of the Company or the
additional manager does not become a Class B
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Member in accordance with Section 9.01(a), the Company shall be dissolved
and liquidated under the provisions of Article X, subject to the provisions
of Section 9.04.
9.02 Withdrawal of a Manager. No manager may withdraw or resign as a
manager from the Company without first obtaining the consent of a Majority in
Interest of Class A Members. Subject to the previous sentence, a manager may
resign or withdraw from the Company at any time upon not less than 60 days'
prior written notice to the Class A Members, whereupon the following shall
occur:
(a) If another person is then an additional manager of the Company, the
Company issues at least one Class B Unit to such additional manager and such
additional manager thereby becomes a Class B Member of the Company within 60
days from the effective date of such resignation or withdrawal, the Company
and its business shall continue with such other Person as the sole manager
and a Class B Member of the Company; or
(b) If no other Person is then a manager of the Company or the
additional manager does not become a Class B Member in accordance with
Section 9.02(a), the Company shall be dissolved and liquidated under the
provisions of Article X, subject to the provisions of Section 9.04.
9.03 Termination of a Manager Other Than by Removal or Withdrawal. In the
event of Bankruptcy or involuntary dissolution of a manager, or, in the case of
a manager which is an individual, the death or the appointment of a conservator
for the individual or any of the individual's property, such manager shall cease
to be a manager of the Company, whereupon the following shall occur:
(a) If another Person is then an additional manager of the Company, the
Company issues at least one Class B Unit to such additional manager and such
additional manager thereby becomes a Class B Member within 60 days of such
Bankruptcy, dissolution, death or appointment of a conservator, the Company
and its business shall continue with such other Person as the sole manager
and a Class B Member of the Company; or
(b) If no other Person is then a manager of the Company or the
additional manager does not become a Class B Member in accordance with
Section 9.03(a), the Company shall be dissolved and liquidated under the
provisions of Article X, subject to the provisions of Section 9.04.
9.04 Election of Successor or Additional Manager; Continuation of Company
Business. At the time of a Terminating Event, all Class A Members and any Class
B Member which is not a
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manager (a Majority in Interest of the Class A Members and any Class B Member
which is not a manager if the Terminating Event is removal of the last remaining
manager of the Company pursuant to the Section 9.01 or the Bankruptcy or
involuntary dissolution of the last remaining manager of the Company) may within
90 days of such Terminating Event elect a successor or additional manager and
issue at least one Class B Unit to such successor or additional manager which
manager thereby shall be admitted as a Class B Member of the Company, subject to
all the terms and provisions of this Agreement pertaining to Class B Members,
including Section 2.03(a) hereof. In the event of the election of such successor
or additional manager and the admission of such successor or additional manager
as a Class B Member, the Company shall continue without termination or
dissolution. In the event a successor or additional manager is not elected and
admitted as a Class B Member pursuant to this Section 9.04, the Company shall
terminate and dissolve in accordance with Article X hereof.
9.05 Admission of Successor or Additional Manager. The following conditions
shall be satisfied before any Person shall become a successor or additional
manager:
(a) Such Person shall have been elected in accordance with Sections 9.04
or 9.07;
(b) Such Person shall have accepted and agreed to be bound as a manager
by all the terms and provisions of this Agreement;
(c) If such Person is an entity other than an individual, it shall have
provided the Company with evidence satisfactory to counsel for the Company
of its authority to become a manager and to be bound by this Agreement; and
(d) Any amendments and filings required or appropriate under the
Delaware Act and applicable securities laws shall have been made.
The Company shall not be dissolved by the admission of successor and/or
additional manager(s) as Class B Members in accordance with the terms of this
Agreement.
9.06 Retiring Managers.
(a) Cessation of Rights. A Retiring Manager shall immediately cease to
be a manager and shall not have any right to participate in the management
of the affairs of the Company or to receive any fees under this Agreement
not already paid or earned; provided, however, that if such Retiring Manager
is a Class B Member, such Retiring Manager shall be, and shall remain,
liable pursuant to Section 2.03(a) hereof for all obligations and
liabilities incurred by the Company prior to the effective date of a manager
acquiring the status of a Retiring Manager, but shall be free from any
obligation or
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liability incurred on account of the activities of the Company from and
after such time and the provisions of Section 2.04 shall continue to be
applicable with respect to the Retiring Manager as to all matters arising
out of or in any way connected with any transactions occurring prior to the
effective date of a manager acquiring the status of a Retiring Manager of
the Company.
(b) Continuation of Business. If, following a manager of the Company
becoming a Retiring Manager, the business of the Company is continued,
either because the Retiring Manager is not the last remaining manager of the
Company or because the Members, in accordance with Section 9.04, have
elected a successor or additional manager and the business of the Company
has thereby been continued, the Retiring Manager's interest in the Company
(as defined below) shall be purchased by the Company in accordance with this
paragraph (b). No later than 60 days after the later of (i) the effective
date of a manager acquiring the status of a Retiring Manager or (ii) the
date of the election, if any, under Section 9.04, the remaining or successor
manager(s), as the case may be, shall notify the Retiring Manager that the
Company is going to purchase the Retiring Manager's interest in the Company.
The notice shall further indicate the terms of such purchase which shall be
as follows:
(A) If the manager acquired the status of a Retiring Manager as a
result of the voluntary resignation or withdrawal of the Retiring
Manager as a manager of the Company, a non-interest bearing unsecured
promissory note with a principal face amount equal to the then present
fair market value (as determined below) of the Retiring Manager's
interest in the Company as of the effective date of such manager
acquiring the status of a Retiring Manager, payable when and as, and
only to the extent that, the Retiring Manager would have received
distributions from the Company pursuant to Articles III or X had the
Retiring Manager continued to act as a manager of the Company and to
own Class B Units of the Company (through itself or through an
Affiliate); or
(B) If the manager acquired the status of a Retiring Manager as a
result of any event other than the voluntary resignation or withdrawal
of the Retiring Manager as a manager of the Company, a promissory note
with a principal face amount equal to the then present fair market
value (as determined below) of the Retiring Manager's interest in the
Company as of the effective date of such manager acquiring the status
of a Retiring Manager, bearing interest at a floating annual rate equal
to the rate of interest announced from time to time by the
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Bank of America, N.T. & S.A., as its reference rate, not to exceed the
maximum rate permitted by law, providing for equal annual payments of
principal and interest and payable in full in five years.
If the remaining or successor manager(s) fail to give such notice to the
Retiring Manager within such time period, the Company shall purchase the
interest in the Company of the Retiring Manager in accordance with clauses
(A) or (B) immediately above, whichever is applicable. The Retiring
Manager's "interest in the Company," as that phrase is used in this Section
9.06(b), shall mean and include the interest of the Retiring Manager and any
Affiliate of the Retiring Manager in the profits, losses, and distributions
of the Company as a manager and as a Class B Member, and shall include any
Class B Units owned by the Retiring Manager, as set forth in Articles III
and X. For purposes of this paragraph (b), the then present fair market
value of the Retiring Manager's interest in the Company shall be determined
by agreement of the Retiring Manager and the remaining or successor
manager(s) or, if they cannot agree, by arbitration in accordance with the
then current rules of the American Arbitration Association. Delivery of the
applicable promissory note in accordance with this paragraph (b) shall be
made to the Retiring Manager within ten days after such fair market value is
determined. Such delivery when made shall constitute complete and full
discharge of all amounts to which the Retiring Manager is entitled with
respect to its interest in the Company (subject only to periodic payments
and interest due under the applicable promissory note). Class B Units
repurchased by the Company in accordance with the foregoing shall be deemed
cancelled and no longer issued or outstanding.
(c) Executory Contracts. All executory contracts between the Company
and the Retiring Manager or any Affiliate thereof (unless such Retiring
Manager or Affiliate is also an Affiliate of the remaining or successor
manager(s)) may be terminated in accordance with Section 2.05(b)(v) by the
Company effective upon 60 days' prior written notice to the party so
terminated. The Retiring Manager or any Affiliate thereof (unless such
Retiring Manager or Affiliate is also an Affiliate of the remaining or
successor manager(s)) may also terminate and cancel any such executory
contract effective upon 60 days' prior written notice of such termination
and cancellation given to the remaining or successor manager(s), if any, or
to the Company.
(d) Indemnity. If, following a manager of the Company becoming a
Retiring Manager, the business of the Company is continued, either because
the Retiring Manager is not the last remaining manager of the Company or
because
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the Members, in accordance with Section 9.04, have elected a successor or
additional manager and the business of the Company has thereby been
continued, the Company shall indemnify and hold harmless the Retiring
Manager from all costs, liabilities and expenses, including attorneys' fees,
that the Retiring Manager may thereafter incur arising out of or in any way
connected with any acts or omissions of the Company or of any remaining or
successor manager(s) of the Company from and after the date a manager
becomes a Retiring Manager; provided, however, that nothing contained in
this Section 9.06(d) shall permit indemnification of a Retiring Manager for
its actions while acting as the manager in excess of the indemnification
permitted under Section 2.04 to an Indemnified Party.
9.07 Election of Additional Manager. A Majority in Interest of the Class A
Members may at any time and from time to time elect an additional manager and,
upon satisfaction of the conditions set forth in Section 9.05, the Person so
elected shall be admitted as an additional manager. Admission of an additional
manager shall not cause dissolution of the Company.
X
TERMINATION, LIQUIDATION, AND DISSOLUTION
OF THE COMPANY
10.01 Events of Dissolution. The Company shall be dissolved and shall
commence the orderly liquidation of its assets upon the first to occur of any of
the following:
(a) A Majority in Interest of the Class A Members by written consent or
vote determines that the Company should be dissolved;
(b) The Company is dissolved by judicial decree;
(c) The expiration of 90 days following a Terminating Event without the
Class A Members having elected a successor or additional manager and
admitted such successor or additional manager as a Class B Member in
accordance with Section 9.04;
(d) The condemnation of all or substantially all of the Equipment;
(e) The determination by the Manager that it is necessary to commence
the liquidation of the Equipment in order for the liquidation of all the
Equipment to be completed in an orderly and businesslike fashion prior to
January 1, 2006 [January 1, 2007]; provided, however, that the Manager may
extend the liquidation process beyond January 1, 2006 [January 1, 2007] if,
in the discretion of the Manager, such
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extension will enable the Company to dispose of its assets upon more
favorable terms; or
(f) The expiration of the term of the Company, as provided in Section
1.03 hereof.
10.02 Death, Bankruptcy, Dissolution, Etc. of Class A Members. The death,
retirement, resignation, expulsion, Bankruptcy or dissolution of a Class A
Member does not terminate the continued membership of a Class A Member in the
Company and shall not cause the Company to be dissolved and its affairs wound up
so long as the Company at all times has two Members. Upon the occurrence of such
event, the business of the Company shall be continued without dissolution and
the decedent's interest shall be treated as provided in Section 7.03 hereof.
10.03 Liquidation, Allocations, and Distributions. Following the Event of
Dissolution, the Liquidating Trustee shall proceed to the winding up of the
affairs and the liquidation of the Company. The Liquidating Trustee shall cause
to be prepared a statement setting forth the assets and liabilities of the
Company as of the date of the Event of Dissolution, and such statement shall be
furnished to all Members. The assets of the Company, which the Liquidating
Trustee determines should be liquidated, shall then be liquidated as promptly as
possible, but in an orderly and businesslike manner so as not to involve undue
sacrifice and the Liquidating Trustee shall cause the proceeds therefrom, to the
extent sufficient therefor, to be applied and distributed in the following
order:
(a) First, to the payment and discharge of all of the Company's debts
and liabilities to creditors including Members, to the extent permitted
under the Delaware Act;
(b) Second, to the extent such payment and discharge has not been
permitted under the Delaware Act to be made pursuant to subsection (a) of
this Section 10.03, to the payment and discharge of any debt or liability
owed to any Retiring Manager pursuant to Section 9.06 hereof;
(c) Third, to the Members in accordance with the provisions of Article
III; provided, however, that no distribution shall be made pursuant to this
Section 10.03 that creates or increases a Capital Account deficit for any
Member which exceeds such Member's obligation (deemed or actual) to restore
such deficit, determined as follows: Distributions shall first be determined
tentatively pursuant to this Section 10.03 (without regard to the Members'
Capital Accounts), and the allocation provisions of Article III shall be
applied tentatively as if such tentative distributions had been made. If any
Member shall thereby have a deficit Capital Account which exceeds his
obligation deemed and actual to restore such deficit, the actual
distribution of such Member pursuant to this Section 10.03 shall be equal to
the tentative distribution
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to such Member less than the amount of the excess to such Member; and
(d) The balance, if any, to the Members in accordance with their
positive Capital Accounts, after giving effect to all contributions,
distributions, and allocations for all periods.
10.04 Compliance With Timing Requirements of Regulations. In the event the
Company is "liquidated" within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to Section 10.03
hereof (if such liquidation constitutes a dissolution of the Company) or Section
3.09 hereof (if it does not) to the Members who have positive Capital Accounts
in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Member
has a deficit balance in its Capital Account (after giving effect to all
contributions, distributions and allocations for all taxable years, including
the year during which such liquidation occurs), such Member shall have no
obligation to make any contribution to the capital of the Company with respect
to such deficit, and such deficit shall not be considered a debt owed to the
Company or any other Person for any purpose whatsoever. In the discretion of the
Liquidating Trustee, a pro rata portion of the distributions that would
otherwise be made to the Members pursuant to this Section 10.04 may be:
(a) distributed to a trust established for the benefit of the Members
for the purposes of liquidating Company assets, collecting amounts owed to
the Company, and paying any contingent or unforeseen liabilities or
obligations of the Company or of the Class B Members arising out of or in
connection with the Company. The assets of any such trust shall be
distributed to the Members from time to time, in the reasonable discretion
of the Liquidating Trustee, in the same proportions as the amount
distributed to such trust by the Company would otherwise have been
distributed to the Members pursuant to this Agreement; or
(b) withheld to provide a reasonable reserve for Company liabilities
(contingent or otherwise) and to reflect the unrealized portion of any
installment obligations owed to the Company, provided that such withheld
amounts shall be distributed to the Members as soon as practicable.
10.05 Dissolution. Immediately following the distribution pursuant to
paragraph (d) of Section 10.03, the Liquidating Trustee shall cause the Company
to be dissolved and the Certificate of Formation of the Company to be cancelled
in accordance with the Delaware Act.
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XI
CERTIFICATES AND OTHER DOCUMENTS
11.01 Manager as Attorney for Members. Each Member, upon admission as a
Member, hereby constitutes and appoints the Manager and its successors, if any,
the true and lawful attorneys of, and in the name, place, and stead of such
Member, from time to time:
(a) To make all agreements amending this Agreement or, if applicable,
the Certificate of Formation, as now or hereafter amended, as an authorized
person within the meaning of the Delaware Act, that may be appropriate to
reflect:
(i) a change of the name or the location of the principal place of
business of the Company;
(ii) the disposal by a Member of the Member's interest in the
Company in any manner permitted by this Agreement;
(iii) a Person becoming a Class A Member, a Substituted Class A
Member or a Class B Member of the Company as permitted by this
Agreement; and
(iv) a change in any provision of this Agreement or the exercise by
any Person of any right or rights under this Agreement requiring the
vote, consent or approval of the Class B Members and/or of a majority
or a specified percentage in interest of the Class A Members if the
required vote, consent or approval has been given;
(b) To make such certificates, instruments, and documents, as an
authorized person within the meaning of the Delaware Act, including
fictitious business name statements, as may be required by, or may be
appropriate under, the Delaware Act and the laws of any state or other
jurisdiction in which the Company is doing or intends to do business in
connection with the use of the name of the Company by the Company;
(c) To make such applications, certificates, affidavits, instruments,
and documents as may be required or appropriate in connection with
documentation and registration of Equipment with the Federal Aviation
Administration, the Coast Guard, the Maritime Administration, and any other
governmental authority having jurisdiction;
(d) To maintain such list as may be required pursuant to Section 6112 of
the Code or any successor provision thereto; provided, however, that each
Member will provide the Manager with all information required for the
correct maintenance of such list; and
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(e) To make such other agreements and such other documents as may be
required to carry out the business of the Company.
Each of such agreements, certificates, instruments, and documents shall be
in such form as the attorney shall deem appropriate. The powers hereby conferred
to make agreements, certificates, instruments, and documents shall be deemed to
include the powers to sign, execute, acknowledge, swear to, verify, deliver,
file, record, and publish them.
Each Member authorizes the attorney to take any further action which the
attorney shall consider necessary or convenient in connection with any of the
foregoing hereby giving the attorney full power and authority to do and perform
each and every act and thing whatsoever requisite and necessary to be done in
and about the foregoing as fully as such Member might or could do if personally
present, and hereby ratifying and confirming all that such attorney shall
lawfully do or cause to be done by virtue hereof.
The powers hereby conferred shall continue from the date each Member becomes
a member in the Company until the Member ceases to be such a member and, being
coupled with an interest, shall be irrevocable.
11.02 Filing of Documents. The Manager shall, when authorized pursuant to
Section 11.01 or otherwise, make, file, or record with the appropriate public
authority and (if required) publish the Certificate of Formation, any amendments
thereto, and such other certificates, instruments, and documents as may be
required or appropriate in connection with the business and affairs of the
Company.
XII
NOTICES
All notices, requests, and other communications provided for herein shall be
in writing and, unless otherwise specified, shall be forwarded by first class
mail, directed to the parties at the addresses set forth in the books and
records of the Company, any which address may be changed by notice to the
Members given in accordance with the provisions of this Article XII. Notices or
communications given, as set forth herein, shall be conclusively deemed to have
been received by the party to whom addressed five business days after they are
deposited in the United States mail.
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XIII
CONVEYANCES, CONTRACTS, AND DOCUMENTS
Any deed, bill of sale, mortgage, lease, contract of sale, or other
commitment purporting to convey or encumber the interest of the Company in all
or in any portion of any real or personal property at any time held in its name
and any other contract, check, draft, document, communication or notice to which
the Company is a party may be signed by the Manager acting alone on behalf of
the Company, and no other signature will be required.
XIV
DISPUTES AND ARBITRATION
Except for actions arising out of or based upon federal or state securities
laws, any dispute or controversy among the Manager and/or the Members arising
under, out of, or in connection with or in relation to this Agreement, and any
amendments thereof, or the breach thereof, or in connection with the dissolution
of the Company, may be determined and settled by arbitration to be held in San
Francisco, California, in accordance with the rules then obtaining of the
American Arbitration Association. Any award rendered therein shall be final and
binding on the Manager and on each and all of the Members, and judgment may be
entered thereon in the Superior Court of the State of California for the City
and County of San Francisco.
XV
MEETINGS OF, OR ACTIONS BY, THE CLASS A MEMBERS
Meetings of the Class A Members to vote upon any matters as to which the
Class A Members are authorized to take action under this Agreement, as the same
may be amended from time to time, may be called at any time by the Manager or by
one or more Class A Members holding more than 10% of the outstanding Class A
Units by delivering written notice, either in person or by registered mail, of
such call to the Manager. Promptly, but in any event within ten days following
receipt of such request, the Manager shall cause a written notice, either in
person or by registered mail, to be given to the Class A Members entitled to
vote at such meeting that a meeting will be held at a time and place fixed by
the Manager, which is not less than 15 days nor more than 60 days after the
mailing of the notice of the meeting; provided, however, that such maximum
periods for the giving of notice and the holding of meetings may be extended for
an additional 60 days if such extension is necessary to obtain the qualification
with the Califor-
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nia Commissioner of Corporations of the matters to be acted upon at such
meeting, the clearance by the appropriate governing agency of the solicitation
materials to be forwarded to Class A Members in connection with such meeting, or
any other administrative authorizations which may be required. Included with the
notice of a meeting shall be a detailed statement of the action proposed,
including a verbatim statement of the wording of any resolution proposed for
adoption by the Class A Members and of any proposed amendment to this Agreement.
All expenses of the meeting and notification shall be borne by the Company.
Upon adjournment of a meeting to another time or place, notice of the new
time or place shall be announced at the meeting at which adjournment is taken.
If the adjournment is for more than 45 days or if, after the adjournment, a new
Record Date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each Class A Member of record entitled to vote at the
meeting.
Personal presence of the Class A Members shall not be required provided an
effective written consent to or rejection of such proposed action is submitted
to the Manager or to a proxy. Attendance by a Class A Member at any meeting and
voting in person shall revoke any written consents or rejections of such Class A
Member submitted with respect to action proposed to be taken at such meeting.
Submission of a later written consent or rejection with respect to any action
shall revoke an earlier one as to such action, but not after Company action was
taken based on such earlier consent. Only the votes of Class A Members holding
Class A Units as of the Record Date for such meeting shall be counted.
Any matter as to which the Class A Members are authorized to take action
under this Agreement or under law may be taken by the Class A Members without a
meeting and shall be as valid and effective as action taken by the Class A
Members at a meeting assembled if written consents to such action by the Class A
Members are (a) signed by the Class A Members entitled to vote upon such action
who held as of the Record Date for the action the number of Class A Units
required to authorize the action and (b) delivered to the Manager. Any action
taken without a meeting shall be effective 15 days after the required minimum
number of voters have signed the consent (assuming that the consent or approval
of the Class B Members, if required, has been obtained) and shall be effective
immediately if Class A Members holding at least 90% of the outstanding Units as
of the Record Date have signed the consent (assuming that the consent or
approval of the Class B Members, if required, has been obtained).
If there is not a Class B Member, the Class A Members may take action
without a meeting by the written consent of Class A Members having the requisite
voting power of the Class A Members entitled to vote.
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XVI
CAPTIONS -- PRONOUNS
Any titles or captions of articles, sections, or paragraphs contained in
this Agreement are for convenience only and shall not be deemed part of the text
of this Agreement. All pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine, neuter, singular, or plural, as the
identification of the Person or Persons may require.
XVII
BINDING EFFECT
Except as otherwise herein provided, this Agreement shall be binding upon
and inure to the benefit of the parties hereto, their heirs, executors,
administrators, successors, and all Persons hereafter having or holding an
interest in the Company, whether as Substituted Class A Members or otherwise.
XVIII
AMENDMENTS
Amendments to this Agreement may be proposed by the Manager or by one or
more Class A Members owning more than 10% of the outstanding Class A Units at
the time of such proposal. Such proposals shall be included in a call for a
meeting made in accordance with Article XV.
Except as otherwise stated in this Agreement, the approval of a Majority in
Interest of the Class A Members shall be required to amend this Agreement;
provided, however, that the Class A Members may not amend this Agreement to
extend the Company term or to change the provisions of Sections 1.08, 2.03(a),
6.02 or 10.01; provided further, that except as otherwise provided in Sections
3.09, 3.10(a)(iii), 3.13, 3.17 and in the last sentence of this Article XVIII,
this Agreement shall not be amended to reduce the relative shares of the Members
in the distributions of the Company without unanimous consent of the Members and
the Manager; provided further, that the Class A Members may not amend this
Agreement to alter the right of the Manager, and its Affiliates to receive
compensation, indemnification, reimbursement, allocations, or distributions
pursuant to Sections 2.02(k), 2.03, 2.04, 2.06, 9.06(d) or 10.03 or Article III
without the consent of the Manager; and provided further, that the Class A
Members may not amend this Agreement to alter the rights of any Class B Member
or its Affiliates without the consent of such Class B Member. Additionally, this
Agreement may be amended from time to time by the Manager, without the consent
of any of the Class A Members, to the extent necessary or appropriate to (1) add
to the
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representations, duties, or obligations of the Manager or its Affiliates or to
surrender any rights or powers granted to the Manager or its Affiliates herein
for the benefit of the Class A Members; (2) cure any ambiguity or to correct or
supplement any provision herein which may be inconsistent with any other
provisions with respect to matters or questions arising under this Agreement or
the Prospectus contained as part of the Registration Statement which will not be
inconsistent with the provisions of this Agreement; (3) delete or add any
provision of this Agreement required to be so deleted or added by the staff of
the Securities and Exchange Commission or any state securities commissioner or
similar such official, which addition or deletion is deemed by such commission
or official to be for the benefit or protection of the Class A Members; (4) vary
the restrictions on trading of Units in response to guidance from the Internal
Revenue Service or Treasury Department; (5) carry out the provisions of Sections
2.02(t) and 2.02(x) hereof; and (6) prevent the assets of the Company from being
characterized as "plan assets" (within the meaning of ERISA) of Benefit Plan
Members (but no such amendment shall alter the tax status of the Company as a
partnership rather than an association taxable as a corporation).
XIX
ENTIRE AGREEMENT, SEPARABILITY OF PROVISIONS
AND GOVERNING LAW
This Agreement contains the entire understanding and agreement among the
parties hereto with respect to the within subject matter. There are no
representations, agreements, arrangements, or understandings, oral or written,
between or among the parties hereto relating to the subject matter of this
Agreement which are not fully expressed herein or expressed in other agreements
referred to herein. If for any reason any provision of this Agreement is
determined to be invalid and contrary to any existing or future law, such
invalidity or illegality shall not impair the operation of or affect those
portions of the Agreement which are valid and legal. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of Delaware
without regard to its conflict of laws and, unless expressly or by necessary
implication contravened by any provision hereof, the provisions of the Delaware
Act shall apply; provided however, that causes of action for violations of state
or federal securities laws arising out of this Agreement shall not be governed
by this sentence.
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XX
TAX CONTROVERSIES
Should there be any controversy with the Internal Revenue Service or any
other taxing authority involving the Company, the Manager, or any Member or
Members, the outcome of which may adversely affect the Company, either directly
or indirectly, the Company may incur expenses which the Manager deems necessary
and advisable in the interest of the Company to oppose such proposed deficiency,
including, without being limited thereto, attorneys' and accounting fees. The
Manager shall be the tax matters partner within the meaning of Section
6231(a)(7) of the Code.
XXI
COUNTERPARTS AND EXECUTION
This Agreement may be executed in multiple counterparts, each of which shall
be deemed an original agreement, and all of which shall constitute one
agreement, by each of the parties hereto, notwithstanding that all of the
parties are not signatories to the original or the same counterpart.
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IN WITNESS WHEREOF, the undersigned have duly executed this Fourth Amended
and Restated Operating Agreement as of the date first above written.
PLM FINANCIAL SERVICES, INC.,
a Delaware corporation, the Manager
By /s/ ALLEN V. HIRSCH
-----------------------------------
Allen V. Hirsch
President
PLM FINANCIAL SERVICES, INC.,
a Delaware corporation, the Initial
Class B Member
By /s/ ALLEN V. HIRSCH
-----------------------------------
Allen V. Hirsch
President
DENISE M. KIRCHUBEL,
the Initial Class A Member
By /s/ DENISE M. KIRCHUBEL
-----------------------------------
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<PAGE> 319
SCHEDULE I
TO THE FOURTH AMENDED AND RESTATED OPERATING AGREEMENT
OF PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C.,
[PROFESSIONAL LEASE MANAGEMENT
INCOME FUND II, L.L.C.,]
A DELAWARE LIMITED LIABILITY COMPANY
CERTIFICATE FOR CLASS A UNITS
OF PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C.,
[PROFESSIONAL LEASE MANAGEMENT
INCOME FUND II, L.L.C.,]
A DELAWARE LIMITED LIABILITY COMPANY
NO.
PLM Financial Services, Inc., as the Manager of Professional Lease
Management Income Fund I, L.L.C., [Professional Lease Management Income Fund II,
L.L.C.,] a Delaware limited liability company (the "Company"), hereby certifies
that is a Class A Member of the Company and the owner of record of
Class A units of limited liability company interests in the Company
("Class A Units"). The rights, preferences, and limitations of the Class A Units
are set forth in the Fourth Amended and Restated Operating Agreement dated as of
January 18, 1995, pursuant to which the Company is governed ("Agreement"),
copies of which are on file at the Manager's principal office at One Market,
Steuart Street Tower, Suite 900, San Francisco, California 94105-1301. This
Certificate is not transferable except as provided in the Agreement. The Class A
Units evidenced by this Certificate are subject to redemption if the Manager
makes certain determinations as to the holder's citizenship status as provided
in the Agreement.
<TABLE>
<S> <C>
PLM FINANCIAL SERVICES, INC., Manager
Dated: ----------------- of PROFESSIONAL LEASE MANAGEMENT
INCOME FUND I, L.L.C., [PROFESSIONAL
LEASE MANAGEMENT INCOME FUND II,
L.L.C.,] a Delaware limited liability
company
By:
-----------------------------------
Name:
Title:
</TABLE>
BY ACCEPTANCE OF THIS CERTIFICATE FOR CLASS A UNITS, AND AS A CONDITION TO BEING
ENTITLED TO ANY RIGHTS IN OR BENEFITS WITH RESPECT TO
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<PAGE> 320
THE CLASS A UNITS EVIDENCED HEREBY, A HOLDER HEREOF (INCLUDING ANY TRANSFEREE
HEREOF) IS DEEMED TO HAVE AGREED, WHETHER OR NOT SUCH HOLDER IS ADMITTED TO THE
COMPANY AS A SUBSTITUTED CLASS A MEMBER WITH RESPECT TO THE CLASS A UNITS
EVIDENCED HEREBY, TO COMPLY WITH AND BE BOUND BY ALL TERMS AND CONDITIONS OF THE
AGREEMENT, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AND MAY BE OBTAINED UPON
REQUEST (FREE OF CHARGE) FROM THE COMPANY.
NO SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR RECEIPT OF ANY
CONSIDERATION THEREFOR, MAY OCCUR WITHOUT THE PRIOR APPROVAL OF THE MANAGER.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. The Commissioner's Rules exempt
from this consent requirement certain transfers including those between
non-California residents who are neither domiciled nor actually present in
California.
ASSIGNEES OF THIS SECURITY MAY BECOME SUBSTITUTED CLASS A MEMBERS ONLY WITH THE
CONSENT OF THE MANAGER.
ANY UNAUTHORIZED ASSIGNMENT OR TRANSFER SHALL BE VOID AB INITIO.
A-73
<PAGE> 321
------------------------------------------------------------------
------------------------------------------------------------------
$1,500,000
(minimum in each of two Delaware limited liability companies)
CLASS A UNITS
in
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.,
a Delaware Limited Liability Company
PROFESSIONAL LEASE MANAGEMENT INCOME FUND II, L.L.C.,
a Delaware Limited Liability Company
PROSPECTUS
January 24, 1995
PLM Securities Corp.
One Market, Steuart Street, Tower, Suite 900
San Francisco, CA 94105-1301
(415) 974-1399
(800) 227-3287 (Nationally)
Until April 24, 1995, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions. This Prospectus does not constitute an offer
or solicitation by anyone in any state or other jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such offer or solicitation.
------------------------------------------------------------------
------------------------------------------------------------------
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.LC.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND II, L.L.C.
CUMULATIVE SUPPLEMENT NO. 3
DATED MAY 6, 1996
TO PROSPECTUS DATED JANUARY 24, 1995
SUMMARY
This is Cumulative Supplement No. 3 to the Prospectus dated January 24, 1995
pertaining to Professional Lease Management Income Fund I, L.L.C. (Fund I) and
Professional Lease Management Income Fund II, L.L.C. (Fund II), together
referred to as the "Companies". This Cumulative Supplement updates and forms a
part of, and must be accompanied or preceded by, the Prospectus. All cross-
references used herein are to the Prospectus, and capitalized terms used
herein have the same definitions as set forth in the Prospectus.
The primary purposes of this Supplement are to:
(a) Report on the status of the Offering, including Fund I having
satisfied the impound conditions of the Offering, and the total
subscription amount received and admitted by Fund I as of February 29,
1996;
(b) Update information regarding the source of interim financing
available to the Companies;
(c) Describe certain Equipment acquisitions and proposed transactions by
Fund I;
(d) Update Industry discussions pertaining to Equipment markets;
(e) Update Government Regulations that may impact Equipment purchased by
the Companies;
(f) Update Income Tax Considerations that may impact secondary trading of
Class A Units;
(g) Describe certain amendments to the Operating Agreement pertaining to
Fund II;
(h) Update through December 31, 1995, the prior performance of certain
diversified equipment leasing programs sponsored by the Manager; and
(i) Update through December 31, 1995, the financial statements of the
Companies and the Consolidated Balance Sheet of the Manager.
EACH POTENTIAL INVESTOR SHOULD THOROUGHLY REVIEW THE PROSPECTUS AND THIS
SUPPLEMENT PRIOR TO SUBSCRIBING FOR INTERESTS IN THE COMPANIES. THE COMPANIES
ARE WHOLLY SEPARATE ENTITIES AND INVESTORS WILL HAVE AN INTEREST ONLY IN THE
COMPANY (OR COMPANIES) IN WHICH THEY PURCHASE CLASS A UNITS.
As of the date of this Supplement, Fund I has acquired items of Equipment
having an aggregate purchase price of approximately $61.7 million which, when
acquired, were or are anticipated to be subject to leases with approximately
41 different lessees. As of the date of this Cumulative Supplement No. 3, no
Equipment has been specified for purchase by Fund II.
1
<PAGE>
FUND I EQUIPMENT PORTFOLIO
ORIGINAL PURCHASES & COMMITMENTS AS OF 3/31/96
(AT ORIGINAL COST)
<TABLE>
<CAPTION>
ACQUISITION % OF TOTAL
COST PORTFOLIO
----------- ----------
<S> <C> <C>
Railcars $13,144,241 21%
Trailers $ 8,621,028 14%
Marine Vessel $16,006,532 26%
Aircraft $23,909,000 39%
----------- ----
Total $61,680,801 100%
</TABLE>
STATUS OF THE OFFERING
On April 13, 1995, the Minimum Subscription Amount of $1,500,000 was
attained by Fund I and funds totaling $1,558,160 were admitted into Fund I on
April 14, 1995. As of April 30, Fund I had accepted subscriptions totalling
$95.1 million (4.75 million units) from approximately 5,000 investors.
It is presently anticipated that Fund I will terminate its offering of Class
A Units on May 15, 1996 and that the offering of Class A Units in Fund II will
commence on May 16, 1996. These dates are subject to change at the Manager's
discretion.
INTERIM FINANCING
As previously described in the Prospectus, the Manager has entered into a
joint $25 million credit facility (the "Committed Bridge Facility") on behalf
of the Companies, PLM Equipment Growth Fund II, PLM Equipment Growth Fund III,
PLM Equipment Growth Fund IV, PLM Equipment Growth Fund V, PLM Equipment
Growth Fund VI, and PLM Equipment Growth & Income Fund VII, all affiliated
investment programs, and TEC Acquisub, Inc. ("TECAI"), an indirect wholly-
owned subsidiary of the Manager, 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 a borrower plus (ii) 50%
of unrestricted cash held by the borrower. The Committed Bridge Facility
became available to the Affiliates on December 20, 1993, and became available
to Fund I on May 8, 1995 and was amended and restated on September 27, 1995 to
expire on September 30, 1996. The Committed Bridge Facility will not be
available to Fund II until Fund II has met its minimum impound requirement of
$1,500,000. The Committed Bridge Facility also provides for a $5 million
Letter of Credit Facility for the eligible borrowers. Outstanding borrowings
by a Company, TECAI or PLM Equipment Growth Funds II through VII reduce the
amount available to each other under the Committed Bridge Facility. Individual
borrowings may be outstanding for no more than 179 days, with all advances due
no later than September 30, 1996. The Committed Bridge Facility prohibits a
Company from incurring any additional indebtedness. Interest accrues at either
the prime rate or adjusted LIBOR plus 2.5% at the borrowers option and is set
at the time of an advance of funds. At December 31, 1995, there were no
outstanding borrowings under this facility. To the extent the Company is
unable to raise sufficient capital through the sale of Class A Units to repay
its portion of the Committed Bridge Facility, a Company will continue to be
obligated under the Committed Bridge Facility until the Company generates
proceeds from operations or the sale of Equipment sufficient for repayment.
Borrowings by the Company are guaranteed by the Manager. (See: "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Liquidity and Capital Resources-Sources" in this Supplement.) (See "RISK
FACTORS: Business Risks--Leverage" in the Prospectus).
2
<PAGE>
EQUIPMENT ACQUISITIONS
RAILCARS
On October 4, 1995, Fund I completed the purchase of 245 70-ton insulated
boxcars manufactured in 1977 by Fruit Growers Express Company. The total
purchase price paid for the boxcars was $4,951,450. The boxcars are subject to
an initial two-year, fixed rate lease with the Norfolk Southern Railway
Company, a wholly-owned subsidiary of Norfolk Southern Corporation ("Norfolk
Southern"). Prior to the expiration of the initial lease term, Norfolk
Southern Railway Company has a fair market rental option to renew the lease
for an additional two-year period. Should Fund I decide to sell the boxcars
prior to the expiration of either the initial lease or the renewal lease
period, Norfolk Southern Railway Company has a right of first refusal to
purchase the cars at a then-agreed-to price.
Norfolk Southern Corporation is a publicly-held, diversified rail and
transportation company headquartered in Norfolk, Virginia. For the year-ended
December 31, 1995, Norfolk Southern reported net income of approximately
$712.7 million on revenues of approximately $4.7 billion. At the year-ended
December 31, 1995, Norfolk Southern reported a net worth of approximately $4.8
billion.
On May 10, 1995, Fund I completed the purchase of the 314 used pressurized
tankcars previously specified in the Prospectus for a total purchase price of
$8,192,791. (See "BUSINESS OF THE COMPANIES: Specified Equipment" in the
Prospectus.)
TRAILERS
On May 10, 1995, Fund I completed the purchase of the 450 new 45-foot piggy-
back dry van trailers as previously described in the Prospectus. The total
purchase price of the trailers was $6,771,028. (See "BUSINESS OF THE
COMPANIES: Specified Equipment" in the Prospectus.)
In February and March 1996, Fund I acquired 50, 28-foot 1996-built Utility
refrigerated trailers for a total purchase price of $1,850,000. The trailers
will be leased to third parties through the PLM Rental Facilities. (See:
"CONFLICTS OF INTEREST: Transactions with Affiliates" and "BUSINESS OF THE
COMPANIES: Leasing and Operation of the Equipment" in the Prospectus.)
AIRCRAFT
On August 31, 1995, Fund I acquired a one-third beneficial interest (33.33%)
in two trusts (the "Trusts") which own three 1983 Boeing 737-200A aircraft,
equipped with Pratt & Whitney JT8D-17A engines, two spare, Pratt & Whitney
JT8D-17A engines and a rotables package (the "Trust Equipment"). Fund I
purchased its investment in the Trust for $9,999,000. The engines described
above meet Stage 2 noise control restrictions. (See: "BUSINESS OF THE
COMPANIES: Government Regulation--Aircraft" in the Prospectus and "Industry
Update--Aircraft" below.) As stated above, title to the Equipment is held by
two trusts. (See: "INCOME TAX CONSIDERATIONS: Ownership of Equipment--Title to
Aircraft" in the Prospectus.) The remaining two-thirds in beneficial interests
(66.67%) are owned by three Affiliated programs. (See: "BUSINESS OF THE
COMPANIES: Joint Investments" and "RISK FACTORS: Investment Risks--Risks of
Joint Investments" in the Prospectus.) The Trust Equipment is subject to a
lease, which expires in January 1998, with Transportes Aeroes Portugueses
("TAP"), the Portuguese National Airline. The lease is guaranteed by the
government of the Republic of Portugal.
3
<PAGE>
In September 1995, Fund I acquired a one-seventh (14.29%) beneficial
interest in a trust owning seven Boeing 737-200A aircraft equipped with Pratt
& Whitney JT8D-9A jet engines. The aircraft were manufactured in 1981 and were
acquired through a sale-leaseback transaction with Canadian Airlines
Corporation ("Canadian Airlines"). The initial lease term is scheduled to
expire in September 2001, and may be followed by two optional renewal periods
of two years each at an increased rental rate. Fund I purchased its investment
in the trust for $4,300,000. The engines described above meet Stage 2 noise
control restrictions. (See: "BUSINESS OF THE COMPANIES: Government
Regulation--Aircraft" in the Prospectus and "Industry Update--Aircraft"
below.) Title to the equipment is held by a trust. (See: "INCOME TAX
CONSIDERATIONS: Ownership of Equipment--Title to Aircraft" in the Prospectus.)
The remaining six-sevenths (85.71%) in beneficial interests are owned by five
Affiliated programs. (See: "BUSINESS OF THE COMPANIES: Joint Investments" and
"RISK FACTORS: Investment Risks--Risks of Joint Investments" in the
Prospectus.)
Pursuant to a separate sale-leaseback transaction completed in November
1995, Fund I acquired one Boeing 737-200A aircraft equipped with Pratt &
Whitney JT8D-9A jet engines from Canadian Airlines for a purchase price of
$4,000,000. The aircraft was manufactured in 1979. The initial lease term is
scheduled to expire in November 2001, and may be followed by two optional
renewal periods of two years each at an increased rental rate. The engines
described above meet Stage 2 noise control restrictions. (See: "BUSINESS OF
THE COMPANIES: Government Regulation--Aircraft" in the Prospectus and
"Industry Update--Aircraft" below.) Title to the aircraft is held by a trust,
all of the beneficial interests of which are owned by Fund I. (See: "INCOME
TAX CONSIDERATIONS: Ownership of Equipment--Title to Aircraft" in the
Prospectus.)
Pursuant to an additional sale-leaseback transaction completed in March
1996, Fund I acquired a one-fifth (20%) beneficial interest in a trust owning
five Boeing 737-200A aircraft equipped with Pratt & Whitney JT8D-17A jet
engines from Canadian Airlines. The aircraft was manufactured in 1981. The
initial lease term is scheduled to expire in March 2002, which may be followed
by two optional renewal periods of two years each at a fair market rental
rate. Fund I purchased its investment in the trust for $5,610,000. The engines
described above are subject to Stage 2 noise control restrictions. (See:
"BUSINESS OF THE COMPANIES: Government Regulation--Aircraft" in the Prospectus
and "Industry Update--Aircraft" below.) Title to the aircraft is held by a
trust. (See: "INCOME TAX CONSIDERATIONS: Ownership of Equipment--Title to
Aircraft" in the Prospectus.) The remaining four-fifths (80%) in beneficial
interests are owned by three Affiliated programs. (See: "BUSINESS OF THE
COMPANIES: Joint Investments" and "RISK FACTORS: Investment Risks--Risk of
Joint Investments" in the Prospectus.)
Canadian Airlines is a publicly-held airline corporation headquartered in
Calgary, Alberta, Canada. Canadian Airlines is the second largest airline in
Canada and the eleventh largest based in North America. For the period ending
December 31, 1995, Canadian Airlines reported net income of ($143.5) million
on operating revenues of $2.3 billion, with shareholders equity of $281.8
million.
MARINE VESSELS
On June 28, 1995, Fund I purchased a beneficial interest in a 28,104 DWT dry
bulk carrier for $12,256,532. This vessel is specially equipped to allow it to
trade in and out of the Great Lakes (a "Lakes" fitted vessel), in addition to
its standard worldwide trading routes, and was built in 1984 by Hitachi
Shipbuilding & Engineering Co., Ltd., Innoshima, Japan. Legal title to the
vessel is held by an unaffiliated single purpose Malaysian corporation. Fund
I's interest in the vessel is secured by a promissory note and money purchase,
first priority perfected mortgage filed with the Malaysian ship registry.
Under the terms of the promissory note, Fund I has the right to acquire the
vessel at any time at its book value payable through forgiveness of amounts
owed under the promissory note. Operating control of the vessel is secured by
a multi-voyage charter agreement between a special purpose limited partnership
owned by Fund I and the Malaysian corporation. (See "INCOME TAX
CONSIDERATIONS: Ownership of Equipment--Title to Marine Vessels" in the
Prospectus.) The vessel is
4
<PAGE>
being operated through a net revenue sharing pool with a number of other
similar Lakes fitted vessels owned by Fund I, and/or Affiliates of Fund I or
other unaffiliated entities, in order to achieve certain marketing
efficiencies. Under this arrangement, the vessel will be subject to variable
rate charters with other end users.
In March 1996, Fund I acquired a 50% beneficial interest in one 5200 DWT,
424 TEU container feeder vessel for $3,750,000 (plus $50,000 in pre-delivery
costs). The remaining 50% beneficial interest is owned by an Affiliated
partnership. Legal title to the vessel is held by a limited partnership, 50%
of the interest of which is owned directly or indirectly by Fund I with the
remaining 50% interest being owned directly or indirectly by the Affiliated
partnership. (See: "INCOME TAX CONSIDERATIONS: Ownership of Equipment--Title
to Marine Vessels", "BUSINESS OF THE COMPANIES: Joint Investments" and "RISK
FACTORS: Investment Risks--Risks of Joint Investments" in the Prospectus.) The
vessel was built in 1983 for Rederiet Knud I Larson A/S ("KiL") by Orskov
Shipyard in Denmark. The vessel was purchased from and chartered back to KiL
under a fixed-rate three-year time charter. This vessel is used primarily in
container feeder operations to move containers from smaller ports without deep
draft and major container handling equipment to larger transshipment ports
serviced by regularly scheduled large container vessels. The vessel is
equipped with two cranes which facilitate the use of the vessel in heavy lift
service and allow it to load and discharge in ports without loading equipment.
Fund I will be responsible for its 50% share of the operating costs of the
vessel.
Rederiet Knud I Larsen A/S is a publicly-held shipping company headquartered
in Vedbaek, Denmark. KiL is a niche-competitor which focuses on three main
market areas, container feeder services, chemical tankers and LPG carriers.
KiL operates over 30 vessels with more than half of these in the container
feeder segment. For the period ending December 31, 1995, KiL reported a net
income of approximately $11.5 million on operating revenues of approximately
$102.9 million, with assets of approximately $372.9 million and liabilities of
approximately $263.8 million. At December 31, 1995, KiL reported a net worth
of approximately $109.1 million.
INDUSTRY UPDATE
COMMERCIAL AIRCRAFT
International airlines are expected to post an aggregate $5.7 billion profit
for 1995, an indication that the world air transport industry made a dramatic
turnaround during the year.(/1/) While U.S. air traffic growth slowed during
1995, capacity levels decreased, resulting in higher load factors, lower unit
costs, and improved yields. Worldwide, airlines took delivery of 517
commercial jets, the lowest number since 1988. A continuing decrease in 1996
deliveries is expected to improve the supply-demand balance.(/2/)
Several factors have favorably impacted the market for "second generation"
commercial jets, the type currently owned by Fund I and most likely to be
owned by Fund II, including Boeing 737-200s. In addition to
fewer deliveries, the new generation of narrowbody aircraft has as yet failed
to produce any significant savings in carriers' direct operating costs, and
there are clear indications of further carrier consolidation within the U.S.
and European markets. These trends, expected to continue through 1996, have
led to increases in demand, rental rates, and market values for "second
generation" commercial aircraft.
AIRCRAFT ENGINES
Most airlines maintain an inventory of spare engines in order to minimize
aircraft downtime due to engine maintenance and overhaul requirements.
(1) Source: AirTransport World--January 1996
(2) Source: AirTransport World--February 1996
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<PAGE>
Although Stage 2 engines do not meet U.S. and European noise regulations
which will come into effect in the future, those owned by Fund I and most
likely to be owned by Fund II, are the most advanced Stage 2 engines produced,
compatible with all models of Boeing 727, 737-200, and McDonnell Douglas DC-9-
30 series aircraft. The resurgence in demand for narrowbody aircraft in the
U.S. and Europe has favorably impacted lease rates and values for these Stage
2 engines. (See "BUSINESS OF THE COMPANIES: Government Regulation--Aircraft"
in the Prospectus.)
AIRCRAFT ROTABLES
Aircraft rotables are a predetermined quantity of replacement spare parts
held by airlines as inventory. They can be removed from an aircraft or engine,
overhauled, and then recertified and refitted to the aircraft in "as-new"
condition. Rotables carry specific identification numbers and can thus be
individually tracked. They include landing gear, certain engine components,
avionics, auxiliary power units, replacement doors, control surfaces, pumps,
valves, and other similar equipment. The useful life of a rotable is usually
measured in terms of either time in service or number of takeoffs and landings
(cycles). While specific guidelines apply to rotables for the length of time
or number of cycles between overhauls, there is no preset limit to the number
of times a rotable can be overhauled and recertified. In practice, a component
will be overhauled until the cost to do so exceeds its replacement cost.
Airlines are expected to continue utilizing off-balance sheet financing such
as sale-leasebacks and inventory pooling arrangements to finance spare parts
inventories.
RAILCARS
Nearly all the major railroads reported substantial revenue increases during
1995. As additional industry consolidation is expected in 1996, these mergers
should produce further operating efficiencies leading to continued increases
in revenues and profits.(/3/) Car loadings rose approximately 3% during 1995
with chemicals, metals, and grain experiencing the largest gains.(/4/) Car
demand for liquefied petroleum gas and liquid fertilizer service was also
strong throughout the year.
The Manager believes rates are at the top of the cycle for all types of cars
owned by Fund I. With demand continuing high, rental rates for most types of
cars owned by Fund I and anticipated to be owned by Fund II are expected to
remain relatively strong during 1996, although no assurances can be given that
this will occur.
On the supply side, industry experts predict approximately 60,853 new car
builds and 34,353 retirements for a net gain of about 2.2% in the total U.S.
fleet during 1996. While car builders are still busy, orders are not coming in
as rapidly as in the last two years, so it is likely additions will not
significantly outpace retirements this year.(/5/)
MARINE VESSELS
One of the vessels currently owned by Fund I operates primarily in pooled
vessel operations. In contrast to longer-term, fixed-rate time charter or
bareboat charters, this operating approach provides greater flexibility in
response to changes in demand and, the Manager believes, has the potential to
achieve a higher average return over the period the vessel is owned.
Over the first half of 1995, freight rates for small to medium-sized dry
bulk vessels, the type owned by the Company, continued the improvement begun
in late 1994. The Baltic Freight Index (an industry standard index
(3) Source: Railway Age--December 1995.
(4) Source: The Journal of Commerce--November 7, 1995.
(5) Source: Progressive Railroading--April 1996 and Railway Progress
Institute--Annual Report & Membership Directory.
6
<PAGE>
for dry freight rates) hit an all-time high in May 1995. Although this index
later declined, it ended 1995 at a level slightly higher than the year before.
In 1996, freight rates are expected to hold at current levels, with some
improvement possible over the latter half of the year. On the supply side,
newbuilding orders for the classes of vessels owned by Fund I are at nearly
the same levels as in 1995. On a long-term basis, the level of scrappings and
retirements will be influenced by market freight rates which are not expected
to grow at more than a moderate level. Another factor which affects the volume
of newbuilding is government subsidy policies, particularly in those countries
which are members of the Organization for Economic Co-Operation and
Development (OECD). While the OECD nations did not come to a firm agreement
regarding ship building subsidies in 1995, it appears that in 1996 and beyond,
subsidies should decline, reducing newbuilding levels.
TRAILERS
After three robust years, growth in the intermodal trailer market was flat
in 1995. This lack of growth resulted from several factors including a
lackluster domestic economy, environmental issues, the peso devaluation, a new
teamsters agreement allowing more aggressive pricing, and consolidation among
U.S. railroads. Industry experts believe these factors may lead to an improved
balance in supply and demand and encourage suppliers to retire older, obsolete
equipment in 1996. Fund I's piggyback trailer fleet, with an average age of
one year compared to the industry norm of 10 years, experienced better
utilization than that of its competitors, averaging near 80% during 1995.
Expansion and utilization levels in the intermodal market are anticipated to
improve in 1996 and trailer loadings are expected to increase 3-4% per year
throughout the rest of the decade.
UPDATE TO GOVERNMENT REGULATIONS--RAILCARS
The Department of Transportation ("DOT") requires compliance with the
Association of American Railroads ("AAR") tankcar stub sill inspection
program, as well as with the supplement to such program which requires owners
of tankcars to develop written design-specific inspection procedures, and
prohibits inspections unless such procedures exist.
The DOT has adopted final regulations, consolidating two previously proposed
regulations, addressing crashworthiness protection requirements for tankcars
and the detection and repair of cracks, pits, corrosion, lining flaws and
other defects of tankcars. To improve crashworthiness, the regulations, among
other things, expand the use of thermal protection systems and head protection
on tankcars, require shell protection for tankcars transporting certain
poisonous materials, require bottom-outlet protection for tankcars with bottom
unloading devices, institute new inspection periods for corrosion and tank
thickness, require protective coatings for new and certain repaired cars, and
eliminate certain grandfather provisions allowing cars built before certain
dates to remain in service without modification. There is a 5-10 year phase-
in-period for these rules. To increase the probability of detecting critical
tankcar defects, the regulations, among other things, increase various
inspection and test intervals and requirements for tankcars, and require
thickness measurements for tankcars. Compliance with the 10 year interval
established for tankcar inspection and tests will be required beginning July
1, 1998 for tankcars without metal jackets and July 1, 2000 for tankcars with
metal jackets.
UPDATE TO INCOME TAX CONSIDERATIONS--PARTNERSHIP STATUS
Section 7704 of the Internal Revenue Code of 1986, as amended (the "Code")
treats certain partnerships (and limited liability companies which are
classified as partnerships for Federal income tax purposes) as corporations if
the interests in the partnerships are "publicly traded." In general, the tax
consequences of
7
<PAGE>
classification as a corporation include the imposition of the corporate income
tax on the net income of the entity and the treatment of distributions as
dividends which are taxable to recipients to the extent of the entity's
earnings and profits. In order to avoid these tax consequences, the Operating
Agreement, which is each Company's governing document, provides that no
transfer of Units "will be recognized or effective for any purpose" to the
extent that the transfer would jeopardize the classification of either Company
as a partnership.
In Notice 88-75, the Internal Revenue Service provided interim rules for
determining whether interests in a partnership were "publicly traded." Notice
88-75 described certain transfers that would not be considered public trading
("exempt transfers") and also set forth a safe harbor for transfers other than
exempt transfers. Under that safe harbor, interests in a partnership would not
be deemed to be readily tradable on a secondary market or the substantial
equivalent thereof if the non-exempt transfers in any year did not exceed five
percent of the profits or capital of the partnership.
On December 4, 1995, the Internal Revenue Service issued final regulations
under Code Section 7704 that effectively supersede Notice 88-75. These
regulations are generally similar to the rules found in Notice 88-75 but take
a more restrictive approach to the safe harbor based on the lack of actual
trading of the partnership interests. The final regulations provide that
interests in a partnership will not be deemed to be readily tradable on a
secondary market or the substantial equivalent thereof if no more than two
percent of the interests in the partnership profits or capital are transferred
in any year. In making this calculation, certain specified transfers (e.g.
interests transferred on the death of a partner) are disregarded.
The final regulations have a delayed effective date for partnerships that
were actively engaged in an activity before December 4, 1995. For these
partnerships, the final regulations do not apply until taxable years beginning
after December 31, 2005, unless the partnership adds a substantial new line of
business after December 4, 1995. The Manager believes that Fund I qualifies
for the delayed effective date; it is not anticipated that Fund I will engage
in a new line of business that would render the transition relief
inapplicable. Furthermore, based on the historic transfer levels experienced
by other partnerships which the Manager has sponsored, the final regulations
will probably not require the Manager to prohibit non-exempt transfers of
interests in Fund I after December 31, 2005. Trading levels could change,
however, and there can be no assurance that the Manager will not be required
to prohibit transfers that would potentially violate Notice 88-75 (in years
prior to 2006) or the final regulations (when they first become applicable to
the Fund I).
Jackson Tufts Cole & Black, LLP, special counsel to the Companies, has
opined that Fund II, will not qualify for the final regulations delayed
effective date. Therefore, the final regulations will apply immediately to
Fund II. Notwithstanding the more restrictive two percent safe harbor set
forth in the final regulations and, based on the historic transfer levels
experienced by other partnerships that the Manager has sponsored, the final
regulations will probably not require the Manager to prohibit non-exempt
transfers of interests in Fund II.
In the Prospectus, under "INCOME TAX CONSIDERATIONS: General" the first
sentence in the first paragraph should read "Subject to the qualifications and
assumptions set forth herein and in counsel's opinion, counsel has opined that
each Company will be classified as a partnership for federal income tax
purposes, that the allocations of Net Profits and Net Loss in each Operating
Agreement should be respected for federal income tax purposes, and on certain
other issues.
OPERATING AGREEMENT
For clarification purposes, it should be noted that all references to the
Operating Agreement pertain to the Fifth Amended and Restated Operating
Agreements dated January 23, 1995, as amended.
The Operating Agreement pertaining to Fund II has been amended to conform
certain provisions of the agreement to meet the requirements of the recent
changes in the Internal Revenue Code governing the secondary trading activity
in limited partnerships.
8
<PAGE>
The definition of "Transfer Application" has been amended to read ". . .
means an application and agreement for transfer of a Class A Unit in the form
prescribed by the Manager by which a transferee (or the transferee's broker,
agent, or nominee holder) identifies the transferee as a U.S. Citizen or an
Alien, identifies the transferee as a Benefit Plan or not as a Benefit Plan,
and identifies any category of exempt transfer within which the transfer falls
under any Internal Revenue Services pronouncement, ruling or regulation under
Section 7704 of the Code; requests admission to the Company as a Substituted
Class A Member; agrees to be bound by the terms and conditions of this
Agreement; grants a power of attorney to the Manager and/or its successors, if
any; and takes such other actions as provided in Section 6.04(b) of this
Agreement."
The first sentence of Section 6.05 titled "Permitted Transfers" has been
amended to read "Pursuant to regulations promulgated under Section 7704 of the
Code, the six categories of transfers listed below in this Section 6.05 are
exempt transfers for purposes of determining whether transfers of Class A
Units are within the 2% volume limitation safe harbor set forth in the
regulations under Section 7704 of the Code." The remainder of this section is
unchanged.
Section 6.05(f) has been amended to read "Any block transfer. A block
transfer by a Class A Member in one or more transactions during any 30-day
period of Class A Units representing in the aggregate more than 2% of the
total outstanding interests in capital or profits of the Company."
The second sentence of Section 6.06(b), titled "Restrictions" has been
amended to read "The Manager will also prohibit any transfer which, in the
good faith judgment of the Manager, will cause the Company to fall outside the
2% safe harbor set forth in the regulation promulgated under Section 7704 of
the Code or any safe harbor which supersedes such 2% safe harbor." The
remainder of this section is unchanged.
PRIOR PERFORMANCE
The following graphic summarizes certain information regarding PLM Equipment
Growth Funds I-VII, Affiliated programs of the Companies and Fund I. The
information set forth in this graphic and the prior performance tables
attached hereto as Appendix A are solely to inform investors of prior and not
future performance and should not be considered as indicative of possible
future benefits. Investors investing in the Companies will not have an
interest in the programs described in the following graphic or tables unless
they are also investors in those programs.
9
<PAGE>
PORTFOLIO SUMMARY FOR PLM EQUIPMENT GROWTH FUNDS
The following is a summary of the PLM Equipment Growth Funds I, II, III, IV,
V, VI, VII and Fund I lease portfolios including their last purchases and
purchase commitments as of December 31, 1995.
<TABLE>
<CAPTION>
MARINE
AIRCRAFT RAIL VESSELS CONTAINERS TRAILERS MODUS* MOD. BLDGS.** TOTAL
------------ ------------ ------------ ----------- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Fund I
Purchase Price... $ 24,790,000 $ 23,238,000 $ 16,716,000 $ 8,402,000 $10,341,000 $14,852,000 $ -0- $ 98,339,000
Percent of
Portfolio....... 25% 24% 17% 9% 10% 15% 0% 100.00%
Growth Fund II
Purchase Price... $ 44,006,000 $ 18,960,000 $ -0- $12,823,000 $21,945,000 $12,113,000 $ -0- $ 109,847,000
Percent of
Portfolio....... 40% 17% 0% 12% 20% 11% 0% 100.00%
Growth Fund III
Purchase Price... $ 64,679,000 $ 35,624,000 $ 21,668,000 $14,623,000 $ 7,299,000 $12,152,000 $ -0- $ 156,045,000
Percent of
Portfolio....... 41% 23% 14% 10% 4% 8% 0% 100.00%
Growth Fund IV
Purchase Price... $ 53,227,000 $ 14,276,000 $ 35,129,000 $16,589,000 $ 6,654,000 $13,862,000 $ -0- $ 139,737,000
Percent of
Portfolio....... 38% 10% 25% 12% 5% 10% 0% 100.00%
Growth Fund V
Purchase Price... $ 40,793,000 $ 10,658,000 $ 67,208,000 $27,058,000 $ 9,218,000 $24,119,000 $ -0- $ 179,054,000
Percent of
Portfolio....... 23% 6% 38% 15% 5% 13% 0% 100.00%
Growth Fund VI
Purchase Price... $ 58,998,000 $ 14,975,000 $ 69,292,000 $16,276,000 $17,873,000 $ 9,911,000 $ -0- $ 187,325,000
Percent of
Portfolio....... 31% 8% 37% 9% 10% 5% 0% 100.00%
Growth Fund VII
Purchase Price... $ 38,409,000 $ 9,094,000 $ 40,259,000 $ -0- $11,096,000 $ -0- $4,641,000 $ 103,499,000
Percent of
Portfolio....... 37% 9% 39% 0% 11% 0% 4% 100.00%
Income Fund I
Purchase Price... $ 18,299,000 $ 13,112,000 $ 16,007,000 $ -0- $ 8,621,000 $ -0- $ -0- $ 56,039,000
Percent of
Portfolio....... 33% 23% 29% 0% 15% 0% 0% 100.00%
Total............ $343,201,000 $139,937,000 $266,279,000 $95,771,000 $93,047,000 $87,009,000 $4,641,000 $1,029,885,000
============ ============ ============ =========== =========== =========== ========== ==============
33% 14% 26% 9% 9% 8% 1% 100.00%
</TABLE>
- ----------
* Mobile Offshore Drilling Units.
** Modular Buildings.
10
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of
Operations relates to the Financial Statements of Professional Lease
Management Income Fund I, L.L.C. (the Company). The following discussion and
analysis of operations focuses on the performance of the Company's equipment
in various sectors of the transportation industry, and its effect on the
Company's overall financial condition.
The analysis is organized in the following manner:
--Results of Operations--Year Over Year Summary and Factors Affecting
Performance
--Financial Condition--Capital Resources, Liquidity, and Distributions
--Outlook for the Future
(A) RESULTS OF OPERATIONS
(1) YEAR OVER YEAR SUMMARY
The Company is in the initial equity-raising stage. The Company commenced
significant operations in May 1995. As of December 31, 1995, the Company had
purchased and placed into service $50.4 million of equipment (see Financial
Statements Note 3). Of the acquisitions, $14.3 million represents partial
interests in aircraft, engines and rotables purchased by the Company which
have been placed in special purpose entities for ownership purposes. All of
these purchases were completed with a combination of unrestricted cash,
interim financing, and an advance from an affiliate of the Manager. The nine
day advance from the Manager was repaid (including interest at commercial loan
rates) in July of 1995. Revenues of $4.1 million were generated during 1995.
Expenses of $4.8 million for 1995 consisted primarily of depreciation expense,
using the double-declining balance method, and normal operating costs incurred
as equipment is being purchased and placed in service.
The Company's performance during 1995 is not necessarily indicative of
future periods.
The Manager continues to offer Units in the Company. All equipment purchased
by the Company was on lease at December 31, 1995.
(2) FACTORS AFFECTING PERFORMANCE
(a) RE-LEASING ACTIVITY AND REPRICING EXPOSURE TO CURRENT ECONOMIC CONDITIONS.
The exposure of the Company's equipment portfolio to re-pricing risk occurs
whenever the leases for the equipment expire or are otherwise terminated and
the equipment must be remarketed. Major factors influencing the current market
rate for transportation equipment include supply and demand for similar or
comparable types or kinds of transport capacity, desirability of the equipment
in the lease market, market conditions for the particular industry segment in
which the equipment is to be leased, overall economic conditions both
domestically and worldwide, various regulations concerning the use of the
equipment, and others. The equipment portfolio owned by the Company at
December 31, 1995 has a weighted average lease term of greater than 36 months,
and experienced no re-pricing exposure for the year ended December 31, 1995.
11
<PAGE>
(b) INVESTMENT RISK DURING OFFERING PHASE
Investment risk during the offering phase of Company operations occurs when
the Company cannot deploy available equity for purchases in a timely manner
either due to the lack of availability of equipment that meets the criteria of
the Manager's Credit Review Committee, or to the lack of equity or financing
sources available to fund the purchase of such equipment.
During 1995, the Company acquired one marine vessel for $12.3 million, one
commercial aircraft for $4.0 million, 450 piggyback trailers for $6.8 million,
314 tank cars for $8.2 million (which includes $0.1 million in capital
improvements), 245 boxcars for $5.0 million, a 14% beneficial interest in a
trust which own seven Boeing 737-200A aircraft for $4.3 million, and a one-
third beneficial interest (33.33%) in two trusts (the Trusts) which own three
1983 Boeing 737-200A aircraft, equipped with Pratt & Whitney JT8D-17A engines,
two spare Pratt & Whitney JT8D-17A engines and a rotables package for $10.0
million. The remaining partial interests are owned by affiliated partnerships.
These purchases were completed with a combination of interim financing,
available unrestricted cash and an advance from an affiliate of the Manager.
The nine day advance from the Manager was repaid (including interest at
commercial loan rates) in July of 1995.
The Company has approximately $9 million in equity available for purchases
that has not been specified for the acquisition of any particular equipment.
(c) EQUIPMENT VALUATION
In March 1995, the Financial Accounting Standards Board (FASB) issued
statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121). This standard is effective
for years beginning after December 15, 1995. The Company adopted SFAS 121
during 1995, the effect of which was not material as the method previously
employed by the Company was consistent with SFAS 121. In accordance with SFAS
121, the Company reviews the carrying value of its equipment at least annually
in relation to expected future market conditions for the purpose of assessing
the recoverability of the recorded amounts. If projected undiscounted cash
flows (future lease revenue plus residual values) are less than the carrying
value of the equipment, the equipment is written down to the estimated fair
value. No adjustments to reflect impairment of individual equipment carrying
values were required for the year ended December 31, 1995.
As of December 31, 1995, the Manager estimates the current fair market value
of the Company's equipment portfolio to be approximately $50.7 million.
(B) FINANCIAL CONDITION--CAPITAL RESOURCES, LIQUIDITY, AND DISTRIBUTIONS
The Manager has entered into a joint $25 million credit facility (the
Committed Bridge Facility) on behalf of the Company, PLM Equipment Growth Fund
II, PLM Equipment Growth Fund III, PLM Equipment Growth Fund IV, PLM Equipment
Growth Fund V, PLM Equipment Growth Fund VI, and PLM Equipment Growth & Income
Fund VII, all affiliated Partnerships, and TEC Acquisub, Inc. (TECAI), an
indirect wholly-owned subsidiary of the Manager, 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 an affiliate
plus (ii) 50% of unrestricted cash held by the borrower. The Committed Bridge
Facility became available to the above mentioned Partnerships on December 20,
1993, and became available to the Company on May 8, 1995 and was amended and
restated on September 27, 1995 to expire on September 30, 1996. The Committed
Bridge Facility also provides for a $5 million Letter of Credit Facility for
the eligible borrowers. Outstanding borrowings by the Company, TECAI or PLM
Equipment Growth Funds II through VII reduce the amount available to each
other
12
<PAGE>
under the Committed Bridge Facility. Individual borrowings may be outstanding
for no more than 179 days, with all advances due no later than September 30,
1996. The Committed Bridge Facility prohibits the Company from incurring any
additional indebtedness. Interest accrues at either the prime rate or adjusted
LIBOR plus 2.5% at the borrower's option and is set at the time of an advance
of funds. To the extent the Company is unable to raise sufficient capital
through the sale of interests to repay its portion of the Committed Bridge
Facility, the Company will continue to be obligated under the Committed Bridge
Facility until the Company generates proceeds from operations or the sale of
Equipment sufficient for repayment. Borrowings by the Company are guaranteed
by the Manager. As of December 31, 1995, neither the Company, Partnerships,
nor TECAI had any outstanding borrowings under the Committed Bridge Facility.
As of December 31, 1995, the Company had entered into a commitment to
purchase a 50% ownership in a marine vessel for $3.8 million (the remaining
interest of this marine vessel will be owned by an affiliated partnership).
The Company has signed a Memorandum of Agreement to purchase the vessel and
lodged a deposit of $0.4 million with the current owners. The total amount of
the deposit is included in this balance sheet as equipment acquisition
deposits. The Company received delivery of this equipment March 1996.
Subsequent to year-end, the Company purchased 50 new refrigerated trailers for
$1,850,000, and a Boeing 737-200A aircraft equipped with Pratt & Whitney JT8D-
17A jet engines from Canadian Airlines for a purchase price of $5,610,000. The
Company used existing cash for the purchase of these assets.
The Company relies on operating cash flow to meet its operating obligations,
make cash distributions to Class A and B Unitholders, and grow the Company's
equipment portfolio through reinvestment of any remaining surplus cash
available in additional equipment.
For the year ended December 31, 1995, the Company generated sufficient
operating income to meet its operating obligations and pay distributions to
those Class A and B Unitholders who have become members of the Company.
On a short term basis the existing portfolio of equipment is capable of
generating sufficient cash flow to meet operating obligations and pay
distributions.
In the long term, equity raised will be used to increase the equipment
portfolio which will continue to generate sufficient cash flow to meet
operating obligations and pay distributions.
(C) OUTLOOK FOR THE FUTURE
Several factors may affect the Company's operating performance in 1996 and
beyond, including changes in the markets for the Company's equipment and
changes in the regulatory environment in which the equipment operates.
(1) INVESTMENT RISK
The Company is in its offering phase, and by December 31, 1995, has sold
approximately 63% of the maximum of 5,000,000 Class A Units offered in the
Offering Prospectus dated January 24, 1995 (the Prospectus). The size of the
Company's initial equipment portfolio is subject to total equity raised, and
any borrowings obtained by the Manager on behalf of the Company for the
acquisition of equipment. (Permanent borrowings obtained by the Manager are
anticipated to be limited to approximately 20% of the aggregate cost of the
equipment at the time any such borrowings are originated). While the Company
has already achieved its minimum offering size, it cannot predict with
certainty that it will sell all Class A Units offered in the Prospectus.
Should the Company not be successful in selling all the Class A Units, the
initial equipment portfolio may be smaller than originally anticipated.
13
<PAGE>
The Manager had identified approximately $15 million of equipment for
acquisition by the Company in the Prospectus, which was purchased with equity
raised from the sale of Class A Units. Subsequently, the Company has purchased
an additional $35 million in equipment with equity raised from further sales
of Class A Units. The availability of suitable equipment for purchase with
subsequent sales of Class A Units cannot be known with certainty at this time,
and the Manager cannot predict with accuracy the impact of such acquisitions
on Company operations.
(2) REPRICING AND REINVESTMENT RISK
The equipment portfolio owned by the Company at December 31, 1995, has a
weighted average lease term of greater than 36 months. The Manager of the
Company does not believe sufficient information is now available to predict
with any degree of certainty the impact of re-leasing activity or re-pricing
exposure on the Company's current equipment portfolio when, on average, its
equipment leases begin to expire.
The Manager intends to grow the Company's equipment portfolio through
reinvestment of any remaining surplus cash available after meeting its
operating obligations and making cash distributions in additional equipment.
Pursuant to the Fifth Amended and Restated Operating Agreement of Professional
Lease Management Income Fund I, L.L.C. (the Agreement), the Company will
reinvest surplus cash available for a period of six years after the Closing
Date of the Company's offering period. As the Company is still in its offering
phase, the Manager can neither predict with any certainty whether the Company
will be able to achieve a level of operations sufficient to generate cash
available for reinvestment in equipment, nor the impact such a reinvestment
strategy, if successful, would have on Company operations.
(3) RESIDUAL RISK
A portion of the total return on the Class A and B Unitholders' investment
in the Company is expected to be realized on the sale or liquidation of the
Company's equipment portfolio, the majority of which is anticipated during the
liquidation phase of Company's operations. The Manager's Credit Review
Committee of the Company selects equipment for acquisition based on many
factors, including anticipated residual values from the eventual sale of that
equipment. These residuals may be affected by several factors during the time
the equipment is held, including changes in regulatory environments in which
the equipment is operated, the onset of technological obsolescence, changes in
the equipment markets, perceived values for equipment at the time of sale, and
others. As the impact of any of these factors becomes difficult to forecast
with accuracy over extended time horizons, the Manager cannot predict with
certainty that the anticipated residual values for equipment selected for
acquisition will actually have realized when the equipment is sold.
Prior to the liquidation phase of Company's operations, the Manager may
decide to selectively sell equipment either when it has determined that
opportunities exist to realize significant gains on the sales; when continuing
ownership of the equipment becomes prohibitively expensive; or when the
Manager determines that continuing ownership of the equipment may result in
the realization of unsatisfactory residual values. At this time, the Manager
cannot predict when such occasions may occur, and thus cannot predict with any
certainty the impact of such events on Company operations.
(4) IMPACT OF GOVERNMENT REGULATIONS ON FUTURE OPERATIONS
The Manager operates the Company's equipment in accordance with current
applicable regulations. However, the continuing implementation of new or
modified regulations by some of the authorities mentioned
14
<PAGE>
previously, or others, may adversely affect the Company'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 Company of
meeting regulatory compliance for the same equipment operated between
countries. Currently, the Manager 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 U.S. and internationally, cannot be predicted with any accuracy
and preclude the Manager from determining the impact of such changes on
Company operations, purchases, or sale of equipment.
(5) ADDITIONAL CAPITAL RESOURCES AND DISTRIBUTION LEVELS
The Company is still in the initial equity offering stage. As of December
31, 1995, the Company had raised approximately $62.9 million in equity. The
Manager intends to use the Company's initial equity and borrowings, if deemed
appropriate, to purchase the Company's initial equipment portfolio. The
Company intends to rely on operating cash flow to meet its operating
obligations, make cash distributions to Class A Unitholders, and grow the
Company's equipment portfolio through reinvestment of any remaining surplus
cash available in additional equipment.
Pursuant to the Fifth Amended and Restated Operating Agreement of
Professional Lease Management Income Fund I, L.L.C. (the Agreement), the
Company will cease to reinvest surplus cash in additional equipment beginning
in its seventh year of operations. The Manager intends to pursue a strategy of
selectively redeploying equipment to achieve competitive returns. By the end
of the reinvestment period, the Manager intends to have assembled an equipment
portfolio capable of achieving a level of operating cash flow for the
remaining life of the Company sufficient to meet its obligations and sustain a
predictable level of distributions to the Class A Unitholders.
Geographic Information
The Company operates its equipment in international markets. Although these
operations expose the Company to certain currency, political, credit and
economic risks, the Manager believes these risks are minimal or has
implemented strategies to control the risks as follows: 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 generally through the avoidance of 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 Company 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 Manager strives to minimize this risk
with market analysis prior to committing equipment to a particular geographic
area. Refer to the Financial Statements, Note 3 for information on the
revenues, income, and assets 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 due to
the Manager's decision to use the 200% declining balance method of
depreciation. The relationships of geographic revenues, net income (loss) and
net book value are expected to significantly change in the future as
additional equity is raised and invested in equipment in various equipment
markets and geographic areas. An explanation of the current relationships is
presented below:
15
<PAGE>
The Company's equipment on lease to US domiciled lessees accounted for 40%
of the revenues generated by owned and partially owned equipment while net
operating income accounted for $197,000 in profits versus $178,500 in loss for
the entire Company. The primary reason for this relationship is the fact that
the Company depreciates its rail equipment over a fifteen year period versus
eight years for other equipment types owned and leased in other geographic
regions. Since railcars make up 63% of the equipment, on an original cost
basis, and 64% of the revenues generated in the United States, it is expected
that this relationship of revenue to net operating income will continue into
the near future for this geographic region, as long as additional equipment
types are not added to the equipment mix. The trailers leased to US domiciled
lessees are expected to become profitable in the near future, as the revenue
from the trailers exceeds the operating costs, and the depreciation recorded
by the Company declines in future periods.
The Company's equipment leased to Canadian domiciled lessees consists of
railcars, an aircraft and a partial interest in another aircraft. Revenues in
Canada accounted for 10% of total revenues while these operations accounted
for $43,800 of the $178,500 of the net operating loss for the entire Company.
The net operating loss generated in Canada was created by the shorter
depreciable life on the partially owned aircraft leased in Canada. While the
aircraft in Canada generated losses for the period, this loss was partially
offset by net operating income from the railcar operations. As the
depreciation recorded by the Company declines in future periods the aircraft
is expected to generate net operating income for the Company.
One marine vessel, which was leased in various regions throughout the
period, accounted for 28% of the revenues and 248% of the net operating loss
for the period. The vessel, representing 23% of the net book value of the
Company's assets and investments, generated a significant depreciation charge
for the period that exceeded the revenues less direct operating costs of the
vessel. As depreciation charges in the future decline, the vessel is expected
to generate net income for the Company.
European operations consist of partial interests in aircraft and aircraft
rotables that are generating revenues that accounted for 21% of combined,
owned and partially owned equipment revenues. The net income generated by this
equipment accounted for $93,700 in profits for the period because lease
revenues exceeded depreciation charges. While this equipment is expected to
remain profitable during the lease term expiring in January 1998 the Company
may not be able to remarket this equipment at comparable rates in the future.
Inflation
There was no significant impact on the Company's operations as a result of
inflation during 1995.
Trends
The Company'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. In 1995, market conditions, supply and demand equilibrium,
and other factors varied in several markets. The marine vessel, and rail
markets could be generally categorized by increasing rates as the demand for
equipment is increasing faster than new additions net of retirements. Demand
for narrowbody Stage II aircraft, such as those owned by the Company, has
increased as expected savings from newer narrowbody aircraft have not
materialized while deliveries of the newer aircraft have slowed down. These
different markets have had individual effects on the performance of Company
equipment--both declining and improving performance.
16
<PAGE>
The ability of the Company 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, governmental or other regulations, and others. The
unpredictability of some of these factors, or of their occurrence, makes it
difficult for the Manager to clearly define trends or influences that may
impact the performance of the Company's equipment. The Manager continuously
monitors both the equipment markets and the performance of the Company's
equipment in these markets. The Manager may make an evaluation to reduce the
Company's exposure to equipment markets in which it determines that it cannot
successfully operate equipment and achieve acceptable rates of return.
Alternatively, the Manager may make a determination to enter equipment markets
in which it perceives opportunities to profit from supply-demand instabilities
or other market imperfections.
The Company intends to use any excess cash flow, after payment of expenses,
loan principal, and cash distributions to acquire additional equipment during
the first seven years of Company's operations. The Manager believes these
acquisitions may generate additional earnings and cash flow for the Company.
FINANCIAL INFORMATION AS OF DECEMBER 31, 1995
The following updates as of December 31, 1995, the financial statements of
the Companies and the Consolidated Balance Sheet of the Manager. Such
financial statements and balance sheet have been audited by KPMG Peat Marwick
LLP, independent auditors, as set forth in their reports appearing herein and
are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Members
Professional Lease Management Income Fund I, L.L.C.:
We have audited the accompanying balance sheets as of December 31, 1995 and
1994 and the related statement of operations for the year ended December 31,
1995, and the statements of changes in members' equity and cash flows for the
year ended December 31, 1995 and for the period from inception (August 22,
1994) through December 31, 1994 of Professional Lease Management Income Fund
I, L.L.C. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We 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 Professional Lease
Management Income Fund I, L.L.C. as of December 31, 1995 and 1994, and the
results of its operations for the year ended December 31, 1995 and its cash
flows for the year ended December 31, 1995 and the period from inception
(August 22, 1994) through December 31, 1994, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
SAN FRANCISCO, CALIFORNIA
March 15, 1996
18
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1995 1994
----------- ----
<S> <C> <C>
Assets:
Equipment held for operating leases......................... $36,139,950 $ --
Less accumulated depreciation............................... (2,869,535) --
----------- ----
Net equipment............................................. 33,270,415 --
Cash and cash equivalents................................... 6,803,946 100
Restricted cash............................................. 6,315,548 --
Investment in unconsolidated special purpose entities....... 14,218,219 --
Accounts receivable, net of allowance for doubtful accounts
of $7,835 in 1995.......................................... 869,097 --
Prepaid expenses............................................ 416,515 --
Equipment acquisition deposits.............................. 377,987 --
Organization and offering costs, net of accumulated amorti-
zation..................................................... 389,289 --
----------- ----
Total assets............................................ $62,661,016 $100
=========== ====
LIABILITIES AND MEMBERS' EQUITY
</TABLE>
<TABLE>
<S> <C> <C>
Liabilities:
Accounts payable and accrued expenses....................... $ 664,686 $ --
Due to affiliates........................................... 387,197 --
Prepaid deposits and reserves for repairs................... 207,409 --
----------- ----
Total liabilities......................................... 1,259,292 --
Subscriptions in escrow....................................... 6,259,500 --
Members' equity:
Class A Members (2,831,388 Units at December 31, 1995 and 5
Units held by an officer of the Manager at December 31,
1994)...................................................... 54,836,617 100
Class B Member.............................................. 305,607 --
----------- ----
Total Members' Equity..................................... 55,142,224 100
----------- ----
Total liabilities and members' equity..................... $62,661,016 $100
=========== ====
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenues:
Lease revenue.................................................... $3,991,638
Interest and other income........................................ 133,253
Gain on disposition of equipment................................. 24,593
----------
Total revenues................................................. 4,149,484
Expenses:
Depreciation and amortization.................................... 2,916,682
Management fees to affiliate..................................... 284,376
Repairs and maintenance.......................................... 586,426
Marine equipment operating expenses.............................. 479,486
Insurance expense to affiliate................................... 3,860
Other insurance expense.......................................... 46,416
Interest expense................................................. 229,660
General and administrative expenses to affiliates................ 118,114
Other general and administrative expenses........................ 172,074
----------
Total expenses................................................. 4,837,094
----------
Equity in net income of unconsolidated special purpose entities.... 69,619
----------
Net loss....................................................... $ (617,991)
==========
Members' share of net loss:
Class A Members.................................................. $ (611,811)
Class B Member................................................... (6,180)
----------
Total.......................................................... $ (617,991)
==========
Net loss per Unit (2,831,388 Units at December 31, 1995)........... $ (0.22)
==========
Cash distributions................................................. $1,302,566
==========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE
PERIOD FROM INCEPTION (AUGUST 22, 1994)
THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Members' capital contributions.......... $ 100 $ -- $ 100
----------- ----------- -----------
Members' equity at December 31, 1994.... 100 -- 100
Members' capital contributions.......... 56,627,660 9,536,106 66,163,766
Syndication costs....................... -- (9,101,085) (9,101,085)
Net loss................................ (611,811) (6,180) (617,991)
Distributions........................... (1,179,332) (123,234) (1,302,566)
----------- ----------- -----------
Members' equity at December 31, 1995.... $54,836,617 $ 305,607 $55,142,224
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE
PERIOD FROM INCEPTION (AUGUST 22, 1994) THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
------------ ----
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (617,991) $ --
Adjustments to reconcile net loss to net cash provided by op-
erating activities:
Depreciation and amortization............................... 2,916,682
Gain on sale of equipment................................... (24,593)
Changes in operating assets and liabilities:
Accounts receivable, net.................................... (869,097)
Prepaid expenses............................................ (416,515)
Accounts payable and accrued expenses....................... 664,686
Due to Affiliates........................................... 387,197
Prepaid deposits and reserves for repairs................... 207,409
------------ ----
Net cash provided by operating activities....................... 2,247,778 --
------------ ----
Investing activities:
Payments to Affiliates for purchase of equipment.............. (29,707,311)
Payments for purchase of equipment............................ (6,464,489)
Payments for equipment acquisition deposits................... (377,987)
Investment in and equipment purchased and placed in unconsoli-
dated special purpose entities............................... (14,299,000)
Cash distributions from Affiliates in excess of income ac-
crued........................................................ 80,781
Proceeds from disposition of equipment........................ 55,028
------------ ----
Net cash used in investing activities........................... (50,712,978) --
------------ ----
Financing activities:
Proceeds from note payable.................................... 1,057,221
Proceeds from note payable--Affiliates........................ 3,956,300
Principal payments on notes payable........................... (1,057,221)
Principal payments on notes payable--Affiliates............... (3,956,300)
Cash distributions to Class A Members......................... (1,179,332)
Cash distributions to Class B Member.......................... (123,234)
Class A members capital contribution.......................... 56,627,660 100
Increase in subscriptions in escrow........................... 6,259,500
Increase in restricted cash from subscriptions in escrow,
net.......................................................... (6,315,548)
------------ ----
Cash provided by financing activities........................... 55,269,046 100
------------ ----
Cash and cash equivalents:
Net increase in cash and cash equivalents..................... 6,803,846 100
Cash and cash equivalents at beginning of period.............. 100 --
------------ ----
Cash and cash equivalents at end of period.................... $ 6,803,946 $100
============ ====
Supplemental information:
Cash items:
Interest paid ($8,902 paid to Affiliate)...................... $ 229,660 $ --
============ ====
Non cash items:
Syndication and offering costs paid by Class B Member......... $ 9,536,106 $ --
============ ====
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION
Organization
Professional Lease Management Income Fund I, L.L.C., a Delaware Limited
Liability Company (Fund I or the Company) was formed on August 22, 1994, to
purchase, lease, charter, or otherwise invest in, a diversified portfolio of
long-lived, low obsolescence capital equipment that is transportable by and
among prospective users (the Equipment). The securities represent limited
liability company interests (the Class A Units) which are offered to the
public. The Company's offering became effective on January 23, 1995. PLM
Financial Services, Inc. (FSI) is the Manager of the Company and is the
initial Class B Member. The purchase price of the Class A Units is $20.00 per
Class A Unit. A minimum of 75,000 Class A Units and an anticipated maximum of
5,000,000 Class A Units will be offered.
At December 31, 1995, the Company had received $62,887,260 (3,144,363 units)
in Class A subscriptions. As of December 31, 1995, the Fund had admitted
$56,627,760 (2,831,388) Class A Units. As of March 6, 1996, the Fund had
received a total of $76,659,540 (3,832,977) Class A Units, and had admitted
$76,588,640 (3,829,432) Class A Units. As of April 13, 1995, the Company had
accepted subscription agreements for 79,408 Class A Units ($1,588,160) thereby
meeting the minimum subscriptions of 75,000 Class A Units, exclusive of
subscriptions from Pennsylvania residents, needed for release of funds from
escrow.
At December 31, 1995, the Class B Member had capital contributions of
$9,536,106 representing the cash payments for organization and syndication
costs. Syndication costs of $9,101,085 are recorded as a reduction to Class B
Member's equity.
The Manager controls and manages the affairs of the Company. The Manager
will pay out of its own corporate funds (as a capital contribution to the
Company) all organization and syndication expenses incurred in connection with
the offering; therefore, 100% of the cash proceeds received by the Company
from the sale of Class A Units are initially being used to purchase Equipment
and establish any required cash reserves. For its contribution, the Manager is
generally entitled to a 15% interest in the Company's cash distributions and
earnings subject to certain allocation provisions. After the investors receive
cash distributions equal to their original capital contributions the Manager's
interest will increase to 25%.
Between the eighth and tenth years of operations of the Company, the Manager
intends to begin the dissolution and liquidation of the Company in an orderly
fashion, unless the Company is terminated earlier upon sale of all of the
equipment or by certain other events. However, under certain circumstances,
the term of the Company may be extended. In no event will the Company extend
beyond December 31, 2010.
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 and 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.
23
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
Operations
The equipment of the Company is being managed, under a management agreement,
by PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary of the
Manager. IMI receives a monthly management fee from the Company for managing
the equipment (See Note 2). The Manager is also the General Partner in a
series of limited partnerships which own and lease transportation equipment.
The Manager, in conjunction with its subsidiaries, also sells transportation
equipment to these partnerships and manages transportation equipment under
management agreements with the partnerships.
Accounting for Leases
The Company'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.
Translation of Foreign Currency Transactions
The Company is a domestic entity, however, a limited number of the Company's
transactions are denominated in a foreign currency. The Company's asset and
liability accounts denominated in a foreign currency were translated into U.S.
dollars at the rates in effect at the balance sheet dates, and revenue and
expense items were translated at average rates during the period. Gains or
losses resulting from foreign currency transactions are included in the
results of operations and are not material.
Depreciation and Amortization
Depreciation of equipment held for operating leases is computed on the 200%
declining balance method taking a full month's depreciation in the month of
acquisition, based upon estimated useful lives of 8 years for aircraft,
trailers, and marine vessels, and 15 years for railcars. The depreciation
method is changed to straight line when annual depreciation expense using the
straight line method exceeds that calculated by the 200% declining balance
method. Organization costs will be amortized over a 60 month period. Major
expenditures which are expected to extend the useful lives or reduce future
operating expenses of equipment are capitalized.
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued
statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121). This standard is effective
for years beginning after December 15, 1995. The Company adopted SFAS 121
during 1995, the effect of which was not material as the method previously
employed by the Company was consistent with SFAS 121. In accordance with SFAS
121, the Company reviews the carrying value of its equipment at least annually
in relation to expected future market conditions for the purpose of assessing
the recoverability of the recorded amounts. If projected undiscounted cash
flows (future lease revenue plus residual values) are less than the carrying
value of the equipment the equipment is written down to the estimated fair
value.
Equipment held for operating leases is stated at cost.
24
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
Investment in Unconsolidated Special Purpose Entities
The Company purchased interests in aircraft, engines and rotables ranging
from 14% to 33% which have been placed in unconsolidated special purpose
entities for ownership purposes. These interests are accounted for using the
equity method.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are not
covered by the lessee, they are charged against operations as incurred. To
meet the maintenance obligations of certain aircraft airframes and engines,
reserve accounts are prefunded by the lessee. Marine vessel drydocking is a
periodic required maintenance process that generally occurs every five years.
The drydock maintenance process generally lasts from 10 to 21 days. Estimated
costs associated with marine vessel drydockings are accrued and charged to
repair and maintenance expense ratably over the period prior to such
drydocking because wear and tear occurs over the same revenue generating
period. The reserve accounts are included in the balance sheet as prepaid
deposits and reserve for repairs.
Net Income (Loss) and Distributions per Depositary Unit
After giving effect to the special allocations set forth in Sections 3.08(b)
and 3.17 of the Company's Operating Agreement, Net Profits and Net Loss shall
be allocated 1% to the Class B Members and 99% to the Class A Members.
Cash Distributions
Cash distributions are recorded when paid and totaled $1,302,566 for 1995.
Cash distributions to Class A Unitholders in excess of net income are
considered to represent a return of capital using the generally accepted
accounting principle basis. Cash distributions to Class A Unitholders of
$1,179,332 in 1995, were deemed to be a return of capital.
Cash distributions related to the fourth quarter results of $300,181 were
paid or are payable during January, 1996, to the Class A Unitholders of record
as of December 31, 1995, for unitholders who elected for monthly
distributions. Quarterly cash distributions of approximately $331,974 were
declared on January 25, 1996 and are to be paid on February 15, 1996 to Class
A and Class B Unitholders.
Cash and Cash Equivalents
The Company considers highly liquid investments that are readily convertible
to known amounts of cash with original maturities of three months or less as
cash equivalents.
Restricted Cash
Subscription deposits for Units in escrow are considered restricted cash
until the members are admitted, usually the next day of the following month,
upon which the funds are no longer considered restricted cash.
2. OTHER TRANSACTIONS WITH AFFILIATES
An officer of PLM Securities Corp. (PLMS) contributed $100 of the Company's
initial capital. Under the equipment management agreement, IMI, subject to
certain reductions, the monthly management fee is equal to
25
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
the lesser of (i) the fees which would be charged by an independent party for
similar services for similar equipment or (ii) the sum of (A) for that
Equipment for which IMI provides only Basic Equipment Management Services (a)
2% of the Gross Lease Revenues attributable to Equipment which is subject to
Full Payout Net Leases, (b) 5% of the Gross Lease Revenues attributable to
Equipment which is subject to Operating Leases, and (B) for that Equipment for
which IMI provides supplemental Equipment Management Services, 7% of the Gross
Lease Revenues attributable to such Equipment. Management fees of $218,500
were payable at December 31, 1995. The Company reimbursed FSI $118,114 for
data processing expenses and administrative services performed on behalf of
the Company during 1995. Transportation Equipment Corporation (TEC) will also
be entitled to receive an equipment liquidation fee equal to the lesser of (i)
3% of the sales price of equipment sold on behalf of the Company, or (ii) 50%
of the "Competitive Equipment Sale Commission," as defined, if certain
conditions are met. PLMS and TEC are wholly-owned subsidiaries of the Manager.
In certain circumstances, the Manager will be entitled to a monthly re-lease
fee for re-leasing services following expiration of the initial lease, charter
or other contract for certain Equipment equal to the lesser of (a) the fees
which would be charged by an independent third party for comparable services
for comparable equipment or (b) 2% of Gross Lease Revenues derived from such
re-lease. No re-lease fee, however, shall be payable if such fee would cause
the combination of the equipment management fee paid to IMI (see Note 1) or
the re-lease fees to exceed 7% Gross Lease Revenues.
The Company paid $3,860 in 1995 to Transportation Equipment Indemnity
Company Ltd. (TEI) which provides insurance coverage for Company equipment and
other insurance brokerage services to the Company. TEI is an affiliate of the
Manager. A substantial portion of these amounts was paid to third party
reinsurance underwriters or placed in risk pools managed by TEI on behalf of
affiliated partnerships 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.
The Company owns certain equipment in conjunction with affiliated
partnerships. In 1995, this equipment included three Stage II commercial
aircraft, two aircraft engines, and aircraft rotables.
3. EQUIPMENT
The components of equipment at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Rail equipment................... $13,112,390
Aircraft......................... 4,000,000
Marine vessel.................... 12,256,532
Trailers......................... 6,771,028
-----------
36,139,950
Less accumulated depreciation.... (2,869,535)
-----------
Net equipment.................... $33,270,415
===========
</TABLE>
26
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
Revenues are earned by placing the equipment under operating leases which
are generally billed monthly or quarterly. The Company's marine vessel is
leased to an operator of utilization-type leasing pools which include
equipment owned by unaffiliated parties. In such instances, revenues received
by the Company consist of a specified percentage of revenues generated by
leasing the 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.
During 1995, the Company acquired one marine vessel for $12.3 million, one
commercial aircraft for $4.0 million, 450 piggyback trailers for $6.8 million,
314 tank cars for $8.2 million (which includes $0.1 million in capital
improvements) and 245 boxcars for $5.0 million. These purchases were completed
with interim financing, available unrestricted cash and an advance from an
affiliate of the Manager. The nine day advance from the Manager was repaid
(including interest at commercial loan rates) in July of 1995.
As of December 31, 1995, all equipment in the Company portfolio was on
lease.
All leases are being accounted for as operating leases. Future minimum rent
under noncancelable leases at December 31, 1995 during each of the next five
years are approximately $12,543,000--1996; $9,041,000--1997; $2,701,000--1998;
$2,464,000--1999; and $2,455,000--2000.
The Company owns certain equipment which is leased and operated
internationally. All leases relating to this equipment were denominated in
U.S. dollars.
The Company leases its aircraft, railcars and trailers to lessees domiciled
in four geographic regions: United States, Canada, Europe, and Asia. The
vessel is leased to multiple lessees in different regions who operate the
vessel worldwide. The tables below set forth geographic information about the
Company's equipment and the Company's proportional interest in equipment owned
by special purpose entities. The Company accounts for proportional interest in
equipment using the equity method grouped by domicile of the lessee as of and
for the year ended December 31, 1995:
<TABLE>
<CAPTION>
INVESTMENT IN
UNCONSOLIDATED
SPECIAL PURPOSE
OWNED ENTITIES
---------- ---------------
<S> <C> <C>
Revenues:
Various............... $1,491,972 $ --
United States......... 2,082,312 --
Canada................ 417,354 78,400
Europe................ -- 1,131,458
Asia.................. -- 45,176
---------- ----------
Total revenues........ $3,991,638 $1,255,034
========== ==========
</TABLE>
27
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
The following table sets forth identifiable net income (loss) information by
equipment type by region for the year ended December 31, 1995:
<TABLE>
<CAPTION>
INVESTMENT IN
UNCONSOLIDATED
SPECIAL PURPOSE
OWNED ENTITIES
--------- ---------------
<S> <C> <C>
Net income (loss):
Various............. $(442,731) $ --
United States....... 197,288 --
Canada.............. (2,724) (41,045)
Europe.............. -- 93,671
Asia................ -- 16,993
--------- --------
Total identifiable
(loss)............... (248,167) 69,619
Administrative and
other................ (439,443) --
--------- --------
Total net loss........ $(687,610) $ 69,619
========= ========
</TABLE>
The net book value of owned assets and the net investments in the
unconsolidated special purpose entities at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
INVESTMENT IN
UNCONSOLIDATED
SPECIAL PURPOSE
OWNED ENTITIES
----------- ---------------
<S> <C> <C>
Various.............. $11,064,923 $ --
United States........ 16,365,304 --
Canada............... 5,840,188 4,108,555
Europe............... -- 9,719,375
Asia................. -- 390,289
----------- -----------
Net equipment........ $33,270,415 $14,218,219
=========== ===========
</TABLE>
For the period from January 31, 1995 through December 31, 1995, one lessee,
Transportes Aeroes Portugueses, accounted for more than 10% of the Company's
revenues. The total amount of revenue accounted for by this lessee is $1.2
million or 22% of total revenues. The Company accounts for its interest in the
special purpose entities owning the aircraft, engines and rotables that are
leased using the equity method. Thus, the lease revenues are not reported in
Lease revenue in the Statement of Operations, but, rather are reported net in
Equity in net income of unconsolidated special purpose entities. Such
concentrations of revenue are not unusual given the early state of the equity
raising period and are expected to decrease in the future to the extent
additional equipment is acquired using proceeds from the Company's sale of
limited liability company interests.
28
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
4. INVESTMENT IN UNCONSOLIDATED AFFILIATES
During 1995, the Company acquired a 14% beneficial interest in a trust which
owns seven Boeing 737-200A aircraft for $4.3 million, and a one-third
beneficial interest (33.33%) in two trusts (the Trusts) which own three 1983
Boeing 737-200A aircraft, equipped with Pratt & Whitney JT8D-17A engines, two
spare Pratt & Whitney JT8D-17A engines and a rotables package for $10.0
million. The remaining interests are owned by affiliated partnerships.
The following summarizes the financial information for the special purpose
entities and the Company's interests therein as of and for the year ended
December 31, 1995:
<TABLE>
<CAPTION>
NET INTEREST
TOTAL NUMBERS OF COMPANY
------------- ------------
<S> <C> <C>
Net Assets............ $59,388,644 $14,218,219
Revenues.............. 4,777,472 1,255,034
Net Income............ (1,021,162) 69,619
</TABLE>
As of December 31, 1995, the Company had entered into a commitment to
purchase a 50% ownership in a marine vessel for $3.8 million (the remaining
interest of this marine vessel will be owned by an affiliated partnership).
The Company has signed a Memorandum of Agreement to purchase the vessel and
lodged a deposit of $0.4 million with the current owners. The total amount of
the deposit is included in this balance sheet as equipment acquisition
deposits. The Company received delivery of this equipment in March 1996.
5. DEBT
The Manager has entered into a joint $25 million credit facility (the
Committed Bridge Facility) on behalf of the Company, PLM Equipment Growth Fund
II, PLM Equipment Growth Fund III, PLM Equipment Growth Fund IV, PLM Equipment
Growth Fund V, PLM Equipment Growth Fund VI, and PLM Equipment Growth & Income
Fund VII, all affiliated investment programs, and TEC Acquisub, Inc. (TECAI),
an indirect wholly-owned subsidiary of the Manager, 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 an
affiliate plus (ii) 50% of unrestricted cash held by the borrower. The
Committed Bridge Facility became available to include the above mentioned
Partnerships on December 20, 1993, and became available to the Company on May
8, 1995, and was amended and restated on September 27, 1995 to expire on
September 30, 1996. The Committed Bridge Facility also provides for a $5
million Letter of Credit Facility for the eligible borrowers. Outstanding
borrowings by the Company, TECAI or PLM Equipment Growth Funds II through VII
reduce the amount available to each other under the Committed Bridge Facility.
Individual borrowings may be outstanding for no more than 179 days, with all
advances due no later than September 30, 1996. The Committed Bridge Facility
prohibits the Company from incurring any additional indebtedness. Interest
accrues at either the prime rate or adjusted LIBOR plus 2.5% at the borrower's
option and is set at the time of an advance of funds. To the extent the
Company is unable to raise sufficient capital through the sale of interests to
repay its portion of the Committed Bridge Facility, the Company will continue
to be obligated under the Committed Bridge Facility until
29
<PAGE>
the Company generates proceeds from operations or the sale of Equipment
sufficient for repayment. Borrowings by the Company are guaranteed by the
Manager. As of December 31, 1995, neither the Company, the Partnerships, nor
TECAI had any outstanding borrowings under the Committed Bridge Facility.
6. INCOME TAXES
The Company is not subject to income taxes as any income or loss is included
in the tax returns of the individual members. Accordingly, no provision for
income taxes has been made in the financial statements of the Company.
As of December 31, 1995, there were temporary differences of approximately
$1,108,000 between the financial statement carrying values of certain assets
and liabilities and the income tax basis of such assets and liabilities,
primarily due to differences in depreciation methods and equipment reserves.
7. SUBSEQUENT EVENT
Subsequent to year-end, the Company purchased 50 new refrigerated trailers
for $1,850,000.
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Initial Class A Member
Professional Lease Management Income Fund II, L.L.C.
We have audited the accompanying balance sheet of Professional Lease
Management Income Fund II, L.L.C., a Delaware Limited Liability Company (the
Company), as of December 31, 1995. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
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 balance sheet is free of
material misstatement. An audit of a balance sheet includes examining, on a
test basis, evidence supporting the amounts and disclosures in that balance
sheet. An audit of a balance sheet also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Professional Lease Management
Income Fund II, L.L.C. as of December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
SAN FRANCISCO, CALIFORNIA
March 15, 1996
31
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND II, L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C>
Cash....................................................................... $100
====
MEMBER'S EQUITY
</TABLE>
<TABLE>
<S> <C>
Class A Member (5 Units held by an officer of the Manager of the
Company)................................................................ $100
====
</TABLE>
See accompanying notes to the balance sheet.
32
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND II, L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
NOTES TO BALANCE SHEET
DECEMBER 31, 1995
1. BASIS OF PREPARATION
Organization
Professional Lease Management Income Fund II, L.L.C., a Delaware Limited
Liability Company (Fund II or the Company) was formed on August 22, 1994 to
purchase, lease, charter, or otherwise invest in, a diversified portfolio of
long-lived, low obsolescence capital equipment that is transportable by and
among prospective users (the Equipment). The securities represent limited
liability company interests (the Class A Units) which will be offered to the
public. PLM Financial Services, Inc. (FSI) is the Manager of the Company and
will be the initial Class B Member. The purchase price of the Class A Units
will be $20.00 per Class A Unit. A minimum of 75,000 Class A Units and an
anticipated maximum of 5,000,000 Class A Units will be offered. As of December
31, 1995, five Class A Units had been purchased in the Company by an officer
of the Manager for which $100 was paid.
The Manager controls and manages the affairs of the Company. The Manager
will pay out of its own corporate funds (as a capital contribution to the
Company) all organization and syndication expenses incurred in connection with
the offering; therefore, 100% of the cash proceeds received by the Company
from the sale of Class A Units will initially be used to purchase Equipment
and establish any required cash reserves. For its contribution, the Manager is
generally entitled to a 15% interest in the Company's cash distributions and
earnings subject to certain allocation provisions. After the investors receive
cash distributions equal to their original capital contributions the Manager's
interest will increase to 25%.
Operations
The equipment of the Company will be managed, under a management agreement,
by PLM Investment Management, Inc. (IMI), a wholly owned subsidiary of the
Manager. Subject to certain reductions, the monthly management fee will be
equal to the lesser of (i) the fees which would be charged by an independent
third party for similar services for similar equipment or (ii) the sum of (A)
for that Equipment for which IMI provides only Basic Equipment Management
Services (a) 2% of the Gross Lease Revenues attributable to Equipment which is
subject to Full Payout Net Leases, (b) 5% of the Gross Lease Revenues
attributable to Equipment which is subject to Operating Leases, and (B) for
that Equipment for which IMI provides supplemental Equipment Management
Services, 7% of the Gross Lease Revenues attributable to such Equipment. The
Manager is also the General Partner in a series of limited partnerships which
own and lease transportation equipment. The Manager, in conjunction with its
subsidiaries, also sells transportation equipment to these partnerships and
manages transportation equipment under management agreements with the
partnerships. As of December 31, 1995, the Company had not commenced
operations.
33
<PAGE>
2. OTHER TRANSACTIONS WITH AFFILIATES
In certain circumstances, the Manager will be entitled to a monthly re-lease
fee for re-leasing services following expiration of the initial lease, charter
or other contract for certain Equipment equal to the lesser of (a) the fees
which would be charged by an independent third party for comparable services
for comparable equipment or (b) 2% of Gross Lease Revenues derived from such
re-lease. No re-lease fee, however, shall be payable if such fee would cause
the combination of the equipment management fee paid to IMI (see Note 1) or
the re-lease fees to exceed 7% of Gross Lease Revenues. The Manager will also
be entitled to receive an equipment liquidation fee equal to the lesser of (i)
3% of the sales price of equipment sold on behalf of the Company, or (ii) 50%
of the "Competitive Equipment Sale Commission," as defined, if certain
conditions are met.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
PLM Financial Services, Inc.
We have audited the accompanying consolidated balance sheet of PLM Financial
Services, Inc. and subsidiaries (the Company) as of December 31, 1995. This
consolidated financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement based on our audit.
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 consolidated balance sheet is
free of material misstatement. An audit of a balance sheet includes examining,
on a test basis, evidence supporting the amounts and disclosures in that
balance sheet. An audit of a balance sheet also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall balance sheet presentation. We believe that our
audit of the consolidated balance sheet provides a reasonable basis for our
opinion.
As more fully described in Notes 1 and 8, the Company is one of several
subsidiaries of PLM International, Inc. and has significant transactions with
its parent and affiliates.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of PLM Financial
Services, Inc. and subsidiaries as of December 31, 1995, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
SAN FRANCISCO, CALIFORNIA
March 1, 1996
35
<PAGE>
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(in thousands)
ASSETS
<TABLE>
<S> <C>
Cash and cash equivalents.............................................. $ 957
Receivables (net of allowance for doubtful accounts of $37 at December
31, 1995)............................................................. 556
Receivables net, from affiliated entities.............................. 8,067
Equity interest in affiliates.......................................... 27,566
Property and equipment, net............................................ 1,788
Other.................................................................. 1,365
-------
Total assets......................................................... $40,299
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable...................................................... $ 638
Other accrued expenses................................................ 4,115
Deferred income taxes................................................. 7,079
-------
Total liabilities.................................................... 11,832
Shareholder's Equity:
Common stock, $.01 par value, 1,000 shares authorized, 100 shares
issued and outstanding at paid-in amount............................. 10,995
Retained earnings..................................................... 17,472
-------
Total shareholder's equity........................................... 28,467
-------
Total liabilities and shareholder's equity........................... $40,299
=======
</TABLE>
See accompanying notes to the consolidated balance sheet.
36
<PAGE>
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying consolidated balance sheet
includes all adjustments necessary to present fairly the financial position of
PLM Financial Services, Inc. and its wholly-owned subsidiaries (FSI or the
Company) as of December 31, 1995. The subsidiaries are: PLM Securities Corp.
(SEC), a registered broker-dealer; PLM Transportation Equipment Corporation
(TEC) and its subsidiaries, PLM Rental, Inc. (PLMR) and TEC Acquisub, Inc.
(TEC Acquisub); PLM Investment Management, Inc. (IMI); and several other
smaller companies. All significant intercompany accounts and transactions
among the consolidated group have been eliminated.
On February 1, 1988, the capital stock of FSI, PLM Railcar Management
Services, Inc., Transportation Equipment Management, Inc., and the
transportation equipment and other assets, subject to related liabilities, of
21 public partnerships (PLM Transportation Equipment Partners I through VIIA
and VIII) sponsored by FSI were acquired by PLM International, Inc., (PLM
International) a newly formed Delaware corporation, in return for its stock,
cash, and contingent cash rights to additional cash. As a result of this
exchange (Consolidation), FSI became a wholly-owned subsidiary of PLM
International.
This consolidated balance sheet has 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 and 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.
Syndication Activities
FSI engages principally in the organization, sale and management of
transportation equipment leasing investment programs, which consist of limited
partnerships, limited liability companies (LLCs) and private placements, and
receives for its services an equity interest in the partnerships and LLCs, and
for certain limited partnership programs equity placement, equipment
acquisition, lease negotiation, and debt placement fees. Equipment management
fees are earned in all investment programs. Generally, FSI or one of its
subsidiaries is the general partner or manager in these programs.
Investment in and Management of Equipment Growth Funds, Other Limited
Partnerships and Private Placements
FSI earns revenues in connection with the organization, marketing, and the
management of the limited partnerships and private placement programs. During
the syndication of each of the Equipment Growth Funds (EGFs), placement fees,
representing approximately 9% of equity raised, were generally earned upon the
purchase by investors of partnership units. A significant portion of these
placement fees were reallowed to the originating broker/dealer. Equipment
acquisition, lease negotiation, and debt placement fees were generally earned
through the purchase, initial lease, and financing of equipment, and were
generally recognized as revenue
37
<PAGE>
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1995
when the Company completed substantially all of the services required to earn
the fees, generally when binding commitment agreements were signed.
Management fees are earned for managing the equipment portfolio and
administering investor programs as provided for in various agreements and are
recognized as revenue over time as they are earned.
As compensation for organizing a partnership investment program, FSI, as
general partner, is generally granted an interest (between 1% and 5%) in the
earnings and cash distributions of the program. The Company recognizes as
partnership interests its equity interest in the earnings of the partnerships
after adjusting such earnings to reflect the use of straight-line depreciation
and the effect of special allocations of the program's gross income allowed
under the respective partnership agreements.
The Company also recognizes as income its interest in the estimated net
residual value of the assets of the partnerships as they are purchased. The
amounts recorded are based on management's estimate of the net proceeds to be
distributed upon disposition of the partnership's equipment at the end of the
respective partnerships. As assets are purchased by the partnerships, these
residual value interests are recorded in other fees at the present value of
the Company's share of estimated disposition proceeds. As required by FASB
Technical Bulletin 1986-2, the discount on the Company's residual value
interests is not accreted over the holding period. The Company reviews the
carrying value of its residual interests at least annually in relation to
expected future market values for the underlying equipment in which it holds
residual interests for the purpose of assessing recoverability of recorded
amounts. When a limited partnership is in the liquidation phase, distributions
received by the Company will be treated as recoveries of its equity interest
in the partnership until the recorded residual is eliminated. Any additional
distributions received will be treated as residual interest income.
In accordance with certain investment program and partnership agreements,
FSI receives reimbursement for organization and offering costs incurred during
the offering period. The reimbursement is generally between 1.5% and 3.0% of
equity raised. The investment program reimburses FSI ratably over the offering
period of the investment program based on equity raised. In the event
organizational and offering costs incurred by FSI as defined by the
partnership agreement exceed amounts allowed, the excess costs are capitalized
as an additional investment in the related partnership and amortized over the
estimated life of the partnership. These additional investments are reflected
as equity interest in affiliates in the accompanying consolidated balance
sheets.
Investment in and Management of Limited Liability Companies
During the year ended December 31, 1995, the Professional Lease Management
Income Fund I, L.L.C. (LLC) was formed as a new investor program. The Company
serves as the Manager for the new program. This product, a limited liability
company with a no front-end fee structure, began syndication in the first
quarter of 1995. There is no compensation paid to FSI for organization of the
LLC, raising equity, acquisition of equipment, or negotiation of the initial
leases. FSI is funding the cost of organization, syndication, and offering and
is treating this as its investment in the LLC. The Company will amortize its
investment in the LLC over the life of
38
<PAGE>
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1995
the program. In return for its investment, FSI is generally entitled to a 15%
interest in the cash distributions and earnings of the LLC subject to certain
allocation provisions. FSI's interest in the cash distributions and earnings
of the LLC will increase to 25% after the investors have received cash
distributions equal to their invested capital. The Company is also entitled to
monthly fees for equipment management services and reimbursement for certain
accounting and administrative services it provides.
As of March 1, 1996 the LLC had raised $76.6 million in equity from third
party investors.
Operation of Trailer Rental Facilities
FSI, through its subsidiary PLMR, operates ten trailer rental facilities. As
of December 31, 1995, these rental facilities managed a fleet of approximately
5,300 trailers owned by FSI, PLM International, and various investment
programs. FSI owns 657 of the trailers managed by the rental facilities.
Rental income earned and operations support expenses, including sales and
administrative expenses incurred, are allocated to the owners of the trailers.
Generally, these indirect expenses are allocated using a proportional revenue
basis. Direct operating expenses are specifically identified and charged to
the appropriate trailer owner.
Assets Held for Sale
The Company classifies assets as held for sale if the particular asset is
held for sale to affiliates or third parties. Assets held for sale to
affiliates or third parties are generally subject to operating leases. The
lease revenue is recorded over the period earned. Depreciation is not recorded
on assets committed to be sold to affiliated programs at the Company's
original cost within a specified time, no longer than 150 days. This equipment
may be financed through a credit facility (see Note 5) available to TEC
Acquisub, through the Company's working capital or through an advance from the
parent.
Property and Equipment
Property and equipment are stated at the lower of depreciated cost, or
estimated net realizable value. Depreciation is computed using the straight-
line method based on estimated useful lives of 3-18 years.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121). This standard is effective for years
beginning after December 15, 1995. The Company adopted SFAS 121 during 1995,
the effect of which was not material as the method previously employed by the
Company was consistent wtih SFAS 121. In accordance with SFAS 121, the Company
reviews the carrying value of its equipment at least annually in relation to
expected future market conditions for the purpose of assessing recoverability
of the recorded amounts. If projected undiscounted cash flows (future lease
revenues plus residual values) are lower than the carrying value of the
equipment, the equipment is written down to the estimated fair value.
Income Taxes
The Company follows the liability method of accounting for income taxes
under Statement of Financial Accounting Standards No. 109 ("Accounting for
Income Taxes") ("SFAS 109"). FSI is included in the consolidated federal and
certain combined state income tax returns of PLM International. FSI provides
income tax expense using a combined federal and state tax rate applied to pre-
tax earnings. FSI's tax provision is calculated on a separate return basis.
The current provision of $4,783,000 in 1995 was paid to PLM International.
39
<PAGE>
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1995
Under the liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
Deferred income taxes arise primarily because of differences in the timing
of reporting transportation equipment depreciation, partnership income, and
certain reserves for financial statement reporting and income tax purposes.
Cash and Cash Equivalents
The Company considers highly liquid investments that are readily convertible
into known amounts of cash with original maturities of ninety days or less as
cash equivalents.
2. ASSETS HELD FOR RESALE
At times during 1995, assets held for resale consisted of transportation
equipment purchased by FSI for resale to affiliated parties or third parties.
This equipment may be financed through a credit facility (see Note 5)
available to TEC Acquisub. At December 31, 1995, there was no equipment held
for resale.
3. EQUITY INTEREST IN AFFILIATES
As of December 31, 1995, FSI was the general partner in seventeen equipment
limited partnerships. TEC was the general partner for six partnerships. The
general partner holds partnership interests of primarily 1% to 5% in most of
these partnerships. Net earnings and distributions of the partnerships are
generally allocated 99% to the limited partners and 1% to the general partner,
except for PLM Equipment Growth Funds (EGFs) II, III, IV, V, VI and PLM
Equipment Growth and Income Fund VII (EGF VII), which are allocated 95% to the
limited partners and 5% to the general partner.
FSI is the Manager of LLC and is entitled to a 15% interest in the cash
distributions and earnings of LLC, subject to certain special allocation
provisions. The Company's interest in the cash distributions and earnings of
LLC will increase to 25% after the investors have received distributions equal
to their invested capital.
40
<PAGE>
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1995
Summarized combined financial data for these affiliates, reflecting
straight-line depreciation, are as follows (in thousands and unaudited):
Financial position at December 31, 1995:
<TABLE>
<S> <C>
Cash and other assets............................................... $ 88,619
Transportation equipment and other assets, net of accumulated
depreciation of $250,715......................................... 843,297
---------
Total assets.................................................... 931,916
Less liabilities, primarily long-term financings.................. (265,356)
---------
Partners' equity.................................................. $ 666,560
=========
FSI's share thereof, recorded as equity in affiliates:
Equity interest................................................... $ 15,245
Estimated residual value interests in equipment................... 12,321
---------
Equity interest in affiliates..................................... $ 27,566
=========
</TABLE>
Most of the limited partnership agreements contain provisions for special
allocations of the partnerships' gross income. These special allocation
provisions, in effect, allow the Company to record income equivalent to the
cash distributions received from the partnerships.
While none of the partners, including the general partner, are directly
liable for partnership borrowings and while the general partner maintains
insurance against liability for bodily injury, death and property damage for
which a partnership may be liable, the general partner may be contingently
liable for non-debt claims against the partnership that exceed net asset
values.
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands) at December
31, 1995:
<TABLE>
<S> <C>
Trailers held for lease.......................................... $ 1,284
Office equipment................................................. 1,215
Other............................................................ 850
-------
3,349
Less accumulated depreciation.................................... (1,561)
-------
Net property and equipment....................................... $ 1,788
=======
</TABLE>
5. SECURED DEBT
A wholly-owned subsidiary of the Company, TEC Acquisub, has a $25.0 million
equipment acquisition warehousing facility to acquire assets to be held on an
interim basis of up to 150 days prior to placement with
41
<PAGE>
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1995
affiliated parties or sale to third parties. The facility was amended on
September 27, 1995 to extend the facility to September 30, 1996. The agreement
provides for a $5.0 million letter of credit facility as part of the $25.0
million facility. The facility bears interest at prime or LIBOR plus 2.5%, at
the option of the borrower at the time of the advance under the facility. The
Company may use the facility for up to 80% of the purchase price of the
equipment. Borrowings under the facility are secured by the equipment and any
associated leases. The facility is shared with EGFs II, III, IV, V, VI, VII,
and the LLC so that any party may take advances against the maximum available
under the line. Borrowings by the EGFs, or the LLC are guaranteed by the
Company.
As of December 31, 1995, the Company, the EGFs and the LLC had no
outstanding borrowings under this facility.
6. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1995, are presented
below (in thousands):
<TABLE>
<S> <C>
Deferred Tax Liabilities:
Transportation equipment, principally differences in
depreciation.................................................. $ 482
Partnership interests.......................................... 4,593
State taxes.................................................... 1,527
Other.......................................................... 477
------
Total deferred tax liabilities............................... $7,079
======
</TABLE>
7. COMMITMENTS
The Company has leases for office space and for rental yard operations. As
of December 31, 1995, annual lease rental commitments under FSI's leases for
the remainder of 1996 through 2000 totaled $496,000--1996; $292,000--1997;
$180,000--1998; $141,000--1999; and $106,000--2000, respectively. The
Company's rent expense (including allocated rent) was $1,771,000 in 1995.
8. TRANSACTIONS WITH AFFILIATES
PLM International and its various subsidiaries, including FSI, incur costs
associated with management, accounting, legal and other general and
administrative activities. These direct and indirect costs are allocated among
FSI, PLM International, and other subsidiaries of PLM International, using an
incremental cost allocation method, which management believes is reasonable
when compared to business activities.
PLM Railcar Management Services, Inc. (RMSI), a wholly-owned subsidiary of
PLM International, performed certain management and equipment acquisition
services on behalf of FSI as equipment manager. Fees paid to RMSI by FSI
totaled $780,000 in 1995.
42
<PAGE>
PLM FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1995
PLMR allocates a portion of its indirect operating expenses to PLM
International and to investment programs for their trailers managed by PLMR
using the proportional revenue basis (see Note 1). This allocations was
$3,221,000 in 1995.
In addition to various fees and the PLMR allocation, (see Notes 1 and 3),
FSI charged the investment programs for certain other reimbursable expenses
allowed for in the partnership agreements. FSI was reimbursed approximately
$4,006,000 in 1995.
Organizational and offering costs related to the programs were $10,635,000
in 1995. These costs will either be recovered ratably over the offering period
of the programs based on equity raised or are capitalized as an additional
investment in the related program (see Note 1).
FSI directs cash transfers to and from PLM International and affiliates to
reimburse expenses paid by one member of the group for the benefit of another.
Cash in excess of minimum funding requirements of FSI is transferred to PLM
International. During 1995, PLM International made no capital contributions to
FSI. Income taxes, general and administrative expense allocations and cash
advances between PLM International and FSI also affect the net
receivable/payable from parent and affiliated entities. During 1995, PLM
International advanced $16.2 million to the Company which was used to paydown
the equipment acquisition warehousing credit facility. The Company had repaid
to PLM International the entire advance as of December 31, 1995.
Outstanding amounts between the parent and affiliated entities are generally
paid within normal business terms.
9. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Off-Balance Sheet Risk: As of December 31, 1995, management believes the
Company had no significant off balance-sheet risk.
Concentrations of Credit Risk: Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
temporary cash investments and transactions with affiliated entities.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers and their dispersion across different
businesses and geographic areas.
10. SUBSEQUENT EVENT
In January 1996, the Company sold PLM Rental, Inc., a wholly-owned
subsidiary of the Company, to its parent, PLM International, at a net book
value of $2.1 million.
43
<PAGE>
APPENDIX A
PRIOR PERFORMANCE TABLES
SELECTED DATA REGARDING PREVIOUS PUBLIC
DIVERSIFIED EQUIPMENT LEASING PROGRAMS
Over the last 24 years, the Manager and its Affiliates have managed capital
equipment for themselves and approximately 100,000 investors from whom a total
of approximately $1.5 billion in public equity has been raised. The Manager
and its Affiliates currently have under management approximately $1.3 billion
of equipment. The Offering is the Manager's fifty-fifth investment program
offering and its seventeenth program involving diversified portfolios of long-
lived, low obsolescence capital equipment.
The following tables present information in connection with the prior PLM
Equipment Growth Funds, Fund I and certain other public diversified equipment
leasing programs sponsored by the Manager and its Affiliates. These tables are
provided solely to enable prospective investors to evaluate the experience,
with respect to prior programs sponsored by the Manager or its Affiliates.
Because of the "No-Load" nature of the Offering, certain fees discussed in
these tables may not apply to an investment in the Companies. Purchasers of
Class A Units in the Companies will have no interest in the programs described
below unless they are also investors in those programs. The tables consist of:
Table A -- Experience in Raising and Investing Funds
Table B -- Acquisition of Equipment by Prior Public Programs
Table C -- Operating Results of Prior Programs
Table D -- Sales or Dispositions of Equipment by Prior Public Programs
Table E -- Compensation to the Manager and Affiliates
The information in the following tables is discussed, in part, under "Prior
Performance". The Companies will provide, upon request and without charge,
copies of the annual reports for such programs which were prepared on a Form
10-K are available from the Manager for review by potential investors.
Exhibits, if any, to each such report will be provided upon request and
payment to the Companies of a fee equal to the cost of copying and mailing
such exhibits.
THE INFORMATION SET FORTH IN THE FOLLOWING PRIOR PERFORMANCE TABLES IS
INCLUDED HEREIN SOLELY TO INFORM INVESTORS OF THE PRIOR AND NOT FUTURE
PERFORMANCE OF SIMILAR EQUIPMENT LEASING PROGRAMS PREVIOUSLY SPONSORED BY THE
MANAGER AND ITS AFFILIATES AND SHOULD NOT BE CONSIDERED AS INDICATIVE OF
POSSIBLE CAPITALIZATION OR OPERATIONS OF THE COMPANIES. MOREOVER, THE TEP VII
AND TEP IX PROGRAMS (INCLUDED IN TABLE D) ARE DISSIMILAR TO THE COMPANIES IN
THAT THEIR PRIMARY EMPHASIS WAS ON THE OWNERSHIP OF NEW EQUIPMENT, THEIR
EQUIPMENT WAS ACQUIRED SOLELY ON AN ALL-CASH BASIS, AND THEY DID NOT INVOLVE
EQUIPMENT OTHER THAN TRANSPORTATION AND TRANSPORTATION-RELATED EQUIPMENT.
PURCHASERS OF CLASS A UNITS OFFERED HEREBY WILL HAVE NO INTEREST IN THE
PROGRAMS DESCRIBED ON THE FOLLOWING TABLES UNLESS THEY ARE ALSO INVESTORS IN
THOSE PROGRAMS.
A-1
<PAGE>
TABLE A
EXPERIENCE IN RAISING AND INVESTING FUNDS
(ON A PERCENTAGE BASIS)
PROGRAM INCEPTION TO DECEMBER 31, 1995
The following table sets forth certain information about the experience of
the Manager in raising and investing funds for prior public programs which
closed in the most recent nine years. A percentage analysis of the application
of the amounts raised is presented for offering and organization expenses. A
percentage analysis of the application of amounts raised, reinvestments and
debt proceeds is presented for equipment acquisition costs. It is expected
that certain of the PLM Equipment Growth Funds ("EGF's") and Professional
Lease Management Income Fund I ("Fund I") will continue to purchase additional
equipment.
<TABLE>
<CAPTION>
EGF I EGF II EGF III EGF IV EGF V EGF VI EGF VII FUND I(8)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY PROCEEDS
Amount
offered(1)...... $120,000,000 $150,000,000 $200,000,000 $175,000,000 $200,000,000 $175,000,000 $150,000,000 $100,000,000
Amount raised.... $119,999,499 $149,976,814 $199,674,056 $174,767,000 $184,265,550 $166,138,656 $107,358,760 $ 62,887,260
Offering and
organization
expenses as
percentage of
amount raised:
Selling
Commissions(2).. 9.0% 8.9% 9.0% 8.9% 8.9% 8.9% 9.0% --
Syndication and
organizational
costs(3)....... 2.9% 2.4% 2.0% 2.2% 2.2% 2.4% 3.0% --
Reserve for
working
capital........ 0.6% 0.5% 0.4% 0.5% 0.4% 0.5% 1.0% 1.0%
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Percent
Available for
investment..... 87.5% 88.2% 88.6% 88.4% 88.5% 88.2% 87.0% 99%
Equipment
purchased
through
reinvestments or
financings(4)... $109,202,166 $109,063,413 $100,818,884 $ 84,786,455 $ 78,973,302 $ 47,140,496 $ 17,610,930 $ --
Amount raised,
reinvestments
and debt
proceeds........ $229,201,665 $259,040,227 $300,492,940 $259,553,455 $263,238,852 $213,279,152 $124,969,690 $ 62,887,260
Equipment
acquisition
costs percentage
of amount
raised,
reinvestments or
financing:
Purchase price
and additional
capitalized
costs(5)....... 88.4% 88.3% 87.6% 87.7% 87.2% 85.6% 84.2% 80.3%
Acquisition and
Lease
Negotiation
Fees(6)........ 5.1% 4.9% 4.8% 4.5% 4.8% 5.2% 4.6% -- %
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Percent
invested....... 93.5% 93.2% 92.4% 92.2% 92.0% 90.8% 88.8% 80.3%
Percent leverage
at December 31,
1995(7)......... 21.6% 22.1% 24.5% 19.9% 20.0% 16.9% 21.0% 0.0%
Effective Date of
offering........ May 86 Jun. 87 Mar. 88 May 89 Apr. 90 Dec. 91 May 93 Jan. 95
Closing Date of
offering........ May 87 Mar. 88 May 89 Mar. 90 Dec. 91 May 93 Apr. 95 N/A
Duration of
offering, in
months.......... 12 9 14 10 20 17 24 N/A
Months from
Effective Date
to invest 90% of
amount available
for investment.. 16 12 12 10 17 23 29 N/A
Months from
Closing Date to
invest 90% of
amount available
for investment.. 4 3 0 0 0 0 5 N/A
</TABLE>
A-2
<PAGE>
- ----------
(1) Includes option of $20,000,000, $30,000,000, $50,000,000, $50,000,000,
$50,000,000, $50,000,000 and $50,000,000 for EGF I, EGF II, EGF III, EGF
IV, EGF V, EGF VI and EGF VII, respectively.
(2) PLM Securities Corp., an affiliate of the Manager, received a fee from
each EGF of up to 9% of equity raised, out of which up to 8% was paid to
Selected Agents. With regard to the Companies, the Manager, and not the
Companies, will be paying this fee.
(3) Includes legal, accounting, printing, registration, filing, other
expenses, and reimbursements to the Manager and its Affiliates, related to
the organization and formation of the program, and the offering of the
Units, paid by each EGF. With regard to the Companies, the Manager, and
not the Companies, will be paying these expenses.
(4) Cost of equipment up to the amount available for investment is considered
to be purchased using original proceeds. Additional equipment is
considered to be purchased from debt proceeds and/or reinvestments,
including equipment purchased using net proceeds from the sale of
equipment.
(5) Total purchases and additional capitalized costs as a percentage of amount
raised, reinvestments and debt proceeds.
(6) Acquisition Fees of 4.5% (EGF II, EGF III, EGF IV, EGF V, EGF VI and EGF
VII) or 5% (EGF I) of the Equipment Purchase Price and Lease Negotiation
Fees of 1% of the Equipment Purchase Price are paid to the Manager or its
Affiliates by each EGF. With regard to the Companies, the Manager and its
Affiliates are foregoing these fees.
(7) Percent leverage at December 31, 1995 is calculated as the principal
amount of indebtedness outstanding at December 31, 1995, as a percentage
of the total equipment acquisition costs for all equipment owned by the
partnership at December 31, 1995.
(8) As of December 31, 1995, Fund I's offering has not been completed.
A-3
<PAGE>
TABLE B
ACQUISITION OF EQUIPMENT BY PRIOR PUBLIC PROGRAMS
PROGRAM INCEPTION TO DECEMBER 31, 1995
The following table sets forth acquisition of equipment by prior public
programs which closed in the most recent nine years. It is anticipated that
the EGF's III through VII and Fund I will periodically purchase additional
equipment.
<TABLE>
<CAPTION>
EGF I EGF II EGF III EGF IV
------------------ ------------------ ------------------ ------------------
EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
ACQUISITION % OF ACQUISITION % OF ACQUISITION % OF ACQUISITION % OF
TYPE OF EQUIPMENT COST(1) TOTAL COST(1) TOTAL COST(1) TOTAL COST(1) TOTAL
----------------- ------------ ----- ------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rail Equipment.......... $ 54,533,780 25.7% $ 45,298,255 19.0% $ 57,424,744 20.9% $ 36,817,817 15.5%
Aircraft................ 59,712,596 28.1 67,273,824 28.1 88,769,648 32.3 75,865,461 32.0
Aircraft
engines/components..... -- -- -- -- -- -- -- --
Containers.............. 14,959,043 7.1 25,911,306 10.8 24,485,416 8.9 24,321,387 10.3
Trailers................ 15,849,689 7.5 31,419,910 13.2 7,826,063 2.8 8,320,014 3.5
Vessels................. 51,662,432 24.3 52,913,258 22.1 83,927,116 30.5 77,234,270 32.6
Modular Buildings....... -- -- -- -- -- -- -- --
Mobile Offshore Drilling
Unit................... 15,544,196 7.3 16,315,405 6.8 12,687,663 4.6 14,485,628 6.1
------------ ----- ------------ ----- ------------ ----- ------------ -----
$212,261,736 100.0% $239,131,958 100.0% $275,120,650 100.0% $237,044,577 100.0%
===== ===== ===== =====
Lease Negotiation
Fees(2)................ 1,939,992 2,211,005 2,609,448 2,235,906
------------ ------------ ------------ ------------
Total................ $214,201,728 $241,342,963 $277,730,098 $239,280,483
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
EGF V EGF VI EGF VII FUND I
------------------ ------------------ ------------------ -----------------
EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
ACQUISITION % OF ACQUISITION % OF ACQUISITION % OF ACQUISITION % OF
TYPE OF EQUIPMENT COST(1) TOTAL COST(1) TOTAL COST(1) TOTAL COST(1) TOTAL
----------------- ------------ ----- ------------ ----- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rail Equipment.......... $ 14,431,120 6.0% $ 15,720,306 8.2% $ 9,490,810 8.6% $13,144,241 26.0%
Aircraft................ 33,147,960 13.8 43,741,470 22.8 39,096,376 35.6 17,303,825 34.3
Aircraft
engines/components..... 13,624,535 5.7 17,992,038 9.4 1,040,186 1.0 995,175 2.0
Containers.............. 41,837,997 17.5 19,402,097 10.1 -- -- -- --
Trailers................ 9,628,513 4.0 20,340,921 10.6 12,263,143 11.1 6,771,028 13.4
Vessels................. 88,832,803 37.0 51,754,743 27.0 42,064,883 38.2 12,256,532 24.3
Modular Buildings....... -- -- -- -- 6,012,930 5.5 -- --
Mobile Offshore Drilling
Units.................. 38,267,914 16.0 22,899,480 11.9 -- -- -- --
------------ ----- ------------ ----- ------------ ----- ----------- -----
$239,770,842 100.0% $191,851,055 100.0% $109,968,328 100.0% $50,470,801 100.0%
===== ===== ===== =========== =====
Lease Negotiation
Fees(2)................ 2,277,472 1,823,736 1,044,723
------------ ------------ ------------
Total................ $242,048,314 $193,674,791 $111,013,051
============ ============ ============
</TABLE>
- ----------
(1) Equipment acquisition cost represents the purchase price and additional
capitalized costs for equipment purchased using the proceeds of the
offering as well as reinvestments and/or debt proceeds. Acquisition Fees
of 4.5% (EGF II, EGF III, EGF IV, EGF V, EGF VI and EGF VII) or 5% (EGF I)
of the Equipment Purchase Price paid to the Manager or its Affiliates by
each EGF, are included in the equipment acquisition cost. With regard to
the Companies, the Manager and its Affiliates are foregoing this fee.
Related to the equipment acquisition cost is financing of $28,000,000 for
EGF I, $35,000,000 for EGF II, $41,000,000 for EGF III, $30,800,000 for
EGF IV, $38,000,000 for EGF V, $30,000,000 for EGF VI, $23,000,000, for
EGF VII and $0 for Fund I and the financing for EGF III and EGF V is
secured by a portion of the respective partnership's portfolio of
equipment.
(2) With regard to the Companies, the Manager and its Affiliates are foregoing
this fee.
A-4
<PAGE>
TABLE C
OPERATING RESULTS OF PRIOR PROGRAMS
PROGRAM INCEPTION TO DECEMBER 31, 1995
($ IN THOUSANDS EXCEPT INVESTMENT DATA PER $1,000 INVESTMENT)
<TABLE>
<CAPTION>
EGF I
-------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Months of operations.... 5 12 12 12 12 12 12 12 12 12
Gross Revenues.......... $ 591 $16,828 $25,358 $30,901 $35,345 $35,640 $27,664 $23,440 $24,074 $21,380
Gain (loss) on disposal
of equipment........... -- 242 3,588 2,858 870 8,955 (194) 838 1,585 2,195
Less: Operating
expenses(11)........... 114 2,689 4,476 7,327 10,646 14,922 17,575 8,298 11,847 7,455
Management Fees....... 67 1,428 2,137 2,668 2,673 2,142 1,820 1,742 1,695 1,318
Interest expense...... -- 105 96 1,331 2,556 2,487 1,522 1,325 1,693 2,021
Depreciation and
Amortization......... 1,038 10,841 14,608 16,708 16,942 15,840 14,045 11,188 10,349 8,547
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)--GAAP
basis(1)............... $ (628) $ 2,007 $ 7,629 $ 5,725 $ 3,398 $ 9,204 $(7,492) $ 1,725 $ 75 $ 4,234
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Federal taxable income
(loss):
from operations........ $ (395) $(1,590) $(1,530) $(1,103) $ 3,092 $ 1,104 $ 4,181 $ 2,906 $ 2,733 $ 745
from gain (loss) on
disposal of
equipment............. -- 235 3,588 3,318 2,021 7,169 (4,258) (1,972) 2,231 1,556
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Federal taxable income
(loss)................. $ (395) $(1,355) $ 2,058 $ 2,215 $ 5,113 $ 8,273 $ (77) $ 934 $ 4,964 $ 2,301
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Cash generated from
operations(2).......... $ 870 $12,714 $18,246 $22,551 $18,335 $16,773 $13,129 $13,787 $11,567 $ 9,829
Cash generated from
disposal of
equipment............. -- 726 8,575 5,491 3,290 25,431 9,213 3,761 3,082 7,142
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cash generated from
operations and
disposal.............. 870 13,440 26,821 28,042 21,625 42,204 22,342 17,548 14,649 16,971
Less: Cash reinvested
and additions or
(deletions) to
reserve(3)............. 833 6,121 14,693 15,237 8,006 28,319 8,512 3,789 1,069 3,422
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cash distributions to
investors(4)........... $ 37 $ 7,319 $12,128 $12,805 $13,619 $13,885 $13,830 $13,759 $13,580 $13,549
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
INVESTMENT DATA PER
$1,000 INVESTMENT(8)
Federal taxable income
(loss):
from operations(5)..... $(16.83) $(15.71) $(12.63) $ (9.12) $ 25.51 $ 8.65 $ 34.82 $ 24.58 $ 22.47 $ 5.94
from gain (loss) on
sale.................. $ -- $ 2.32 $ 29.61 $ 27.45 $ 16.68 $ 59.42 $(35.83) $(16.68) $ 18.37 $ 12.14
Cash distributions to
investors(4):
Source (on a GAAP
basis)(9)
Investment income..... $ -- $ 19.82 $ 62.94 $ 47.35 $ 28.03 $ 75.79 $ -- $ 13.48 $ -- $ 34.96
Return of capital..... $ 1.56 $ 52.47 $ 37.12 $ 58.55 $ 84.33 $ 39.21 $115.00 $101.52 $115.00 $ 80.48
Source (on a cash
basis)
Sales................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Refinancing........... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operations............ $ 1.56 $ 72.29 $100.06 $105.90 $112.36 $115.00 $115.00 $115.00 $115.00 $115.44
Other................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
A-5
<PAGE>
TABLE C
OPERATING RESULTS OF PRIOR PROGRAMS--(CONTINUED)
PROGRAM INCEPTION TO DECEMBER 31, 1995
($ IN THOUSANDS EXCEPT INVESTMENT DATA PER $1,000 INVESTMENT)
<TABLE>
<CAPTION>
EGF II
-------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Months of operation..... 6 12 12 12 12 12 12 12 12
Gross Revenues.......... $ 2,835 $25,591 $38,355 $42,659 $39,345 $ 34,837 $30,197 $23,979 $17,498
Gain (loss) on disposal
of equipment........... -- -- 1,000 1,535 5,173 (329) 6,704 2,347 1,485
Less: Operating ex-
penses(11)............. 124 4,856 8,877 13,270 17,180 24,351 14,569 11,418 6,327
Management Fees....... 96 1,236 1,944 2,104 1,949 1,668 1,523 1,150 818
Interest expense...... 29 -- 2,090 3,429 3,460 2,225 1,708 2,550 2,349
Depreciation and Amor-
tization............. 3,004 18,482 22,623 23,676 20,482 16,753 13,504 11,141 8,552
------- ------- ------- ------- ------- -------- ------- ------- -------
Net income (loss)--GAAP
basis(1)............... $ (418) $ 1,017 $ 3,821 $ 1,715 $ 1,447 $(10,489) $ 5,597 $ 67 $ 937
======= ======= ======= ======= ======= ======== ======= ======= =======
Federal taxable income
(loss):
from operations........ $(1,557) $(1,961) $ 306 $ (879) $(1,198) $ (843) $ 1,835 $ (860) $ (981)
from gain (loss) on
disposal of
equipment............. -- -- 841 2,288 5,610 248 (4,051) (6,950) (1,086)
------- ------- ------- ------- ------- -------- ------- ------- -------
Federal taxable income
(loss)................. $(1,557) $(1,961) $ 1,147 $ 1,409 $ 4,412 $ (595) $(2,216) $(7,810) $(2,067)
======= ======= ======= ======= ======= ======== ======= ======= =======
Cash generated from
operations(2)(10)...... $ 2,146 $21,546 $24,377 $23,444 $10,918 $ 17,444 $17,290 $11,310 $ 8,176
Cash generated from
disposal of
equipment............. -- -- 3,417 4,976 18,109 763 21,229 13,558 7,005
------- ------- ------- ------- ------- -------- ------- ------- -------
Cash generated from
operations and
disposal.............. 2,146 21,546 27,794 28,420 29,027 18,207 38,519 $24,868 $15,181
Less: Cash reinvested
and additions or
(deletions) to
reserve(3)............. 1,779 9,250 12,008 11,648 11,658 837 25,854 12,248 2,632
------- ------- ------- ------- ------- -------- ------- ------- -------
Cash distributions to
investors(4)........... $ 367 $12,296 $15,786 $16,772 $17,369 $ 17,370 $12,665 $12,620 $12,549
======= ======= ======= ======= ======= ======== ======= ======= =======
INVESTMENT DATA PER
$1,000 INVESTMENT(8)
Federal taxable income
(loss):
from operations(5)..... $(34.11) $(20.83) $ 1.94 $ (5.57) $ (7.59) $ (9.05) $ 12.24 $ (6.27) $ (7.60)
from gain (loss) on
sale.................. $ -- $ -- $ 5.33 $ 14.49 $ 35.53 $ -- $(27.03) $(49.66) $(12.17)
Cash distributions to
investors(4):
Source (on a GAAP
basis)(9)
Investment income..... $ -- $ 6.62 $ 24.20 $ 10.86 $ 1.64 $ -- $ 29.84 $ -- $ --
Return of capital..... $ 8.04 $ 73.40 $ 75.79 $ 95.33 $108.37 $ 110.02 $ 50.46 $ 80.22 $ 79.76
Source (on a cash
basis)
Sales................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Refinancing........... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operations............ $ 8.04 $ 80.02 $ 99.99 $106.19 $110.01 $ 110.02 $ 80.30 $ 80.22 $ 79.76
Other................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
A-6
<PAGE>
TABLE C
OPERATING RESULTS OF PRIOR PROGRAMS--(CONTINUED)
PROGRAM INCEPTION TO DECEMBER 31, 1995
($ IN THOUSANDS EXCEPT INVESTMENT DATA PER $1,000 INVESTMENT)
<TABLE>
<CAPTION>
EGF III
-----------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995
------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Months of operations.... 8 12 12 12 12 12 12 12
Gross Revenues.......... $ 5,007 $37,148 $49,416 $49,452 $ 42,641 $40,442 $37,384 $25,119
Gain (loss) on disposal
of equipment........... -- 52 120 5,838 1,081 1,707 2,863 2,936
Less: Operating ex-
penses(11)............. 1,947 8,524 17,826 22,353 27,354 19,317 18,951 7,981
Management Fees....... 245 1,806 2,502 2,435 2,145 1,989 1,788 1,137
Interest expense...... 149 1,093 3,630 3,515 2,460 2,493 2,938 3,474
Depreciation and
Amortization......... 4,255 26,520 29,498 27,019 23,011 18,591 16,318 12,757
------- ------- ------- ------- -------- ------- ------- -------
Net income (loss)--GAAP
basis(1)............... $(1,589) $ (743) $(3,920) $ (32) $(11,248) $ (241) $ 252 $ 2,706
======= ======= ======= ======= ======== ======= ======= =======
Federal taxable income
(loss):
from operations........ $(2,323) $ 4,847 $ 95 $(4,523) $ 1,813 $ 2,780 $(3,720) $(2,654)
from gain (loss) on
disposal of
equipment............. -- 48 269 3,176 (898) (1,614) (5,789) (4,609)
------- ------- ------- ------- -------- ------- ------- -------
Federal taxable income
(loss)................. $(2,323) $ 4,895 $ 364 $(1,347) $ 915 $ 1,166 $(9,509) $(7,263)
======= ======= ======= ======= ======== ======= ======= =======
Cash generated from
operations(2).......... $ 2,012 $25,502 $25,160 $22,304 $ 25,762 $16,608 $13,720 $13,806
Cash generated from
disposal of
equipment............. -- 71 530 15,537 4,241 10,808 16,748 3,389
------- ------- ------- ------- -------- ------- ------- -------
Cash generated from
operations and
disposal.............. 2,012 25,573 25,690 37,841 30,003 27,416 30,468 17,195
Less: Cash reinvested
and additions or
(deletions) to
reserve(3) ............ 1,118 9,777 4,638 16,263 7,897 10,587 13,657 458
------- ------- ------- ------- -------- ------- ------- -------
Cash distributions to
investors(4)........... $ 894 $15,796 $21,052 $21,578 $ 22,106 $16,829 $16,811 $16,737
======= ======= ======= ======= ======== ======= ======= =======
INVESTMENT DATA PER
$1,000 INVESTMENT(8)
Federal taxable income
(loss):
from operations(6)..... $(47.67) $ 25.06 $ 0.45 $(21.49) $ 8.62 $ 13.92 $(17.70) $(12.68)
from gain (loss) on
sale.................. $ -- $ 0.25 $ 1.28 $ 1.67 $ (9.60) $ (8.08) $(34.12) $(28.07)
Cash distributions to
investors(4):
Source (on a GAAP
basis)(9)
Investment income..... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Return of capital..... $ 18.34 $ 81.66 $100.00 $102.50 $ 105.00 $ 80.07 $ 80.12 $ 70.87
Source (on a cash
basis)
Sales................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Refinancing........... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operations............ $ 18.34 $ 81.66 $100.00 $102.50 $ 105.00 $ 80.07 $ 80.12 $ 70.87
Other................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
A-7
<PAGE>
TABLE C
OPERATING RESULTS OF PRIOR PROGRAMS--(CONTINUED)
PROGRAM INCEPTION TO DECEMBER 31, 1995
($ IN THOUSANDS EXCEPT INVESTMENT DATA PER $1,000 INVESTMENT)
<TABLE>
<CAPTION>
EGF IV
---------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995
------- ------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Months of operations.... 8 12 12 12 12 12 12
Gross revenues.......... $ 5,335 $30,028 $35,470 $33,623 $ 27,746 $ 21,031 $20,880
Gain on disposal of
equipment.............. -- 1 1,847 47 179 3,336 530
Less: Operating ex-
penses(11)............. 1,117 7,286 10,403 13,185 11,536 10,742 8,270
Management Fees....... 180 1,447 1,805 1,668 1,382 1,183 1,064
Interest expense...... 1,050 1,385 3,209 3,222 3,290 3,379 3,126
Depreciation and Amor-
tization............. 5,386 24,287 27,359 22,748 18,097 14,175 12,561
------- ------- ------- ------- -------- -------- -------
Net loss--GAAP ba-
sis(1)................. $(2,398) $(4,376) $(5,459) $(7,153) $ (6,380) $ (5,112) $(3,611)
======= ======= ======= ======= ======== ======== =======
Federal taxable loss:
from operations........ $(1,035) $ 1,669 $(1,407) $ (697) $ (3,351) $ (7,977) $(4,189)
from gain (loss) on
disposal of equip-
ment.................. -- 1 1,676 248 (8,517) (4,964) (1,559)
------- ------- ------- ------- -------- -------- -------
Federal taxable income
(loss)................. $(1,035) $ 1,670 $ 269 $ (449) $(11,868) $(12,941) $(5,748)
======= ======= ======= ======= ======== ======== =======
Cash generated from op-
erations(2)............ $ 4,467 $20,586 $20,001 $16,177 $ 14,587 $ 6,310 $ 7,461
Cash generated from
disposal of equip-
ment.................. -- 37 13,011 615 14,658 14,591 6,239
------- ------- ------- ------- -------- -------- -------
Cash generated from
operations and
disposals............. 4,467 20,623 33,012 16,792 29,245 20,901 13,700
Less: Cash reinvested
and additions or
(deletions) to
reserve(3)............. 3,831 5,188 14,088 (2,645) 14,617 13,378 7,257
------- ------- ------- ------- -------- -------- -------
Cash distributions to
investors(4)........... $ 636 $15,435 $18,924 $19,437 $ 14,628 $ 7,523 $ 6,443
======= ======= ======= ======= ======== ======== =======
INVESTMENT DATA PER
$1,000 INVESTMENT(8)
Federal taxable income
(loss):
from operations(7)..... $(18.24) $ 5.51 $ (7.64) $ (3.79) $ (19.15) $ (46.89) $(24.09)
from gain (loss) on
sale.................. $ -- $ -- $ 9.10 $ 1.35 $ (48.67) $ (30.04) $(11.00)
Cash distributions to
investors(4):
Source (on a GAAP ba-
sis)(9)
Investment income..... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Return of capital..... $ 11.14 $ 88.52 $102.74 $105.54 $ 80.06 $ 41.18 $ 35.42
Source (on a cash ba-
sis)
Sales................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Refinancing........... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operations............ $ 11.14 $ 88.52 $102.74 $105.54 $ 80.06 $ 41.18 $ 35.42
Other................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
A-8
<PAGE>
TABLE C
OPERATING RESULTS OF PRIOR PROGRAMS--(CONTINUED)
PROGRAM INCEPTION TO DECEMBER 31, 1995
($ IN THOUSANDS EXCEPT INVESTMENT DATA PER $1,000 INVESTMENT)
<TABLE>
<CAPTION>
EGF V
----------------------------------------------------
1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Months of operations..... 9 12 12 12 12 12
Gross revenues........... $ 4,751 $25,091 $38,770 $39,060 $39,371 $35,307
Gain (loss) on disposal
of equipment............ -- (39) (273) (584) 4,920 3,835
Less: Operating ex-
penses(11).............. 869 5,711 9,071 17,938 16,500 14,961
Management Fees........ 216 1,220 1,906 1,952 2,097 1,767
Interest expense....... 1,527 1,701 2,179 1,869 2,235 3,048
Depreciation and Amor-
tization.............. 5,179 20,945 29,460 25,160 20,266 17,321
------- ------- ------- ------- ------- -------
Net income (loss)--GAAP
basis(1)................ $(3,040) $(4,525) $(4,119) $(8,443) $ 3,193 $ 2,045
======= ======= ======= ======= ======= =======
Federal taxable income
(loss):
from operations......... $(2,172) $ (240) $(2,866) $ 454 $(1,695) $(2,381)
from gain (loss) on dis-
posal of equipment..... -- (9) (131) (175) 3,501 (1,737)
------- ------- ------- ------- ------- -------
Federal taxable income
(loss).................. $(2,172) $ (249) $(2,997) $ 279 $ 1,806 $(4,118)
======= ======= ======= ======= ======= =======
Cash generated from oper-
ations(2)............... $ 2,424 $15,585 $26,218 $22,063 $18,639 $18,728
Cash generated from dis-
posal of equipment..... -- 181 1,253 2,286 14,827 18,375
------- ------- ------- ------- ------- -------
Cash generated from op-
erations and dispos-
als.................... 2,424 15,766 27,471 24,349 33,466 37,103
Less: Cash reinvested and
additions or (deletions)
to reserve(3)........... 1,826 3,466 8,291 4,919 14,046 17,761
------- ------- ------- ------- ------- -------
Cash distributions to
investors(4)............ $ 598 $12,300 $19,180 $19,430 $19,420 $19,342
======= ======= ======= ======= ======= =======
INVESTMENT DATA PER
$1,000 INVESTMENT(8)
Federal taxable income
(loss):
from operations(7)...... $(69.51) $ (6.08) $(14.77) $ 2.47 $ (9.12) $(13.71)
from gain (loss) on
sale................... $ -- $ (0.07) $ (0.68) $ (.95) $ 13.65 $(14.00)
Cash distributions to in-
vestors(4):
Source (on a GAAP
basis)(9)
Investment income...... $ -- $ -- $ -- $ -- $ 12.05 $ 5.87
Return of capital...... $ 19.82 $ 87.23 $ 98.85 $100.11 $ 88.00 $ 94.25
Source (on a cash basis)
Sales.................. $ -- $ -- $ -- $ -- $ -- $ --
Refinancing............ $ -- -- $ -- $ -- $ -- $ --
Operations............. $ 19.82 $ 87.23 $ 98.85 $100.11 $100.05 $100.12
Other.................. $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
A-9
<PAGE>
TABLE C
OPERATING RESULTS OF PRIOR PROGRAMS--(CONTINUED)
PROGRAM INCEPTION TO DECEMBER 31, 1995
($ IN THOUSANDS EXCEPT INVESTMENT DATA PER $1,000 INVESTMENT)
<TABLE>
<CAPTION>
EGF VI
----------------------------------
1992 1993 1994 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Months of operations....................... 12 12 12 12
Gross revenues............................. $ 6,454 $20,186 $33,172 $33,317
Gain (loss) on disposal of equipment....... (55) (113) 4,295 128
Less: Operating expenses(11)............... 2,010 5,570 9,533 9,607
Management Fees.......................... 305 979 1,760 1,775
Interest expense......................... 261 295 2,016 2,044
Depreciation and Amortization............ 5,762 16,495 25,838 21,993
------- ------- ------- -------
Net income (loss)--GAAP basis(1)........... $(1,939) $(3,266) $(1,680) $(1,974)
======= ======= ======= =======
Federal taxable income (loss):
from operations........................... $ 134 $ (866) $ 491 $ 379
from gain (loss) on disposal of equip-
ment..................................... (72) (117) 3,282 354
------- ------- ------- -------
Federal taxable income (loss).............. $ 62 $ (983) $ 3,773 $ 733
======= ======= ======= =======
Cash generated from operations(2).......... $ 3,552 $16,459 $19,482 $19,917
Cash generated from disposal of equip-
ment..................................... 168 464 13,368 1,038
------- ------- ------- -------
Cash generated from operations and dispos-
als...................................... 3,720 16,923 32,850 20,955
Less: Cash reinvested and additions or
(deletions) to reserve(3)................. 480 2,095 15,313 3,437
------- ------- ------- -------
Cash distributions to investors(4)......... $ 3,240 $14,828 $17,537 $17,518
======= ======= ======= =======
INVESTMENT DATA PER $1,000 INVESTMENT(8)
Federal taxable income (loss):
from operations(7)........................ $ 0.27 $(11.06) $ 2.80 $ 1.54
from gain (loss) on sale.................. $ (1.55) $ (.73) $ 18.74 $ 1.44
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income........................ $ -- $ -- $ -- $ --
Return of capital........................ $ 70.13 $ 93.15 $100.15 $100.03
Source (on a cash basis)
Sales.................................... $ -- $ -- $ -- $ --
Refinancing.............................. $ -- $ -- $ -- $ --
Operations............................... $ 70.13 $ 93.15 $100.15 $100.03
Other.................................... $ -- $ -- $ -- $ --
</TABLE>
A-10
<PAGE>
TABLE C
OPERATING RESULTS OF PRIOR PROGRAMS--(CONTINUED)
PROGRAM INCEPTION TO DECEMBER 31, 1995
($ IN THOUSANDS EXCEPT INVESTMENT DATA PER $1,000 INVESTMENT)
<TABLE>
<CAPTION>
EGF VII
------------------------
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Months of operations................................. 12 12 12
Gross revenues....................................... $ 695 $ 9,195 $18,456
Gain (loss) on disposal of equipment................. -- 22 182
Less: Operating expenses(11)......................... 324 2,408 4,160
Management Fees.................................... 34 485 971
Interest expense................................... 1 313 290
Depreciation and Amortization...................... 1,198 9,820 14,409
------ ------- -------
Net income (loss)--GAAP basis(1)..................... $ (862) $(3,809) $(1,192)
====== ======= =======
Federal taxable income (loss):
from operations..................................... $ 174 $(1,076) $ 3,785
from gain (loss) on disposal of equipment........... -- 27 371
------ ------- -------
Federal taxable income (loss)........................ $ 174 $(1,049) $ 4,156
====== ======= =======
Cash generated from operations(2).................... $ 824 $ 6,061 $13,001
Cash generated from disposal of equipment........... -- 180 1,210
------ ------- -------
Cash generated from operations and disposals........ 824 6,241 14,211
Less: Cash reinvested and additions or (deletions) to
reserve(3).......................................... 458 871 4,584
------ ------- -------
Cash distributions to investors(4)................... $ 366 $ 5,370 $ 9,627
====== ======= =======
INVESTMENT DATA PER $1,000 INVESTMENT(8)
Federal taxable income (loss):
from operations(7).................................. $ 8.56 $(16.55) $ 34.42
from gain (loss) on sale............................ $ -- $ 0.41 $ 3.37
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income.................................. $ -- $ -- $ --
Return of capital.................................. $18.41 $ 78.97 $ 87.65
Source (on a cash basis)
Sales.............................................. $ -- $ -- $ --
Refinancing........................................ $ -- $ -- $ --
Operations......................................... $18.41 $ 78.97 $ 87.65
Other.............................................. $ -- $ -- $ --
</TABLE>
A-11
<PAGE>
TABLE C
OPERATING RESULTS OF PRIOR PROGRAMS--(CONTINUED)
PROGRAM INCEPTION TO DECEMBER 31, 1995
($ IN THOUSANDS EXCEPT INVESTMENT DATA PER $1,000 INVESTMENT)
<TABLE>
<CAPTION>
FUND I
------
1995
------
<S> <C>
Months of operations........................................... 10
Gross revenues................................................. $5,380
Gain (loss) on disposal of equipment........................... 25
Less: Operating expenses(11)................................... 1,407
Management Fees.............................................. 343
Interest expense............................................. 230
Depreciation and Amortization................................ 4,043
------
Net (loss)--GAAP basis(1)...................................... $ (618)
======
Federal taxable income:
from operations............................................... $ 510
from gain on disposal of equipment............................ 23
------
Federal taxable income......................................... $ 533
======
Cash generated from operations(2).............................. $2,329
Cash generated from disposal of equipment..................... 55
------
Cash generated from operations and disposals.................. 2,384
Less: Cash reinvested and additions or (deletions) to
reserve(3).................................................... 1,081
------
Cash distributions to investors(4)............................. $1,303
======
INVESTMENT DATA PER $1,000 INVESTMENT(8)
Federal taxable income:
from operations(7)............................................ $13.65
from gain on sale............................................. $ .82
Cash distributions to investors(4):
Source (on a GAAP basis)(9)
Investment income............................................ $ --
Return of capital............................................ $20.83
Source (on a cash basis)
Sales........................................................ $ --
Refinancing.................................................. $ --
Operations................................................... $20.83
Other........................................................ $ --
</TABLE>
A-12
<PAGE>
Notes to Table C
(1) "GAAP" is generally accepted accounting principles.
(2) "Cash generated from operations" is calculated by adding non-cash
expenses to "net income (loss) GAAP basis" and adjusting for changes in
certain working capital accounts.
(3) "Cash reinvested and additions or (deletions) to reserves" represents
undistributed cash from operations and disposals. The amount does not
represent the effect, if any, of debt proceeds or debt principal
repayments.
(4) Because cash is generally distributed in the quarter following the period
in which it was generated, "cash distributions to investors" for the
periods ended December 31 generally covers operations from the fourth
quarter of the prior year through September 30th for the current year
presented. All cash distributions to investors are from operating cash
flow.
(5) After the following special allocations of income to the Manager
resulting from an amendment to the limited partnership agreement. (The
amendment did not change the allocation of cash distributions to the
partners.)
<TABLE>
<CAPTION>
EGF I EGF II
--------------------- ---------------------
PER PER
SPECIAL $1,000 SPECIAL $1,000
ALLOCATION INVESTMENT ALLOCATION INVESTMENT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995:
Federal income tax basis....... $169,293 $1.45 $ 983,000 $6.60
1994:
Federal income tax basis....... 132,882 1.13 963,101 6.43
1993:
Federal income tax basis....... 127,025 1.08 845,209 5.64
1992:
Federal income tax basis....... 44,357 0.37 791,957 5.28
1991:
Federal income tax basis....... 59,608 0.50 1,129,623 7.53
</TABLE>
(6) After the following special allocations of income to the Manager related
to the gain on sale of assets. (These special allocations are in
accordance with the limited partnership agreement and did not change the
allocation of cash distributions to partners.)
<TABLE>
<CAPTION>
EGF III
---------------------
PER
SPECIAL $1,000
ALLOCATION INVESTMENT
---------- ----------
<S> <C> <C>
1995:
Federal income tax basis.............................. $1,199,968 $ 6.04
1994:
Federal income tax basis.............................. 1,312,605 6.58
1993:
Federal income tax basis.............................. 783,244 3.92
1992:
Federal income tax basis.............................. 1,066,473 5.33
1991:
Federal income tax basis.............................. 2,682,741 13.41
</TABLE>
In addition, the Manager received a special allocation of income in 1992 of
$508,166 ($2.54 per $1,000 investment) on a GAAP basis and $0 on a federal
income tax basis, resulting from a 1991 amendment to the limited
partnership agreement. (This amendment did not change the allocation of
cash distributions to the partners.)
A-13
<PAGE>
(7) After the following special allocations of income to the Manager to
increase the Manager's capital account to zero. (These special
allocations are in accordance with the limited partnership agreement and
did not change the allocation of cash distributions to the partners.)
<TABLE>
<CAPTION>
EGF IV EGF V EGF VI EGF VII FUND I
--------------------- --------------------- --------------------- --------------------- ---------------------
SPECIAL PER $1,000 SPECIAL PER $1,000 SPECIAL PER $1,000 SPECIAL PER $1,000 SPECIAL PER $1,000
ALLOCATION INVESTMENT ALLOCATION INVESTMENT ALLOCATION INVESTMENT ALLOCATION INVESTMENT ALLOCATION INVESTMENT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
Federal income
tax basis...... $ 606,027 $3.51 $1,173,636 $6.40 $200,837 $1.21 $ -- $ -- $117,904 $4.16
1994:
Federal income
tax basis...... 1,035,272 5.98 880,202 4.77 -- -- 185,881 2.86 -- --
1993:
Federal income
tax basis...... 1,330,016 7.67 169,557 .92 -- -- -- -- -- --
1992:
Federal income
tax basis...... 989,541 5.65 801,335 4.35 115,751 2.60 -- -- -- --
1991:
Federal income
tax basis...... 930,598 5.32 590,843 4.40 -- -- -- -- -- --
1990:
Federal income
tax basis...... 679,740 4.10 115,892 3.90 -- -- -- -- -- --
1989:
Federal income
tax basis...... 83,448 1.54 -- -- -- -- -- -- -- --
</TABLE>
(8) Prior to the first full year after the closing of the offering,
"Investment data per $1,000 investment" is calculated based on the
weighted average amount of investment in the partnership during each
year.
(9) Cash distributions to investors from investment income on a GAAP basis
per $1,000 limited partner investment represents the limited partners'
share of distributions on a GAAP basis, but not in excess of the limited
partners' share of net income for each period presented, divided by total
capital contributed by the limited partners based on a $1,000 investment.
Cash distributions from return of capital on a GAAP basis per $1,000
limited partner investment represents the amount by which the limited
partners' share of each year's distributions on a GAAP basis exceeds the
limited partners' share of net income on a GAAP basis for each period
presented divided by total capital contributed by the limited partners
based on a $1,000 investment. In cases where a net loss exists, all
distributions for the period are presented as a return of capital. Cash
distributions from return of capital for each period are presented herein
in accordance with the foregoing formula and may or may not reflect the
actual amount of capital returned to the limited partners as determined
upon liquidation of the partnerships. A final accounting of return of
capital and yield on investment is dependent upon collection of all rents
and residual sale proceeds resulting from the lease, re-lease and
disposition of all assets within the partnerships' equipment portfolios.
These amounts are realized over the entire life of each partnership and
accrue from several types and quantities of equipment. Accordingly, the
accumulation of all amounts necessary to compute the true investment yield,
if any, and return of capital is possible only at final liquidation of each
partnership. At such time, these amounts will be determined and may be
different from the amounts reported herein.
(10) The decrease from prior periods is due primarily to severe damage to one
of EGF II's vessels experienced during heavy weather conditions in
December 1990. This marine vessel returned to service in mid-1991 and is
insured for both damage to the hull and lost revenues on the charter
hire. The damage to this vessel and the resultant lost revenues have not
had an adverse effect on operating results of EGF II due to insurance
coverages.
(11) The decrease in operating expenses in 1993 versus 1992 is due primarily
to revaluation of equipment. The loss on revaluation of equipment
amounted to approximately $7.9 million for EGF I in 1992 v. $1.4 million
in 1993; $6.8 million for EGF II in 1992 v. $0.2 million in 1993; $8.3
million for EGF III in 1992 v. $0.1 million in 1993; $3.4 million for EGF
IV in 1992 and none in 1993; and approximately $4.1 million for EGF V in
1993. There were no significant revaluations in years prior to 1992. This
decrease in operating expenses is offset by an increase in marine
operating expenses due to a move from bareboat charters in 1992 to voyage
charters in 1993. With bareboat charters all operating costs are borne by
the lessee while on voyage charters some operating costs are borne by the
lessor.
A-14
<PAGE>
TABLE D
SALES OR DISPOSITIONS OF EQUIPMENT BY PRIOR PUBLIC PROGRAMS
FIVE YEAR PERIOD ENDED DECEMBER 31, 1995
The following table sets forth the sales and other dispositions of equipment
by prior programs through December 31, 1995.
<TABLE>
<CAPTION>
TOTAL FEDERAL
TYPE OF YEAR OF YEAR OF ACQUISITION NET BOOK NET GAAP TAXABLE
PARTNERSHIP EQUIPMENT ACQUISITION DISPOSITION COST(1) VALUE(2) PROCEEDS(3) GAIN/(LOSS) GAIN/(LOSS)
- ----------- -------------- ----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TEP VII(4) Containers 1985 1987 $ 3,426 $ 2,541 $ 3,593 $ 1,052 $ 925
Trailers 1985 1987 41,808 34,356 44,595 10,239 12,022
Trailers 1985 1988 55,898 34,870 45,464 10,594 14,182
Trailers 1985 1989 2,239,348 932,792 629,162 (303,630) (237,874)
Containers 1985 1989 3,426 1,771 688 (1,083) (453)
Aircraft 1985 1989 500,018 243,804 240,000 (3,804) 73,681
Containers 1985 1990 2,040 849 1,515 666 1,229
Trailers 1985 1990 217,076 125,199 101,036 (24,163) 76,872
Containers 1985 1991 2,040 836 1,695 859 1,695
Trailers 1985 1991 857,538 250,633 287,122 36,489 287,122
Trailers 1985 1992 366,837 99,448 66,000 (33,448) 66,000
Containers 1985 1992 37,057 11,376 23,574 12,198 23,574
Aircraft 1985 1992 1,365,000 200,000 213,842 13,842 213,842
Trailers 1985 1993 1,897,469 551,819 384,700 (167,119) 273,648
Containers 1985 1993 71,506 17,400 37,002 19,602 37,002
Trailers 1985 1994 638,619 112,512 163,386 50,874 274,491
Containers 1985 1994 166,392 30,529 62,542 32,013 62,542
Containers 1985 1995 839,958 111,722 195,150 83,428 195,150
Trailers 1985 1995 139,477 18,607 47,030 28,423 47,030
------------ ----------- ----------- ---------- -----------
$ 9,444,933 $ 2,781,064 $ 2,548,096 $ (232,968) $ 1,422,680
TEP IX(4) Trailers 1986 1987 $ 15,435 $ 11,624 $ 15,582 $ 3,958 $ 1,613
Trailers 1986 1989 1,443,033 595,442 480,931 (114,511) 281,480
Containers 1986 1989 6,458 3,651 5,349 1,698 1,973
Rail equipment 1986 1989 40,425 22,972 38,502 15,530 15,963
Tractors 1986 1990 812,652 412,712 213,500 (199,212) 158,276
Containers 1986-1987 1991 28,134 12,072 33,930 21,858 33,214
Trailers 1986 1991 333,220 130,863 79,000 (51,863) 79,000
Trailers 1986-1987 1992 914,729 272,988 180,919 (92,069) 180,919
Containers 1986-1987 1992 32,614 11,456 22,136 10,680 22,136
Aircraft 1986-1987 1992 368,550 136,077 214,633 78,556 146,298
Trailers 1986 1993 1,084,110 272,673 272,155 (518) 272,155
Containers 1986-1987 1993 96,454 31,939 77,130 45,191 77,130
Trailers 1986-1989 1994 1,974,484 321,010 492,100 171,090 492,100
Containers 1986-1987 1994 284,147 65,824 107,741 41,917 107,741
Rail equipment 1986 1994 473,515 136,331 135,000 (1,331) 135,000
Trailers 1989 1995 2,281,139 446,829 576,954 130,125 576,954
Containers 1986 1995 285,862 53,717 137,114 83,397 137,114
Aircraft 1986 1995 3,076,382 555,450 1,090,000 534,550 1,068,497
Railcars 1986 1995 869,845 267,188 500,885 233,697 500,885
------------ ----------- ----------- ---------- -----------
$ 14,421,188 $ 3,760,818 $ 4,673,561 $ 912,743 $ 4,288,448
EGF I Containers 1986 1987 $ 58,021 $ 50,970 $ 66,887 $ 15,917 $ 17,279
Rail equipment 1986 1987 448,652 432,724 659,017 226,293 217,858
Rail equipment 1986 1988 5,926,119 4,974,638 8,561,785 3,587,147 3,581,802
Trailers 1987 1988 13,924 11,806 13,244 1,438 6,783
Rail equipment 1986 1989 106,972 83,933 18,837 (65,096) (41,697)
Containers 1986 1989 115,817 79,312 135,330 56,018 95,026
Vessels 1987 1989 2,514,957 1,588,484 4,433,626 2,845,142 2,760,081
Aircraft 1986 1989 1,419,810 881,614 903,691 22,077 505,009
Rail equipment 1987 1990 2,483,971 1,956,287 2,823,340 867,053 1,830,665
Containers 1986 1990 195,581 106,596 227,804 121,208 198,769
Trailers 1987 1990 606,872 357,005 239,050 (117,955) 106,801
Rail equipment 1986-1989 1991 13,469,021 9,184,707 13,228,493 4,043,786 3,646,986
Containers 1986 1991 378,888 188,242 384,419 196,177 320,531
Trailers 1987 1991 326,017 142,101 69,470 (72,631) 31,659
Aircraft 1987 1991 2,730,467 1,264,349 624,787 (639,562) (107,108)
</TABLE>
A-15
<PAGE>
TABLE D
SALES OR DISPOSITIONS OF EQUIPMENT BY PRIOR PUBLIC PROGRAMS--(CONTINUED)
FIVE YEAR PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL
TYPE OF YEAR OF YEAR OF ACQUISITION NET BOOK NET GAAP
PARTNERSHIP EQUIPMENT ACQUISITION DISPOSITION COST(1) VALUE(2) PROCEEDS(3) GAIN/(LOSS)
- ----------- -------------------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Vessels 1987 1991 $ 11,650,972 $ 5,492,657 $10,920,535 $ 5,427,878
Rail equipment 1986 1992 25,360 11,460 2,009 (9,451)
Containers 1986 1992 619,862 271,226 347,191 75,965
Trailers 1987 1992 2,551,150 978,206 483,195 (495,011)
Aircraft 1986 1992 6,809,250 800,345 895,000 94,655
Vessels 1990 1992 11,964,582 7,345,170 7,485,260 140,090
Vessels 1989 1993 2,729,600 1,086,299 1,519,042 432,743
Containers 1987-1989 1993 905,615 327,963 850,789 522,826
Trailers 1988 1993 738,496 228,375 185,751 (42,624)
Rail equipment 1989 1993 5,159,614 1,280,068 1,204,991 (75,077)
Aircraft 1987-1989 1994 14,295,419 432,421 1,115,018 682,597
Vessels 1987 1994 430,500 133,712 565,000 431,288
Containers 1986-1992 1994 2,416,824 633,497 1,046,772 413,275
Trailers 1986-1987 1994 465,488 109,969 34,200 (75,769)
Rail equipment 1986 1994 918,801 187,190 320,967 133,777
Rail 1986 1995 1,709,547 540,400 1,245,437 705,037
Container 1987-1991 1995 1,101,879 319,480 764,275 444,795
Aircraft 1989-1990 1995 7,098,750 2,271,655 2,763,037 491,382
Vessels 1990 1995 4,725,000 1,716,841 2,253,430 536,589
Trailers 1986-1994 1995 444,261 98,713 116,026 17,313
Mobile
Offshore
drilling unit 1992 1994 0 0 0 0
------------ ----------- ----------- -----------
$107,556,059 $45,568,415 $66,507,705 $20,939,290
EGF II Rail equipment 1987 1989 $ 2,227,133 $ 1,843,853 $ 2,943,149 $ 1,099,296
Trailers 1988 1989 667,275 572,734 474,036 (98,698)
Rail equipment 1987 1990 2,975,614 2,222,633 3,527,315 1,304,682
Containers 1987 1990 1,780,562 1,144,071 1,340,104 196,033
Trailers 1987 1990 138,798 74,420 108,871 34,451
Rail equipment 1987-1989 1991 12,404,980 8,666,915 14,993,032 6,326,117
Containers 1989 1991 1,275,564 772,826 830,984 58,158
Trailers 1988 1991 913,709 544,224 335,411 (208,813)
Aircraft 1987 1991 6,374,035 2,951,511 1,949,633 (1,001,878)
Rail equipment 1987 1992 106,226 54,576 92,452 37,876
Containers 1987-1989 1992 1,224,372 569,733 431,635 (138,098)
Trailers 1988 1992 1,011,030 468,104 239,150 (228,954)
Rail equipment 1987 1993 3,277,121 3,086,474 5,416,162 2,329,688
Containers 1987-1989 1993 788,253 401,837 536,397 134,560
Aircraft 1987 1993 10,255,404 4,469,112 4,648,230 179,118
Trailers 1988 1993 2,475,736 969,385 432,361 (537,024)
Vessels 1987 1993 23,451,839 6,364,858 10,962,034 4,597,176
Rail equipment 1987 1994 44,885 17,475 35,490 18,015
Containers 1987-1991 1994 2,253,850 727,522 1,059,345 331,823
Trailers 1988-1994 1994 2,779,404 987,502 1,548,060 560,558
Vessels 1988-1989 1994 24,758,919 7,255,115 7,388,748 133,633
Mobile
offshore
drilling unit 1992 1994 3,657,828 2,223,892 3,526,767 1,302,875
Rail equipment 1987 1995 13,381 4,515 12,512 7,997
Marine containers 1987-1989 1995 4,538,923 2,542,309 3,411,223 868,914
1991,1994
Marine vessel 1990 1995 4,702,500 1,978,662 2,524,430 545,768
Aircraft 1990 1995 4,697,369 1,206,707 1,253,623 46,916
Trailers and tractor 1988 1995 159,948 41,383 57,600 16,217
------------ ----------- ----------- -----------
$118,954,658 $52,162,348 $70,078,754 $17,916,406
<CAPTION>
FEDERAL
TAXABLE
PARTNERSHIP GAIN/(LOSS)
- ----------- -------------
<S> <C>
$ 3,276,846
(13,171)
316,720
315,299
(1,448,212)
(3,428,822)
(452,318)
494,067
185,751
(2,199,636)
498,522
492,705
983,852
34,200
221,652
401,535
674,350
1,354,631
(798,973)
77,570
(152,700)
-------------
$ 14,004,312
EGF II $ 729,019
112,535
1,877,403
327,804
83,060
5,257,210
167,838
20,814
164,612
52,392
30,624
165,128
4,496,606
276,630
(2,341,051)
412,215
(6,895,458)
33,796
912,019
1,532,824
(10,272,494)
844,254
12,512
1,478,639
(1,187,846)
(1,447,214)
57,600
-------------
$ (3,098,529)
</TABLE>
A-16
<PAGE>
TABLE D
SALES OR DISPOSITIONS OF EQUIPMENT BY PRIOR PUBLIC PROGRAMS--(CONTINUED)
FIVE YEAR PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL FEDERAL
TYPE OF YEAR OF YEAR OF ACQUISITION NET BOOK NET GAAP TAXABLE
PARTNERSHIP EQUIPMENT ACQUISITION DISPOSITION COST(1) VALUE(2) PROCEEDS(3) GAIN/(LOSS) GAIN/(LOSS)
- ----------- -------------- ----------- ----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EGF III Rail equipment 1988 1989 $ 24,350 $ 19,441 $ 71,807 $ 52,366 $ 48,370
Rail equipment 1988 1990 181,395 140,208 232,829 92,621 135,335
Containers 1988-1989 1990 356,355 269,607 296,959 27,352 133,843
Rail equipment 1988 1991 5,669,370 3,736,355 8,170,598 4,434,243 4,224,036
Containers 1988-1990 1991 1,466,845 950,254 1,035,019 84,765 427,584
Vessels 1989 1991 9,006,181 5,388,014 6,706,542 1,318,528 (1,475,484)
Rail equipment 1989 1992 2,249,249 1,346,185 2,262,526 916,341 1,425,182
Containers 1988-1991 1992 1,321,236 764,882 829,054 64,172 436,183
Aircraft 1988 1992 6,531,250 1,050,000 1,150,000 100,000 (2,759,683)
Rail equipment 1988 1993 5,990,323 3,665,004 2,325,319 (1,339,685) (301,460)
Containers 1988-1991 1993 2,017,117 1,060,421 1,168,859 108,438 861,183
Vessels 1988 1993 12,422,353 4,375,514 7,313,941 2,938,427 (2,174,217)
Rail equipment 1988 1994 719,618 310,712 429,102 118,390 329,452
Containers 1988-1991 1994 2,519,560 1,141,623 1,227,187 85,564 1,051,586
Aircraft 1988-1989 1994 14,656,125 3,931,456 2,730,032 (1,201,424) (2,729,438)
Vessels 1989 1994 22,999,407 8,229,366 12,081,400 3,852,034 (4,536,816)
Trailers 1993 1994 201,946 165,412 173,750 8,338 96,383
Rail equipment 1988-1994 1995 3,415,142 1,104,809 2,545,569 1,440,760 1,808,185
Containers 1988-1991 1995 1,770,761 656,013 843,770 187,757 796,050
Vessels 1995 16,801,081 3,732,623 5,000,000 1,267,377 (7,213,503)
------------ ----------- ----------- ----------- ------------
$110,319,664 $42,037,899 $56,594,263 $14,556,364 $ (9,417,229)
EGF IV Rail equipment 1990 1990 $ 39,247 $ 36,590 $ 37,200 $ 610 $ 794
Rail equipment 1989 1991 13,282,868 10,713,269 12,762,868 2,049,599 1,794,895
Containers 1990-1991 1991 529,191 450,296 248,190 (202,106) (118,408)
Rail equipment 1990 1992 39,715 30,098 43,752 13,654 23,351
Containers 1989-1991 1992 799,831 537,812 571,277 33,465 225,219
Rail equipment 1989 1993 2,583,125 2,583,125 2,433,500 (149,625) (2,317,825)
Containers 1989-1990 1993 1,911,455 1,203,122 737,975 (465,147) 140,512
Aircraft 1989 1993 8,381,160 3,767,861 3,803,099 35,238 (2,085,055)
Vessels 1989 1993 14,555,541 6,924,136 7,683,065 758,929 (4,254,484)
Rail equipment 1990-1991 1994 63,590 34,297 61,112 26,815 44,114
Containers 1990 1994 1,622,594 806,425 746,391 (60,034) 402,726
Trailers 1993 1994 15,257 11,861 16,398 4,537 7,819
Vessels 1990 1994 25,407,942 10,402,214 13,766,819 3,364,605 (5,418,981)
Containers 1989-1991 1995 2,119,866 841,742 935,581 93,839 769,613
Aircraft 1989 1995 11,764,889 3,506,960 3,910,000 403,040 (2,358,634)
Trailers 1995 1995 1,361,250 1,361,250 1,391,500 30,250 30,250
------------ ----------- ----------- ----------- ------------
$ 84,477,521 $43,211,058 $49,148,727 $ 5,937,669 $(13,114,094)
EGF V Containers 1990-1991 1991 $ 242,388 $ 219,867 $ 181,088 $ (38,779) $ (9,822)
Rail equipment 1990-1991 1992 79,795 64,983 102,153 37,170 59,614
Containers 1990-1991 1992 1,737,814 1,461,347 1,151,203 (310,144) (191,188)
Rail equipment 1990 1993 87,752 59,591 66,879 7,288 11,854
Containers 1990-1991 1993 4,017,186 2,810,054 2,219,134 (590,920) (186,941)
Rail equipment 1990-1991 1994 408,000 293,825 507,194 213,369 364,187
Containers 1990-1991 1994 2,928,566 1,671,205 1,724,758 53,553 121,755
Mobile
offshore
drilling unit 1993 1994 13,063,814 7,942,159 12,595,067 4,652,908 3,014,936
Aircraft 1995 1995 4,180,000 3,920,774 4,623,531 702,757 443,531
Containers 1990-1991 1995 4,615,442 2,212,346 2,394,605 182,259 1,234,373
Vessels 1990 1995 18,612,643 6,527,058 8,692,890 2,165,832 (5,066,380)
Railcars 1990-1992 1995 2,719,572 1,882,404 2,666,367 783,963 1,651,507
------------ ----------- ----------- ----------- ------------
$ 52,692,972 $29,065,613 $36,924,869 $ 7,859,256 $ 1,447,426
</TABLE>
A-17
<PAGE>
TABLE D
SALES OR DISPOSITIONS OF EQUIPMENT BY PRIOR PUBLIC PROGRAMS--(CONTINUED)
FIVE YEAR PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL
TYPE OF YEAR OF YEAR OF ACQUISITION NET BOOK NET GAAP
PARTNERSHIP EQUIPMENT ACQUISITION DISPOSITION COST(1) VALUE(2) PROCEEDS(3) GAIN/(LOSS)
- ----------- ----------------- ----------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
EGF VI Rail equipment 1992 1992 $ 22,208 $ 21,463 $ 7,597 $ (13,866)
Containers 1992 1992 220,938 201,781 160,410 (41,371)
Rail equipment 1992 1993 21,997 18,665 15,815 (2,850)
Containers 1992 1993 677,096 558,991 448,631 (110,360)
Trailers 1993 1994 1,053,260 946,303 744,900 (201,403)
Containers 1991 1994 717,708 502,030 530,050 28,020
Mobile
offshore
drilling unit 1993 1994 12,541,314 7,624,460 12,092,840 4,468,380
Containers 1992 1995 715,868 464,726 556,432 91,706
Railcars 1993 1995 20,355 17,073 23,371 6,298
Trailers 1993 1995 612,923 428,214 460,343 32,129
------------ ------------ ------------ -----------
$ 16,603,667 $ 10,783,706 $ 15,040,389 $ 4,256,683
EGF VII Trailers 1993 1994 $ 164,901 $ 158,118 $ 180,000 $ 21,882
Modular buildings 1994 1995 1,163,085 904,283 1,042,488 138,205
Trailers 1993 1995 469,399 337,299 381,300 44,001
------------ ------------ ------------ -----------
$ 1,797,385 $ 1,399,700 $ 1,603,788 $ 204,088
------------ ------------ ------------ -----------
Fund I Rail Equipment 1995 1995 $ 31,851 $ 30,435 $ 55,028 $ 24,593
------------ ------------ ------------ -----------
Total......................................................... $516,297,898 $230,801,056 $303,175,180 $72,374,124
============ ============ ============ ===========
<CAPTION>
FEDERAL
TAXABLE
PARTNERSHIP GAIN/(LOSS)
- ----------- ------------
<S> <C>
EGF VI $ (14,401)
(58,446)
(346)
(116,896)
340,448
45,034
2,896,064
149,224
12,689
192,552
------------
$ 3,445,992
EGF VII $ 26,608
187,978
182,773
------------
$ 397,359
------------
Fund I $ 23,177
------------
Total............... $ (654,528)
============
</TABLE>
- ----------
(1) Acquisition cost includes Acquisition Fees. With regard to the Companies,
the Manager and its Affiliates are foregoing these fees.
(2) Represents total acquisition cost less accumulated depreciation calculated
on a GAAP basis.
(3) Net proceeds received at disposition less any direct selling costs.
(4) Acquired only new equipment. EGF's I through VII and Fund I acquired
primarily used equipment.
A-18
<PAGE>
TABLE E
COMPENSATION TO THE MANAGER AND AFFILIATES
PROGRAM INCEPTION TO DECEMBER 31, 1995
The following table sets forth certain information concerning the
compensation earned by the Manager and its Affiliates for the prior PLM
Equipment Growth Fund (EGF) programs and Professional Lease Management Income
Fund I (Fund I). Amounts are from two sources: proceeds of the offering and
gross revenues. Amounts from operations are cumulative.
<TABLE>
<CAPTION>
EGF I EGF II EGF III EGF IV EGF V EGF VI EGF VII FUND I(6)
------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Effective Date of
offering........ May-86 June-87 March-88 May-89 April-90 Dec.-91 May-93 Jan.-96
Amount raised.... $119,999,499 $149,976,814 $199,674,056 $174,767,000 $184,265,550 $166,138,656 $107,358,760 $62,887,260
Equipment
Purchased from
Original
Proceeds(1)..... $104,999,562 $132,279,550 $176,911,214 $154,494,028 $163,075,012 $146,534,295 $ 93,402,121 $50,470,801
Equipment
Purchased with
debt and/or from
reinvestment(1).. $109,202,166 $109,063,413 $100,818,884 $ 84,786,455 $ 78,973,302 $ 47,140,496 $ 17,610,930 $ --
Amounts paid from
the proceeds of
offering,
reinvestment
and/or debt:
Selling
Commissions(2).. $ 1,205,300 $ 1,523,580 $ 1,981,947 $ 1,735,384 $ 1,833,239 $ 1,651,112 $ 1,190,293 $ --
Acquisition and
Lease
Negotiation
Fees(3)........ $ 11,508,067 $ 12,589,460 $ 14,515,204 $ 11,592,191 $ 12,664,996 $ 10,041,947 $ 5,748,065 $ --
Debt Placement
Fees(4)........ $ 396,730 $ 377,631 $ 428,320 $ 330,000 $ 380,000 $ 148,174 $ -- $ --
Cash generated
from operations
before deducting
payments to the
Manager and
Affiliates...... $161,040,000 $153,832,000 $167,846,000 $104,266,000 $119,039,000 $ 69,223,000 $ 22,605,000 $ 2,794,000
Amount paid to
the Manager and
Affiliates from
operations:
Equipment
Management
Fees........... $ 17,691,000 $ 12,490,000 $ 14,047,000 $ 8,730,000 $ 9,158,000 $ 4,819,000 $ 1,489,000 $ 343,000
Reimbursements(5).. $ 5,548,000 $ 8,138,000 $ 8,930,000 $ 5,947,000 $ 6,223,000 $ 4,243,000 $ 1,228,000 $ 122,000
Dollar amount of
equipment sales
and refinancing
before deducting
payments to the
Manager and
Affiliates:
Cash............ $ 66,507,500 $ 67,058,000 $ 51,218,000 $ 49,150,646 $ 36,922,477 $ 15,038,243 $ 1,390,388 $ 55,028
Notes........... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Amount paid to
the Manager and
Affiliates from
equipment sales
and
refinancing..... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
- ---------
(1) Includes Acquisition and Lease Negotiation Fees. With regard to the
Companies, the Manager and its Affiliates are foregoing these fees.
Equipment purchased from reinvestment proceeds includes equipment
purchased using net proceeds from the sale of equipment.
(2) PLM Securities, an Affiliate of the Manager, received a fee from each EGF
of up to 9% of equity raised, of which approximately 8% was paid to
Selected Agents. Represents the amounts retained by the Affiliate. With
regard to the Companies, the Manager, and not the Companies, will be
paying these fees.
(3) Acquisition Fees of 4.5% (EGF II, EGF III, EGF IV, EGF V, EGF VI and EGF
VII) or 5% (EGF I) of the Equipment Purchase Price, and Lease Negotiation
Fees of 1% of the Equipment Purchase Price are paid to the Manager or its
Affiliates by each EGF. With regard to the Companies, the Manager and its
Affiliates are foregoing these fees.
(4) Debt Placement Fees equal to 1% of the partnership's borrowings, reduced
by any amounts paid to third parties, is paid to the General Partner or
its affiliates. The fee is assumed to be paid by the EGF out of the
proceeds of the offering. With regard to the Companies, the Manager and
its Affiliates are foregoing these fees.
(5) Includes reimbursements of expenses such as marine vessel insurance,
legal, accounting, data processing, and other services.
(6) As of December 31, 1995, Fund I's offering has not been completed.
A-19
<PAGE>
PART II
Information Not Required in the Prospectus
------------------------------------------
ITEM 16. Exhibits and Financial Statement Schedule
(a) Exhibits
8.4 Opinion re: Tax Matters
23.24 Consent of Counsel (included in Exhibit 8.4)
23.25 Consent of Independent Public Accountants
II-1
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 5 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Francisco, State of California, on the 3rd
day of May, 1996.
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I,
L.L.C., a Delaware limited liability company
PROFESSIONAL LEASE MANAGEMENT INCOME FUND II,
L.L.C., a Delaware limited liability company
By PLM FINANCIAL SERVICES, INC., the Manager
By: /s/ Allen V. Hirsch
--------------------
Allen V. Hirsch
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 5 to the Registration Statement has been signed below by
the following persons in the capacities indicated, on May 3, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Allen V. Hirsch President (Principal Executive Officer) and
- ---------------------------- Director of the Manager
Allen V. Hirsch
* Chief Financial Officer (Principal Financial and
____________________________ Accounting Officer) of the Manager
J. Michael Allgood
*
____________________________ Director of the Manager
J. Alec Merriam
*
____________________________ Director of the Manager
Robert L. Pagel
</TABLE>
II-2
<PAGE>
* Allen V. Hirsch, by signing his name hereto, does sign this Post-Effective
Amendment No. 5 to the Registration Statement on behalf of each of the persons
indicated above pursuant to the powers of attorney duly executed by such persons
and filed with the Securities and Exchange Commission.
/s/ Allen V. Hirsch
-------------------
Allen V. Hirsch
Attorney-in-Fact
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- ------------
<S> <C> <C>
8.4 Opinion re: Tax Matters
23.24 Consent of Counsel (included in Exhibit 8.4)
23.25 Consent of Independent Public Accountants
</TABLE>
<PAGE>
Exhibit 8.4
May 3, 1996
Professional Lease Management Income
Fund I, L.L.C.
Professional Lease Management Income
Fund II, L.L.C.
c/o PLM Financial Services, Inc.
One Market
Steuart Street Tower, Suite 900
San Francisco, CA 94105-1301
Re: Professional Lease Management Income Fund
-----------------------------------------
Ladies and Gentlemen:
You have requested our opinions as to certain federal income tax and ERISA
aspects of Professional Lease Management Income Fund I, L.L.C., a Delaware
limited liability company, and Professional Lease Management Income Fund II,
L.L.C., a Delaware limited liability company ("Fund II") (collectively, the
"Companies"). In rendering our opinions, we have reviewed and relied upon (a)
information and representations that the Manager of the Companies has furnished
to us; (b) Post-Effective Amendment No. 4 to the Registration Statement on Form
S-1 the Companies are filing on May 1, 1996 with the United States Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Registration Statement"); (c) the Fifth Amended and Restated Operating
Agreement of each of the Companies; and (d) Amendment No. 1 to the Fifth Amended
and Restated Operating Agreement of Fund II. Capitalized terms not defined
herein have the meanings set forth in the Prospectus which is a part of the
Registration Statement. The foregoing opinions supercede the opinions set forth
in our letter dated March 18, 1996.
We hereby confirm to you that those portions of the Registration
Statement entitled "Income Tax Considerations," "Update to Income Tax
Considerations - Partnership
<PAGE>
Status" and "ERISA Considerations" accurately describe our opinions, subject to
the assumptions, representations, qualifications and uncertainties discussed
therein.
We know that we are referred to under the headings "Summary of the Offering
- - Tax Rulings," "Risk Factors: Tax Risks," "Income Tax Considerations," "ERISA
Considerations," "Legal Matters" and "Update to Income Tax Considerations -
Partnership Status" in the Prospectus, and we hereby consent to such use of our
name.
Very truly yours,
/s/ JACKSON TUFTS COLE & BLACK, LLP
<PAGE>
Exhibit 23.24
May 3, 1996
PLM Financial Services, Inc.
One Market
Steuart Street Tower
Suite 900
San Francisco, CA 94105-1301
Re: Professional Lease Management Income Funds
------------------------------------------
Ladies and Gentlemen:
In connection with Cumulative Supplement No. 3 to the Prospectus forming a
part of this Post-Effective Amendment No. 5 to Form S-1 Registration Statement
No. 33-83216, which will be filed with the Securities and Exchange Commission by
Professional Lease Management Income Fund I, L.L.C. and Professional Lease
Management Income Fund II, L.L.C., we hereby consent to the use of our name
under the headings "Summary of the Offering - Tax Ruling," "Risk Factors: Tax
Risks," "Income Tax Considerations," "ERISA Considerations" and "Legal Matters"
in the Prospectus, which is a part of the above-referenced Registration
Statement.
Very truly yours,
/s/ JACKSON TUFTS COLE & BLACK, LLP
<PAGE>
EXHIBIT 23.25
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
PLM International, Inc.
We consent to the use of our reports on the balance sheets of Professional Lease
Management Income Fund I, L.L.C. as of December 31, 1995 and 1994, and the
related statement of operations for the year ended December 31, 1995, and the
statements of changes in members' equity and cash flows for the year ended
December 31, 1995 and for the period from inception (August 22, 1994) through
December 31, 1994, on the balance sheet of Professional Lease Management Income
Fund II, L.L.C. as of December 31, 1995, and on the consolidated balance sheet
of PLM Financial Services, Inc. and subsidiaries as of December 31, 1995 and to
the reference to our firm under the heading "Financial Information as of
December 31, 1995" in the Cumulative Supplement No. 3 dated May 6, 1996 to the
Prospectus dated January 24, 1995.
We also consent to the use of our reports on the balance sheets of Professional
Lease Management Income Fund I, L.L.C. and Professional lease Management Income
Fund II, L.L.C. (the "Companies"), as of August 22, 1994, and of our report on
the consolidated balance sheet of PLM Financial Services, Inc. and subsidiaries,
as of December 31, 1993, in the registration statement.
/s/ KPMG PEAT MARWICK LLP
San Francisco, California
May 6, 1996
