.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-83216-01
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PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3209289
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MARKET, STEUART STREET TOWER
SUITE 800, SAN FRANCISCO, CA 94105-1301
(Address of principal executive offi (Zip code)
Registrant's telephone number, including area code (415) 974-1399
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Aggregate market value of voting stock: N/A
An index of exhibits filed with this Form 10-K is located at page 28.
Total number of pages in this report: 48.
<PAGE>
PART I
ITEM 1. BUSINESS
(A) Background
In August 1994, PLM Financial Services, Inc. (FSI or the Manager), a
wholly-owned subsidiary of PLM International, Inc. (PLMI International or PLMI),
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission with respect to a proposed offering of 5,000,000 Class A units (the
units) in Professional Lease Management Income Fund I, L.L.C., a Delaware
Limited Liability Company (the Fund). The Fund's offering became effective on
January 23, 1995. The Fund engages in the business of investing in a diversified
equipment portfolio consisting primarily of used, long-lived, low-obsolescence
capital equipment that is easily transportable by and among prospective users.
The Fund's primary objectives are:
(1) to invest in a diversified 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.
All transactions over $1.0 million must be approved by the PLMI Credit Review
Committee (the Committee), which is made up of members of PLMI's senior
management. In determining a lessee's creditworthiness, the Committee will
consider, among other factors, the lessee's financial statements, internal and
external credit ratings, and letters of credit;
(2) to generate cash distributions, which may be substantially tax-deferred
(i.e., distributions that are not subject to current taxation) during the early
years of the Fund;
(3) to create a significant degree of safety relative to other equipment
leasing investments through the purchase of a diversified equipment portfolio.
This diversification reduces the exposure to market fluctuations in any one
sector. The purchase of used, long-lived, low-obsolescence equipment, typically
at prices that are substantially below the cost of new equipment, also reduces
the impact of economic depreciation and can create the opportunity for
appreciation in certain market situations, where supply and demand return to
balance from oversupply conditions; and
(4) to increase the Fund's revenue base by reinvesting a portion of its
operating cash flow in additional equipment during the first six years of the
Fund's operation in order to grow the size of its portfolio. Since net income
and distributions are affected by a variety of factors, including purchase
prices, lease rates, and costs and expenses, growth in the size of the Fund's
portfolio does not necessarily mean that the Fund's aggregate net income and
distributions will increase upon the reinvestment of operating cash flow.
The offering of units of the Fund closed on May 13, 1996. As of December 31,
1998, there were 4,999,581 units outstanding. The Manager contributed $100 for
its Class B Member interest in the Fund. The Manager paid out of its own
corporate funds (as a capital contribution to the Fund) all organization and
syndication expenses incurred in connection with the offering; therefore, 100%
of the net cash proceeds received by the Fund from the sale of Class A Units
were used to purchase equipment and establish any required cash reserves.
Beginning in the Fund's seventh year of operation, which commences January 1,
2003, the Manager will stop reinvesting cash flow and surplus funds, if any,
less reasonable reserves, which will be distributed to the partners. Between the
eighth and tenth years of operations, the Manager intends to begin its
dissolution and liquidation in an orderly fashion, unless the Fund is terminated
earlier upon sale of all of the equipment or by certain other events. However,
under certain circumstances, the term of the Fund may be extended, although in
no event will the Fund extend beyond December 31, 2010.
<PAGE>
Table 1, below, lists the equipment and the cost of equipment in the Fund's
portfolio, and the cost of investments in unconsolidated special-purpose
entities, as of December 31, 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
TABLE 1
Units Type Manufacturer Cost
- ------------------------------------------------------------------------------------------------------------------------
Owned equipment held for operating leases:
<S> <C> <C>
2 Anchor handling supply marine
vessels Moss Point $ 17,700
1 Oil tanker marine vessel Hyundai 17,000
1 Bulk carrier marine vessel Hitachi Shipbuilding & Engineering Co. 12,257
0.61 Mobile offshore drilling unit AT & CH de France 20,356<F1>(1)
4 737-200A stage II commercial
aircraft Boeing 20,605
362 Pressurized tank railcars Various 9,504
100 Covered hopper railcars Various 5,445
246 Box railcars Various 4,972
152 Foodservice refrigerated trailers Various 6,999
445 Piggyback trailers Various 6,696
29 Over the road refrigerated trailers Various 833
25 Over the road dry trailers Various 259
-------------------
Total owned equipment held for operating leases $ 122,626<F2>(2)
===================
Investments in unconsolidated special-purpose entities:
0.33 Two trusts consisting of a total of:
Three 737-200A stage II
commercial aircraft Boeing
Two stage II JT8D aircraft engines Pratt Whitney
Portfolio of rotable components Various $ 9,999<F3>(3)
0.50 Trust owning an MD-82
stage III commercial aircraft McDonnell Douglas 7,775<F4>(4)
0.50 Trust owning an MD-82
stage III commercial aircraft McDonnell Douglas 6,825<F4>(4)
0.50 Container cargo feeder marine
vessel O. C. Staalskibsvaerft A/F 3,836<F4>(4)
-------------------
Total investments in unconsolidated special-purpose entities $ 28,435<F1>(1)
===================
<FN>
<F1> (1) Jointly owned by Fund I and two affiliated programs.
<F2> (2) Includes equipment and investment purchased with the proceeds from
capital contributions, undistributed cash flow from operation and Fund
borrowings. Includes costs capitalized, subsequent to the date of purchase.
<F3> (3) Jointly owned by Fund I and three affiliated programs.
<F4> (4) Jointly owned by Fund I and an affiliated program.
</FN>
</TABLE>
The equipment is generally leased under operating leases for a term of one to
six years.
As of December 31, 1998, approximately 33% of the Fund's trailer equipment was
in rental facilities operated by PLM Rental, Inc., an affiliate of the Manager,
doing business as PLM Trailer Leasing. Revenues collected under short-term
rental agreements with the rental yards' customers are credited to the owners of
the related equipment as received. Direct expenses associated with the equipment
are charged directly to the Fund. An allocation of other indirect expenses of
the rental yard operations is charged to the Fund monthly.
The lessees of the equipment include, but are not limited to: Transportation
Airline Portugal, Norfolk Southern, Varig South America, Trans World Airlines,
Seacor Smit Inc., and Burlington Northern Rail.
(B) Management of Fund Equipment
The Fund has entered into an equipment management agreement with PLM Investment
Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the management of
the Fund's equipment. The Fund's management agreement with IMI is to
co-terminate with the dissolution of the Fund unless the Class A members vote to
terminate the agreement prior to that date or at the discretion of the Manager.
IMI has agreed to perform all services necessary to manage the equipment on
behalf of the Fund and to perform or contract for the performance of all
obligations of the lessor under the Fund's leases. In consideration for its
services and pursuant to the Operating Agreement, IMI is entitled to a monthly
management fee. (See Notes 1 and 2 to the audited financial statements).
(C) Competition
(1) Operating Leases versus Full Payout Leases
Generally, the equipment owned by or invested in the Fund is leased out on an
operating lease basis wherein the rents received during the initial
noncancelable term of the lease are insufficient to recover the Fund's purchase
price of the equipment. The short to mid-term nature of operating leases
generally command a higher rental rate than longer-term, full payout leases and
offers lessees relative flexibility in their equipment commitment. In addition,
the rental obligation under an operating lease need not be capitalized on the
lessee's balance sheet.
The Fund encounters considerable competition from lessors that utilize full
payout leases on new equipment, i.e. leases that have terms equal to the
expected economic life of the equipment. While some lessees prefer the
flexibility offered by a shorter-term operating lease, other lessees prefer the
rate advantages possible with a full payout lease. Competitors may write full
payout leases at considerably lower rates and for longer terms than the Fund
offers, or larger competitors with a lower cost of capital may offer operating
leases at lower rates, which may put the Fund at a competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Fund competes with equipment manufacturers who offer operating leases and
full payout leases. Manufacturers may provide ancillary services that the Fund
cannot offer, such as specialized maintenance service (including possible
substitution of equipment), training, warranty services, and trade-in
privileges.
The Fund also competes with many equipment lessors, including ACF Industries,
Inc. (Shippers Car Line Division), GATX Corporation, General Electric Railcar
Services Corporation, General Electric Capital Aviation Services Corporation,
Xtra Corporation and other investment programs that lease the same types of
equipment.
(D) Demand
The Fund operates in the following operating segments: marine vessel leasing,
aircraft leasing, railcar leasing, trailer leasing, and mobile offshore drilling
unit leasing. Each equipment leasing segment engages in short-term to mid-term
operating leases to a variety of customers. Except for those aircraft leased to
passenger air carriers, the Fund's equipment and investments are used to
transport materials and commodities, rather than people.
The following section describes the international and national markets in which
the Fund's capital equipment operates:
(1) Marine Vessels
The Fund owns or has investments in small to medium-sized dry bulk vessels,
product tankers, and container vessels that trade in worldwide markets and carry
commodity cargoes. Demand for commodity shipping closely follows worldwide
economic growth patterns, which can alter demand by causing changes in volume on
trade routes. The Manager operates the several of the Fund's marine vessels
through spot and period charters, an operating approach that provides the
flexibility to adapt to changing market situations. The anchor handling supply
vessels operates through bare-boat charters.
(a) Anchor Handling Supply Vessels
The Fund owns a U.S. flag anchor-handling/tug/supply boat that supports rig
drilling operations in the U.S. Gulf of Mexico. Although the boat can be
utilized in other geographic regions, the more desirable market is the U.S. Gulf
of Mexico because of the U.S. maritime law stipulating that only U.S. flag
vessels be used in this region. Demand for anchor-handling boats depends
primarily on the demand for floating drilling services by oil companies. Demand
for such services remained strong, and kept utilization of the 20 to 26 boats in
the Gulf close to 100% --during both 1997 and 1998, no more than two boats were
idle at any one time. Prospects for 1999 indicate that the strong market in the
Gulf of Mexico will continue through the first half of the year. Activity during
the second half of 1999 will depend on the strength of oil and gas prices and
the effects such prices have on drilling. Even if oil company capital spending
programs are cut back because of weak oil and gas prices, demand will be
sustained at a base level by ongoing projects. The U.S. Gulf of Mexico fleet of
anchor-handling/tug/supply vessels is relatively small, and should continue to
realize relatively high utilization, even if drilling is reduced.
(b) Oil Tanker Vessel
The Fund owns a small to medium-sized product tanker that trades in worldwide
markets and carry commodity cargoes. Demand for commodity shipping closely
follows worldwide economic growth patterns, which can alter demand by causing
changes in volume on trade routes. The Manager operates the Fund's vessels
through spot and period charters, an operating approach that provides the
flexibility to adapt to changing market situations.
Product tanker markets experienced a year in which a fall in product trade
volume and an increase in total fleet size induced a decline in freight rates.
Charter rates for standard-sized product tankers averaged $10,139 per day in
1998, compared to $13,277 per day in 1997. The weakening in rates resulted
primarily from a decrease in product import levels to the United States and
Japan. Significantly lower crude oil prices worldwide induced higher volumes of
imports of crude oil to the United States, thereby lessening domestic demand for
refined products. Product trade in 1998 fell by an estimated 5% worldwide. The
crude oil trade, which is closely related to product trades, especially in
larger vessels, remained stable in 1998. Crude trade grew 1% in volume, led by
imports to Europe, which grew 6%.
Overall, the entire product tanker fleet grew only 1% in 1998. Supply growth in
1998 was moderated by high scrapping levels, especially of larger ships. In
1999, the fleet is expected to receive an additional 9% in capacity from newly
built deliveries, most of which will be in large tankers (above 80,000
deadweight (dwt) tons) carrying crude products. Smaller tankers (below 80,000
dwt tons) are expected to receive 7% in new deliveries over current fleet
levels.
While these new deliveries represent a high percentage of the existing fleet,
the tanker markets are now beginning to feel the effects of the United States
Oil Pollution Act of 1990. Under the act, older tankers are restricted from
trading to the United States once they exceed 25 years old if they do not have
double bottoms and/or double hulls. Similar though somewhat less stringent
restrictions are in place in other countries with developed economies. The
retirement of older, noncomplying tankers may allow the fleet to absorb what
would otherwise be an excessive number of new orders in relation to current
demand prospects. Given that a large proportion of the current tanker fleet does
not meet these regulatory requirements, coupled with anticipated flat demand yet
continuing high delivery levels, charter rates for 1999 are not anticipated to
increase significantly from 1998 levels.
(c) Bulk Carrier Vessels
Freight rates for dry bulk vessels decreased for all ship sizes in 1998, with
the largest vessels experiencing the greatest declines. After a relatively
stable year in 1997, rates declined due to a decrease in cargo tonnage moving
from the Pacific Basin and Asia to western ports. The size of the overall dry
bulk carrier fleet decreased by 3%, as measured by the number of vessels, but
increased by 1%, as measured by dwt tonnage. While scrapping of ships was a
significant factor in 1998 (scrapping increased by 50% over 1997) overall there
was no material change in the size of the dry bulk vessel fleet, as deliveries
and scrappings were nearly equal.
Total dry trade (as measured in deadweight tons) was flat, compared to a 3%
growth in 1997. As a result, the market had no foundation for increasing freight
rates, and charter rates declined as trade not only failed to grow, but actually
declined due to economic disruptions in Asia. Overall activity is expected to
remain flat in 1999, with trade in two of the three major commodities static or
decreasing in volume. Iron ore volume is expected to decrease, and grain trade
is anticipated to be flat, while a bright spot remains in an estimated increase
in steam coal trade.
Ship values experienced a significant decline in 1998, as expectations for trade
growth were dampened. The decline in ship values was also driven by bargain
pricing for newbuilding in Asian yards.
The uncertainty in forecasts is the Asian economic situations; if there is some
recovery from the economic shake-up that started in the second half of 1997,
then 1999 has prospects for improvement. The delivery of ships in 1999 is
expected to be less than in 1998, and high scrapping levels should continue. Dry
bulk shipping is a cyclical business -- inducing capital investment during
periods of high freight rates and discouraging investment during periods of low
rates. The current environment thus discourages investment. However, the history
of the industry implies that this period will be followed by one of increasing
rates and investment in new ships, driven by growth in demand. Over time, demand
grows at an average of 3% a year, so when historic levels of growth in demand
resume, the industry is expected to experience a significant increase in freight
rates and ship values.
(d) Container Feeder Vessels
Container vessels transport containerized cargo. They are called feeder vessels
when they move containers from small, outlying ports to main transportation hub
ports, from which containers are moved by regularly scheduled liner services.
Container vessels typically carry up to about 1,000 20-foot-equivalent unit
containers (TEUs). This trade has been characterized by growth in both supply
and demand for the past several years; however, in 1998, patterns changed. All
containerized trade, as measured by TEU movement, grew 8% in shipments from
Asia, but declined 14% in shipments to Asia, for a composite decline of 1% over
1997 levels. This flattening of trade represents a significant change in the
container shipping markets, which have shown robust growth ever since containers
were introduced as a shipping medium.
As with other shipping markets, the lack of growth in demand has occurred at the
same time that the capacity to meet previously projected growth has been
underway, and charter rates have decreased accordingly. The total fleet of
containerized vessels has increased in capacity by over 60% since 1988. While
some of this growth has come from very large vessels, which have created
container shipping demand due to lower unit costs, the expansion of the fleet
has eroded charter rates, since demand has not grown as quickly. For the larger
container vessels (above 1,000 TEU per ship), rate erosion may continue, because
ships on order could add as much as 16% to existing capacity through 2001. For
feeder ships (less than 1,000 TEU), only 9% of existing capacity is on order,
and most remaining orders will be delivered in 1999. While these deliveries will
suppress prospects for improving feeder vessel charter rates in 1999, the lack
of planned deliveries beyond then provides some potential for rate and value
increases.
(2) Aircraft
(a) Commercial Aircraft
The world's major airlines experienced a fourth consecutive year of profits,
showing a combined marginal net income (net income measured as a percentage of
revenue) of 6%, compared to the industry's historical annual rate of 1%.
Airlines recorded positive marginal net annual income of 2% in 1995, 4% in 1996,
6% in 1997, and 6% in 1998. The two factors that have led to this increase in
profitability are improvements in yield management systems and reduced operating
costs, particularly lowered fuel costs. These higher levels of profitability
have allowed many airlines to re-equip their fleets with new aircraft, resulting
in a record number of orders for manufacturers.
Major airlines increased their fleets from 7,181 aircraft in 1997 to 7,323 in
1998, which has resulted in more used aircraft available on the secondary
market. Despite these increases, the number of Stage II aircraft in these fleets
(similar to those owned by the Fund) decreased by 26% from 1997 to 1998, and
sharper decreases are expected in 1999. This trend is due to Federal Aviation
Regulation section C36.5, which requires airlines to convert 100% of their
fleets to Stage III aircraft, which have lower noise levels than Stage II
aircraft, by the year 2000 in the United States and the year 2002 in Canada and
Europe. Stage II aircraft can be modified to Stage III with the installation of
a hushkit that significantly reduces engine noise. The cost of hushkit
installation ranges from $1.0 to $2.0 million for the types of aircraft owned by
the Fund.
Orders for new aircraft have risen rapidly worldwide in recent years: 691 in
1995, 1,182 in 1996, 1,328 in 1997, and an estimated 1,500 in 1998. As a result
of this increase in orders, manufacturers have expanded their production, and
new aircraft deliveries have increased from 482 in 1995, 493 in 1996, and 674 in
1997, to an estimated 825 in 1998.
The industry now has in place two of the three conditions that led to financial
problems in the early 1990s: potential excess orders and record deliveries. The
missing element is a worldwide recession. Should a recession occur, the industry
will experience another period of excess aircraft capacity and surplus aircraft
on the ground.
The Fund's fleet of aircraft is a mix of Stage II and Stage III aircraft. The
Stage II aircraft are either positioned with air carriers that are outside Stage
III-legislated areas or anticipated to be sold or leased outside Stage III areas
before the year 2000.
(b) Aircraft Engines
Availability has decreased over the past two years for the Pratt & Whitney Stage
II JT8D engine, which powers many of the Fund's Stage II commercial aircraft.
This decrease in supply is due primarily to the limited production of spare
parts to support these engines. Due to the fact that demand for this type of
aircraft currently exceeds supply, the Fund expects to sell its JT8D engines in
1999.
(c) Rotables
Aircraft rotables, or components, are replacement spare parts held in an
airline's inventory. They are recycled parts that are first removed from an
aircraft or engine, overhauled, and then recertified, returned to an airline's
inventory, and ultimately refit to an aircraft in as-new condition. Rotables
carry identification numbers that allow them to be individually tracked during
their use.
The types of rotables owned and leased by the Fund include landing gear, certain
engine components, avionics, auxiliary power units, replacement doors, control
surfaces, pumps, and valves. The market for the Fund's rotables remains stable.
The Fund expects to sell the rotables used on its Stage II aircraft during 1999
as part of a package to sell several aircraft, engines, and rotables jointly
owned by the Fund and an affiliated program.
(3) Railcars
(a) Pressurized Tank Railcars
Pressurized tank cars transport primarily two chemicals: liquefied petroleum gas
(natural gas) and anhydrous ammonia (fertilizer). Natural gas is used in a
variety of ways in businesses, electric plants, factories, homes, and now even
cars. The demand for fertilizer is driven by a number of factors, including
grain prices, the status of government farm subsidy programs, the amount of
farming acreage and mix of crops planted, weather patterns, farming practices,
and the value of the U.S. dollar.
In North America, 1998 carload originations of both chemicals and petroleum
products remained relatively constant, compared to 1997. The 98% utilization
rate of the Fund's pressurized tank cars was consistent with this statistic.
(b) Covered Hopper (Grain) Railcars
Covered hopper railcars are used to transport grain to domestic food processors,
poultry breeders, cattle feed lots, and for export. Demand for covered hopper
cars softened. In 1998, as total North American grain shipments declined 8%,
compared to 1997, with grain shipments within Canada contributing to most of
this decrease. This has put downward pressure on lease rates, which has been
exacerbated by a significant increase in the number of covered hopper cars built
in the last few years. Since 1988, there has been a nearly 20% increase in rail
transportation capacity assigned to agricultural service. In 1996, just over
one-half of all new railcars built were covered hopper cars; in 1997, this
percentage dropped somewhat, to 38% of all cars built.
The Fund's covered hopper cars were not impacted by the decrease in lease rates
during 1998, as all of the cars continued to operate on long-term leases.
(c) Box Railcars
Box cars are used primarily to transport paper and paper products. Carloadings
of paper and paper products fell slightly in 1998, compared to 1997, decreasing
by 2% both in the United States and Canada. Prices moved modestly higher for
most grades of paper during the year, and a variety of positive industry factors
indicates that the upturn could continue for some time. However, the financial
difficulties now being experienced in parts of Asia may have a negative effect
on future paper industry trends.
All of the Fund's box cars continued to operate on long-term leases during 1998.
(4) Trailers
(a) Foodservice Refrigerated Trailers
Foodservice distribution trailers are highly specialized, multi-temperature,
multi-compartmental, refrigerated trailers used to transport food and other
perishable goods on short-haul deliveries to restaurants, grocery stores, food
processors, and warehouses. Consumer demand is fueling double-digit growth in
the foodservice industry, reflecting the consumer trend toward eating fresh,
easy-to-prepare foods. Heightened fears about food safety and increased service
demands from customers have accelerated the development of new technology for
refrigerated trailers and caused foodservice distributors to upgrade their
fleets.
The foodservice industry's desire to utilize late-model trailers has helped the
Manager expand its specialized refrigerated trailer fleet, as companies have
found that leasing provides easy, affordable access to late-model equipment.
Overall utilization and fleet size increased significantly in 1998, and the
trend is expected to continue in 1999.
(b) Intermodal Trailers
Intermodal (piggyback) trailers are used to ship goods either by truck or by
rail. Activity within the North American intermodal trailer market declined
slightly in 1998, with trailer shipments down 4% from 1997 levels, due primarily
to rail service problems associated with the mergers in this area. Utilization
of the intermodal per diem rental fleet, consisting of approximately 170,000
units, was 73%. Intermodal utilization in 1999 is expected to decline another 2%
from 1998 levels, due to a slight leveling off of overall economic activity in
1999, after a robust year in 1998.
The Manager has initiated expanded marketing and asset management efforts for
its intermodal trailers, from which it expects to achieve improved trailer
utilization and operating results. During 1998, average utilization rates for
the Fund's intermodal trailer fleet approached 80%.
(c) Over-the-Road Refrigerated Trailers
The temperature-controlled over-the-road trailer market remained strong in 1998
as freight levels improved and equipment oversupply was reduced. Many
refrigerated equipment users retired older trailers and consolidated their
fleets, making way for new, technologically improved units. Production of new
equipment is backlogged into the third quarter of 1999. In light of the current
tight supply of trailers available on the market, it is anticipated that
trucking companies and other refrigerated trailer users will look outside their
own fleets more frequently by leasing trailers on a short-term basis to meet
their equipment needs.
This leasing trend should benefit the Fund, which makes most of its trailers
available for short-term leasing from rental yards owned and operated by a PLM
International subsidiary. The Fund's utilization of refrigerated trailers showed
improvement in 1998, with utilization rates approaching 70%, compared to 60% in
1997.
<PAGE>
(d) Over-the-Road Dry Trailers
The U.S. over-the-road dry trailer market continued to recover in 1998, with a
strong domestic economy resulting in heavy freight volumes. The leasing outlook
continues to be positive, as equipment surpluses of recent years are being
absorbed by a buoyant market. In addition to high freight volumes, declining
fuel prices have led to a strong trucking industry and improved equipment
demand.
The Fund's dry van fleet experienced strong utilization throughout 1998, with
utilization rates remaining well above 70% throughout the year.
(5) Mobile Offshore Drilling Units
For the first half of 1998, overall worldwide demand for mobile offshore
drilling units (rigs) continued the increases experienced in 1996 and 1997.
During the second half of the year, demand softened -- particularly in the
shallow-water U.S. Gulf markets -- due to decreases in worldwide oil prices and
U.S. gas prices. Day rates in the shallow-water sector showed significant
decreases; however, day rates for deep-water floating rigs maintained the gain
attained earlier in the year. Future prospects for offshore drilling markets are
favorable, since low oil and gas prices, along with economic growth in general,
tend to stimulate demand for oil and gas. In the short term, 1999 is expected to
be a flat year for growth in the offshore markets, with the exception of
long-term projects already planned or contracted by large international oil and
gas exploration and development companies.
The Fund currently has an interest in one drillship, a floating drilling rig.
The floating rig market has experienced the most improvement of all rig types
since 1995. Technological advances and more efficient operations have improved
the economics of drilling and production in the deepwater locations in which
floating rigs are utilized. Overall, demand for floating rigs increased from 128
rig-years in 1996 to 131 rig-years in 1997, and stayed at that level in 1998 (a
rig-year is the equivalent of one rig employed for 12 consecutive months). The
increase in demand and utilization during this period prompted significant
increases in contract day rates and an associated increase in market values for
floating rigs. Currently 177 floating rigs (151 semisubmersibles and 26
drillships) are operating internationally and 39 floating rigs are on order or
undergoing conversion, scheduled for delivery between 1999 and 2001. All but six
of these newbuildings and conversions have already been contracted for more than
two years. This high level of commitment should prevent a significant
deterioration in the market as the rigs are delivered
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local and/or foreign government authorities. Such regulations may impose
restrictions and financial burdens on the Fund's ownership and operation of
equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Fund's equipment portfolio are either
registered or operated internationally. Such equipment may be subject to adverse
political, government, or legal actions, including the risk of expropriation or
loss arising from hostilities. Certain of the Fund's equipment is subject to
extensive safety and operating regulations, which may require its removal from
service or extensive modification of such equipment to meet these regulations,
at considerable cost to the Fund.
Such regulations include but are not limited to:
(1) the U.S. Oil Pollution Act of 1990, which established liability for
operators and owners of vessels and mobile offshore drilling units that
create environmental pollution. This regulation has resulted in higher oil
pollution liability insurance. The lessee of the equipment typically
reimburses the Fund for these additional costs;
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990,
which limits or eliminates the operation of commercial aircraft in the
United States that do not meet certain noise, aging, and corrosion
criteria. In addition, under U.S. Federal Aviation Regulations, after
December 31, 1999, no person may operate an aircraft to or from any airport
in the contiguous United States unless that aircraft has been shown to
comply with Stage III noise levels. The Fund has Stage II aircraft that do
not meet Stage III requirements. The cost to install a hush kit to meet
quieter Stage III requirements is approximately $1.5 million, depending on
the type of aircraft. These Stage II aircraft will remain with the current
lessee, which operate in a country that does not require this regulation.
The Fund's 33% interest in two trusts that is comprised of a total of three
Stage II narrowbody aircraft, two Stage II aircraft engines, and a
portfolio of rotable components are also scheduled for sale during 1999;
(3) the Montreal Protocol on Substances that Deplete the Ozone Layer and
the United States Clean Air Act Amendments of 1990, which call for the
control and eventual replacement of substances that have been found to
cause or contribute significantly to harmful effects on the stratospheric
ozone layer and that are used extensively as refrigerants in over-the-road
refrigerated trailers;
(4) the U.S. Department of Transportation's Hazardous Materials
Regulations, which regulate the classification and packaging requirements
of hazardous materials and which apply particularly to the Fund's tank
railcars, issued a statement which requires the Fund to initially inspect
approximately 23% of the tank railcars for a protective coating to the
outside of the tank and the inside of the metal tank jacket whenever a tank
is insulated. If any of the tank railcars inspected fail to meet the
requirements, an additional percentage of the tank railcars will need to be
inspected. If all the tank railcars in the initial inspection meet the
issued requirements, the remaining railcars will be eliminated from the
inspection program. The Fund owns 30 of these tank railcars. Tank railcars
that fail the inspection, will have to be repaired at a cost of
approximately $25,000 each before it can go back into service by August
2000. The initial inspection of tank railcars will be completed by the end
of March 1999.
As of December 31, 1998, the Fund was in compliance with the above governmental
regulations. Typically, costs related to extensive equipment modifications to
meet government regulations are passed on to the lessee of that equipment.
ITEM 2. PROPERTIES
The Fund neither owns nor leases any properties other than the equipment it has
purchased or interests in entities which own equipment for leasing purposes. As
of December 31, 1998, the Fund owned a portfolio of transportation and related
equipment and investments in equipment owned by unconsolidated special-purpose
entities (USPEs), as described in Item I, Table 1. The Fund acquired equipment
with the proceeds of the Fund offering of $100.0 million, proceeds of debt
financing of $25.0 million, and by reinvesting a portion of its operating cash
flow in additional equipment.
The Fund maintains its principal office at One Market, Steuart Street Tower,
Suite 800, San Francisco, California 94105-1301. All office facilities are
provided by FSI without reimbursement by the Fund.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Fund's members during the fourth
quarter of its fiscal year ended December 31, 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR THE FUND'S EQUITY AND RELATED UNITHOLDER MATTERS
Pursuant to the terms of the operating agreement, the Manager is generally
entitled to a 1% interest in the profits and losses and 15% of cash
distributions. The Manager will be specially allocated (i) 100% of the Fund's
organizational and offering cost amortization expenses and (ii) income equal to
the excess of cash distribution over the Manager`s 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. After the investors receive cash distributions equal
to their original capital contributions the Manager's interest in the cash
distributions of the Fund will increase to 25%. The Manager is the sole holder
of such interests. The remaining interests in the profits and losses and
distributions of the Fund are owned as of December 31, 1998, by the
approximately 5,032 holders of Units in the Fund.
There are several secondary markets in which Class A units trade. Secondary
markets are characterized as having few buyers for limited partnership interests
and, therefore, are generally viewed as inefficient vehicles for the sale of
units. Presently, there is no public market for the units and none is likely to
develop. To prevent the units from being considered publicly traded and thereby
to avoid taxation of the Fund as an association treated as a corporation under
the Internal Revenue Code, the units will not be transferable without the
consent of the Manager, which may be withheld in its absolute discretion. The
Manager intends to monitor transfers of units in an effort to ensure that they
do not exceed the percentage or number permitted by certain safe harbors
promulgated by the Internal Revenue Service. A transfer may be prohibited if the
intended transferee is not an U.S. citizen or if the transfer would cause any
portion of the units of a "Qualified Plan" as defined by the Employee Retirement
Income Security Act of 1974 and Individual Retirement Accounts to exceed the
allowable limit. The Fund may redeem a certain number of units each year under
the terms of the Fund's operating agreement, beginning November 13, 1998. The
purchase price paid by the Fund 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. The price may not bear any relationship to the fair market
value of a Class A Unit. As of December 31, 1998, the Fund had agreed to
purchase approximately 28,000 units for an aggregate price of approximately $0.4
million. The Manager anticipates that these units will be repurchased in the
second and third quarters of 1999. In addition to these units, the Manager may
purchase additional units on behalf of the Fund in the future.
(This space intentionally left blank)
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Fund:
TABLE 2
For the Years Ended December 31,
(in thousands of dollars, except weighted-average unit amounts
<TABLE>
<CAPTION>
1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating results:
Total revenues $ 28,301 $ 22,920 $ 11,295 $ 4,150
Net gain on disposition of
equipment 2,759 1,682 -- 25
Equity in net income (loss) of
unconsolidated special-purpose
entities 2,390 1,453 (256) 69
Net income (loss) 4,316 (2,052) (2,392) (618)
At year-end:
Total assets $ 99,635 $ 108,524 $ 87,755 $ 62,589
Total liabilities 28,905 29,337 1,466 1,187
Note payable 25,000 25,000 -- --
Cash distribution $ 11,765 $ 11,763 $ 9,832 $ 1,303
Cash distribution representing
a return of capital to Class A members $ 7,405 $ 9,998 $ 8,471 $ 1,180
Per weighted-average Class A unit:
Net income (loss) $ 0.52 $ (0.75)
Cash distribution $ 2.00 $ 2.00 Various, according to
interim closings
Cash distribution representing a return
of capital $ 1.48 $ 2.00
</TABLE>
(This space intentionally left blank)
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the Financial Statements of Professional Lease Management
Income Fund I, L.L.C. (the Fund). The following discussion and analysis of
operations focuses on the performance of the Fund's equipment in various
segments in which it operates and its effect on the Fund's overall financial
condition.
(B) Results of Operations -- Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Fund's equipment portfolio to repricing 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 the Fund's equipment include, but are not limited to, supply and demand for
similar or comparable types of transport capacity, desirability of the equipment
in the leasing market, market conditions for the particular industry segment in
which the equipment is to be leased, overall economic conditions, and various
regulations concerning the use of the equipment. Equipment that is idle or out
of service between the expiration of one lease and the assumption of a
subsequent lease can result in a reduction of contribution to the Fund. The Fund
experienced re-leasing or repricing activity in 1998, primarily in its trailer,
marine vessel and railcars portfolios.
(a) Trailers: The Fund's trailer portfolio operates in short-term rental
facilities or with short-line railroad systems. The relatively short duration of
most leases in these operations exposes the trailers to considerable re-leasing
and repricing activity. Contributions from the Fund's trailers were higher than
projected due to higher utilization and lease rates than in previous years.
(b) Marine vessels: Certain of the Fund's marine vessels and investment in an
entity which owns a marine vessel operated in the time charter markets
throughout 1998. Time charters of a short duration (such as a single voyage of
10 - 45 days), or may be of extended duration (as much as three years) in weaker
cheaper markets. Short duration charters are the dominant forms of contract.
During 1998, the Fund's marine vessels experienced a decrease in contribution
due to lower re-lease rates as a result of a soft bulk carrier vessel market.
(c) Railcars: While this equipment experienced some re-leasing activity, lease
rates in this market remain relatively constant.
(2) Equipment Liquidations and Nonperforming Lessees
Liquidation of Fund equipment and investments in unconsolidated special-purpose
entities (USPEs), unless accompanied by an immediate replacement of additional
equipment earning similar rates (see Reinvestment Risk, below), represents a
reduction in the size of the equipment portfolio and may result in a reduction
of contribution to the Fund. Lessees not performing under the terms of their
leases, either by not paying rent, not maintaining or operating the equipment in
accordance with the conditions of the leases, or other possible departures from
the leases, can result not only in reductions in contribution, but also may
require the Fund to assume additional costs to protect its interests under the
leases, such as repossession or legal fees. The Fund experienced the following
in 1998:
(a) Liquidations: During 1998, the Fund received proceeds of $15.8 million from
the sale and disposal of aircraft, trailers, railcars and its interest in two
trusts containing eight aircraft.
(b) Nonperforming Lessees: In the fourth quarter of 1998, the Manager terminated
the lease with a former charterer due to financial difficulties that the
charterer encountered. Currently, the marine vessel in which the Fund has a 50%
interest, is on lease with another charterer at a significantly lower rate.
<PAGE>
(3) Reinvestment Risk
Reinvestment risk occurs when; the Fund cannot generate sufficient surplus cash
after fulfillment of operating obligations and distributions to reinvest in
additional equipment during the reinvestment phase of Fund; equipment is sold or
liquidated for less than threshold amounts; proceeds from disposition or surplus
cash available for reinvestment cannot be reinvested at the threshold lease
rates; or proceeds from dispositions or surplus cash available for reinvestment
cannot be deployed in a timely manner.
During the first six years of operations through December 31, 2002, the Fund
intends to increase its equipment portfolio by investing surplus cash in
additional equipment after fulfilling operating requirements and paying
distributions to the Members. Subsequent to the end of the reinvestment period,
the Fund will continue to operate for an additional two years, then begin an
orderly liquidation over an anticipated two-year period.
Other nonoperating funds for reinvestment are generated from the sale of
equipment prior to the Fund's planned liquidation phase, the receipt of funds
realized from the payment of stipulated loss values on equipment lost or
disposed of during the time it is subject to lease agreements, or from the
exercise of purchase options in certain lease agreements. Equipment sales
generally result from evaluations by the Manager that continued ownership of
certain equipment is either inadequate to meet Fund performance goals, or that
market conditions, market values, and other considerations indicate it is the
appropriate time to sell certain equipment.
During 1998, the Fund acquired two marine vessels (a deposit of $0.9 million was
paid in December 1997 for the purchase of one of these marine vessels) for $26.2
million, a hush kit for an aircraft for $1.2 million and 39 railcars for $1.0
million. In addition, the Fund purchased a 50% interest in an MD-82 stage III
commercial aircraft for $6.8 million (a deposit of $0.7 million was paid in
December of 1997) and a 50% interest in another MD-82 stage III commercial
aircraft for $7.8 million. The remaining interests are owned by affiliated
programs.
(4) Equipment Valuation
In accordance with Financial Accounting Standards Board statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Manager reviews the carrying value of the Fund's equipment
portfolio at least quarterly in relation to expected future market conditions
for the purpose of assessing the recoverability of the recorded amounts. If the
undiscounted projected future lease revenues plus residual values are less than
the carrying value of the equipment, a loss on revaluation is recorded.
Reductions of $1.0 million to the carrying value of partially owned equipment
were required during 1998. No reductions were required to the carrying value of
equipment during 1997 or 1996.
As of December 31, 1998, the Manager estimated the current fair market value of
the Fund's equipment portfolio, including the Fund's interest in equipment owned
by USPEs, to be $118.0 million. This estimate is based on recent market
transactions for equipment similar to the Fund's equipment portfolio and the
Fund's interest in equipment owned by USPEs. Ultimate realization of fair market
value by the Fund may differ substantially from the estimate due to specific
market conditions, technological obsolescence, and government regulations, among
other factors that the Manager cannot accurately predict.
(C) Financial Condition -- Capital Resources, Liquidity, and Unit Redemption
Plan
The Manager purchased the Fund's equipment portfolio with capital raised from
its initial equity offering of $100.0 million and permanent debt financing of
$25.0 million. No further capital contributions from Class A Members are
permitted under the terms of the Fund's operating agreement. The Fund relies on
operating cash flow to meet its operating obligations, make cash distributions
to Members, and increase the Fund's equipment portfolio with any remaining
available surplus cash. The total outstanding debt, currently $25.0 million, can
be increased with borrowings from the short-term Committed Bridge Facility in an
aggregate principal amount not to exceed the lesser of $10.0 million or 50% of
the aggregate principal amount of the Notes outstanding at the time of issuance
and not to remain outstanding for more than 180 days.
The Fund intends to rely on operating cash flow to meet its operating
obligations, make cash distributions to Class A Members, and increase the Fund's
equipment portfolio through reinvestment of any remaining surplus cash available
in additional equipment.
For the year ended December 31, 1998, the Fund generated $23.7 million in
operating cash (net cash provided by operating activities plus non-liquidating
cash distributions from USPEs) to meet its operating obligations and make
distributions of $11.8 million to the members.
Pursuant to the terms of the operating agreement, beginning in the fourth
quarter of 1998, the Fund may, at the sole discretion of the Manager, redeem up
to 2% of the outstanding Class A units each year. The purchase price paid by the
Fund 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. The
price may not bear any relationship to the fair market value of a Class A Unit.
As of December 31, 1998, the Fund had agreed to purchase approximately 28,000
units for an aggregate price of approximately $0.4 million. The Manager
anticipates that these Class A units will be repurchased in the second and third
quarters of 1999. In addition to these units, the Manager may purchase
additional units on behalf of the Fund in the future.
The Fund has a $25.0 million note payable. The loan was funded in March 1997.
The note bears interest at a fixed rate of 7.33% per annum and has a final
maturity in 2006. Interest on the note is payable semi-annually. The note will
be repaid in five principal payments of $3.0 million on December 31, 2000, 2001,
2002, 2003, and 2004 and two principal payments of $5.0 million on December 31,
2005, and 2006. The agreement requires the Fund to maintain certain financial
covenants related to fixed-charge coverage.
The Manager has entered into a joint $24.5 million credit facility (the
Committed Bridge Facility) on behalf of the Fund, PLM Equipment Growth Fund VI
(EGF VI) and PLM Equipment Growth & Income Fund VII (EGF VII), both affiliated
investment programs; and TEC Acquisub, Inc. (TECAI), an indirect wholly-owned
subsidiary of the Manager. The Committed Bridge Facility may be used to provide
interim financing of up to (i) 70% of the aggregate book value or 50% of the
aggregate net fair market value of eligible equipment owned by the Fund, plus
(ii) 50% of unrestricted cash held by the borrower. The Fund, EGF VI, EGF VII,
and TECAI collectively may borrow up to $24.5 million of the Committed Bridge
Facility. Outstanding borrowings by one borrower reduce the amount available to
each of the other borrowers under the Committed Bridge Facility. The Committed
Bridge Facility also provides for a $5.0 million Letter of Credit Facility for
the eligible borrowers. Individual borrowings may be outstanding for no more
than 179 days, with all advances due no later than December 14, 1999. Interest
accrues at either the prime rate or adjusted LIBOR plus 1.625% at the borrower's
option and is set at the time of an advance of funds. Borrowings by the Fund are
guaranteed by the Manager. As of December 31, 1998, no eligible borrower had any
outstanding borrowings. As of March 25, 1999, EGF VI had outstanding borrowings
of $3.7 million and TECAI had outstanding borrowings of $8.3 million; no other
eligible borrower had any outstanding borrowings. The Manager believes it will
be able to renew the Committed Bridge Facility upon its expiration with similar
terms as those in the current Committed Bridge Facility.
The Manager has not planned any expenditures, nor is it aware of any
contingencies that would cause it to require any additional capital to that
mentioned above.
(D) Results of Operations -- Year to Year Detail Comparison
(1) Comparison of the Fund's Operating Results for the Years Ended December
31, 1998 and 1997
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
increased during the year ended December 31, 1998, when compared to the same
period of 1997. Gains or losses from the sale of equipment and certain expenses
such as depreciation and amortization and general and administrative expenses
relating to the operating segments (see Note 5 to the audited financial
statements), are not included in the owned equipment operation discussion
because they are more indirect in nature, not a result of
<PAGE>
operations but more the result of owning a portfolio of equipment. The following
table presents lease revenues less direct expenses by segment (in thousands of
dollars):
For the Years Ended
December 31,
1998 1997
----------------------------
Marine vessels $ 5,794 2,085
Aircraft 4,525 4,994
Mobile offshore drilling unit 3,936 4,989
Rail equipment 3,323 2,712
Trailers 3,263 3,250
Marine vessels: Marine vessel lease revenues and direct expenses were $8.7
million and $2.9 million, respectively, for the year ended December 31, 1998,
compared to $3.7 million and $1.6 million, respectively, during the same period
of 1997. Marine vessel contribution increased due to the purchase of a marine
vessel at the end of the second quarter of 1997 and a marine vessel in each of
the first and second quarters of 1998.
Aircraft: Aircraft lease revenues and direct expenses were $4.6 million and
$42,000, respectively, during the year ended December 31, 1998, compared to $5.0
million and $43,000, respectively, during the same period of 1997. Aircraft
contribution decreased due to the sale of an aircraft at the end of the second
quarter of 1998.
Mobile offshore drilling unit (rig): Rig lease revenues and direct expenses were
$4.0 million and $0.1 million, respectively, for the year ended December 31,
1998, compared to $5.1 million and $0.1 million, respectively, for the year
ended December 31, 1997. Lease revenue increased $0.6 million and direct
expenses increased $0.1 million during 1998, compared to the same period in 1997
due to the increase of the Fund's investment in an entity that owns a rig late
in the first quarter of 1997. This increase in net contribution was offset, in
part, by a decrease in lease revenue of $1.6 million and a decrease in direct
expenses of $22,000 during 1998 as a result of the sale of one of the Fund's rig
in the fourth quarter of 1997 as part of the original purchase agreement that
gave the charterer the option to purchase the rig.
Rail equipment: Railcar lease revenues and direct expenses were $4.0 million and
$0.6 million, respectively, for the year ended December 31, 1998, compared to
$3.4 million and $0.7 million, respectively, during the same period of 1997.
Lease revenues increased in the year ended December 31, 1998, compared to the
same period of 1997 due to the purchase of rail equipment in the first quarter
of 1998. Railcar expenses decreased due to lower running repairs required on
certain railcars during 1997, that were not needed during 1998.
Trailers: Trailer revenues and direct expenses were $3.9 million and $0.6
million, respectively, for the year ended December 31, 1998, compared to $3.7
million and $0.4 million, respectively, during the same period in 1997. Lease
revenues increased during 1998, due to higher utilization earned on trailers
operating in the short-term rental facilities when compared to 1997. Expenses
increased due to repairs required on certain trailers during 1998, which were
not needed in 1997 and to the purchase of additional trailers.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $22.0 million for the year ended December 31, 1998
decreased from $23.6 million for the same period in 1997. Significant variances
are explained as follows:
(i) A $2.6 million decrease in depreciation and amortization expenses from 1997
levels resulted from an approximately $5.6 million decrease in depreciation
expense due to the Fund's double-declining balance depreciation method, which
results in greater depreciation in the first years an asset is owned, an
approximately $1.9 million decrease in depreciation expense due to the sale of
the aircraft in the second quarter of 1998, and the sale of the rig at the end
of 1997. The decline was partially offset by an approximately $4.9 million
increase in depreciation expense from the purchase of equipment during 1998 and
1997.
(ii) A $0.2 million increase in management fees to affiliate reflects the higher
levels of lease revenues in 1998, when compared to 1997.
(iii) A $0.3 million increase in minority interest due to an increase in revenue
of $0.1 million offset by a decrease in direct and indirect expenses of $0.2
million during 1998 when compared to 1997.
(iv) A $0.4 million increase in interest expense was due to a higher average
debt balance outstanding during 1998 compared to 1997.
(c) Net Gain on Disposition of Owned Equipment
Net gain on the disposition of equipment for the year ended December 31, 1998,
totaled $2.8 million, and resulted from the sale of an aircraft, rail equipment,
and trailers with an aggregate net book value of $2.6 million, for proceeds of
$5.4 million. Net gain on the disposition of equipment for the year ended
December 31, 1997 totaled $1.7 million, and resulted from the sale of trailers
and a rig with an aggregate net book value of $9.2 million, for net sale
proceeds of $10.9 million.
(d) Equity in Net Income of Unconsolidated Special-Purpose Entities (USPEs)
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method are presented as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997
----------------------------
<S> <C> <C>
Aircraft, aircraft engines and rotable components $ 3,834 $ 1,795
Marine vessel (1,444) (342)
-----------------------------
Equity in net income of USPEs $ 2,390 $ 1,453
=============================
</TABLE>
Aircraft, aircraft engines and rotable components: As of December 31, 1998, the
Fund owned interests in two trusts that each own a commercial aircraft, and an
interest in two trusts that own a total of three commercial aircraft, two
aircraft engines, and a portfolio of aircraft rotables. As of December 31, 1997,
the Fund owned an interest in two trusts that each own four commercial aircraft,
and an interest in two trusts that own a total of three commercial aircraft, two
aircraft engines, and a portfolio of aircraft rotables. During the year ended
December 31, 1998, lease revenues of $4.3 million and the gain from the sale of
the Fund's interest in two trusts that owned commercial aircraft of $6.3 million
were offset by depreciation, direct and administrative expenses of $6.8 million.
During the year ended December 31, 1997, lease revenues and expenses were $5.9
million and $4.2 million, respectively. Lease revenues decreased $1.4 million
due to the sale of the Fund's investment in two trusts containing eight
commercial aircraft and a decrease of $2.0 million due to a lower lease rate
earned on certain equipment. The decrease in lease revenues was offset in part
by an increase in lease revenue of $1.8 million due to the Fund's investment in
two additional trusts owning a total of two aircraft during 1998. The increase
in expenses was due primarily to depreciation on the investment in two
additional trusts during 1998, which was partially offset in part by the sale of
the Fund's interest in the two trusts.
Marine vessel: As of December 31, 1998 and 1997, the Fund had an interest in an
entity that owns a marine vessel. Marine vessel revenues and expenses were $0.9
million and $2.3 million, respectively, for the year ended December 31, 1998,
compared to $1.2 million and $1.6 million, respectively, during the same period
in 1997. Lease revenues decreased primarily due to the marine vessel that the
Fund owns an interest in being off-hire for 58 days in 1998 compared to 2 days
in the same period in 1997. Expenses increased due to the loss on revaluation of
equipment of $1.0 million for the year ended December 31, 1998, which resulted
from the Fund reducing the carrying value of its interest in an entity owning a
marine vessel to its estimated net realizable value. There was no revaluation of
the carrying value in the interest owning a marine vessel required during 1997.
The increase in expenses were offset in part by the decreases in depreciation
expense of $0.1 million due to the use of the double-declining balance
depreciation method, which results in greater depreciation in the first years an
asset is owned and reduced repairs and maintenance expenses of $0.1 million in
the year ended December 31, 1998, compared to the same period in 1997.
<PAGE>
(e) Net Income (Loss)
As a result of the foregoing, the Fund's net income for the year ended December
31, 1998 was $4.3 million, compared to a net loss of $2.1 million during the
same period of 1997. The Fund's ability to acquire, operate, and liquidate
assets, secure leases, and re-lease those assets whose leases expire is subject
to many factors, and the Fund's performance in the year ended December 31, 1998
is not necessarily indicative of future periods. In the year ended December 31,
1998, the Fund distributed $10.0 million to the Class A members, or $2.00 per
weighted-average Class A unit.
(2) Comparison of the Fund's Operating Results for the Year Ended December 31,
1997 and 1996
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repair and maintenance,
equipment operating, and asset-specific insurance expenses) on owned equipment
increased during the year ended December 31, 1997, when compared to the same
period of 1996. Gains or losses from the sale of equipment and certain expenses
such as depreciation and amortization and general and administrative expenses
relating to the operating segments (see Note 5 to the audited financial
statements), are not included in the owned equipment operation discussion
because they are more indirect in nature, not a result of operations but more
the result of owning a portfolio of equipment. The following table presents
lease revenues less direct expenses by segment (in thousands of dollars):
For the Years Ended
December 31,
1997 1996
----------------------------
Aircraft $ 4,994 1,994
Mobile offshore drilling unit 4,989 --
Trailers 3,250 1,880
Rail equipment 2,712 2,371
Marine vessels 2,085 1,242
Aircraft: Aircraft lease revenues and direct expenses were $5.0 million and
$43,000, respectively, during the year ended December 31, 1997, compared to $2.0
million and $21,000, respectively, during the same period of 1996. Aircraft
contribution increased due to the purchase of four 737-200A Stage II commercial
aircraft in the third quarter of 1996. These aircraft were on lease for the
entire year of 1997.
Mobile offshore drilling unit (rig): Rig lease revenues and direct expenses were
$5.1 million and $0.1 million, respectively, for the year ended December 31,
1997. Lease revenue increased $3.5 million and direct expenses increased $48,000
during 1997, compared to the same period in 1996 due to the increase of the
Fund's investment in an entity that owns a rig late in the first quarter of
1997. In addition, lease revenue increased $1.6 million and direct expenses
increased $22,000 during 1998 as a result of the purchase of one of the Fund's
rig in the first quarter of 1997. This rig was sold in December 1997 as part of
the original purchase agreement that gave the charterer the option to purchase
the rig. The Fund did not own any rigs in the year ended December 31, 1996.
Trailers: Trailer revenues and direct expenses were $3.7 million and $0.4
million, respectively, for the year of 1997, compared to $2.1 million and $0.2
million, respectively, during the same period in 1996. Trailer contribution
increased due to the purchase of additional trailers throughout 1996 and 1997.
These trailers were operating in the short-term rental facilities for the entire
year of 1997.
Rail equipment: Railcar lease revenues and direct expenses were $3.4 million and
$0.7 million, respectively, for the year ended December 31, 1997, compared to
$3.1 million and $0.8 million, respectively, during the same period of 1996.
Lease revenues rose 10% in the year of 1997, compared to the same period of
1996. The increase was due to railcars owned and on lease for all of 1997
compared to being owned and on lease for part of the year ended 1996. Expenses
decreased due to lower running repairs in the year ended December 31, 1997,
compared to the same period of 1996. Although the Fund purchased additional
railcars in the last two months of 1996, these railcars were off lease in the
first eight months of 1997 and did not make a significant net contribution to
the Fund in 1997.
Marine vessels: Marine vessel lease revenues and direct expenses were $3.7
million and $1.6 million, respectively, for the year ended December 31, 1997,
compared to $2.7 million and $1.4 million, respectively, during the same period
of 1996. Marine vessel contribution increased $1.2 million due to the purchase
of a marine vessel at the end of the second quarter of 1997. This increase in
contribution due to this additional vessel, was offset slightly by a $0.2
million decrease in lease revenue due to lower re-lease rates for another marine
vessel as a result of a softer bulk carrier vessel market and higher insurance
expense of $0.2 million on the dry bulk vessel.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $23.6 million for the year ended December 31, 1997
increased from $11.0 million for the same period in 1996. The significant
variances are explained as follows:
(i) A $9.9 million increase in depreciation and amortization expenses from 1996
levels reflects the purchase of equipment during 1997 and 1996.
(ii) A $1.4 million increase in interest expense was due to the Fund's
borrowings under the long-term senior note agreement in 1997.
(iii) A $0.8 million increase in administrative expenses from 1996 levels
resulted primarily from increased administrative costs associated with the
short-term trailer rental facilities due to additional trailers operating in the
facilities in the first year of 1997, compared to the same period of 1996.
(iv) A $0.5 million increase in management fees to affiliate reflects the higher
levels of lease revenues in 1997, compared to 1996, due to the purchase of
equipment throughout 1996 and 1997.
(c) Net Gain on Disposition of Owned Equipment
Net gain on the disposition of equipment for the year ended December 31, 1997
totaled $1.7 million, and resulted from the sale of trailers and the sale of the
rig with a net book value of $9.2 million, for proceeds of $11.0 million net of
sales commissions of $0.1 million. There was no disposition of equipment in
1996.
(d) Interest and Other Income
Interest and other income decreased $1.0 million due to lower cash balances
available for investment in the year ended December 31, 1997, compared to the
same period of 1996.
(e) Equity in Net Income (Loss) of USPEs
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method are presented as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1997 1996
----------------------------
<S> <C> <C>
Aircraft, aircraft engines and rotable components $ 1,795 $ 260
Mobile offshore drilling unit -- (94)
Marine vessel (342) (422)
-----------------------------
Equity in net income (loss) of USPEs $ 1,453 (256)
=============================
</TABLE>
Aircraft, aircraft engines and rotable components: As of December 31, 1997 and
1996, the Fund owned an interest in a trust that owns four commercial aircraft,
an interest in another trust that owns four commercial aircraft, and an interest
in two trusts that own three commercial aircraft, two aircraft engines, and a
portfolio of rotable components. Aircraft revenues and expenses were $5.9
million and $4.2 million, respectively, for the year ended December 31, 1997,
compared to $5.6 million and $5.4 million, respectively, during the same period
in 1996. The increase in revenues of $0.3 million was due to the purchase of an
interest in a trust that owns commercial aircraft at the end of the first
quarter of 1996. These aircraft were on lease for the entire year of 1997,
compared to only six months in the same period in 1996. Expenses decreased due
to the use of the double-declining balance depreciation method, which results in
greater depreciation in the first years an asset is owned.
Mobile offshore drilling unit: As of December 31, 1996, the Fund had an interest
in an entity that owns a mobile offshore drilling unit (rig) purchased during
the fourth quarter of 1996. During the year ended December 31, 1996, revenues of
$6,000 were offset by depreciation and administrative expenses of $0.1 million.
During 1997, the Fund purchased an additional 26% interest in a rig therefore
bringing its ownership interest in this entity to 61%. In addition, the Fund
transferred this investment to owned equipment during 1997.
Marine vessel: As of December 31, 1997 and 1996, the Fund had an interest in an
entity that owns a marine vessel. Marine vessel revenues and expenses were $1.2
million and $1.6 million, respectively, for the year ended December 31, 1997,
compared to $0.9 million and $1.3 million, respectively, during the same period
in 1996. The increase in revenues of $0.3 million and expenses of $0.1 million
was due to the purchase of an interest in an entity that owns a marine vessel in
the second quarter of 1996. This marine vessel was on lease for the entire year
of 1997 compared to only seven months in 1996. In addition, expenses increased
$0.2 million due to required repairs needed on this marine vessel in the year
ended December 31, 1997. Similar repairs were not required on the vessel in
1996.
(f) Net Loss
As a result of the foregoing, the Fund's net loss for the year ended December
31, 1997 was $2.1 million for the year of 1997, compared to a net loss of $2.4
million during the same period of 1996. The Fund's ability to acquire, operate,
and liquidate assets, secure leases, and re-lease those assets whose leases
expire is subject to many factors, and the Fund's performance during the year
ended December 31, 1997 is not necessarily indicative of future periods. In the
year ended December 31, 1997, the Fund distributed $10.0 million to the Class A
members, or $2.00 per weighted-average Class A unit.
(E) Geographic Information
Certain of the Fund's equipment operates in international markets. Although
these operations expose the Fund to certain currency, political, credit and
economic risks, the Manager believes these risks are minimal or has implemented
strategies to control the risks. Currency risks are at a minimum because all
invoicing, with the exception of a small number of railcars operating in Canada,
is conducted in U.S. dollars. Political risks are minimized by avoiding
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 Fund 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 Note 6 to the audited financial statements for information on the lease
revenues, net income (loss), and net book value of equipment in various
geographic regions.
Revenues and net operating income by geographic region are impacted by the time
period the assets are owned and the useful life ascribed to the assets for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years due to
the use of the double-declining balance method of depreciation. The
relationships of geographic revenues, net income (loss), and net book value of
equipment are expected to change significantly in the future, as assets come off
lease and decisions are made to either redeploy the assets in the most
advantageous geographic location or sell the assets.
The Fund's owned equipment on lease to United States (U.S.)-domiciled lessees
consists of trailers, railcars, and interests in entities that own aircraft.
During 1998, lease revenue in the U.S. accounted for 26% of the total lease
revenues generated by wholly-owned and partially-owned equipment while reporting
a net loss of $2.0 million compared to the total aggregate net income for the
fund of $4.3 million. The loss was due primarily to the double-declining balance
method of depreciation on the two additional aircraft that the Fund owns
interests, purchased during 1998, which results in greater depreciation in the
first years an asset is owned.
South American operations consists of four aircraft that generated revenues that
accounted for 15% of the total lease revenues from wholly and partially-owned
equipment, while the net income in this region accounted for $2.3 million of the
total aggregate net income of $4.3 million for the entire Fund.
The Fund's equipment on lease to Canadian-domiciled lessees consist or consisted
of railcars, aircraft and interests in entities that owned two trusts containing
eight commercial aircraft. Lease revenues in Canada accounted for 9% of total
lease revenues from wholly and partially-owned equipment while a net income
accounted for $7.2 million of the total aggregate net income for the Fund of
$4.3 million. The primary reason for this relationship is that the Fund sold an
aircraft and its two trusts containing eight commercial aircraft for a net gain
of $6.3 million.
European operations consist of interests in entities that own aircraft and
aircraft rotables that generated lease revenues that accounted for 5% of total
lease revenues from wholly-owned and partially-owned equipment revenues. The net
income generated in this region accounted for $0.3 million of the $4.3 million
in total aggregate net income for the entire Fund.
Two wholly-owned marine vessels, an investment in an entity that owns a marine
vessel and an investment in an entity that owns a mobile offshore drilling unit,
which were leased in the rest of the world accounted for 45% of the lease
revenues from wholly and partially-owned equipment while the net loss in this
region accounted for $1.1 million compared to the total aggregate net income of
$4.3 million for the entire Fund. The primary reason for this relationship is
that the Fund reduced the carrying value of its interest in an entity owning a
marine vessel to its estimated net realizable value.
(F) Effects Of Year 2000
It is possible that the Manager's currently installed computer systems, software
products, and other business systems, or the Fund's vendors, service providers
and customers, working either alone or in conjunction with other software or
systems, may not accept input of, store, manipulate, and output dates on or
after January 1, 2000 without error or interruption (a problem commonly known as
the "Year 2000" problem). As the Fund relies substantially on the Manager's
software systems, applications and control devices in operating and monitoring
significant aspects of its business, any Year 2000 problem suffered by the
Manager could have a material adverse effect on the Fund's business, financial
condition and results of operations.
The Manager has established a special Year 2000 oversight committee to review
the impact of Year 2000 issues on its software products and other business
systems in order to determine whether such systems will retain functionality
after December 31, 1999. The Manager (a) is currently integrating Year 2000
compliant programming code into its existing internally customized and
internally developed transaction processing software systems and (b) the
Manager's accounting and asset management software systems have either already
been made Year 2000 compliant or Year 2000 compliant upgrades of such systems
are planned to be implemented by the Manager before the end of fiscal 1999.
Although the Manager believes that its Year 2000 compliance program can be
completed by the beginning of 1999, there can be no assurance that the
compliance program will be completed by that date. To date, the costs incurred
and allocated to the Fund to become Year 2000 compliant have not been material.
To date, the cost incurred, the Manager believes the future costs allocable to
the Fund to become Year 2000 compliant will not be material.
It is possible that certain of the Fund's equipment lease portfolio may not be
Year 2000 compliant. The Manager is currently contacting equipment manufacturers
of the Fund's leased equipment portfolio to assure Year 2000 compliance or to
develop remediation strategies. The Manager does not expect that non-Year 2000
compliance of the Fund's leased equipment portfolio will have an adverse
material impact on its financial statements.
Some risks associated with the Year 2000 problem are beyond the ability of the
Fund or Manager to control, including the extent to which third parties can
address the Year 2000 problem. The Manager is communicating with vendors,
services providers and customers in order to assess the Year 2000 compliance
readiness of such parties and the extent to which the Fund is vulnerable to any
third-party Year 2000 issues. There can be no assurance that the software
systems of such parties will be converted or made Year 2000 compliant in a
timely manner. Failure by the Manager or such other parties to make their
respective systems Year 2000 compliant could have a material adverse effect on
the business, financial position and results of operations of the Fund. The
Manager will make an ongoing effort to recognize and evaluate potential exposure
relating to third-party Year 2000 non-compliance and will develop a contingency
plan if the Manager determines that third-party non-compliance will have a
material adverse effect on the Fund's business, financial position or results of
operation.
The Manager is currently developing a contingency plan to address the possible
failure of any systems due to the Year 2000 problems. The Manager anticipates
these plans will be completed by September 30, 1999.
(G) Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities," (SFAS No. 133) which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of December 31, 1998,
the Manager is reviewing the effect this standard will have on the Fund's
consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
which requires start-up activities and organization costs to be expensed as
incurred. The statement requires that initial application be reported as a
cumulative effect of a change in accounting principle. This statement is
effective for the Fund's fiscal year ended December 31, 1999, with earlier
application permitted. The Manager does not expect the adoption of this
statement to have an adverse material impact on the Fund's financial statements.
(H) Inflation
Inflation had no significant impact on the Fund's operations during 1998, 1997,
or 1996.
(I) Forward-Looking Information
Except for historical information contained herein, the discussion in this Form
10-K contains forward-looking statements that involve risks and uncertainties,
such as statements of the Fund's plans, objectives, expectations, and
intentions. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Fund's actual results could differ materially from those
discussed here.
(J) Outlook for the Future
Several factors may affect the Fund's operating performance in 1999 and beyond,
including changes in the markets for the Fund's equipment and changes in the
regulatory environment in which that equipment operates.
The Fund's operation of a diversified equipment portfolio in a broad base of
markets is intended to reduce its exposure to volatility in individual equipment
sectors.
The ability of the Fund to realize acceptable lease rates on its equipment in
the different equipment markets is contingent on many factors, such as specific
market conditions and economic activity, technological obsolescence, and
government or other regulations. The unpredictability of some of these factors
makes it difficult for the Manager to clearly define trends or influences that
may impact the performance of the Fund's equipment. The Manager continually
monitors both the equipment markets and the performance of the Fund's equipment
in these markets. The Manager may make an evaluation to reduce the Fund's
exposure to those equipment markets in which it determines that it cannot
operate equipment and achieve acceptable rates of return. Alternatively, the
Manager may make a determination to enter those equipment markets in which it
perceives opportunities to profit from supply-demand instabilities or other
market imperfections.
The Fund intends to use excess cash flow, if any, after payment of expenses,
loan principal and interest on debt, and cash distributions, to acquire
additional equipment during the first six years of the Fund's operations which
concludes December 31, 2002. The Manager believes that these acquisitions may
cause the Fund to generate additional earnings and cash flow for the Fund.
(1) Repricing and Reinvestment Risk
Certain of the Fund's aircraft, marine vessels, mobile offshore drilling unit,
and trailers will be remarketed in 1999 as existing leases expire, exposing the
Fund to some repricing risk/opportunity. Additionally, the Manager may elect to
sell certain underperforming equipment or equipment whose continued operation
may become prohibitively expensive. In either case, the Manager intends to
re-lease or sell equipment at prevailing market rates; however, the Manager
cannot predict these future rates with any certainty at this time, and cannot
accurately assess the effect of such activity on future Fund performance. The
proceeds from the sold or liquidated equipment will be redeployed to purchase
additional equipment, as the Fund is in its reinvestment phase.
(2) Impact of Government Regulations on Future Operations
The Manager operates the Fund's equipment in accordance with current applicable
regulations (see Item 1, Section E, Government Regulations). However, the
continuing implementation of new or modified regulations by some of the
authorities mentioned previously, or others, may adversely affect the Fund'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 Fund of meeting regulatory compliance for the same equipment operated
between countries. Currently, the Manager has observed rising insurance costs to
operate certain vessels in U.S. ports, resulting from implementation of the U.S.
Oil Pollution Act of 1990. Ongoing changes in the regulatory environment, both
in the United States and internationally, cannot be predicted with accuracy, and
preclude the Manager from determining the impact of such changes on Fund
operations, purchases, or sale of equipment. Under U.S. Federal Aviation
Regulations, after December 31, 1999, no person may operate an aircraft to or
from any airport in the contiguous United States unless that aircraft has been
shown to comply with Stage III noise levels. The Fund has Stage II aircraft that
do not meet Stage III requirements. These Stage II aircraft will remain with the
current lessee, which operate in a country that does not require this
regulation. The Fund's 33% interest in two trusts that is comprised of a total
of three Stage II narrowbody aircraft, two Stage II aircraft engines, and a
portfolio of rotable components are also scheduled for sale during 1999.
Furthermore, the U.S. Department of Transportation's Hazardous Materials
Regulations, which regulate the classification and packaging requirements of
hazardous materials and which apply particularly to the Fund's tank railcars,
issued a statement which requires the owner to inspect a certain percentage of
the tank railcars for a protective coating to the outside of the tank and the
inside of the metal tank jacket whenever a tank is insulated. The Fund owns tank
railcars that need to be inspected and, if needed, repaired before it can go
back into service by August 2000.
(3) Additional Capital Resources and Distribution Levels
The Fund's initial contributed capital was composed of the proceeds from its
initial offering of $100.0 million, supplemented by permanent debt in the amount
of $25.0 million. The Manager has not planned any expenditures, nor is it aware
of any contingencies that would cause it to require any additional capital to
that mentioned above. The Fund intends to rely on operating cash flow to meet
its operating obligations, make cash distributions to limited partners, make
debt payments, and increase the Fund's equipment portfolio with any remaining
surplus cash available.
Pursuant to the Fifth Amended and Restated Operating Agreement of Professional
Lease Management Income Fund I, L.L.C. (the operating agreement), the Fund will
cease to reinvest surplus cash in additional equipment beginning in its seventh
year of operations which commences on January 1, 2003. Prior to that date, the
Manager intends to continue its 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 Fund sufficient to meet its
obligations and sustain a predictable level of distributions to the Class A
Unitholders.
The Manager will evaluate the level of distributions the Fund can sustain over
extended periods of time and, together with other considerations, may adjust the
level of distributions accordingly. In the long term, the difficulty in
predicting market conditions precludes the Manager from accurately determining
the impact of changing market conditions on liquidity or distribution levels.
The Fund's permanent debt obligation begins to mature in December 2000. The
Manager believes that sufficient cash flow will be available in the future for
repayment of debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Fund's primary market risk exposure is that of currency risk. 74% of the
Fund's total lease revenues from wholly-and partially-owned equipment in 1998
came from non-United States domiciled lessees. Most of the leases require
payment in United States (U.S.) currency. If these lessees currency devalues
against the U.S. dollar, the lessees could potentially encounter difficulty in
making the U.S. dollar denominated lease payment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Fund are listed on the Index to Financial
Statements included in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(This space intentionally left blank)
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM INTERNATIONAL AND PLM
FINANCIAL SERVICES, INC.
As of the date of this annual report, the directors and executive officers of
PLM International and of PLM Financial Services, Inc. (and key executive
officers of its subsidiaries) are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------------- ------- ------------------------------------------------------------------
<S> <C> <C>
Robert N. Tidball 60 Chairman of the Board, Director, President, and Chief Executive
Officer, PLM International, Inc.;
Director, PLM Financial Services, Inc.;
Vice President, PLM Railcar Management Services, Inc.;
President, PLM Worldwide Management Services Ltd.
Randall L.-W. Caudill 51 Director, PLM International, Inc.
Douglas P. Goodrich 52 Director and Senior Vice President, PLM International, Inc.;
Director and President, PLM Financial Services, Inc.; President,
PLM Transportation Equipment Corporation; President, PLM Railcar
Management Services, Inc.
Warren G. Lichtenstein 33 Director, PLM International, Inc.
Howard M. Lorber 50 Director, PLM International, Inc.
Harold R. Somerset 63 Director, PLM International, Inc.
Robert L. Witt 58 Director, PLM International, Inc.
J. Michael Allgood 50 Vice President and Chief Financial Officer, PLM International,
Inc. and PLM Financial Services, Inc.
Robin L. Austin 52 Vice President, Human Resources, PLM International, Inc. and PLM
Financial Services, Inc.
Stephen M. Bess 52 President, PLM Investment Management, Inc.; Vice President and
Director, PLM Financial Services, Inc.
Richard K Brock 36 Vice President and Corporate Controller, PLM International, Inc.
and PLM Financial Services, Inc.
James C. Chandler 50 Vice President, Planning and Development, PLM International,
Inc. and PLM Financial Services, Inc.
Susan C. Santo 36 Vice President, Secretary, and General Counsel, PLM
International, Inc. and PLM Financial Services, Inc.
Janet M. Turner 42 Vice President, Investor Relations and Corporate Communications,
PLM International, Inc. and PLM Investment Management, Inc.
</TABLE>
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment as President and Chief Executive Officer, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989.
Mr. Tidball was appointed a Director of PLM Financial Services, Inc. in July
1997 and was elected President of PLM Worldwide Management Services Limited in
February 1998. He has served as an officer of PLM Railcar Management Services,
Inc. since June 1987. Mr. Tidball was Executive Vice President of Hunter Keith,
Inc., a Minneapolis-based investment banking firm, from March 1984 to January
1986. Prior to Hunter Keith, he was Vice President, General Manager, and
Director of North American Car Corporation and a director of the American
Railcar Institute and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997.
He is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm serving emerging growth companies. Prior to founding
Dunsford Hill Capital Partners, Mr. Caudill held senior investment banking
positions at Prudential Securities, Morgan Grenfell Inc., and The First Boston
Corporation. Mr. Caudill also serves as a director of Northwest Biotherapeutics,
Inc., VaxGen, Inc., SBE, Inc., and RamGen, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Senior Vice President of PLM International in March 1994, and
appointed Director and President of PLM Financial Services, Inc. in June 1996.
Mr. Goodrich has also served as Senior Vice President of PLM Transportation
Equipment Corporation since July 1989 and as President of PLM Railcar Management
Services, Inc. since September 1992, having been a Senior Vice President since
June 1987. Mr. Goodrich was an executive vice president of G.I.C. Financial
Services Corporation of Chicago, Illinois, a subsidiary of Guardian Industries
Corporation, from December 1980 to September 1985.
Warren G. Lichtenstein was elected to the Board of Directors in December 1998.
Mr. Lichtenstein is the Chief Executive Officer of Steel Partners II, L.P.,
which is PLM International's largest shareholder, currently owning 16% of the
Company's common stock. Additionally, Mr. Lichtenstein is Chairman of the Board
of Aydin Corporation, a NYSE-listed defense electronics concern, as well as a
director of Gateway Industries, Rose's Holdings, Inc., and Saratoga Beverage
Group, Inc. Mr. Lichtenstein is a graduate of the University of Pennsylvania,
where he received a Bachelor of Arts degree in economics.
Howard M. Lorber was elected to the Board of Directors in January 1999. Mr.
Lorber is President and Chief Operating Officer of New Valley Corporation, an
investment banking and real estate concern. He is also Chairman of the Board and
Chief Executive Officer of Nathan's Famous, Inc., a fast food company.
Additionally, Mr. Lorber is a director of United Capital Corporation and Prime
Hospitality Corporation and serves on the boards of several community service
organizations. He is a graduate of Long Island University, where he received a
Bachelor of Arts degree and a Masters degree in taxation. Mr. Lorber also
received charter life underwriter and chartered financial consultant degrees
from the American College in Bryn Mawr, Pennsylvania. He is a trustee of Long
Island University and a member of the Corporation of Babson College.
Harold R. Somerset was elected to the Board of Directors of PLM International in
July 1994. From February 1988 to December 1993, Mr. Somerset was President and
Chief Executive Officer of California & Hawaiian Sugar Corporation (C&H Sugar),
a subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined C&H Sugar in 1984
as Executive Vice President and Chief Operating Officer, having served on its
Board of Directors since 1978. Between 1972 and 1984, Mr. Somerset served in
various capacities with Alexander & Baldwin, Inc., a publicly held land and
agriculture company headquartered in Honolulu, Hawaii, including Executive Vice
President of Agriculture and Vice President and General Counsel. Mr. Somerset
holds a law degree from Harvard Law School as well as a degree in civil
engineering from the Rensselaer Polytechnic Institute and a degree in marine
engineering from the U.S. Naval Academy. Mr. Somerset also serves on the boards
of directors for various other companies and organizations, including Longs Drug
Stores, Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993,
Mr. Witt has been a principal with WWS Associates, a consulting and investment
group specializing in start-up situations and private organizations about to go
public. Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel Corporation, an international advanced materials company with sales
primarily in the aerospace, transportation, and general industrial markets. Mr.
Witt also serves on the boards of directors for various other companies and
organizations.
J. Michael Allgood was appointed Vice President and Chief Financial Officer of
PLM International in October 1992 and Vice President and Chief Financial Officer
of PLM Financial Services, Inc. in December 1992. Between July 1991 and October
1992, Mr. Allgood was a consultant to various private and public-sector
companies and institutions specializing in financial operations systems
development. In October 1987, Mr. Allgood co-founded Electra Aviation Limited
and its holding company, Aviation Holdings Plc of London, where he served as
Chief Financial Officer until July 1991. Between June 1981 and October 1987, Mr.
Allgood served as a first vice president with American Express Bank Ltd. In
February 1978, Mr. Allgood founded and until June 1981 served as a director of
Trade Projects International/Philadelphia Overseas Finance Company, a joint
venture with Philadelphia National Bank. From March 1975 to February 1978, Mr.
Allgood served in various capacities with Citibank, N.A.
Robin L. Austin became Vice President, Human Resources of PLM Financial
Services, Inc. in 1984, having served in various capacities with PLM Investment
Management, Inc., including Director of Operations, from February 1980 to March
1984. From June 1970 to September 1978, Ms. Austin served on active duty in the
United States Marine Corps and served in the United States Marine Corp Reserves
from 1978 to 1998. She retired as a Colonel of the United States Marine Corps
Reserves in 1998. Ms. Austin has served on the Board of Directors of the
Marines' Memorial Club and is currently on the Board of Directors of the
International Diplomacy Council.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Investment Management, Inc. in
August 1989, having served as Senior Vice President of PLM Investment
Management, Inc. beginning in February 1984 and as Corporate Controller of PLM
Financial Services, Inc. beginning in October 1983. Mr. Bess served as Corporate
Controller of PLM, Inc. beginning in December 1982. Mr. Bess was Vice
President-Controller of Trans Ocean Leasing Corporation, a container leasing
company, from November 1978 to November 1982, and Group Finance Manager with the
Field Operations Group of Memorex Corporation, a manufacturer of computer
peripheral equipment, from October 1975 to November 1978.
Richard K Brock was appointed Vice President and Corporate Controller of PLM
International and PLM Financial Services, Inc. in June 1997, having served as an
accounting manager beginning in September 1991 and as Director of Planning and
General Accounting beginning in February 1994. Mr. Brock was a division
controller of Learning Tree International, a technical education company, from
February 1988 through July 1991.
James C. Chandler became Vice President, Planning and Development of PLM
International in April 1996. From 1994 to 1996 Mr. Chandler worked as a
consultant to public companies, including PLM, in the formulation of business
growth strategies. Mr. Chandler was Director of Business Development at Itel
Corporation from 1987 to 1994, serving with both the Itel Transportation Group
and Itel Rail.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM
International and PLM Financial Services, Inc. in November 1997. She has worked
as an attorney for PLM International since 1990 and served as its Senior
Attorney since 1994. Previously, Ms. Santo was engaged in the private practice
of law in San Francisco. Ms. Santo received her J.D. from the University of
California, Hastings College of the Law.
Janet M. Turner became Vice President of Investor Services of PLM International
in 1994, having previously served as Vice President of PLM Investment
Management, Inc. since 1990. Before 1990, Ms. Turner held the positions of
manager of systems development and manager of investor relations at the Company.
Prior to joining PLM in 1984, she was a financial analyst with The
Toronto-Dominion Bank in Toronto, Canada.
The directors of PLM International, Inc. are elected for a three-year term and
the directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM International Inc. or PLM
Financial Services, Inc., PLM Transportation Equipment Corp., or PLM Investment
Management, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The Fund has no directors, officers, or employees. The Fund has no pension,
profit sharing, retirement, or similar benefit plan in effect as of December 31,
1998.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The Manager is generally entitled to a 1% interest in profits and
losses and a 15% interest in the Fund's cash distributions, subject to
certain special allocation of income provisions. After the investors
receive cash equal to their original capital contribution, the
Manager's interest in the distributions of the Fund will increase to
25%. As of December 31, 1998, no investor was known by the Manager to
beneficially own more than 5% of the Units of the Fund.
(B) Security Ownership of Management
Neither the Manager and its affiliates nor any executive officer or
director of the Manager and its affiliates owned any Units of the Fund
as of December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
During 1998, management fees to IMI were $1.4 million. The Fund
reimbursed FSI and/or its affiliates $1.0 million for administrative
and data processing services performed on behalf of the Fund during
1998. The Fund paid Transportation Equipment Indemnity Fund Ltd. (TEI),
a wholly owned, Bermuda-based subsidiary of PLM International, $2,000
for insurance coverages during 1998, these amounts were paid
substantially 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 Fund received a $16,000 loss-of-hire insurance refund from TEI
due to lower claims from the insured Fund and other insured affiliated
programs.
During 1998, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Fund's proportional share of ownership):
management fees - $0.2 million; and administrative and data processing
services - $0.1 million. The Fund's proportional share of a refund of
$5,000 from TEI was received during 1998 from lower loss-of-hire claims
from the insured USPE's and other insured affiliated programs.
(This space intentionally left blank.)
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on
Form 10-K.
(B) Reports on Form 8-K
None.
(C) Exhibits
4. Operating Agreement of Fund, incorporated by reference to the
Fund's Registration Statement on Form S-1 (Reg. No. 33-55796) which
became effective with the Securities and Exchange Commission on May
25, 1993.
10.1 Management Agreement between Fund and PLM Investment Management,
Inc., incorporated by reference to the Fund's Registration
Statement on Form S-1 (Reg. No. 33-55796) which became effective
with the Securities and Exchange Commission on May 25, 1993.
10.2 $25.0 Million Note Agreement, dated as of December 30, 1996,
incorporated by reference to the Fund's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 14,
1997.
10.3 Fourth Amended and Restated Warehousing Credit Agreement, dated as
of December 15, 1998, with First Union National Bank.
24. Powers of Attorney.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Fund has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
The Fund has no directors or officers. The Manager has signed on behalf of the
Fund by duly authorized officers.
PROFESSIONAL LEASE MANAGEMENT INCOME
Date: January 5, 2000 FUND I
By: PLM Financial Services, Inc.
Manager
By: /s/ Douglas P. Goodrich
----------------------------------
Douglas P. Goodrich
President and Director
By: /s/ Richard K Brock
---------------------------------
Richard K Brock
Vice President and
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following directors of the Fund's Manager on the
dates indicated.
Name Capacity Date
*_________________________
Robert N. Tidball Director - FSI January 5, 2000
*_________________________
Douglas P. Goodrich Director - FSI January 5, 2000
*_________________________
Steven M. Bess Director - FSI January 5, 2000
* Susan C. Santo, by signing her name hereto, does sign this document on behalf
of the persons indicated above pursuant to powers of attorney duly executed by
such persons and filed with the Securities and Exchange Commission.
/s/ Susan C. Santo
- -------------------------
Susan C. Santo
Attorney-in-Fact
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I
(A LIMITED LIABILITY COMPANY)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' report 31
Balance sheets as of December 31, 1998 and 1997 32
Statements of operations for the years ended
December 31, 1998, 1997 and 1996 33
Statement of changes in members' equity for the years ended
December 31, 1998, 1997, and 1996 34
Statements of cash flows for the years ended
December 31, 1998, 1997, and 1996 35
Notes to financial statements 36-47
All other financial statement schedules have been omitted as the required
information is not pertinent to the Registrant or is not material, or because
the information required is included in the financial statements and notes
thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Professional Lease Management Income Fund I, L.L.C.:
We have audited the accompanying financial statements of Professional Lease
Management Income Fund I, L.L.C. (the Fund) as listed in the accompanying index
to financial statements. These financial statements are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Professional Lease Management
Income Fund I, L.L.C. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- ------------------------------------
SAN FRANCISCO, CALIFORNIA
March 12, 1999, except as to note 10,
which is as of December 22, 1999
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEETS
DECEMBER 31,
(in thousands of dollars, except unit amounts)
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
Assets
<S> <C> <C>
Equipment held for operating leases, at cost $ 122,626 $ 99,488
Less accumulated depreciation (44,350) (30,318)
-------------------------------------
Net equipment 78,276 69,170
Cash and cash equivalents 3,720 19,179
Accounts receivable, less of allowance for doubtful accounts
of $43 in 1998 and $70 in 1997 1,876 2,047
Investments in unconsolidated special-purpose entities 15,224 16,486
Equipment acquisition deposits -- 920
Debt placement fees, less accumulated amortization
of $34 in 1998 and $16 in 1997 143 160
Organization and offering costs, less accumulated amortization 132 221
of $310 in 1998 and $222 in 1997
Prepaid expenses and other assets 264 341
-------------------------------------
Total assets $ 99,635 $ 108,524
=====================================
Liabilities and member's equity
Liabilities
Accounts payable and accrued expenses $ 465 $ 597
Due to affiliates 400 2,021
Lessee deposits and reserves for repairs 3,040 1,719
Note payable 25,000 25,000
-------------------------------------
Total liabilities 28,905 29,337
-------------------------------------
Minority interest 5,705 6,713
Members' equity
Class A members (4,999,581 Units at December 31, 1998 and
1997) 64,893 72,298
Class B member 132 176
-------------------------------------
Total members' equity 65,025 72,474
-------------------------------------
Total liabilities and members' equity $ 99,635 $ 108,524
=====================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of dollars, except weighted-average unit amounts
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------
REVENUES
<S> <C> <C> <C>
Lease revenue $ 25,149 $ 20,833 $ 9,939
Interest and other income 393 405 1,356
Net gain on disposition of equipment 2,759 1,682 --
-------------------------------------------------------
Total revenues 28,301 22,920 11,295
-------------------------------------------------------
EXPENSES
Depreciation and amortization 16,774 19,347 9,408
Repairs and maintenance 2,024 1,414 1,363
Equipment operating expenses 2,069 995 926
Insurance expense to affiliate (14) 24 7
Other insurance expense 312 419 180
Management fees to affiliate 1,368 1,125 585
Interest expense 1,833 1,418 9
General and administrative expenses to affiliates 966 925 313
Other general and administrative expenses 692 729 640
Minority interest 351 29 --
-------------------------------------------------------
Total expenses 26,375 26,425 13,431
-------------------------------------------------------
Equity in net income (loss) of
unconsolidated special-purpose entities 2,390 1,453 (256)
-------------------------------------------------------
Net income (loss) $ 4,316 $ (2,052) $ (2,392)
=======================================================
MEMBERS' SHARE OF NET INCOME (LOSS)
Class A members $ 2,595 $ (3,728) $ (3,705)
Class B member 1,721 1,676 1,313
-------------------------------------------------------
Total $ 4,316 $ (2,052) $ (2,392)
=======================================================
Net income (loss) per weighted-average
Class A unit $ 0.52 $ (0.75) $ N/A
=======================================================
Cash distribution $ 11,765 $ 11,763 $ 9,832
=======================================================
Cash distribution per weighted-average
Class A unit $ 2.00 $ 2.00 $ N/A
=======================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
Class A Class B Total
---------------------------------------------------------
<S> <C> <C> <C>
Members' equity as of December 31, 1995 $ 54,836 $ 306 $ 55,142
Members' capital contributions 43,364 5,069 48,433
Syndication costs -- (5,062) (5,062)
Net income (loss) (3,705) 1,313 (2,392)
Cash distributions (8,471) (1,361) (9,832)
---------------------------------------------------------
Members' equity as of December 31, 1996 86,024 265 86,289
Net income (loss) (3,728) 1,676 (2,052)
Cash distributions (9,998) (1,765) (11,763)
---------------------------------------------------------
Members' equity as of December 31, 1997 72,298 176 72,474
Net income 2,595 1,721 4,316
Cash distributions (10,000) (1,765) (11,765)
--------------------------------------------------------------------------------------------------------------
Members' equity as of December 31, 1998 $ 64,893 $ 132 $ 65,025
=========================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of dollars)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES 1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 4,316 $ (2,052) $ (2,392)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 16,774 19,347 9,408
Net gain on dispositions of equipment (2,759) (1,682) --
Equity in net (income) loss of unconsolidated special
purpose entities (2,390) (1,453) 256
Changes in operating assets and liabilities:
Restricted cash -- 223 (223)
Accounts receivable, net 173 (513) (737)
Prepaid expenses 77 164 (89)
Accounts payable and accrued expenses (132) 167 (235)
Due to affiliates 115 122 (225)
Lessee deposits and reserve for repairs 1,321 846 738
Minority interest (1,008) (1,425) --
-------------------------------------------
Net cash provided by operating activities 16,487 13,744 6,501
-------------------------------------------
INVESTING ACTIVITIES
Payments for purchase of equipment (27,477) (24,444) (34,193)
Equipment acquisition deposits -- (920) --
Investment in and equipment purchased and placed
in unconsolidated special-purpose entities (13,917) (683) (16,067)
Liquidation distributions from unconsolidated special-
purpose entities 10,385 -- --
Distributions from unconsolidated special-purpose entities 7,184 4,092 5,059
Proceeds from disposition of equipment 5,380 10,901 --
-------------------------------------------
Net cash used in investing activities (18,445) (11,054) (45,201)
-------------------------------------------
FINANCING ACTIVITIES
Proceeds from note payable -- 25,000 --
(Decrease) increase due to affiliates (1,736) 1,736 --
Cash distributions to Class A members (10,000) (9,998) (8,471)
Cash distributions to Class B member (1,765) (1,765) (1,361)
Class A members capital contribution -- -- 43,364
Debt placement fees -- (176) --
Decrease in subscriptions in escrow -- -- (6,260)
Increase in restricted cash from
subscriptions in escrow, net -- -- 6,316
-------------------------------------------
Net cash (used in) provided by financing activities (13,501) 14,797 33,588
-------------------------------------------
Net (decrease) increase in cash and cash equivalents (15,459) 17,487 (5,112)
Cash and cash equivalents at beginning of year 19,179 1,692 6,804
-------------------------------------------
Cash and cash equivalents at end of year $ 3,720 $ 19,179 $ 1,692
===========================================
SUPPLEMENTAL INFORMATION
Interest paid $ 1,833 $ 1,418 $ 9
===========================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BASIS OF PRESENTATION
ORGANIZATION
Professional Lease Management Income Fund I, L.L.C., a Delaware Limited
Liability Company (Fund) was formed on August 22, 1994, to engage in the
business of owning, leasing, or otherwise investing in predominately used
transportation and related equipment. PLM Financial Services, Inc. (FSI) is
the Manager of the Fund. FSI is a wholly-owned subsidiary of PLM
International, Inc. (PLM International).
On May 13, 1996, the Fund ceased its offering for Class A Units. As of
December 31, 1998, there were 4,999,581 Units outstanding.
The Fund will terminate on December 31, 2010, unless terminated earlier
upon sale of all equipment or by certain other events. Beginning in the
Fund's seventh year of operations, which commences on January 1, 2003, the
Manager will stop reinvesting excess cash, if any, which less reasonable
reserves, will be distributed to the members. Between the eighth and tenth
years of operations, the Manager intends to begin an orderly liquidation of
the Fund's assets.
The Manager (Class B Member) controls and manages the affairs of the Fund.
The Manager paid out of its own corporate funds (as a capital contribution
to the Fund) all organization and syndication expenses incurred in
connection with the offering; therefore, 100% of the net cash proceeds
received by the Fund from the sale of Class A Units were initially used to
purchase equipment and established any required cash reserves. For its
contribution, the Manager is generally entitled to a 1% interest in profits
and losses and 15% interest in the Fund's cash distributions subject to
certain special allocation provisions (see Net Income (Loss) and
Distributions Per Class A Unit, below). After the investors receive cash
distributions equal to their original capital contributions the Manager's
interest in the cash distributions of the Fund will increase to 25%.
The operating agreement includes a redemption provision. Upon the
conclusion of the 30-month period immediately following the termination of
the offering, beginning November 13, 1998, the Fund may, at the Manager's
sole discretion, redeem up to 2% of the outstanding units each year. The
purchase price paid by the Fund 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. The price may not bear any
relationship to the fair market value of a Class A Unit. As of December 31,
1998, the Fund agreed to repurchase approximately 28,000 units for an
aggregate price of approximately $0.4 million. The Manager anticipates that
these units will be repurchased in the second and third quarters of 1999.
The Manager may purchase additional units on behalf of the Fund in the
future.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
OPERATIONS
The equipment of the Fund is managed, under a continuing management
agreement, by PLM Investment Management, Inc. (IMI), a wholly-owned
subsidiary of the FSI. IMI receives a monthly management fee from the Fund
for managing the equipment (see Note 2). FSI, in conjunction with its
subsidiaries, sells equipment to investor programs and third parties,
manages pools of equipment under agreements with investor programs, and is
a general partner of other programs.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BASIS OF PRESENTATION (CONTINUED)
ACCOUNTING FOR LEASES
The Fund'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.
DEPRECIATION AND AMORTIZATION
Depreciation of transportation equipment held for operating leases is
computed on the double-declining balance method taking a full month's
depreciation in the month of acquisition, based upon estimated useful lives
of 15 years for railcars, and typically 12 years for most other types of
equipment. Certain aircraft are depreciated under the double-declining
balance method over the lease term. The depreciation method is changed to
straight-line when annual depreciation expense using the straight-line
method exceeds that calculated by the double-declining balance method. Debt
placement fees are amortized over the term of the related loan (see Note
7). Organization costs are amortized over a 60 month period. Major
expenditures that are expected to extend the useful lives or reduce future
operating expenses of equipment are capitalized and amortized over the
estimated remaining life of the equipment.
TRANSPORTATION EQUIPMENT
In accordance with the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", the Manager reviews the carrying
value of the Fund's equipment at least annually in relation to expected
future market conditions for the purpose of assessing recoverability of the
recorded amounts. If projected undiscounted future lease revenue plus
residual values are less than the carrying value of the equipment, a loss
on revaluation is recorded. Reductions of $1.0 million to the carrying
value of partially owned equipment were required during 1998. No reductions
were required to the carrying value of wholly and partially-owned equipment
during 1997 or 1996.
Equipment held for operating leases is stated at cost.
INVESTMENTS IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITIES
The Fund has interests in unconsolidated special-purpose entities (USPEs)
that own transportation equipment. Where the Fund owns greater than 50% of
the assets within the USPE, the assets and liabilities are consolidated.
Where the Fund owns less than 50% of the assets within the USPE, the
interests are accounted for using the equity method.
The Fund has interests in unconsolidated special-purpose entities (USPEs)
that own transportation equipment. These interests are accounted for using
the equity method.
The Fund's interests in USPEs are managed by IMI. The Fund's equity
interest in the net income (loss) of USPEs is reflected net of management
fees paid or payable to IMI.
REPAIRS AND MAINTENANCE
Repair and maintenance costs related to marine vessels, railcars, and
trailers are usually the obligation of the Fund. Maintenance costs and most
of the other equipment are the obligation of the lessee. If they are not
covered by the lessee, they are generally charged against operations as
incurred. To meet the maintenance requirements of certain aircraft
airframes and engines, reserve accounts are prefunded by the lessee.
Estimated costs associated with marine vessel drydockings are accrued and
charged to income ratably over the period prior to such drydocking. The
reserve accounts are included in the balance sheet as lessee deposits and
reserve for repairs.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BASIS OF PRESENTATION (CONTINUED)
NET INCOME (LOSS) AND DISTRIBUTIONS PER UNIt
The net profits and net loss of the Fund are generally allocated 1% to the
Class B Members and 99% to the Class A Members. The Class B Member or
Manager will be specially allocated (i) 100% of the Fund's organizational
and offering cost amortization expenses and (ii) income equal to the excess
of cash distribution over the Manager`s 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. During 1998, the Manager received a special
allocation of income of $1.6 million ($1.8 million in 1997 and $1.4 million
in 1996). Cash distributions of the Fund are generally allocated 85% to the
Class A members and 15% to the Manager and may include amounts in excess of
net income. After the investors receive cash distributions equal to their
original capital contributions the Manager's interest in the cash
distributions of the Fund will increase to 25%. The Class A members' net
income (loss) is allocated among the Class A members based on the number of
Class A units owned by each member and on the number of days of the year
each member is in the Fund.
Cash distributions are recorded when paid. Monthly unitholders receive a
distribution check 15 days after the close of the previous month's business
and quarterly unitholders receive a distribution check 45 days after the
close of the quarter.
Cash distributions to Class A Unitholders in excess of net income are
considered a return of capital. Cash distributions to Class A Unitholders
of $7.4 million, $10.0 million and $8.5 million in 1998, 1997 and 1996,
respectively, were deemed to be a return of capital.
Cash distributions relating to the fourth quarter of 1998, 1997, and 1996,
of $2.3 million for each year, were paid during the first quarter of 1999,
1998, and 1997, respectively.
NET INCOME (LOSS) PER WEIGHTED-AVERAGE CLASS A UNIT
Net income (loss) per weighted-average Class A unit was computed by
dividing net income (loss) attributable to Class A members by the
weighted-average number of Class A units deemed outstanding during the
period. The weighted-average number of Class A units deemed outstanding
during the years ended December 31, 1998 and 1997 was 4,999,581.
CASH AND CASH EQUIVALENTS
The Fund considers highly liquid investments that are readily convertible
to known amounts of cash with original maturities of three months or less
as cash equivalents. The carrying amount of cash equivalents approximates
fair market value due to the short-term nature of the investments.
COMPREHENSIVE INCOME
During 1998, the Partnership adopted Financial Accounting Standards Board's
Statement No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in
equity from nonowner sources. The Partnership's net income (loss) is equal
to comprehensive income for the years ended December 31, 1998, 1997, and
1996.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
2. MANAGER AND TRANSACTIONS WITH AFFILIATES
An officer of PLM Securities Corp., a wholly-owned subsidiary of the
Manager, contributed the $100 of the Fund's initial capital. Under the
equipment management agreement, IMI, subject to certain reductions,
receives a monthly management fee attributable to either owned equipment or
interests in equipment owned by the USPEs equal to the lesser of (i) the
fees that would be charged by an independent third party for similar
services for similar equipment or (ii) the sum of (A) 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 that 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 equipment for which IMI provides
both management and additional services. Fund management fees of $0.2
million were payable at December 31, 1998 and 1997, respectively. The
Fund's proportional share of the USPE's management fee payable were
$40,000, and $0.2 million as of December 31, 1998 and 1997, respectively.
The Fund's proportional share of USPE management fees was $0.2 million,
$0.3 million, and $0.2 million during 1998, 1997, and 1996, respectively.
The Fund reimbursed FSI $1.0 million, $0.9 million, and $0.3 million for
data processing expenses and other administrative services performed on
behalf of the Fund during 1998, 1997, and 1996. The Fund's proportional
share of the USPE's administrative and data processing expenses
reimbursable to FSI was $0.1 million during 1998, 1997, and 1996.
The Fund paid $2,000, $24,000, and $7,000 in 1998, 1997, and 1996,
respectively, to Transportation Equipment Indemnity Company, Ltd. (TEI),
which provides marine insurance coverage for Fund equipment and other
insurance brokerage services. TEI is an affiliate of the Manager. During
1998, the Fund received a $16,000 loss-of-hire insurance refund from TEI
due to lower claims from the insured Fund and other insured affiliated
programs. The Fund's proportional share of USPE's marine insurance coverage
paid to TEI was $10,000 and $1,000 during 1997 and 1996, respectively. A
substantial portion of this amount was paid to third-party reinsurance
underwriters or placed in risk pools managed by TEI on behalf of affiliated
programs and PLM International which provide threshold coverages on marine
vessel loss of hire and hull and machinery damage. All pooling arrangement
funds are either paid out to cover applicable losses or refunded pro rata
by TEI. The Fund's proportional share of a refund of $5,000 was received
during 1998, from lower loss-of-hire insurance claims from the insured
USPEs and other insured affiliated programs. PLMI plans to liquidate TEI in
1999. During 1998, TEI did not provide the same level of insurance coverage
as had been provided during previous years. These services were provided by
an unaffiliated third party.
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 Fund, or (ii) 50% of the
"Competitive Equipment Sale Commission," as defined in the agreement, if
certain conditions are met. TEC is a wholly-owned subsidiary of the
Manager. In certain circumstances, the Manager will be entitled to a
monthly re-lease fee for re-leasing services following the 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 fee would cause the combination of
the equipment management fee paid to IMI and the re-lease fees with respect
to such transactions to exceed 7% of gross lease revenues.
As of December 31, 1998, approximately 33% of the Fund's trailer equipment
was in rental facilities operated by PLM Rental, Inc., an affiliate of the
Manager, doing business as PLM Trailer Leasing. Revenues collected under
short-term rental agreements with the rental yards' customers are credited
to the owners of the related equipment as received. Direct expenses
associated with the equipment are charged directly to the Fund. An
allocation of indirect expenses of the rental yard operations is charged to
the Fund monthly.
The Fund had an interest in certain equipment in conjunction with
affiliated programs during 1998, 1997, and 1996 (see Note 4).
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
2. MANAGER AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
The balance due to affiliates as of December 31, 1998, included $0.2
million due to FSI and its affiliates for management fees. The balance due
to affiliates as of December 31, 1997, included $0.2 million due to FSI and
its affiliates for management fees and $1.8 million due to affiliated
USPEs.
3. Equipment
The components of owned equipment as of December 31, are as follows (in
thousands of dollars):
Equipment Held for Operating Leases 1998 1997
-----------------------------------
---------------------------------
Marine vessels $ 46,957 $ 20,756
Aircraft 20,605 24,605
Mobile offshore drilling unit 20,356 20,356
Rail equipment 19,920 18,958
Trailers 14,788 14,813
-------------------=-------------
122,626 99,488
Less accumulated depreciation (44,350) (30,318)
---------------------------------
Net equipment $ 78,276 $ 69,170
=================================
Revenues are earned by placing the equipment under operating leases. A
portion of the Fund's marine vessels is leased to operators of
utilization-type leasing pools that include equipment owned by unaffiliated
parties. In such instances, revenues received by the Fund consist of a
specified percentage of revenues generated by leasing the pooled equipment
to sublessees after deducting certain direct operating expenses of the
pooled equipment. Rents for railcars are based on mileage traveled or a
fixed rate; rents for all other equipment are based on fixed rates.
As of December 31, 1998, all owned equipment in the Fund portfolio was
either on lease or operating in PLM-affiliate short-term trailer rental
yards except for 3 railcars with a carrying value of $37,000. As of
December 31, 1997, all owned equipment in the Fund portfolio was either on
lease or operating in PLM-affiliated short-term trailer rental yards except
for one railcar with a carrying value of $22,000 million.
During the year ended December 31, 1998, the Fund purchased 39 rail
equipment, two marine vessels (a deposit of $0.9 million was paid in
December 1997 for the purchase of one of these marine vessels) and a hush
kit for an aircraft for a total of $28.4 million. During the year ended
December 31, 1997, the Fund purchased 25 trailers, a mobile offshore
drilling unit, and a marine vessel for a total of $19.3 million.
During the year ended December 31, 1998, the Fund sold an aircraft,
trailers and rail equipment with a net book value of $2.6 million, for
proceeds of $5.4 million. During the year ended December 31, 1997, the Fund
sold trailers and a mobile offshore drilling unit with an aggregate net
book value of $9.2 million, for proceeds of $11.0 million, net sales
commission of $0.1 million.
Periodically, PLM International purchases groups of assets whose ownership
may be allocated among affiliated programs and PLM International.
Generally, in these cases, only assets that are on lease will be purchased
by the affiliated programs. PLM International will generally assume the
ownership and remarketing risks associated with off-lease equipment.
Allocation of the purchase price will be determined by a combination of
third-party industry sources and recent transactions or published fair
market value references. During 1996, PLM International realized $0.7
million of gains on the sale of 69 off-lease railcars purchased by PLM
International as part of a group of assets in 1994 that had been allocated
to the Fund, PLM Equipment Growth Funds IV and VI, PLM Equipment Growth &
Income Fund VII, and PLM International.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
3. EQUIPMENT (CONTINUED)
All owned equipment on lease is being accounted for as operating leases.
Future minimum rent under noncancelable operating leases as of December 31,
1998 for the owned equipment during each of the next five years are
approximately $11.2 million, 1999; $6.5 million, 2000; $4.0 million, 2001;
$0.7 million, 2002; and $0.3 million, 2003 and thereafter.
4. INVESTMENTS IN UNCONSOLIDATED SPECIAL PURPOSE ENTITIES
The net investments in USPEs include the following jointly-owned equipment
as of December 31, (and related assets and liabilities) (in thousands of
dollars):
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
50% interest in a trust owning an MD-82 commercial aircraft $ 6,441 $ --
33% interest in two trusts owning a total of three 737-200A
stage II commercial aircraft, two stage II aircraft
engines,
and a portfolio of aircraft rotables 3,929 7,788
50% interest in a trust owning an MD9-82 stage III commercial
aircraft 3,342 682
50% interest in a trust owning a cargo marine vessel 1,265 2,638
25% interest in a trust that owned four 737-200A stage II
commercial aircraft 137 3,163
25% interest in a trust that owned four 737-200A stage II
commercial aircraft 110 2,215
=============================================
Net investments $ 15,224 $ 16,486
=============================================
</TABLE>
The Fund had interests in two USPEs that own multiple aircraft (the
Trusts). These Trusts contain provisions under certain circumstances for
allocating specific aircraft to the beneficial owners. During the year
ended December 31, 1998, the Fund and affiliated programs each sold the
commercial aircraft designated to it in one of these Trusts. The Fund sold
the commercial aircraft assigned to it with a net book value of $2.3
million, for proceeds of $5.9 million.
In the second Trust, the Fund and affiliated programs each sold their
designated aircraft during the year ended December 31, 1998. The Fund sold
the commercial aircraft assigned to it with a net book value of $1.8
million, for proceeds of $4.5 million.
During 1998, the Fund purchased a 50% interest in a MD-82 stage III
commercial aircraft for $6.8 million (a deposit of $0.7 million was paid in
December of 1997) and a 50% interest in a MD-82 stage III commercial
aircraft for $7.8 million.
During 1997, the Fund purchased an additional 26% interest in a drilling
marine vessel for $5.1 million increasing its ownership interest in this
entity to 61%. This investment was transferred to owned equipment during
1997.
During 1998, the Fund reduced its interest in an entity owning a container
feeder vessel by $1.0 million to reflect its share of the net realizable
value.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
4. INVESTMENTS IN UNCONSOLIDATED SPECIAL PURPOSE ENTITIES (CONTINUED)
The following summarizes the financial information for the special-purpose
entities and the Fund's interests therein as of and for the years ended
December 31, 1998, 1997 and 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
Net Net Net
Total Interest of Total Interest of Total Interest
USPEs Fund USPEs Fund USPEs of Fund
------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net investments $ 35,630 $ 15,224 $ 59,369 $ 16,486 $ 80,846 $ 25,349
Lease revenues 13,601 5,200 24,283 7,125 24,676 6,566
Net income (loss) 14,377 2,390 10,831 1,453 (3,071) (256)
</TABLE>
All partially owned equipment on lease is being accounted for as operating
leases. Future minimum rent under noncancelable operating leases as of
December 31, 1998 for the partially owned equipment during each of the next
five years are approximately $4.7 million, 1999; $2.1 million, 2000; $2.1
million, 2001; $0.9 million, 2002; and $0.9 million, 2003 and thereafter.
5. OPERATING SEGMENTS
The Fund operates in five primary operating segments: aircraft leasing,
mobile offshore drilling unit (rig) leasing, marine vessel leasing, trailer
leasing, and railcar leasing. Each equipment leasing segment engages in
short-term to mid-term operating leases to a variety of customers.
The Manager evaluates the performance of each segment based on profit or
loss from operations before allocation of general and administrative
expenses, interest expenses and certain other expenses. The segments are
managed separately due to different business strategies for each operation.
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
5. OPERATING SEGMENTS (CONTINUED)
The following tables present a summary of the operating segments (in
thousands of dollars):
<TABLE>
<CAPTION>
Marine
Aircraft Rig Vessel Trailer Railcar All
For the Year Ended December 31, 1998 Leasing Leasing Leasing Leasing Leasing Other<F1>1 Total
------------------------------------ ------- ------- ------- ------- ------- ------ -----
REVENUES
<S> <C> <C> <C> <C> <C> <C> <C>
Lease revenue $ 4,567 $ 4,046 $ 8,684 $ 3,894 $ 3,958 $ -- $ 25,149
Interest income and other 13 -- 13 -- 19 348 393
Net gain (loss) on disposition
of equipment 2,710 -- -- 9 40 -- 2,759
-------------------------------------------------------------------------
Total revenues 7,290 4,046 8,697 3,903 4,017 348 28,301
EXPENSES
Operations support 42 110 2,890 631 634 83 4,390
Depreciation and amortization 4,624 2,798 5,490 1,738 2,018 106 16,774
Interest expense -- -- -- -- -- 1,833 1,833
Management fee 213 202 434 256 263 -- 1,368
General and administrative expenses 69 47 121 816 27 579 1,659
Minority interest -- 351 -- -- -- -- 351
-------------------------------------------------------------------------
Total costs and expenses 4,948 3,508 8,935 3,441 2,942 2,601 26,375
-------------------------------------------------------------------------
Equity in net income (loss) of USPEs 3,834 -- (1,444) -- -- -- 2,390
------------------------------------------------------------------------
Net income (loss) $ 6,176 $ 538 $ (1,682) $ 462 $ 1,075 $ (2,253) $ 4,316
=========================================================================
As of December 31, 1998
Total assets $ 20,387 $ 14,392 $ 37,916 $ 8,682 $ 13,109 $ 5,149 $ 99,635
=========================================================================
Marine
Aircraft Rig Vessel Trailer Railcar All
For the Year Ended December 31, 1997 Leasing Leasing Leasing Leasing Leasing Other<F1>1 Total
------------------------------------ ------- ------- ------- ------- ------- ------ -----
REVENUES
Lease revenue $ 5,037 $ 5,059 $ 3,690 $ 3,670 $ 3,377 $ -- $ 20,833
Interest income and other 14 -- -- -- 1 390 405
Net gain (loss) on disposition
of equipment -- 1,675 -- 7 -- -- 1,682
-------------------------------------------------------------------------
Total revenues 5,051 6,734 3,690 3,677 3,378 390 22,920
EXPENSES
Operations support 43 70 1,606 420 666 47 2,852
Depreciation and amortization 8,007 4,670 2,363 2,059 2,143 105 19,347
Interest expense -- -- -- -- -- 1,418 1,418
Management fee 203 253 185 248 216 20 1,125
General and administrative expenses 21 85 72 861 129 486 1,654
Minority interest -- 29 -- -- -- -- 29
-------------------------------------------------------------------------
Total costs and expenses 8,274 5,107 4,226 3,588 3,154 2,076 26,425
-------------------------------------------------------------------------
Equity in net income (loss) of USPEs 1,795 -- (342) -- -- -- 1,453
------------------------------------------------------------------------
Net income (loss) $ (1,428) $ 1,627 $ (878) $ 89 $ 224 $ (1,686 ) $ (2,052)
=========================================================================
As of December 31, 1997
Total assets $ 26,291 $ 16,808 $ 19,657 $ 10,432 $ 14,150 $ 21,186 $ 108,524
=========================================================================
<FN>
<F1> (1) Includes costs not identifiable to a particular segment such as
amitorization expense and interest expense and certain interest income and
other, operations support expenses, and general and administrative expenses.
</FN>
</TABLE>
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
5. OPERATING SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
Marine
Aircraft Rig Vessel Trailer Railcar All
For the Year Ended December 31, 1996 Leasing Leasing Leasing Leasing Leasing Other<F1>1 Total
------------------------------------ ------- ------- ------- ------- ------- ------ -----
REVENUES
<S> <C> <C> <C> <C> <C> <C> <C>
Lease revenue $ 2,015 $ -- $ 2,669 $ 2,117 $ 3,138 $ -- $ 9,939
Interest income and other -- -- -- -- -- 1,356 1,356
-------------------------------------------------------------------------
Total revenues 2,015 -- 2,669 2,117 3,138 1,356 11,295
Expenses
Operations support 21 -- 1,434 237 767 17 2,476
Depreciation and amortization 4,044 -- 1,844 1,676 1,756 88 9,408
Interest expense -- -- -- -- -- 9 9
Management fee 51 -- 134 144 221 35 585
General and administrative expenses 5 -- 15 294 29 610 953
-------------------------------------------------------------------------
Total costs and expenses 4,121 -- 3,427 2,351 2,773 759 13,431
-------------------------------------------------------------------------
Equity in net income (loss) of USPEs 260 (94) (422) -- -- -- (256)
-------------------------------------------------------------------------
Net income (loss) $ (1,846) $ (94) $ (1,180) $ (234) $ 365 $ 597 $ (2,392)
=========================================================================
As of December 31, 1996
Total assets $ 35,882 $ 6,906 $ 12,889 $ 12,261 $ 16,212 $ 3,605 $ 87,755
=========================================================================
<FN>
<F1> (1) Includes costs not identifiable to a particular segment such as
amitorization expense and interest expense and certain interest income and
other, operations support expenses, and general and administrative expenses.
</FN>
</TABLE>
6. GEOGRAPHIC INFORMATION
The Fund owns certain equipment, which is leased and operated
internationally. A limited number of the Fund's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Fund leases its aircraft, railcars and trailers to lessees domiciled in
four geographic regions: United States, Canada, Europe, and South America.
The marine vessels and mobile offshore drilling unit are leased to multiple
lessees in different regions who operate the marine vessels and mobile
offshore drilling unit worldwide.
The following table sets forth lease revenue information by region for the
owned equipment and investments in USPEs for the years ended December 31,
are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Owned Equipment Investments in USPEs
-------------------------------------------------------------------------------------
Region 1998 1997 1996 1998 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 6,172 $ 6,296 $ 4,573 $ 1,783 $ -- $ --
South America 4,567 4,057 966 -- -- --
Canada 1,680 1,731 1,731 945 2,405 2,110
Europe -- -- -- 1,560 3,530 3,530
Rest of the world 12,730 8,749 2,669 912 1,190 926
-------------------------------------------------------------------------------------
Lease Revenues $ 25,149 20,833 $ 9,939 $ 5,200 $ 7,125 $ 6,566
=====================================================================================
</TABLE>
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
6. GEOGRAPHIC INFORMATION (CONTINUED)
The following table sets forth income (loss) information by region for
owned equipment and investments in USPEs for the years ended December 31,
are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Owned Equipment Investments in USPEs
-------------------------------------------------------------------------------------
Region 1998 1997 1996 1998 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 1,070 $ 214 $ (201) $ (3,037) $ -- $ --
South America 2,342 (2,446) (1,918) -- -- --
Canada 466 (28) 128 6,718 142 (896)
Europe -- -- -- 153 1,653 1,156
Rest of the world 300 1,204 (774) (1,444) (342) (516)
-------------------------------------------------------------------------------------
Regional
Income (loss) 4,178 (1,056) (2,765) 2,390 1,453 (256)
Administrative
and other (2,252) (2,449) 629 -- -- --
-------------------------------------------------------------------------------------
Net income (loss) $ 1,926 $ (3,505) $(2,136) $ 2,390 $ 1,453 $ (256)
=====================================================================================
</TABLE>
The net book value of owned assets and the net investment in the
unconsolidated special-purpose entities at December 31, are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
Owned Equipment Investments in USPEs
------------------------------------------ ------------------------------------------
Region 1998 1997 1996 1998 1997 1996
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 15,751 $ 24,901 $ 26,401 $ 9,782 $ -- $ --
South America 6,429 10,022 17,858 -- 4,006 --
Canada 6,040 2,102 4,664 248 4,614 6,665
Europe -- -- -- 3,929 5,180 8,767
Rest of the world 50,056 32,145 9,221 1,265 2,686 9,917
========================================================================================
Net book value $ 78,276 $ 69,170 $ 58,144 $ 15,224 $ 16,486 $ 25,349
========================================================================================
</TABLE>
7. NOTES PAYABLE
In December 1996, the Fund entered into an agreement to issue a $25.0
million long-term note to one institutional investor. The note bears
interest at a fixed rate of 7.33% per annum and has a final maturity in
2006. Interest on the note is payable semi-annually. The note will be
repaid in five principal payments of $3.0 million on December 31, 2000,
2001, 2002, 2003, and 2004 and two principal payments of $5.0 million on
December 31, 2005, and 2006. The agreement requires the Fund to maintain
certain financial covenants related to fixed-charge coverage The loan was
funded in March 1997. The Manager estimates, based on recent transactions,
that the fair value of the $25.0 million fixed-rate note is $25.7 million.
The Manager has entered into a joint $24.5 million credit facility (the
Committed Bridge Facility) on behalf of the Fund, PLM Equipment Growth Fund
VI (EGF VI), and PLM Equipment Growth & Income Fund VII (EGF VII), both
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 the
Fund, plus (ii) 50% of unrestricted cash held by the borrower. The Fund,
EGF VI, EGF VII, and TECAI collectively may borrow up to $24.5 million
under the Committed Bridge Facility. Outstanding borrowings by one borrower
reduce the amount available to each of the other borrowers under the
Committed Bridge Facility. The Committed Bridge Facility also provides for
a $5.0 million Letter of Credit Facility for the eligible borrowers.
Individual borrowings may be outstanding for no more than 179 days, with
all advances due no later than December 14, 1999. Interest accrues at
either the prime rate or adjusted LIBOR plus 1.625%, at the borrower's
option, and is set at the time of an advance of funds. Borrowings by the
Fund are guaranteed by the
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
7. NOTES PAYABLE (CONTINUED)
Manager. As of December 31, 1998, no eligible borrower had any outstanding
borrowings under this Facility. The Manager believes it will be able to
renew the Committed Bridge Facility upon its expiration with similar terms
as those in the current Committed Bridge Facility.
8. CONCENTRATIONS OF CREDIT RISK
As of December 31, 1998, the Fund's customers that accounted for 10% or
more of the total consolidated revenues for the owned equipment and
partially owned equipment during 1998, 1997, and 1996 were TAP Air Portugal
(12% in 1997, and 20% in 1996) and Canadian Airlines Int'l. (11% in 1997,
and 17% in 1996). No single lessee accounted for more than 10% of the
consolidated revenues for the year ended December 31, 1998. In 1998,
however, Triton Aviation Services, Ltd. purchased three commercial aircraft
from the Fund and the gain from the sale accounted for 23% of total
consolidated revenues from wholly and partially owned equipment. In 1997,
Hercules Rig Corporation, also a lessee, purchased the mobile offshore
drilling unit that they were leasing from the Fund. The lease revenues and
the gain from the sale accounted for 11% of total consolidated revenues
during 1997.
As of December 31, 1998 and 1997, the Manager believes the Fund had no
significant concentrations of credit risk that could have a material
adverse effect on the Fund.
9. INCOME TAXES
The Fund is not subject to income taxes, as any income or loss is included
in the tax returns of the individual partners. Accordingly, no provision
for income taxes has been made in the financial statements of the Fund.
As of December 31, 1998, there were temporary differences of approximately
$27.5 million between the financial statement carrying values of certain
assets and liabilities and the federal income tax basis of such assets and
liabilities, primarily due to differences in depreciation methods,
equipment reserves, provisions for bad debts, lessee's prepaid deposits,
and the tax treatment of syndication costs.
10. RESTATEMENT
The financial statements have been restated to reflect the consolidation of
the Fund's majority interests in greater than 50% owned USPE's previously
reported under the equity method of accounting for the years ending
December 31, 1998 and 1997.
As a result of the consolidation, total assets, total liabilities, and
minority interests changed as of December 31, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1998 1997
As reported Amended As reported Amended
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Total assets $ 93,466 $ 99,635 $ 101,482 $ 108,524
Total liabilities 28,441 28,905 29,008 29,337
Minority interests -- 5,705 -- 6,713
</TABLE>
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. RESTATEMENT (CONTINUED)
Additionally, as a result of the consolidation, total revenues, total
expenses, and equity in net income of USPEs changed for the years ended
December 31, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1998 1997
As reported Amended As reported Amended
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Total revenues $ 24,255 $ 28,301 $ 19,445 $ 22,920
Total expenses 22,867 26,375 22,767 26,425
Equity in net
income of USPEs 2,928 2,390 1,270 1,453
Net income $ 4,316 $ 4,316 $ (2,050) $ (2,052)
</TABLE>
The consolidation of the Fund's majority interests in USPE's did not change
members' capital or net income (loss) as of and for the years ending
December 31, 1998 and 1997.
11. SUBSEQUENT EVENT
During February and March 1999, the Fund sold part of its interest in two
trusts that owned a total of three stage II commercial aircraft with a net
book value of $3.4 million for proceeds of $6.0 million. The Fund expects
that its remaining interest in the two trusts that still own two stage II
aircraft engines and a portfolio of aircraft rotables will be sold before
the end of March 1999.
(This space intentionally left blank.)
<PAGE>
PROFESSIONAL LEASE MANAGEMENT INCOME FUND I, L.L.C.
INDEX OF EXHIBITS
Exhibit Page
4. Operating Agreement of Fund. *
10.1 Management Agreement between Fund and *
PLM Investment Management, Inc.
10.2 $25.0 Million Note Agreement, dated as of December 30, 1996. *
10.3 Fourth Amended and restated Warehousing Credit Agreement, dated
as of December 15, 1998, with First Union National Bank *
24. Powers of Attorney. *
* Incorporated by reference. See page 28 of this report.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,720
<SECURITIES> 0
<RECEIVABLES> 1,876
<ALLOWANCES> (43)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 122,626
<DEPRECIATION> (44,350)
<TOTAL-ASSETS> 99,635
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 70,730
<TOTAL-LIABILITY-AND-EQUITY> 99,635
<SALES> 0
<TOTAL-REVENUES> 28,301
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,833
<INCOME-PRETAX> 4,316
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,316
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,316
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.52
</TABLE>
