UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2004
[ ] 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 0-21806
_______________________
PLM EQUIPMENT GROWTH FUND VI
(Exact name of registrant as specified in its charter)
California | 94-3135515 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
200 Nyala Farms Road | ||
Westport, CT | 06880 | |
(Address of principal | (Zip code) | |
executive offices) |
Former Address: 235 3rd Street South, Suite 200, St. Petersburg, FL. 33701
Registrant's telephone number, including area code: (203) 341-0555
_______________________
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. YesXNo ____
Transitional Small Business Disclosure Format: YesNoX
Aggregate market value of voting stock:N/A
PLM EQUIPMENT GROWTH FUND VI |
(A Limited Partnership) |
CONDENSED BALANCE SHEETS |
(in thousands of dollars, except unit amounts) |
(unaudited)
June 30, | December 31, | ||||||||
2004 | 2003 | ||||||||
Assets | |||||||||
Equipment held for operating leases, at cost | $68,289 | $65,675 | |||||||
Less accumulated depreciation | (47,075) | (48,220) | |||||||
Net equipment | 21,214 | 17,455 | |||||||
Cash and cash equivalents | 8,106 | 13,294 | |||||||
Restricted cash | -- | 410 | |||||||
Accounts receivable, less allowance for doubtful accounts | |||||||||
of $428 in 2004 and $444 in 2003 | 1,249 | 1,060 | |||||||
Equity investments in affiliated entities | 9,093 | 9,241 | |||||||
Deferred charges, net of accumulated amortization of | |||||||||
$290 in 2004 and $508 in 2003 | 291 | 302 | |||||||
Prepaid expenses and other assets | 276 | 241 | |||||||
Total assets | $40,229 | $42,003 | |||||||
Liabilities and partners’ capital | |||||||
Liabilities: | |||||||
Accounts payable and accrued expenses | $ | 525 | $ | 495 | |||
Due to affiliates | 1,250 | 1,552 | |||||
Notes payable | 12,000 | 14,000 | |||||
Total liabilities | 13,775 | 16,047 | |||||
Commitments and contingencies | |||||||
Partners’ capital: | |||||||
Limited partners (7,730,965 limited partnership units) | 26,454 | 25,956 | |||||
General Partner | -- | -- | |||||
Total partners’ capital | 26,454 | 25,956 | |||||
Total liabilities and partners’ capital | $ | 40,229 | $ | 42,003 | |||
See accompanying notes to unaudited condensed financial statements.
PLM EQUIPMENT GROWTH FUND VI |
(A Limited Partnership) |
CONDENSED STATEMENTS OF OPERATIONS |
(in thousands of dollars, except weighted-average limited partnership unit amounts) |
(unaudited)
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||
Revenues | |||||||||||
Lease revenue | $2,153 | $2,128 | $4,294 | $4,122 | |||||||
Interest and other income | 11 | 17 | 31 | 41 | |||||||
Gain on disposition of equipment | 429 | 35 | 503 | 71 | |||||||
Loss on disposition of equipment | (1) | (5) | -- | (22) | |||||||
Total revenues | 2,592 | 2,175 | 4,828 | 4,212 | |||||||
Expenses | |||||||||||
Depreciation and amortization | 1,021 | 1,364 | 2,018 | 2,389 | |||||||
Repairs and maintenance | 433 | 219 | 808 | 517 | |||||||
Insurance expense | 71 | 61 | 134 | 125 | |||||||
Management fees to affiliate | 89 | 103 | 186 | 184 | |||||||
Interest expense | 149 | 160 | 322 | 314 | |||||||
General and administrative expenses | |||||||||||
to affiliates | 118 | 25 | 270 | 70 | |||||||
Other general and administrative expenses | 309 | 363 | 629 | 641 | |||||||
Impairment loss on equipment | -- | -- | -- | 77 | |||||||
(Recovery of) provision for bad debts | -- | (3) | (9) | 33 | |||||||
Total expenses | 2,190 | 2,292 | 4,358 | 4,350 | |||||||
Equity in net (loss) Income of equity | |||||||||||
investments | (18) | (753) | 28 | (469) | |||||||
Net income (loss) | $384 | $(870) | $498 | $(607) | |||||||
Partners' share of net income (loss) | |||||||||||
Limited partners | $384 | $(870) | $498 | $(607) | |||||||
General Partner | -- | -- | -- | -- | |||||||
Total | $384 | $(870) | $498 | $(607) | |||||||
Limited partners' net income (loss) per | |||||||||||
weighted-average limited partnership unit | $0.05 | $(0.11) | $0.06 | $(0.08) | |||||||
See accompanying notes to unaudited condensed financial statements.
PLM EQUIPMENT GROWTH FUND VI |
(A Limited Partnership) |
CONDENSED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL |
For the Period from December 31, 2003 to June 30, 2004 |
(in thousands of dollars) |
(unaudited)
Limited Partners | General Partner | Total | |||||
Partners’ capital as of December 31, 2003 | $25,956 | $ -- | $25,956 | ||||
Net income | 498 | -- | 498 | ||||
Partners’ capital as of June 30, 2004 | $26,454 | $ -- | $26,454 | ||||
See accompanying notes to unaudited condensed financial statements.
PLM EQUIPMENT GROWTH FUND VI | |||||||||||||||||||||||||
(A Limited Partnership) | |||||||||||||||||||||||||
CONDENSED STATEMENTS OF CASH FLOWS | |||||||||||||||||||||||||
(in thousands of dollars) | |||||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||
For the Six Months Ended June 30, | |||||||||||||||||||||||||
2004 | 2003 | ||||||||||||||||||||||||
Operating activities | |||||||||||||||||||||||||
Net income (loss) | $498 | $(607) | |||||||||||||||||||||||
Adjustments to reconcile net income (loss) | |||||||||||||||||||||||||
to net cash provided by (used in) operating activities: | |||||||||||||||||||||||||
Depreciation and amortization | 2,018 | 2,389 | |||||||||||||||||||||||
Amortization of debt issuance costs | 55 | 63 | |||||||||||||||||||||||
(Recovery of) provision for bad debts | (9) | 33 | |||||||||||||||||||||||
Impairment loss on equipment | -- | 77 | |||||||||||||||||||||||
Net gain on disposition of equipment | (503) | (49) | |||||||||||||||||||||||
Equity in net (income) loss from equity investments | (28) | 469 | |||||||||||||||||||||||
Distribution from equity investments | 176 | 1,163 | |||||||||||||||||||||||
Changes in operating assets and liabilities: | |||||||||||||||||||||||||
Accounts receivable | (180) | (140) | |||||||||||||||||||||||
Prepaid expenses and other assets | (35) | 44 | |||||||||||||||||||||||
Accounts payable and accrued expenses | 30 | (253) | |||||||||||||||||||||||
Due to affiliates | (302) | 220 | |||||||||||||||||||||||
Lessee deposits | -- | 1 | |||||||||||||||||||||||
Net cash provided by operating activities | 1,720 | 3,410 | |||||||||||||||||||||||
Investing activities | |||||||||||||||||||||||||
Payments for purchase of equipment and capitalized repairs | (5,969) | (4,100) | |||||||||||||||||||||||
Payments of acquisition fees to affiliate | (269) | (184) | |||||||||||||||||||||||
Payments of lease negotiation fees to affiliate | (60) | (41) | |||||||||||||||||||||||
Proceeds from disposition of equipment | 980 | 171 | |||||||||||||||||||||||
Net cash used in investing activities | (5,318) | (4,154) | |||||||||||||||||||||||
Financing activities | |||||||||||||||||||||||||
Payments of notes payable | (2,000) | (2,250) | |||||||||||||||||||||||
Decrease in restricted cash | 410 | -- | |||||||||||||||||||||||
Net cash used in financing activities | (1,590) | (2,250) | |||||||||||||||||||||||
Net decrease in cash and cash equivalents | (5,188) | (2,994) | |||||||||||||||||||||||
Cash and cash equivalents at beginning of period | 13,294 | 8,286 | |||||||||||||||||||||||
Cash and cash equivalents at end of period | $8,106 | $5,292 | |||||||||||||||||||||||
Supplemental information | |||||||||||||||||||||||||
Interest paid | $275 | $403 | |||||||||||||||||||||||
See accompanying notes to unaudited condensed financial statements.
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The unaudited financial statements presented herein are prepared in conformity with generally accepted accounting principles in the United States of America and the instructions for preparing Form 10-QSB under Rule 310 of Regulation S-B of the Securities and Exchange Commission. Rule 310 provides that disclosures that would substantially duplicate those contained in the most recent annual report to the limited partners may be omitted from interim financial statements. The accompanying unaudited condensed financial statements have been prepared on that basis and, therefore, should be read in conjunction with the financial statements and notes presented in the 2003 Annual Report (Form 10-KSB) of PLM Equipment Growth Fund VI (the Partnership) on file with the United States Securities and Exchange Commission. Except as disclosed herein, there have been no material changes to the information presented in the notes to the 2003 Annual Report in Form 10-KSB.
In the opinion of the management of PLM Financial Services, Inc. (FSI or the General Partner) all adjustments necessary, consisting primarily of normal recurring accruals, to present fairly the Partnership’s unaudited condensed balance sheets at June 30, 2004, condensed statements of operations for the three and six months ended June 30, 2004 and 2003, condensed statements of changes in partners’ capital for the period from December 31, 2003 to June 30, 2004, and the condensed statements of cash flows for the six months ended June 30, 2004 and 2003 have been made and are reflected.
2. Schedule of Partnership Phases
The Partnership is currently in its investment phase during which the Partnership uses cash generated from operations and proceeds from asset dispositions to purchase additional equipment. The General Partner believes these acquisitions may cause the Partnership to generate additional earnings and cash flow for the Partnership.
The Partnership may commit its cash flow, surplus cash and equipment disposition proceeds to purchase additional equipment, consistent with the objectives of the Partnership, until December 31, 2004. The Partnership will terminate on December 31, 2011, unless terminated earlier upon sale of all equipment and by certain other events.
3. Reclassification
Certain amounts previously reported have been reclassified to conform to the 2004 presentation. This reclassification did not have any effect on total assets, total liabilities, partners’ capital, or net income (loss).
4. Transactions with General Partner and Affiliates
The balance due to affiliates as of June 30, 2004 and December 31, 2003, included $0.1 million due to FSI or its affiliates for management fees and $1.1 million and $1.4 million, respectively, due to equity investments in affiliated entities.
The Partnership’s proportional share of the affiliated expenses incurred by affiliated equity investments during 2004 and 2003 is listed in the following table (in thousands of dollars):
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||||
Management fees | $ | 37 | $ | 61 | $ | 75 | $ | 121 | |||||||||
Data processing and administrative | |||||||||||||||||
expenses | 4 | 3 | 13 | 8 |
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
4. Transactions with General Partner and Affiliates (continued)
These affiliate expenses reduced the Partnership's proportional share of the equity interest in the income of equity investments.
During the six months ended June 30, 2004, the Partnership purchased $6.0 million in railcars from FSI or its affiliates and paid $0.3 million for acquisition fees and $0.1 million for lease negotiation fees. The Partnership's cost for these railcars was the lower of FSI's or its affiliates cost or the fair market value at the time of purchase. During the six months ended June 30, 2003, the Partnership purchased railcars from an unaffiliated third party and paid FSI or its affiliates $0.2 million for acquisition fees and $41,000 for lease negotiation fees
5. Equipment
Owned equipment held for operating leases is stated at cost. The components of owned equipment were as follows (in thousands of dollars):
June 30, | December 31, | |||
2004 | 2003 | |||
Railcars | $24,523 | $21,095 | ||
Marine containers | 22,893 | 23,381 | ||
Aircraft and rotables | 15,708 | 15,987 | ||
Trailers | 5,165 | 5,212 | ||
68,289 | 65,675 | |||
Less accumulated depreciation | (47,075) | (48,220) | ||
Net equipment | $21,214 | $17,455 | ||
Equipment held for operating leases is stated at cost less depreciation and any reductions to the carrying value.
As of June 30, 2004, all owned equipment in the Partnership’s portfolio was on lease except for aircraft rotables and 120 railcars with an aggregate net book value of $0.9 million. As of December 31, 2003, all owned equipment in the Partnership's portfolio was on lease except for a portfolio of aircraft rotables and 218 railcars with an aggregate net book value of $1.3 million.
During the six months ended June 30, 2004 and 2003, the Partnership purchased railcars for $6.2 million and $4.3 million including acquisition fees of $0.3 million and $0.2 million, respectively.
During the six months ended June 30, 2004, the Partnership disposed of aircraft rotables, marine containers, railcars and trailers, with an aggregate net book value of $0.5 million for proceeds of $1.0 million. During the six months ended June 30, 2003, the Partnership disposed of marine containers and railcars, with an aggregate net book value of $0.1 million for proceeds of $0.2 million.
During the six months ended June 30, 2003, the Partnership recorded an impairment of $0.1 million to owned aircraft rotables. The Partnership marketed the aircraft rotables for re-lease or sale and this indicated to the General Partner that an impairment may exist. The General Partner determined the fair value of the aircraft rotables based on the valuation given by its independent third party aircraft equipment manager that considered, among other factors, expected income to be earned from the asset, condition of the aircraft rotables, estimated sales proceeds and holding costs excluding interest. As a result of this, the Partnership recorded an impairment of $0.1 million to owned aircraft rotables.
No reductions were required to the carrying value of the owned equipment during the six months ended June 30, 2004.
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
6. Equity Investments in Affiliated Entities
The Partnership owns equipment and other assets jointly with affiliated programs.
Ownership interest is based on the Partnership’s contribution towards the cost of the assets in the equity investments. The Partnership’s proportional share of equity and income (loss) in each entity is not necessarily the same as its ownership interest. The primary reason for this is that certain fees such as management fees, acquisition fees, and lease and re-lease negotiation fees vary among the owners of the equity investments. The Partnership’s investment in equity investments includes acquisition and lease negotiation fees paid by the Partnership to the General Partner or its affiliates. The Partnership’s equity interest in the net income (loss) of equity investments is reflected net of management fees paid or payable and the amortization of acquisition and lease negotiation fees.
The tables below set forth 100% of the revenues, direct and indirect expenses, impairment loss on equipment, and net income (loss) of the entities in which the Partnership has an interest, and the Partnership‘s proportional share of income (loss) in each entity for the three and six months ended June 30, 2004 and 2003 (in thousands of dollars):
Aero | Boeing | PLM | ||||||||||||||
For the three months ended | Lion | California | 737-300 | Worldwide | ||||||||||||
June 30, 2004 | Partnership1 | Trust2 | Trust3 | Leasing4 | Total | |||||||||||
Revenues | $ | 1,351 | $ | 38 | $ | 390 | ||||||||||
Less: Direct expenses | 1,109 | 6 | 5 | |||||||||||||
Indirect expenses | 354 | 25 | 407 | |||||||||||||
Net (loss) income | $ | (112 | ) | $ | 7 | $ | (22 | ) | ||||||||
Partnership’s share of net (loss) income | $ | (58 | ) | $ | 3 | $ | (11 | ) | $ | 48 | $ | (18 | ) | |||
Aero | Boeing | ||||||||||||
For the three months ended | Lion | California | 737-300 | ||||||||||
June 30, 2003 | Partnership1 | Trust2 | Trust3 | Total | |||||||||
Revenues | $ | 2,096 | $ | 95 | $ | 465 | |||||||
Less: Direct expenses | 1,508 | 5 | 2 | ||||||||||
Indirect expenses | 423 | 29 | 547 | ||||||||||
Impairment loss on equipment | -- | -- | 1,321 | ||||||||||
Net income (loss) | $ | 165 | $ | 61 | $ | (1,405 | ) | ||||||
Partnership’s share of net income (loss) | $ | 80 | $ | 25 | $ | (858 | ) | $ | (753 | ) | |||
1 The Partnership owns a 53% interest in the Lion Partnership that owns a product tanker.
2 The Partnership owns a 40% interest in the Aero California Trust that owns two stage III commercial aircraft on a direct finance lease.
3 The Partnership owns a 62% interest in the Boeing 737-300 Trust that owns a stage III commercial aircraft.
4 The Partnership owns a 25% interest in PLM Worldwide Leasing Corp.
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
6. Equity Investments in Affiliated Entities (continued)
Aero | Boeing | PLM | ||||||||||||||
For the six months ended | Lion | California | 737-300 | Worldwide | ||||||||||||
June 30, 2004 | Partnership1 | Trust2 | Trust3 | Leasing4 | Total | |||||||||||
Revenues | $ | 2,722 | $ | 87 | $ | 780 | ||||||||||
Less: Direct expenses | 2,020 | 15 | 12 | |||||||||||||
Indirect expenses | 712 | 51 | 816 | |||||||||||||
Net income | $ | (10 | ) | $ | 21 | $ | (48 | ) | ||||||||
Partnership’s share of net (loss) income | $ | (5 | ) | $ | 8 | $ | (23 | ) | $ | 48 | $ | 28 | ||||
Aero | Boeing | ||||||||||||
For the six months ended | Lion | California | 737-300 | ||||||||||
June 30, 2003 | Partnership1 | Trust2 | Trust3 | Total | |||||||||
Revenues | $ | 3,957 | $ | 198 | $ | 930 | |||||||
Less: Direct expenses | 2,358 | 10 | 7 | ||||||||||
Indirect expenses | 841 | 59 | 1,097 | ||||||||||
Impairment loss on equipment | -- | -- | 1,321 | ||||||||||
Net income (loss) | $ | 758 | $ | 129 | $ | (1,495 | ) | ||||||
Partnership’s share of net income (loss) | $ | 386 | $ | 52 | $ | (907 | ) | $ | (469 | ) | |||
During the six months ended June 30, 2003 the General Partner recorded an impairment of $1.3 million to a Boeing 737-300 commercial aircraft. Declining fair values of aircraft similar to the one owned by the equity investment, indicated to the General Partner that an impairment to this aircraft may exist. The General Partner determined the fair value of the aircraft based on the valuation given by its independent third party aircraft equipment manager that considered, among other factors, expected income to be earned from the asset, condition of the aircraft, estimated sales proceeds and holding costs excluding interest. No reductions were required to the carrying value of jointly-owned equipment during the six months ended June 30, 2004.
As of June 30, 2004 and December 31, 2003, all jointly-owned equipment in the Partnership’s equity investment portfolio was on lease.
7. Operating Segments
The Partnership operates in five primary operating segments: marine vessel leasing, aircraft leasing, railcar leasing, trailer leasing and marine container leasing. Each equipment leasing segment primarily engages in short-term to mid-term operating leases to a variety of customers.
1 The Partnership owns a 53% interest in the Lion Partnership that owns a product tanker.
2 The Partnership owns a 40% interest in the Aero California Trust that owns two stage III commercial aircraft on a direct finance lease.
3 The Partnership owns a 62% interest in the Boeing 737-300 Trust that owns a stage III commercial aircraft.
4 The Partnership owns a 25% interest in PLM Worldwide Leasing Corp.
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
7. Operating Segments(continued)
The following tables present a summary of the operating segments (in thousands of dollars):
Marine | Marine | |||||||||
For the three months ended | Vessel | Aircraft | Railcar | Trailer | Container | |||||
June 30, 2004 | Leasing | Leasing | Leasing | Leasing | Leasing | Other1 | Total | |||
Revenues | ||||||||
Lease revenue | $-- | $308 | $949 | $209 | $687 | $-- | $2,153 | |
Interest income and other income | -- | -- | -- | -- | -- | 11 | 11 | |
Gain (loss) on disposition of equipment | -- | -- | 340 | (1) | 89 | -- | 428 | |
Total revenues | -- | 308 | 1,289 | 208 | 776 | 11 | 2,592 | |
Expenses | ||||||||
Depreciation and amortization | -- | -- | 531 | 72 | 415 | 3 | 1,021 | |
Operations support | -- | -- | 298 | 157 | 17 | 32 | 504 | |
Management fees to affiliate | -- | 1 | 55 | 8 | 25 | -- | 89 | |
Interest expense | -- | -- | -- | -- | -- | 149 | 149 | |
General and administrative expenses | -- | (5) | 206 | 1 | -- | 225 | 427 | |
(Recovery of) provision for bad debts | -- | -- | (1) | 1 | -- | -- | -- | |
Total expenses | -- | (4) | 1,089 | 239 | 457 | 409 | 2,190 | |
Equity in net (loss) income of equity | ||||||||
investments | (58) | 40 | -- | -- | -- | -- | (18) | |
Net (loss) income | $(58) | $352 | $200 | $(31) | $319 | $(398) | $384 | |
Total assets as of June 30, 2004 | $3,379 | $6,139 | $12,137 | $616 | $9,421 | $8,537 | $40,229 | |
Marine | Marine | ||||||||
For the three months ended | Vessel | Aircraft | Railcar | Trailer | Container | ||||
June 30, 2003 | Leasing | Leasing | Leasing | Leasing | Leasing | Other2 | Total | ||
Revenues | |||||||
Lease revenue | $-- | $310 | $998 | $82 | $738 | $-- | $2,128 |
Interest income and other income | -- | 5 | -- | -- | -- | 12 | 17 |
(Loss) gain on disposition of equipment | -- | -- | (5) | -- | 35 | -- | 30 |
Total revenues | -- | 315 | 993 | 82 | 773 | 12 | 2,175 |
Expenses | |||||||
Depreciation and amortization | -- | -- | 774 | 73 | 515 | 2 | 1,364 |
Operations support | -- | (1) | 170 | 81 | 11 | 19 | 280 |
Management fees to affiliate | -- | 18 | 52 | 4 | 29 | -- | 103 |
Interest expense | -- | -- | -- | -- | -- | 160 | 160 |
General and administrative expenses | -- | 90 | 61 | 35 | (19) | 221 | 388 |
Recovery of bad debts | -- | -- | (3) | -- | -- | -- | (3) |
Total expenses | -- | 107 | 1,054 | 193 | 536 | 402 | 2,292 |
Equity in net income (loss) of equity | |||||||
investments | 80 | (833) | -- | -- | -- | -- | (753) |
Net income (loss) | $80 | $(625) | $(61) | $(111) | $237 | $(390) | $(870) |
1 Includes certain assets not identifiable to a specific segment such as cash, certain deferred charges and prepaid expenses. Also includes interest income and costs not identifiable to a particular segment, such as interest expense, and certain amortization, general and administrative and operations support expenses.
2 Includes interest income and costs not identifiable to a particular segment, such as interest expense, and certain amortization, general and administrative and operations support expenses.
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
7. Operating Segments(continued)
Marine | Marine | |||||||||
For the six months ended | Vessel | Aircraft | Railcar | Trailer | Container | |||||
June 30, 2004 | Leasing | Leasing | Leasing | Leasing | Leasing | Other1 | Total | |||
Revenues | ||||||||
Lease revenue | $-- | $632 | $1,851 | $427 | $1,384 | $-- | $4,294 | |
Interest income and other | -- | -- | -- | -- | -- | 31 | 31 | |
Gain on disposition of equipment | -- | -- | 374 | 3 | 126 | -- | 503 | |
Total revenues | -- | 632 | 2,225 | 430 | 1,510 | 31 | 4,828 | |
Expenses | ||||||||
Depreciation and amortization | -- | -- | 1,020 | 145 | 848 | 5 | 2,018 | |
Operations support | -- | -- | 564 | 286 | 30 | 62 | 942 | |
Management fees to affiliate | -- | 11 | 107 | 16 | 52 | -- | 186 | |
Interest expense | -- | -- | -- | -- | -- | 322 | 322 | |
General and administrative expenses | 2 | 27 | 354 | 29 | -- | 487 | 899 | |
Recovery of bad debts | -- | -- | (9) | -- | -- | -- | (9) | |
Total expenses | 2 | 38 | 2,036 | 476 | 930 | 876 | 4,358 | |
Equity in net (loss) income of equity | ||||||||
investments | (5) | 33 | -- | -- | -- | -- | 28 | |
Net (loss) income | $(7) | $627 | $189 | $(46) | $580 | $(845) | $498 | |
Equipment purchases and | ||||||||
capitalized repairs | $-- | $-- | $5,969 | $-- | $-- | $-- | $5,969 | |
Acquisition fees to affiliate | $-- | $-- | $269 | $-- | $-- | $-- | $269 | |
Marine | Marine | |||||||||
For the six months ended | Vessel | Aircraft | Railcar | Trailer | Container | |||||
June 30, 2003 | Leasing | Leasing | Leasing | Leasing | Leasing | Other1 | Total | |||
Revenues | ||||||||
Lease revenue | $-- | $656 | $1,667 | $299 | $1,500 | $-- | $4,122 | |
Interest income and other income | -- | 5 | -- | -- | -- | 36 | 41 | |
(Loss) gain on disposition of equipment | -- | -- | (22) | -- | 71 | -- | 49 | |
Total revenues | -- | 661 | 1,645 | 299 | 1,571 | 36 | 4,212 | |
Expenses | ||||||||
Depreciation and amortization | -- | 36 | 1,155 | 146 | 1,048 | 4 | 2,389 | |
Operations support | -- | (1) | 392 | 191 | 23 | 37 | 642 | |
Management fees to affiliate | -- | 27 | 89 | 12 | 56 | -- | 184 | |
Interest expense | -- | -- | -- | -- | -- | 314 | 314 | |
General and administrative expenses | -- | 90 | 126 | 71 | -- | 424 | 711 | |
Impairment loss on equipment | -- | 77 | -- | -- | -- | -- | 77 | |
Provision for bad debts | -- | -- | 33 | -- | -- | -- | 33 | |
Total expenses | -- | 229 | 1,795 | 420 | 1,127 | 779 | 4,350 | |
Equity in net income (loss) of equity | ||||||||
investments | 386 | (855) | -- | -- | -- | -- | (469) | |
Net income (loss) | $386 | $(423) | $(150) | $(121) | $444 | $(743) | $(607) | |
Equipment purchases and | ||||||||
capitalized repairs | $-- | $-- | $4,100 | $-- | $-- | $-- | $4,100 | |
Acquisition fees to affiliate | $-- | $-- | $184 | $-- | $-- | $-- | $184 | |
8. Net Income (Loss) Per Weighted-Average Limited Partnership Unit
Net income (loss) per weighted-average limited partnership unit was computed by dividing net income or loss attributable to limited partners by the weighted-average number of limited partnership units deemed outstanding during the period. The weighted-average number of limited partnership units deemed outstanding during the three and six months ended June 30, 2004 and 2003 was 7,730,965.
1 Includes interest income and costs not identifiable to a particular segment, such as interest expense, and certain amortization, general and administrative and operations support expenses.
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
9. Accounts Receivable
Accounts receivable represent balances due from current or former lessees for unpaid balances incurred from leasing Partnership owned equipment. The components of accounts receivable were as follows (in thousands of dollars):
June 30, | December 31, | |||||
2004 | 2003 | |||||
Trade accounts receivable | $1,677 | $1,504 | ||||
Allowance for doubtful accounts | (428) | (444) | ||||
$1,249 | $1,060 | |||||
10. Debt
The Partnership is a participant in a $7.5 million warehouse facility. The warehouse facility is scheduled to expire on December 31, 2004 with all advances due no later than December 31, 2004. As of June 30, 2004 and December 31, 2003, the Partnership had no borrowings outstanding under this facility.
The Partnership made the regularly scheduled principal payments totaling $2.0 million to the lender of the notes payable during the six months ended June 30, 2004.
11. Commitments and Contingencies
PLM Transportation Equipment Corp. (TEC), an affiliate of the General Partner, arranged for the lease or purchase of up to 1,050 railcars with a delivery date between 2002 and 2004. The commitment requires a minimum of 30% of the railcars delivered under the arrangement be purchased and the remaining 70% of the railcars may be leased or purchased. As of June 30, 2004, TEC or an affiliated program have purchased 354 railcars, at a cost of $25.8 million, and have leased 494 railcars, exceeding the minimum purchase requirement under this commitment. The remaining 202 railcars to be purchased or leased under this commitment with a cost of $15.0 million, will be delivered in 2004 and may be purchased or leased by TEC, the Partnership, an affiliated program, or an unaffiliated third party.
In the fourth quarter of 2003, FSI exercised its option under the above agreement to purchase or lease 400 additional railcars which will be delivered in 2004 and 2005. The commitment requires that a minimum of 30% of the total railcars to be delivered under the original agreement and the option be purchased and the remaining railcars may be leased or purchased. If purchased, the total cost for the 400 railcars is $30.3 million. The Partnership, an affiliate, or unaffiliated third party may purchase or lease these railcars. While FSI has not determined which managed program will buy these railcars, it is possible that they will be purchased by the Partnership.
As of June 30, 2004, TEC is required to purchase an additional 13% of the total remaining railcars under the commitment to meet its overall requirement that 30% of the total commitment be purchased.
At June 30, 2004, railcars with an original equipment cost of $3.4 million were owned by FSI, some of which were purchased from the above transaction. While FSI has neither determined if a Program Affiliate will purchase these railcars nor the timing of any purchases, it is possible the Partnership may purchase some of these railcars.
PLM EQUIPMENT GROWTH FUND VI
(A Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Litigation
On December 31, 2003 and during 2004, in the Court of Common Pleas for Williamsburg County, South Carolina, actions have been filed by Harold H. Collins, Dianne Collins his wife, and Rickey Thomas, Sr. against South Carolina Central Railroad Company, Inc., CSX Transportation, Inc., TradeMark Nitrogen, Inc. and PLM Investment Management, Inc. The actions involve a chemical spill from a railcar owned by the Partnership. All three law suits claim permanent injuries and alleges negligence on the part of all four defendants in their duty to exercise reasonable care in the inspection, maintenance and repair of the railcar. The complaints do not allege a specific amount of damages. The General Partner expects that these actions will be amended at some point and that the Partnership will also be named as a defendant.
The attorney for these plaintiffs states that he also represents a number of additional potential plaintiffs. Published reports indicate that several nearby residents were evacuated. While no additional actions have been served as of this time, the potential exists for additional claims to be filed.
The General Partner believes that the actions will not have a material effect on the financial condition of the Partnership, are completely without merit and will vigorously defend against the actions.
The Partnership is involved as plaintiff or defendant in various legal actions incidental to its business. Management does not believe that any of these actions will be material to the financial condition or results of operations of the Partnership.
12. Recent Accounting Pronouncements
In January 2003, Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 requires the Partnership to evaluate all existing arrangements to identify situations where the Partnership has a “variable interest,” commonly evidenced by a guarantee arrangement or other commitment to provide financial support, in a “variable interest entity,” commonly a thinly capitalized entity, and further determine when such variable interest requires the Partnership to consolidate the variable interest entities’ financial statements with its own. The Partnership is required to perform this assessment by December 31, 2004 and consolidate any variable interest entities for which the Partnership will absorb a majority of the entities’ expected losses or receive a majority of the expe cted residual gains.
The General Partner is still in the process of evaluating its impact and has not completed its analysis or concluded on the impact that FIN 46 will have on the Partnership.
13. Subsequent Events
In July 2004, the Partnership transferred 774 railcars with a net book value of $11.4 million to PLM Rail Partners, LLC (PLM Rail Partners), a limited liability company jointly owned with two affiliated programs. The manager of PLM Rail Partners is PLM Financial Services, Inc. The Partnership owns a 43.3% interest in PLM Rail Partners. In July, PLM Rail Partners borrowed $25.3 million on a non-recourse basis. The loan is collateralized by railcars and future lease payments. This loan bears interest at rates from 5.65% to 7.25% and is to be amortized over 8 years.
During July 2004, PLM Rail Partners distributed $9.9 million to the Partnership from the proceeds of this loan. The Partnership intends to purchase additional equipment with these proceeds.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(I) RESULTS OF OPERATIONS
Comparison of PLM Equipment Growth Fund VI’s (the Partnership’s) Operating Results for the Three Months Ended June 30, 2004 and 2003
(A) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance and asset-specific insurance expenses) on owned equipment decreased during the three months ended June 30, 2004, compared to the same period of 2003. Gains or losses from the disposition of equipment, interest and other income, and certain expenses such as management fees to affiliate, depreciation and amortization, impairment loss on equipment and general and administrative expenses relating to the operating segments (see Note 7 to the unaudited condensed financial statements), are not included in the owned equipment operation discussion because these expenses are indirect in nature and not a result of operations, but the result of owning a portfolio of equipment. The following table presents lease revenues less direct expenses by segment (in thousands of dollars):
For the Three Months | |||||||||||||
Ended June 30, | |||||||||||||
2004 | 2003 | ||||||||||||
Marine containers | $ | 670 | $ | 727 | |||||||||
Railcars | 651 | 828 | |||||||||||
Aircraft and rotables | 308 | 311 | |||||||||||
Trailers | 52 | 1 |
Marine containers: Marine container lease revenues and direct expenses were $0.7 million and $17,000, respectively, for the three months ended June 30, 2004, compared to $0.7 million and $11,000, respectively, during the same period of 2003. The decrease in lease revenues of $0.1 million during the three months ended June 30, 2004 was due to lower lease rates earned on the Partnership's marine containers.
Railcars: Railcar lease revenues and direct expenses were $0.9 million and $0.3 million, respectively, for the three months ended June 30, 2004, compared to $1.0 million and $0.2 million, respectively, during the same period of 2003. Railcar lease revenues decreased $0.3 million during the three months ended June 30, 2004 due to the sale of railcars in 2003 and 2004 that were on lease during the second quarter of 2003. The decrease was partially offset by the increase of $0.3 million due the purchase and lease of railcars during 2004.
Aircraft and rotables: Aircraft and rotables lease revenues were $0.3 million for the three months ended June 30, 2004 and 2003. The Partnership's wholly owned aircraft is on lease through July 2008 and as such, lease revenues are expected to remain at their current level through the end of the lease.
Trailers: Trailer lease revenues and direct expenses were $0.2 million and $0.2 million, respectively, for the three months ended June 30, 2004, compared to $0.1 million and $0.1 million, respectively, during the same period of 2003.
(B) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $1.7 million for the three months ended June 30, 2004 decreased from $2.0 million for the same period in 2003. Significant variances are explained as follows:
(i) A $0.3 million decrease in depreciation and amortization expenses from 2003 levels reflects the decrease of $0.2 caused by the sale of railcars during the second quarter of 2004 and a $0.2 million decrease caused by the double-declining balance method of depreciation which results in greater depreciation in the first years an asset is owned. These decreases were partially offset by an increase of approximately $0.1 million caused by the purchase of railcars during 2004;
(ii) A $11,000 decrease in interest expense resulted from lower average borrowings outstanding in the three months ended June 30, 2004 compared to the same period of 2003; and
(iii) A $39,000 increase in general and administrative expenses during the three months ended June 30, 2004 was primarily due to additional professional costs associated with equipment acquisitions.
(C) Net Gain on Disposition of Owned Equipment
The net gain on the disposition of owned equipment for the three months ended June 30, 2004 totaled $0.4 million, and resulted from the disposition of aircraft rotables, marine containers, railcars and trailers, with an aggregate net book value of $0.3 million for proceeds of $0.8 million. The net gain on the disposition of owned equipment for the second quarter of 2003 totaled $30,000, and resulted from the sale of marine containers and railcars, with an aggregate net book value of $0.1 million for proceeds of $0.1 million.
(D) Equity in Net (Loss) Income of Equity Investments
Equity in net (loss) income of equity investments generally represents the Partnership's share of the net income or loss generated from the operation of jointly owned entities accounted for under the equity method of accounting. The following table presents equity in net income or (loss) by equipment type (in thousands of dollars):
For the Three Months | |||||||||||
Ended June 30, | |||||||||||
2004 | 2003 | ||||||||||
Aircraft | $ | 40 | $ | (833 | ) | ||||||
Marine vessel | (58) | 80 | |||||||||
Equity in net loss of equity investments | $ | (18 | ) | $ | (753 | ) | |||||
The following equity investment discussion by equipment type is based on the Partnership's proportional share of revenues, depreciation expense, direct expenses, administrative expenses, and impairment loss on equipment in the equity investments:
Aircraft: As of June 30, 2004 and 2003, the Partnership owned an interest in entities owning two commercial aircraft on a direct finance lease, an interest in an entity owning a Boeing 737-300 commercial aircraft and an interest in an entity owning other assets. During the three months ended June 30, 2004, equipment owning entities generated revenues of $0.3 million which were partially offset by depreciation expense, direct expenses and administrative expenses of $0.3 million. During the same period of 2003, entities owning equipment generated revenues of $0.3 million which were offset by depreciation expense, direct expenses and administrative expenses of $0.3 million and an impairment loss on equipment of $0.8 million. During the three months ended June 30, 2004, contribution from an entity owning other assets increased $48,000 compared to 2003.
Aircraft revenues decreased $47,000 due to a lower lease rate being earned on the Boeing 737-300 commercial aircraft compared to the same period 2003 and decreased $23,000 due to a lower outstanding principal balance on the finance lease compared to 2003.
Direct expenses decreased $0.1 million caused by the double-declining balance method of depreciation which results in greater depreciation in the first years an asset is owned. During the second quarter 2003, impairment loss of $0.8 million resulted from the reduction of the carrying value of a Boeing 737-300 commercial aircraft to its estimated fair value. No impairment was required during the second quarter of 2004.
Marine vessel: As of June 30, 2004 and 2003, the Partnership owned an interest in an entity that owned a marine vessel. During the three months ended June 30, 2004, lease revenues of $0.7 million were partially offset by depreciation expense, direct expenses, and administrative expenses of $0.8 million. During the same period of 2003, lease revenues of $1.1 million were offset by depreciation expense, direct expenses, and administrative expenses of $1.0 million.
Marine vessel lease revenues decreased $0.4 million during the three months ended June 30, 2004 compared to the same period 2003. Lease revenues decreased $0.2 million during the second quarter 2004 due to being off-hire approximately 20 days and decreased $0.2 million due to the marine vessel earning a lower lease rate compared to 2003.
Direct expenses decreased $0.3 million due to lower operation expenses of $0.1 million, lower repairs and maintenance of $45,000 and lower management fees to affiliate of $28,000.
(E) Net Income (Loss)
As a result of the foregoing, the Partnership's net income for the three months ended June 30, 2004 was $0.4 million, compared to a net loss of $0.9 million during the same period of 2003. The Partnership's ability to acquire, operate, and liquidate assets, secure leases and re-lease those assets whose leases expire is subject to many factors. Therefore, the Partnership's performance in the second quarter of 2004 is not necessarily indicative of future periods.
Comparison of the Partnership’s Operating Results for the Six Months Ended June 30, 2004 and 2003
(A) Owned Equipment Operations
Lease revenues less direct expenses on owned equipment decreased during the six months ended June 30, 2004, compared to the same period of 2003. The following table presents lease revenues less direct expenses by segment (in thousands of dollars):
For the Six Months | ||||||||||
Ended June 30, | ||||||||||
2004 | 2003 | |||||||||
Marine containers | $ | 1,354 | $ | 1,477 | ||||||
Railcars | 1,287 | 1,275 | ||||||||
Aircraft and rotables | 632 | 657 | ||||||||
Trailers | 141 | 108 |
Marine containers: Marine container lease revenues and direct expenses were $1.4 million and $30,000, respectively, for the six months ended June 30, 2004, compared to $1.5 million and $23,000, respectively, during the same period of 2003. The decrease in lease revenues of $0.1 million during the six months ended June 30, 2004 was due to lower lease rates earned on the Partnership's marine containers.
Railcars: Railcar lease revenues and direct expenses were $1.9 million and $0.6 million, respectively, for the six months ended June 30, 2004, compared to $1.7 million and $0.4 million, respectively, during the same period of 2003. Railcar lease revenues increased $0.4 million due the purchase and lease of railcars during 2004 and 2003. The increase was partially offset by a decrease of $0.2 million caused by the sale of railcars that were on lease during the six months ended June 30, 2003.
Aircraft and rotables: Aircraft and rotables lease revenues were $0.6 million for the six months ended June 30, 2004, compared to $0.7 million during the same period of 2003. The Partnership's wholly owned aircraft is on lease through July 2008 and as such, lease revenues are expected to remain at their current level through the end of the current lease.
Trailers: Trailer lease revenues and direct expenses were $0.4 million and $0.3 million, respectively, for the six months ended June 30, 2004, compared to $0.3 million and $0.2 million, respectively, during the same period of 2003. Trailer direct expenses increased $0.1 million due to an increase in repairs and maintenance in order to prepare trailers for hire.
(B) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $3.5 million for the six months ended June 30, 2004 decreased from $3.7 million for the same period in 2003. Significant variances are explained as follows:
(i) A $0.4 million decrease in depreciation and amortization expenses from 2003 levels reflects the decrease of $0.4 million decreased caused by the double-declining balance method of depreciation which results in greater depreciation in the first years an asset is owned and a $0.2 decrease caused by the sale of railcars during 2004 and 2003. These decreases were partially offset by an increase of approximately $0.2 million caused by the purchase of railcars during 2004;
(ii) A $0.1 million decrease in the impairment loss on equipment resulted from the Partnership reducing the carrying value of the owned aircraft rotables to their estimated fair value during the six months ended June 30, 2003. No impairment of equipment was required during the same period of 2004;
(iii) (Recovery of) provision for bad debts decreased $42,000 compared to 2003 was primarily based on the General Partner’s evaluation of the collectability of receivables; and
(iv) A $0.2 million increase in general and administrative expenses during the six months ended June 30, 2004 was primarily due to additional professional costs associated with equipment acquisitions.
(C) Net Gain on Disposition of Owned Equipment
The net gain on the disposition of owned equipment for the six months ended June 30, 2004 totaled $0.5 million, and resulted from the disposition of aircraft rotables, marine containers, railcars and trailers, with an aggregate net book value of $0.5 million for proceeds of $1.0 million. The net gain on the disposition of owned equipment for the six months ended June 30, 2003 totaled $49,000, and resulted from the sale of marine containers and railcars, with an aggregate net book value of $0.1 million for proceeds of $0.2 million.
(D) Equity in Net Income (Loss) of Equity Investments
Equity in net income (loss) of equity investments generally represents the Partnership's share of the net income or loss generated from the operation of jointly owned entities accounted for under the equity method of accounting. The following table presents equity in net income (loss) by equipment type (in thousands of dollars):
For the Six Months | ||||||||||
Ended June 30, | ||||||||||
2004 | 2003 | |||||||||
Aircraft | $ | 33 | $ | (855 | ) | |||||
Marine vessel | (5 | ) | 386 | |||||||
Equity in net income (loss) of equity investments | $ | 28 | $ | (469 | ) | |||||
The following equity investment discussion by equipment type is based on the Partnership's proportional share of revenues, depreciation expense, direct expenses, administrative expenses, and impairment loss on equipment in the equity investments:
Aircraft: As of June 30, 2004 and 2003, the Partnership owned an interest in entities owning two commercial aircraft on a direct finance lease, an interest in an entity owning a Boeing 737-300 commercial aircraft and an interest in an entity owning other assets. During the six months ended June 30, 2004, entities owning equipment generated revenues of $0.5 million which were offset by depreciation expense, direct expenses and administrative expenses of $0.5 million. During the same period of 2003, entities owning equipment generated revenues of $0.7 million which were offset by depreciation expense, direct expenses and administrative expenses of $0.7 million and the impairment loss on equipment of $0.8 million. During the six months ended June 30, 2004, contribution from an entity owning other assets increased $48,000 compared to 2003.
Aircraft revenues decreased $0.1 million due to a lower lease rate being earned on the Boeing 737-300 commercial aircraft compared to the same period 2003 and decreased $44,000 due to a lower outstanding principal balance on the finance lease compared to 2003.
Direct expenses decreased $0.2 million caused by the double-declining balance method of depreciation which results in greater depreciation in the first years an asset is owned. During the six months ended June 30, 2003, impairment loss of $0.8 million resulted from the reduction of the carrying value of a Boeing 737-300 commercial aircraft to its estimated fair value. No impairment was required during the period of 2004.
Marine vessel: As of June 30, 2004 and 2003, the Partnership owned an interest in an entity that owned a marine vessel. During the six months ended June 30, 2004, lease revenues of $1.4 million were partially offset by depreciation expense, direct expenses, and administrative expenses of $1.4 million. During the same period of 2003, lease revenues of $2.1 million were offset by depreciation expense, direct expenses, and administrative expenses of $1.7 million.
Marine vessel lease revenues decreased $0.6 million during the six months ended June 30, 2004 compared to the same period 2003. Lease revenues decreased approximately $0.3 million during the six months ended June 30, 2004 due to being off-hire while in dry-dock approximately 30 days in 2004 compared to 2003 and decreased $0.3 million due to earning a lower lease rate during 2004 compared to 2003.
(E) Net Income (Loss)
As a result of the foregoing, the Partnership's net income for the six months ended June 30, 2004 was $0.5 million, compared to a net loss of $0.6 million during the same period of 2003. The Partnership's ability to acquire, operate, and liquidate assets, secure leases and re-lease those assets whose leases expire is subject to many factors. Therefore, the Partnership's performance in the six months ended June 30, 2004 is not necessarily indicative of future periods.
(II) CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires PLM Financial Services, Inc. (FSI or the General Partner) to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On a regular basis, the General Partner reviews these estimates including those related to asset lives and depreciation methods, impairment of long-lived assets, allowance for doubtful accounts, reserves related to legally mandated equipment repairsand contingencies and litigation. These estimates are based on the General Partner's historical ex perience and on various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The General Partner believes, however, that the estimates, including those for the above-listed items, are reasonable and that actual results will not vary significantly from the estimated amounts.
The General Partner believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Partnership's financial statements:
Revenue recognition: Lease revenues are earned by the Partnership monthly and no significant amounts are calculated on factors other than the passage of time. The Partnership’s leases are accounted for as operating leases and are non-cancelable. Rents received prior to their due dates are deferred.
The Partnership has an equity investment that owns aircraft jointly with other affiliated programs. These aircraft are leased on a direct finance lease. The equity investment’s revenues from the direct finance lease are based on a monthly amortization schedule.
Asset lives and depreciation methods: The Partnership’s primary business involves the purchase and subsequent lease of long-lived transportation and related equipment. The General Partner has chosen asset lives that it believes correspond to the economic life of the related asset. Depreciation is computed using 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 12 years for all other equipment. The depreciation method changes to straight line when annual depreciation expense using the straight-line method exceeds that calculated by the double-declining balance method. The General Partner has chosen a depreciation method that it believes matches the benefit to the Partnership from the asset with the associated costs. These judgments have been made based on t he General Partner’s expertise in each equipment segment that the Partnership operates. If the asset life and depreciation method chosen does not reduce the book value of the asset to at least the potential future cash flows from the asset to the Partnership, the Partnership would be required to record an impairment loss. Likewise, if the net book value of the asset was less than the economic value, the Partnership may record a gain on sale upon final disposition of the asset.
Impairment of long-lived assets: Whenever circumstances indicate that an impairment may exist, the General Partner reviews the carrying value of its equipment and equity investments in affiliated entities to determine if the carrying value of the assets may not be recoverable, in consideration of the current economic conditions. This requires the General Partner to make estimates related to future cash flows from each asset as well as the determination if the deterioration is temporary or permanent. If these estimates or the related assumptions change in the future, the Partnership may be required to record additional impairment charges.
Allowance for doubtful accounts: The Partnership maintains allowances for doubtful accounts for estimated losses resulting from the inability of the lessees to make the lease payments. These estimates are primarily based on the amount of time that has lapsed since the related payments were due as well as specific knowledge related to the ability of the lessees to make the required payments. If the financial condition of the Partnership’s lessees were to deteriorate, additional allowances could be required that would reduce income. Conversely, if the financial condition of the lessees were to improve or if legal remedies to collect past due amounts were successful, the allowance for doubtful accounts may need to be reduced and income would be increased.
Reserves for repairs: The Partnership accrues for legally required repairs to equipment such as scheduled major maintenance for marine vessels and engine overhauls to aircraft engines over the period prior to the required repairs. The amount that is reserved for is based on the General Partner’s expertise in each equipment segment, the past history of such costs for that specific piece of equipment and discussions with independent, third party equipment brokers. If the amount reserved for is not adequate to cover the cost of such repairs or if the repairs must be performed earlier than the General Partner estimated, the Partnership would incur additional repair and maintenance or equipment operating expenses.
Contingencies and litigation: The Partnership is subject to legal proceedings involving ordinary and routine claims related to its business. The ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates in recording liabilities for potential litigation settlements. Estimates for losses from litigation are disclosed if considered possible and accrued if considered probable after consultation with outside counsel. If estimates of potential losses increase or the related facts and circumstances change in the future, the Partnership may be required to record additional litigation expense.
(III) FINANCIAL CONDITION -- CAPITAL RESOURCES AND LIQUIDITY
For the six months ended June 30, 2004, the Partnership generated cash from operations of $1.7 million to meet its operating obligations, purchase additional equipment, pay debt and interest, and maintain working capital reserves.
During the six months ended June 30, 2004, the Partnership purchased railcars for $6.0 million and paid FSI or its affiliates $0.3 million for acquisition fees and $0.1 million for lease negotiation fees. During the six months ended June 30, 2004, the Partnership disposed of owned equipment and received aggregate proceeds of $1.0 million.
Restricted cash decreased $0.4 million resulting from the withdrawal of the lender from the Partnership's debt facilities that required these deposits. No such deposits were required from the new lender.
Accounts receivable increased $0.2 million during the six months ended June 30, 2004 due to the timing of cash receipts.
Equity investments in affiliated entities decreased $0.1 million during the six months ended June 30, 2004 due to cash distributions of $0.2 million from the equity investments to the Partnership partially offset by an increase from income of $28,000 that was recorded by the Partnership for its interests in the equity investments.
Due to affiliates decreased $0.3 million during the six months ended June 30, 2004 due to the payment of $0.4 million in engine reserves due to an equity investment to repair the engines on an aircraft. This decrease was partially offset by an increase of $0.1 million in additional engine reserves deposits during 2004.
The Partnership made its scheduled principal payments totaling $2.0 million on the notes payable during the six months ended June 30, 2004. The Partnership is scheduled to make quarterly debt payments of $1.0 million plus interest to the lenders of the notes payable during 2004. The cash for these payments will come from operations and equipment dispositions.
In July 2004, the Partnership transferred 774 railcars with a net book value of $14.6 million to PLM Rail Partners, LLC (PLM Rail Partners), a limited liability company jointly owned with two affiliated programs. The manager of PLM Rail Partners is PLM Financial Services, Inc. The Partnership owns a 43.3% interest in PLM Rail Partners. In July, PLM Rail Partners borrowed $25.3 million on a non-recourse basis. The loan is collateralized by railcars and future lease payments. This loan bears interest at rates from 5.65% to 7.25% and is to be amortized over 8 years.
During July 2004, PLM Rail Partners distributed $9.9 million to the Partnership from the proceeds of this loan. The Partnership intends to purchase additional equipment with these proceeds.
The Partnership is a participant in a $7.5 million warehouse facility. The warehouse facility is shared by the Partnership, PLM Equipment Growth Fund V, PLM Equipment Growth & Income Fund VII, and MILPI Holdings LLC (MILPI), all of which are related parties. The facility provides for financing up to 100% of the cost of the equipment and expires on December 31, 2004. Any borrowings by the Partnership are collateralized by equipment purchased with the proceeds of the loan. Outstanding borrowings by one borrower reduce the amount available to each of the other borrowers under the facility. Individual borrowings may be outstanding for no more than 270 days, with all advances due no later than December 31, 2004. Interest accrues either at the prime rate or LIBOR plus 2.0% at the borrower’s option and is set at the time of an advance of funds. Borrowings by the Partner ship are guaranteed by PLM International, Inc. and MILPI, the parent companies of the General Partner. The Partnership is not liable for the advances made to the other borrowers.
As of August 13, 2004, there were no outstanding borrowings on this facility by the Partnership or any of the other eligible borrowers.
PLM Transportation Equipment Corp. (TEC), an affiliate of the General Partner, arranged for the lease or purchase of up to 1,050 railcars with a delivery date between 2002 and 2004. The commitment requires a minimum of 30% of the railcars delivered under the arrangement be purchased and the remaining 70% of the railcars may be leased or purchased. As of June 30, 2004, TEC or an affiliated program have purchased 354 railcars, at a cost of $25.8 million, and have leased 494 railcars, exceeding the minimum purchase requirement under this commitment. The remaining 202 railcars to be purchased or leased under this commitment with a cost of $15.0 million, will be delivered in 2004 and may be purchased or leased by TEC, the Partnership, an affiliated program, or an unaffiliated third party.
In the fourth quarter of 2003, FSI exercised its option under the above agreement to purchase or lease 400 additional railcars which will be delivered in 2004 and 2005. The commitment requires that a minimum of 30% of the total railcars to be delivered under the original agreement and the option be purchased and the remaining railcars may be leased or purchased. If purchased, the total cost for the 400 railcars is $30.3 million. The Partnership, an affiliate, or unaffiliated third party may purchase or lease these railcars. While FSI has not determined which managed program will buy these railcars, it is possible that they will be purchased by the Partnership.
As of June 30, 2004, TEC is required to purchase an additional 13% of the total remaining railcars under the commitment to meet its overall requirement that 30% of the total commitment be purchased.
At June 30, 2004, railcars with an original equipment cost of $3.4 million were owned by FSI, some of which were purchased from the above transaction. While FSI has neither determined if a Program Affiliate will purchase these railcars nor the timing of any purchases, it is possible the Partnership may purchase some of these railcars.
Commitments and contingencies as of June 30, 2004 are as follows (in thousands of dollars):
Less than | 1-3 | ||||||||||
Partnership Obligations: | Total | 1 Year | Years | ||||||||
Notes payable | $12,000 | $4,000 | $8,000 | ||||||||
Affiliate Obligations: | |||||||||||
Commitment to purchase railcars | $44,982 | 1 | $23,329 | $21,653 | |||||||
1 While FSI has neither determined if a Program Affiliate will purchase these railcars nor the timing of any purchases, it is possible the Partnership may purchase some of the railcars.
(IV) RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003,Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 requires the Partnership to evaluate all existing arrangements to identify situations where the Partnership has a “variable interest,” commonly evidenced by a guarantee arrangement or other commitment to provide financial support, in a “variable interest entity,” commonly a thinly capitalized entity, and further determine when such variable interest requires the Partnership to consolidate the variable interest entities’ financial statements with its own. The Partnership is required to perform this assessment by December 31, 2004 and consolidate any variable interest entities for which the Partnership will absorb a majority of the en tities’ expected losses or receive a majority of the expected residual gains.
The General Partner is still in the process of evaluating its impact and has not completed its analysis or concluded on the impact that FIN 46 will have on the Partnership.
(V) OUTLOOK FOR THE FUTURE
The ability of the Partnership to realize acceptable lease rates on its equipment in the different equipment markets is contingent on many factors, such as specific market conditions and economic activity, technological obsolescence, and government or other regulations. The unpredictability of these factors makes it difficult for the General Partner to clearly define trends or influences that may impact the performance of the Partnership's equipment. The General Partner continually monitors both the equipment markets and the performance of the Partnership's equipment in these markets. The General Partner may decide to reduce the Partnership's exposure to equipment markets in which it determines it cannot operate equipment to achieve acceptable rates of return. Alternatively, the General Partner may make a determination to enter equipment markets in which it perceives oppo rtunities to profit from supply/demand instabilities or other market imperfections.
Several factors may affect the Partnership's operating performance during the remainder of 2004 and beyond, including changes in the markets for the Partnership's equipment and changes in the regulatory environment in which that equipment operates.
The Partnership's operation of a diversified equipment portfolio in a broad base of markets is intended to reduce its exposure to volatility in individual equipment sectors.
Other factors affecting the Partnership’s operations during the remainder of 2004 and beyond include:
(1) In 2003 a significant number of the Partnership’s marine containers on a fixed rate lease switched to a lease based on utilization. This will result in a significant decrease in lease revenues in 2004 compared to 2003;
(2) Economic recovery in the railcar segment continues to be strong. Orders for new tank railcars, a key leading indicator for the railcar fleet, indicate a backlog of a full year production of approximately 11,000 units. Overall railcar loadings are now forecast to grow approximately 6% in 2004 which is an extremely strong outlook and an increase in the industry consensus forecast since last quarter. The railcar fleet is largely used by a broadly defined chemical sector. Chemical production has grown 3% per year on average over the last two decades.
Although chemical and petroleum railcar loadings are projected to grow by 5% this year, the rapid increase in steel prices which has resulted in increases in the price of a new tank car by over 20%, may cause the industry recovery to slow. The speed of recovery in lease rates continues to lag behind this price increase and lease rates remain low compared to historical norms. While this is likely to change, reduced railcar availability and higher lease costs may slow the industry growth and perhaps cause a shift to other forms of transportation;
(3) The Partnership has an investment in a double-hull product tanker constructed in 1985 that operates in international markets carrying a variety of clean commodity-type cargoes. Demand for commodity-based shipping is closely tied to worldwide economic growth patterns, which can affect demand by causing changes in specific grade volume on trade routes. The General Partner operates the Partnership’s product tanker in the spot charter markets, carrying mostly gasoline, jet fuel, gas oils and similar petroleum distillates or simple chemicals or vegetable oils, an approach that provides the flexibility to adapt to changes in market conditions.
The charter market for tankers is expected to remain strong for the remainder of 2004;
(4) Market demand for new and used aircraft has been severely impacted by the poor financial condition of the airline industry. The General Partner believes that there is a significant oversupply of commercial aircraft available that has caused a decrease in aircraft fair market values. The General Partner believes aircraft prices have decreased to a level which may make them attractive investment opportunities. Accordingly, the Partnership may purchase aircraft in 2004.
The Partnership’s owned aircraft rotables are off-lease. The General Partner is currently marketing this equipment for sale. Due to the poor market for these rotables, it may take a considerable period of time to dispose of them.
During 2004, the lessee of the Partnership’s two partially owned DC-9's on a direct finance lease fell behind in its monthly payments. As of August 13, 2004, payments on these aircraft are four months in arrears. The General Partner is currently reviewing its options including the possibility of sending the lessee a notification of default and the age of these aircraft. Due to the economic condition of the airline industry, should the General Partner repossess these aircraft, it will be difficult to remarket and may be off-lease for a considerable period of time.
During 2004, the General Partner renegotiated the lease for the partially owned Boeing 737-300. The lease was extended from April 2005 to July 2008 and the monthly lease rate was lowered by 6%.
(5) The management fee rate paid by the Partnership is reduced by 25% for the period starting January 1, 2003 and ending June 30, 2005;
(6) The Partnership is expected to continue to have increased general and administrative costs due to costs associated with the acquisition of additional equipment and as it liquidates other investment programs that currently share certain shared general and administrative expenses; and
(7) General and administrative expenses are expected to increase over the next 18 months due to additional expenses required to meet compliance standards of the Sarbanes - Oxley Act.
The Partnership may commit to purchase additional equipment with its cash flow, surplus cash, and equipment sale proceeds generated prior to December 31, 2004, consistent with the objectives of the Partnership. The General Partner believes that these acquisitions may cause the Partnership to generate additional earnings and cash flow for the Partnership. The Partnership will terminate on December 31, 2011, unless terminated earlier upon sale of all equipment and by certain other events.
The Partnership intends to use cash flow from operations to satisfy its operating requirements, pay loan principal and interest on debt, and purchase additional equipment.
The General Partner believes prices on certain transportation equipment, primarily railcar equipment and selected aircraft equipment, have reached attractive levels and is currently in the market to make investments in 2004. The General Partner believes that transportation equipment purchased in today's economic environment may appreciate. Accordingly, the General Partner believes that most of the cash currently held by the Partnership will be used to purchase additional equipment.
The General Partner does not anticipate declaring any cash distributions to the partners until at least the end of the investment phase of the Partnership. Cash distributions when paid to the partners generally consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Partnership and will be dependent upon the collection of all future contracted rent, the generation of renewal and/or re-lease rents and the residual value realized for each asset at its disposal.
(VI) FORWARD-LOOKING INFORMATION
Except for the historical information contained herein, this Form 10-QSB contains forward-looking statements that involve risks and uncertainties, such as statements of the Partnership’s plans, objectives, expectations, and intentions. The cautionary statements made in this Form 10-QSB should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-QSB. There are a number of important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the collection of the Partnership’s contracted rents, the realization of residual proceeds, and future economic conditions.
ITEM 3. CONTROLS AND PROCEDURES
Limitations on the Effectiveness of Controls
The General Partner’s management, including it’s President and Chief Financial Officer (CFO), does not expect that our internal controls or disclosure control will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of control can provide absolute assurance that all control issues and instances of fraud, if any, within the Partnership have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or by management override of the control. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Notwithstanding the forgoing limitations, we believe that our internal controls and disclosure control provide reasonable assurances that the objectives of our control system are met.
Quarterly Evaluation of the Partnership’s Disclosure Controls and Internal Controls
(1) Within the 90-day period prior to the filing of this report, the General Partner carried out an evaluation, under the supervision and with the participation of the General Partner’s management, including it’s President and CFO, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the President and CFO concluded that the Partnership’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Partnership’s required to be included in the Partnership’s exchange act filings.
(2) There have been no significant changes in the Partnership’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the General Partner carried out its evaluations.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan agreement between PLM Rail Partners, LLC and HSH Nordbank AG, New York, dated June 30, 2004.
10.2 Asset Transfer Agreement between PLM Equipment Growth Fund VI and PLM Rail Partners, LLC, dated July 1, 2004.
10.3 Limited Liability Company Agreement of PLM Railcars Partners dated June 29, 2004.
31.1 Certificate of President of the General Partner pursuant to Section 302 of Sarbanes - Oxley Act.
31.2 Certificate of Chief Financial Officer of the General Partner pursuant to Section 302 of Sarbanes - Oxley Act.
32.1 Certificate of President of the General Partner pursuant to Section 906 of Sarbanes - Oxley Act.
32.2 Certificate of Chief Financial Officer of the General Partner pursuant to Section 906 of Sarbanes - Oxley Act.
(b) Reports on Form 8-K
None.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PLM EQUIPMENT GROWTH FUND VI
By: PLM Financial Services, Inc.
General Partner
Date: August 13, 2004 By: /s/ Richard B Brock
Richard K Brock
Chief Financial Officer