UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year ended
December 31, 1995.
[ ] 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 1-10553
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PLM EQUIPMENT GROWTH FUND II
(Exact name of registrant as specified in its charter)
California 94-3041013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Market, Steuart Street Tower
Suite 900, San Francisco, CA 94105-1301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (415) 974-1399
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of Limited Partnership Units held by
non-affiliates of the Registrant as of March 19, 1996 was $61,446,000.
Indicate the number of units outstanding of each of the issuer's
classes of partnership units, as of the latest practicable date:
Class Outstanding at March 14, 1996
Limited Partnership Depositary Units 7,385,605
General Partnership Units: 1
An index of exhibits filed with this Form 10-K is located at page 45.
Total number of pages in this report: 48
PART I
ITEM 1. BUSINESS
(A) Background
On April 2, 1987, PLM Financial Services, Inc. (FSI or the General Partner), a
wholly-owned subsidiary of PLM International, Inc. (PLM International), filed a
Registration Statement on Form S-1 with the Securities and Exchange Commission
with respect to a proposed offering of 7,500,000 limited partnership units (the
Units) in PLM Equipment Growth Fund II, a California limited partnership (the
Partnership, the Registrant or EGF II). The Partnership's offering became
effective on June 5, 1987. FSI, as General Partner, owns a 5% interest in the
Partnership. The Partnership engages in the business of owning and leasing
transportation equipment to be operated by and/or leased to various shippers and
transportation companies.
The Partnership was formed to engage in the business of owning and managing
a diversified pool of used and new transportation-related equipment and certain
other items of equipment. The Partnership's primary objectives are:
(i) to acquire and maintain, a diversified portfolio of long-lived, low
obsolescence, high residual value equipment with the net proceeds of the initial
partnership offering, supplemented by debt financing, until the conclusion of
the reinvestment phase of Partnership operations on December 31, 1995;
(ii)to generate sufficient net operating cash flow from lease operations to
meet existing liquidity requirements and to generate cash distributions to the
Limited Partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(iii) to selectively sell and purchase (until the conclusion of the
reinvestment phase, which ended on December 31, 1995) other equipment to add to
the Partnership's initial equipment portfolio. The General Partner intends to
sell equipment when it believes that, due to market conditions, market prices
for equipment exceed inherent equipment values; or when expected future benefits
from continued ownership of a particular asset will not equal or exceed other
equipment investment opportunities. Proceeds from sales, together with excess
net cash flow from operations that remained after cash distributions had been
made to the partners, were used to acquire additional equipment throughout the
seven year reinvestment phase of the Partnership, which concluded on December
31, 1995;
(iv)to preserve and protect the value of the portfolio through quality
management, maintaining the portfolio's diversity and constantly monitoring
equipment markets.
The offering of the Units of the Partnership closed on March 18, 1988. On
November 20, 1990, the Units of the Partnership began trading on the American
Stock Exchange. Thereupon each Unitholder received a depositary receipt
representing ownership of the number of Units owned by such Unitholder. As of
December 31, 1995, there were 7,426,305 depositary units (Depositary Units)
outstanding (including 1,150 Depositary Units held in the Treasury). The General
Partner contributed $100 for its 5% general partner interest in the Partnership.
It is anticipated that in the eleventh year of operations of the
Partnership the General Partner will commence liquidation of the assets of the
Partnership in an orderly fashion, unless the Partnership is terminated earlier
upon sale of all Partnership property or by certain other events. Beginning in
the seventh year of operations, cash flow and surplus funds, if any, will not be
reinvested and will be distributed to the partners, used to repay Partnership's
debt, or held as Partnership working capital. The seventh year of operations
ended December 31, 1995.
Table 1, below, lists the equipment and the cost of the equipment in the
Partnership portfolio at December 31, 1995 (thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
- ----------------------------------------------------------------------------------------------------------------------
1 727-100C commercial aircraft Boeing $ 6,986
2 727-200 commercial aircraft Boeing 18,021
1.50 737-200 commercial aircraft Boeing 15,899<F1>
1 340A commuter aircraft Saab-Fairchild 5,041
814 Refrigerated marine containers Various 12,468
45 Dry marine containers Various 121
308 Open top marine containers Various 810
210 Refrigerated trailers Trailmobile 6,840
213 Dry trailers Various 2,803
821 Dry piggyback trailers Various 12,079
125 Refrigerated piggyback trailers Various 1,192
2 Cartage trailers Various 18
463 Box cars Various 7,844
184 Tank cars Various 4,810
115 Covered hopper cars Various 2,634
193 Mill gondolas Various 4,459
0.55 Mobile offshore drilling unit Ingalls Shipbuilding 12,658<F1>
---------------
Total equipment $ 114,683<F2>
===============
<FN>
<F1> Jointly owned by EGF II and an affiliated partnership.
<F2> Includes proceeds from capital contributions, operations and partnership
borrowings invested in equipment. Includes costs capitalized, subsequent to
the date of acquisition, and equipment acquisition fees paid to PLM
Transportation Equipment Corporation. All equipment was used equipment at
the time of purchase, except 165 refrigerated trailers and 636 piggyback
dry trailers.
</FN>
The equipment is generally leased under operating leases with terms of one
to six years. Some of the Partnership's marine containers are leased to
operators of utilization-type leasing pools which include equipment owned by
unaffiliated parties. In such instances, revenues received by the Partnership
consist of a specified percentage of revenues generated by leasing the equipment
to sub-lessees, after deducting certain direct operating expenses of the pooled
equipment.
At December 31, 1995, 31% of the Partnership's trailer equipment operated
in rental yards owned and maintained by PLM Rental, Inc., the short-term trailer
rental subsidiary of PLM International. Revenues collected under short-term
rental agreements with the rental yards' customers are distributed monthly to
the owners of the related equipment. Direct expenses associated with the
equipment, and an allocation of other direct expenses of the rental yard
operations, are billed to the Partnership.
The lessees of the equipment include, but are not limited to: Carnival
Airlines, Inc., DHL Airways, Inc., Trans Ocean Ltd., Union Pacific Railroad
Company, Burlington Northern, and Cargill International. As of December 31,
1995, all of the equipment was either operating in short-term rental facilities,
on lease, or under other contractual agreements except an aircraft, a railcar,
and 115 containers.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the equipment. IMI agreed to perform all services necessary to
manage the transportation equipment on behalf of the Partnership and to perform
or contract for the performance of all obligations of the lessor under the
Partnership's leases. In consideration for its services and pursuant to the
Partnership Agreement, IMI is entitled to a monthly management fee (see
Financial Statements, footnotes 1 and 2).
(C) Competition
(1) Operating Leases vs. Full Payout Leases
Generally, the equipment owned by the Partnership is leased out on an operating
lease basis wherein the rents owed during the initial noncancelable term of the
lease are insufficient to recover the Partnership's purchase price of the
equipment. The shortto mid-term nature of operating leases generally commands 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 the operating lease need not be capitalized on the lessee's
balance sheet.
The Partnership encounters considerable competition from lessors utilizing
full payout leases on new equipment, i.e., leases which have terms equal to the
expected economic life of the equipment. Full payout leases are written for
longer terms and for lower rates than the Partnership offers. 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 of the
Partnership may write full payout leases at considerably lower rates, or larger
competitors with a lower cost of capital may offer operating leases at lower
rates, and as a result, the Partnership may be at a competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership also competes with equipment manufacturers who offer operating
leases and full payout leases. Manufacturers may provide ancillary services
which the Partnership cannot offer, such as specialized maintenance service
(including possible substitution of equipment), training, warranty services, and
trade-in privileges.
The Partnership competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), General Electric Railcar Services
Corporation, Greenbrier Leasing Company, Polaris Aircraft Leasing Corp., GPA
Group Plc, and other limited partnerships which lease the same types of
equipment.
(D) Demand
The Partnership invests in transportation, transportation-related capital
equipment, and in "relocatable environments." "Relocatable environments" refer
to capital equipment constructed to be self-contained in function but
transportable, example of which includes mobile offshore drilling units. A
general distinction can be drawn between equipment used for the transport of
either materials and commodities or people. With the exception of aircraft
leased to passenger air carriers, the Partnership's equipment is used primarily
for the transport of materials.
The following describe the markets for the Partnership's equipment:
(1) Commercial Aircraft
International airlines are expected to post an aggregate $5.7 billion profit for
1995, an indication that the world air transport industry made a dramatic
turnaround during the year. While U.S. air traffic growth slowed during 1995,
capacity levels decreased, resulting in higher load factors, lower unit costs,
and improved yields. Worldwide, airlines took delivery of 517 commercial jets,
the lowest number since 1988. A continuing decrease in 1996 deliveries is
expected to improve the supply-demand balance.
Several factors have favorably impacted the market for "second generation"
commercial jets, the type owned by the Partnership, including Boeing 727s, and
737-200s. In addition to fewer deliveries, the new generation of narrowbody
aircraft has as yet failed to produce any significant savings in carriers'
direct operating costs, and there are clear indications of further carrier
consolidation within the U.S. and European markets. These trends, expected to
continue through 1996, have led to increases in demand, rental rates, and market
values for "second generation" commercial aircraft.
The Partnership owns predominantly aircraft that are affected by the U.S.
Federal Aviation Administration (FAA) regulatory requirements. However, the bulk
of this equipment is on long-term leases in foreign markets and has been
commanding lease rates higher than those available in the U.S. Those aircraft
operating in the U.S. that are affected by the FAA regulatory requirements will
either be moved into foreign markets, as applicable, or remain on lease in the
U.S. maximizing what economic value is attainable until they must be retired
from service.
(2) Marine Containers
The container market ended 1994 with expectations that the strengthening market
experienced late in the year would continue into 1995. Such was not the case as
the usual seasonal slowdown during the post-Christmas time period extended
longer than expected, and utilization in 1995 did not achieve 1994 levels. While
per diem rates increased somewhat by summertime, they did not fully recover from
the 8-12% decrease experienced during the preceding two years. Aggressive
pricing by several major leasing companies attempting to capture greater market
share is expected to put further pressure on refrigerated container utilization
and per diem rates. On the secondary markets, there continues to be significant
increases in supply as primary operators dispose of large numbers of older
equipment. Since the Partnership owns predominately older containers, it will
continue to be impacted by these industry trends.
During 1996, major leasing companies are expected to reduce purchases of
new equipment in response to soft market conditions. This anticipated reduction
in supply should lead to a strengthening in utilization and per diem rates later
in the year as demand catches up to supply.
(3) Railcars
Nearly all the major railroads reported substantial revenue increases during
1995. As additional industry consolidation is expected in 1996, these mergers
should produce further operating efficiencies leading to continued increases in
revenues and profits. Car loadings rose approximately 3% during 1995 with
chemicals, metals, and grain experiencing the largest gains. Car demand for
liquefied petroleum gas and liquid fertilizer service was also strong throughout
the year.
The Partnership's fleet experienced almost 100% utilization during 1995.
The few cars out of service were undergoing scheduled maintenance or repair. The
General Partner believes rates are at the top of the cycle for all types of cars
owned by the Partnership. With demand continuing high, rental rates for most
types of cars owned by the Partnership are expected to remain relatively strong
during 1996.
On the supply side, industry experts predict approximately 55,000 new car
builds and 40,000 retirements for a net gain of about 1.2% in the total U.S.
fleet during 1996. While car builders are still busy, orders are not coming in
as rapidly as in the last two years, so it is likely additions will not
significantly outpace retirements this year.
(4) Mobile Offshore Drilling Units (Rigs)
Demand for offshore drilling services utilizing jack-up rigs increased slightly
in 1995 over the prior two years due principally to continued demand for U.S.
natural gas and improved returns from international oil drilling. Utilization
and day rates have been bolstered by a continued decline in the supply of rigs.
In 1995, seven of the 264 rigs in service were retired from the active drilling
fleet and only one rig was added. Another factor contributing to stronger
contract day rates has been the continued consolidation in rig ownership through
corporate mergers and rig acquisitions by larger market players. This
consolidation has had a recognizable effect on stabilizing day rates in times of
low utilization and increasing day rates faster in times of increasing
utilization.
Demand in the U.S. Gulf of Mexico, the largest market for jack-up rigs, is
expected to continue at existing levels, while demand in international markets,
primarily the North Sea and offshore India, should increase. On a long-term
basis, overall demand is expected to continue at the present level and supply
should continue to decline as older rigs are retired. The overall effect of
these trends should be increased utilization, day rates, and rig market values
as demand and supply reach equilibrium. Some industry experts predict that by
the year 2000, day rates will increase to levels which will induce
limitedbuilding of new rigs.
(5) Intermodal Trailers
After three robust years, growth in the intermodal trailer market was flat in
1995. This lack of growth resulted from several factors including a lackluster
domestic economy, environmental issues, the peso devaluation, a new teamsters
agreement allowing more aggressive pricing, and consolidation among U.S.
railroads. Industry experts believe these factors may lead to an improved
balance in supply and demand and encourage suppliers to retire older, obsolete
equipment in 1996. The Partnership's piggyback trailer fleet, with the average
age of 7 years compared to the industry norm of 10 years, experienced better
utilization than that of its competitors, averaging near 80% during 1995.
Expansion and utilization levels in the intermodal market are anticipated to
improve in 1996 and trailer loadings are expected to increase 3-4% per year
throughout the rest of the decade.
(6) Over-the-Road Dry Trailers
The over-the-road dry trailer market remained strong in 1995 due to record
freight movements and equipment utilization. The General Partner achieved
excellent utilization levels in 1995 averaging over 85%. Current levels show
some signs of softening demand in comparison to the record-setting levels of
1994, when users encountered backlogs of up to 18 months for new equipment
delivery. While new production is expected to decline over the next few years,
this should not dramatically affect utilization levels, as plenty of older,
obsolete equipment needs to be retired.
The General Partner continues to transfer trailers with expiring lease
terms to the short-term trailer rental facilities operated by PLM Rental, Inc.
The General Partner believes the strong performance of units in these rental
facilities reflects the demand for short-term leases mentioned above and expects
this trend to continue as long as the current shortage of trailers exists.
(7) Over-the-Road Refrigerated Trailers
After a record year in 1994, demand for refrigerated trailers softened in 1995.
This softened demand affected overall performance in 1995. Adverse weather
conditions reduced the volume of fresh fruit and produce available, so
refrigerated equipment operators focused on hauling generic freight, adding to
the dry freight market while reducing capacity and demand in
temperature-controlled markets.
Heavy consolidation in the trucking industry induced carriers to work off
excess equipment inventory from 1994 levels. However, inventory is expected to
return to more normal levels in 1996 and continue throughout the rest of the
decade, as excess capacity is retired, newer refrigeration technology standards
become more defined, and environmentally-damaging refrigerants are phased out of
service.
(E) Government Regulations
The use, maintenance, and ownership of equipment is regulated by federal, state,
local, and/or foreign governmental authorities. Such regulations may impose
restrictions and financial burdens on the Partnership'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 Partnership'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 Partnership's
equipment is subject to extensive safety and operating regulations which may
require the removal from service or extensive modification of such equipment to
meet these regulations at considerable cost to the Partnership. 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, mobile offshore drilling units, etc. that
create environmental pollution);
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990
(which limits or eliminates the operation of commercial aircraft in the U.S.
that do not meet certain noise, aging, and corrosion criteria);
(3) the Montreal Protocol on Substances That Deplete the Ozone Layer and
the U.S. 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 which are
used extensively as refrigerants in refrigerated marine cargo containers,
over-the-road trailers, etc.);
(4) the U.S. Department of Transportation's Hazardous Materials Regulations
(which regulate the classification of and packaging requirements for hazardous
materials and which apply particularly to the Partnership's tank cars).
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased for leasing purposes. At December 31, 1995, the partnership
owned a portfolio of transportation equipment as described in Part I, Table 1.
The Partnership maintains its principal office at One Market, Steuart
Street Tower, Suite 900, San Francisco, California 94105-1301. All office
facilities are provided by FSI without reimbursement by the Partnership.
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 Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1995.
Part II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT MATTERS
The Partnership's Depositary Units began trading (under the ticker symbol GFY)
on November 20, 1990, on the American Stock Exchange (AMEX). As of March 14,
1996, there were 7,385,605 Depositary Units outstanding (including 1,150
Depositary Units held in the Treasury). There are approximately 9,900 Depositary
Unitholders of record as of the date of this report.
Pursuant to the terms of the Partnership Agreement, the General Partner is
generally entitled to a 5% interest in the profits and losses and distributions
of the Partnership. The General Partner also is entitled to a special allocation
of any gains from sale of the Partnership's assets during the liquidation phase
in an amount sufficient to eliminate any negative balance in the General
Partner's capital account.
The Partnership depositary units are listed and traded on the American Stock
Exchange under the symbol GFY. Under the Internal Revenue Code (the Code), the
Partnership is classified as a Master Limited Partnership. The Code treats all
Publicly Traded Partnerships as corporations if they remain publicly traded
after December 31, 1997. Treating the Partnership as a corporation will mean the
Partnership itself will become a taxable, rather than a "flow through" entity.
As a taxable entity, the income of the Partnership will be subject to federal
taxation at both the partnership level and at the investor level to the extent
that income is distributed to an investor. In addition, the General Partner
believes that the trading price of the Depositary Units may be distorted when
the Partnership begins the final liquidation of the underlying equipment
portfolio. In order to avoid taxation of the Partnership as a corporation and to
prevent unfairness to Unitholders, the General Partner has requested to delist
the Partnership's Depositary Units from the AMEX prior to March 29, 1996. The
last day for trading on the AMEX will be March 22, 1996. While the Partnership's
Depositary Units will no longer be publicly traded on a national stock exchange,
the General Partner will continue to manage the equipment of the Partnership and
prepare and distribute quarterly and annual reports and Forms 10-Q and 10-K in
accordance with the Securities and Exchange Commission requirements. In
addition, the General Partner will continue to provide pertinent tax reporting
forms and information to Unitholders. The General Partner anticipates that
following delisting, an informal market for the Partnership's units may develop
in the secondary marketplace similar to that which currently exists for
non-publicly traded partnerships.
Table 2, below, sets forth the high and low reported prices of the
Partnership's Depositary Units for 1994 and 1993 as reported by the AMEX as well
as cash distributions paid per Depositary Unit.
TABLE 2
Cash
Distributions
Paid Per
Reported Trade Depositary
Prices Unit
-------------------------------------------
Calendar Period High Low
1995
1st Quarter $ 8.500 $ 7.000 $ 0.40
2nd Quarter $ 8.563 $ 7.250 $ 0.40
3rd Quarter $ 8.000 $ 6.250 $ 0.40
4th Quarter $ 6.625 $ 4.563 $ 0.40
1994
1st Quarter $ 12.250 $ 10.125 $ 0.40
2nd Quarter $ 11.625 $ 10.125 $ 0.40
3rd Quarter $ 10.625 $ 9.375 $ 0.40
4th Quarter $ 9.875 $ 7.250 $ 0.40
The Partnership has engaged in a plan to repurchase up to 250,000 of the
outstanding Depositary Units. During 1995, the Partnership repurchased and
canceled 46,400 Depositary Units at a total cost of $345,000. During the fourth
quarter of 1994, the Partnership repurchased 20,200 Depositary Units at a total
cost of $156,000. During the first quarter of 1993, the Partnership repurchased
6,700 Depositary Units at a total cost of $70,000. As of December 31, 1995, the
Partnership had purchased and canceled a cumulative total of 73,300 Depositary
units at a cost of $571,000.
ITEM 6. SELECTED FINANCIAL DATA
Table 3, below, lists selected financial data for the Partnership:
TABLE 3
For the years ended
December 31, 1995, 1994, 1993, 1992, and 1991
(thousands of dollars except per unit amounts)
1995 1994 1993 1992 1991
--------------------------------------------------------------------------
Operating results:
Total revenues $ 18,983 $ 26,326 $ 36,901 $ 34,508 $ 44,519
Net gain (loss) on
disposition of equipment 1,485 2,347 6,704 (329) 5,173
Loss on revaluation of
equipment (667) (887) (161) (6,876) (300)
Net income (loss) 937 67 5,596 (10,489) 1,447
At year-end:
Total assets $ 49,161 $ 69,485 $ 84,206 $ 92,928 $ 124,422
Total liabilities 30,965 39,332 41,344 42,928 46,562
Notes payable 27,000 35,000 35,000 38,218 41,724
Cash distributions $ 12,549 $ 12,620 $ 12,665 $ 17,371 $ 17,369
Cash distributions which represent a return $ 11,847 11,989 $ 7,563 $ 16,502 $ 16,256
of capital $
Per Depositary Unit:
Net income (loss) $ 0.01<F1> $ (0.12)<F1> $ 0.60<F1> $ (1.53)<F1> $ 0.03<F1>
Cash distributions $ 1.60 $ 1.60 $ 1.60 $ 2.20 $ 2.20
Cash distributions which represent a return $ $ $
of capital 1.60 $ 1.60 1.01 $ 2.20 2.17
<FN>
<F1> After reduction of income of $815 ($0.11 per Depositary Unit) in 1995, $963
($0.13 per Depositary Unit) in 1994, $845 ($0.11 per Depositary Unit) in
1993, $1,495 ($0.20 per Depositary Unit) in 1992, and $1,130 (%0.15 per
Depositary Unit) in 1991 representing special allocations to the General
Partner resulting from an amendment to the Partnership Agreement (see Note
1 to the financial statements).
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
Management's Discussion and Analysis of Financial Condition and Results of
Operations relates to the Financial Statements of PLM Equipment Growth Fund II
(the Partnership). The following discussion and analysis of operations focuses
on the performance of the Partnership's equipment in various sectors of the
transportation industry and its effect on the Partnership's overall financial
condition.
The analysis is organized in the following manner:
- - Results of Operations - Year Over Year Summary and Factors Affecting
Performance
- - Financial Condition - Capital Resources, Liquidity, and Distributions
- - Outlook for the Future
- - Results of Operations - Year to Year Detail Comparison
(A) Results of Operations
(1) Year Over Year Summary
The Partnership's operating contribution before depreciation, amortization,
gain/loss on sales, and loss on revaluation declined by approximately 11% in
1995 from 1994, primarily due to the sale of certain equipment, reduction in
lease rates for certain equipment re-leased during the year, and the
Partnership's use of sales proceeds for debt reduction rather than the
acquisition of additional equipment. Interest expense decreased as the
Partnership prepaid two annual principal payments, thereby reducing its
outstanding debt balance, while management fees decreased as a function of
decreased lease revenues.
(2) Factors Affecting Performance
(a) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Partnership'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 transportation equipment include supply and demand for similar or comparable
types or kinds of transport capacity, desirability of the equipment in the lease
market, market conditions for the particular industry segment in which the
equipment is to be leased, overall economic conditions, various regulations
concerning the use of the equipment, and others. The Partnership experienced
re-pricing exposure in 1995 primarily in its rig and trailer portfolios.
(i) Mobile Offshore Drilling Unit (Rigs): Effective in the first quarter of
1995, the lease of the Partnership's rig reached the end of that period of the
lease term in which rents were paid on a fixed daily rate, and began a new
portion of the lease term in which the fixed daily rate was reduced by
approximately 30% with the provision for sharing 50% of any profits realized by
the charterer operating the rig calculated on a quarterly basis. During 1995, no
profit sharing was realized. For a more thorough discussion of market conditions
and those factors impacting rates for rigs, see the "Demand" section on Mobile
Offshore Drilling Units.
(ii)Trailers: The majority of the Partnership's trailer portfolio operates
in short-term rental facilities or short-line railroad systems. The relatively
short duration of most leases in these operations exposes the trailers to
considerable re-leasing activity. While a year over year comparison of the
Partnership's trailer portfolio shows an increase in net contribution, the
impact of trailer purchases in late 1994 had far greater impact on performance
than changing rates, as approximately 77% of the Partnership's total intermodal
trailers used in short-line railroad service were purchased in the third and
fourth quarters of 1994. Net contributions for the Partnership's trailers
operated in short-term rental facilities declined slightly from 1994 to 1995,
for reasons described in the "Demand" section on trailers.
Of the Partnership's remaining equipment, other factors, such as those
described in the next section, had far greater impact on net contribution than
changing rates.
(b) Equipment Liquidations, Nonperforming Lessees, and Off-lease Time
The Partnership's exposure to meeting its objective of generating net operating
cash flow from lease operations to meet existing liquidity requirements and
generate cash distributions lies in its ability to keep its equipment portfolio
on-lease and for lessees to perform under the terms of those leases prior to the
liquidation phase of Partnership operations. The previous section described
risks involved in re-leasing equipment in changing markets. Risk factors
involving equipment lease operations are:
-liquidation of Partnership equipment without subsequent replacement by
additional equipment (see below in Reinvestment Risk), which represents a
reduction in the size of the equipment portfolio, and may result in reduction of
net contributions to the partnership;
- 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 which can
not only result in reductions in net contribution, but also may require the
Partnership to assume additional costs to protect its interests under the
leases, such as repossession, legal fees, etc.
- equipment that is idle or out of service between the expiration of one
lease and the assumption of a subsequent one can result in a reduction of net
contribution to the Partnership, not only through the loss of economic
productivity of such equipment, but also through the assumption of costs
involved in maintaining or refitting the equipment as new leases are sought.
The Partnership experienced the following in 1995:
(i) Liquidations: During 1995, the Partnership sold its remaining interest
in a marine vessel, 2,278 marine containers, its interest in a McDonnell-Douglas
DC-9 aircraft, 1 railcar, 11 trailers and 1 tractor. A portion of the proceeds
from the sale of this equipment was used to prepay the first two annual
installments of the Partnership's outstanding debt, totaling $8 million. As no
additional equipment was purchased in 1995, these liquidations represent a
permanent reduction in the Partnership's equipment portfolio. The net result of
all sales, liquidations, and no reinvestment has been a reduction in the cost
basis of the Partnership's equipment portfolio of approximately $14.1 million.
(ii) Nonperforming Lessees: The Partnership purchased 1,959 marine
containers for approximately $2.2 million between the first and third quarter of
1994. The lessee of this equipment encountered financial difficulties in the
fourth quarter of 1994. The Partnership established reserves against receivables
invoiced for these units due to the General Partner's determination that
ultimate collection of this revenue was uncertain. Additionally, the Partnership
accrued legal and other costs necessary to protect its interests under the term
of the lease. The General Partner reached an agreement with the lessee resulting
in the sale of the units to the lessee for $2.2 million in the third quarter
1995. The Partnership recovered the purchase cost of the containers and
approximately $0.2 million in unpaid receivables, but was required to write-off
approximately $0.3 million in receivables that will not be collected as a result
of the sale.
In the fourth quarter of 1995, the Partnership established reserves of
approximately $0.2 million against invoices for one of its
internationally-operated aircraft due to the General Partner's determination
that ultimate collection of this rent is uncertain.
(iii) Off-lease Time: One of the Partnership's aircraft was off-lease in
the first quarter and for part of the second quarter of 1995 as it underwent
repairs and retrofits in accordance with the manufacturer's Aging-Aircraft and
Corrosion directives. These modifications were more extensive than anticipated,
costing approximately $0.8 million, and slowing delivery to a new lessee by
approximately one month. During the fourth quarter of 1995, the lease of one of
the Partnership's aircraft expired, and the aircraft is presently being marketed
for sale. As stated previously, it may be difficult to quantify the true
economic loss to the Partnership resulting from the aircraft being off-lease in
the fourth quarter; however, at previous lease rates, the net contribution from
the aircraft declined by approximately $0.13 million from 1994 to 1995.
(c) Reinvestment Risk
Reinvestment risk occurs when 1) the Partnership cannot generate sufficient
surplus cash after fulfillment of operating obligations and distributions to
reinvest in additional equipment during the reinvestment phase of Partnership
operations; 2) equipment is sold or liquidated for less than threshold amounts;
3) proceeds from sales, losses, or surplus cash available for reinvestment
cannot be reinvested at threshold lease rates; or 4) proceeds from sales,
losses, or surplus cash available for reinvestment cannot be deployed in a
timely manner.
During the first seven years of operations, the Partnership intended to
increase its equipment portfolio by investing surplus cash in additional
equipment after fulfilling operating requirements and paying distributions to
the partners. Subsequent to the end of the reinvestment period which concluded
on December 31, 1995, the Partnership will continue to operate for an additional
three years, then begin an orderly liquidation over an anticipated two-year
period.
For the year ended December 31, 1995, the Partnership generated sufficient
operating revenues to meet its operating obligations, including interest
expense. Cash distributions of $12.5 million included both funds generated from
current period operations and cash available, but not distributed, in previous
periods. During the year, the Partnership received proceeds of approximately
$7.0 million from the liquidation or sale of marine containers, trailers,
railcars, its 50% interest in an aircraft, and 50% interest in a marine vessel.
The Partnership reinvested approximately $0.6 million in aircraft modifications,
but did not purchase any additional equipment in 1995. The Reinvestment phase of
Partnership operations ended on December 31, 1995.
The Partnership began the year with approximately $12.6 million in cash and
restricted cash, of which approximately $8.0 million was reserved by the General
Partner for prepayment of the first two annual payments of the Partnership's
outstanding debt. A $7.0 million payment was made at the end of the first
quarter, and an additional $1.0 million was paid in the third quarter.
(d) Equipment Valuation and Write-downs
In March 1995, the Financial Accounting Standards Board (FASB) issued statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121). This standard is effective for years
beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995,
the effect of which was not material as the method previously employed by the
Partnership was consistent with SFAS 121. In accordance with SFAS 121, the
Partnership reviews the carrying value of its equipment at least annually in
relation to expected future market conditions for the purpose of assessing the
recoverability of the recorded amounts. If projected future lease revenue plus
residual values are less than the carrying value of the equipment, a loss on
revaluation is recorded. The carrying value of an aircraft was reduced by
approximately $0.7 million in 1995.
As of December 31, 1995, the General Partner estimated the current fair
market value of the Partnership's equipment portfolio to be approximately $61.4
million.
(B) Financial Condition - Capital Resources, Liquidity, and Distributions
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering and permanent debt financing. No
further capital contributions from original partners are permitted under the
terms of the Partnership's Limited Partnership Agreement, while the
Partnership's total outstanding indebtedness, currently $27.0 million, has been
reduced from its previous level of $35 million. The Partnership relies on
operating cash flow to meet its operating obligations, make cash distributions
to Limited Partners, and increase the Partnership's equipment portfolio with any
remaining surplus cash.
For the year ended December 31, 1995, the Partnership generated sufficient
operating revenues to meet its operating obligations, but used undistributed
available cash from prior periods of approximately $1.3 million to maintain the
current level of distributions (total of $12.5 million in 1995) to the partners.
During the year, the General Partner sold equipment for approximately $7.0
million and used these proceeds to prepay $8.0 million in principal payments on
its outstanding debt.
(C) Outlook for the Future
Several factors may affect the Partnership's operating performance in 1996 and
beyond, including changes in the markets for the Partnership's equipment,
changes in the regulatory environment in which that equipment operates, and
general economic conditions in each year.
(1) Repricing and Reinvestment Risk
Certain of the Partnership's aircraft, railcars, rig, and trailers will be
remarketed in 1996 as existing leases expire, exposing the Partnership to
considerable repricing risk/opportunity. Additionally, the General Partner may
select to be sold certain underperforming equipment, or equipment whose
continued operation may become prohibitively expensive. As the reinvestment
phase of Partnership operations ended December 31, 1995, and proceeds from sold
or liquidated equipment cannot subsequently be used for investment in additional
equipment, such sales will result in a smaller equipment portfolio and may
result in a reduction in net income available for distribution.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership'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
Partnership'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 Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the General Partner has
observed rising insurance costs to operate certain vessels into U.S. ports
resulting from implementation of the U.S. Oil Pollution Act of 1990. Ongoing
changes in the regulatory environment, both in the U.S. and internationally,
cannot be predicted with any accuracy, and preclude the General Partner from
determining the impact of such changes on Partnership operations, purchases, or
sale of equipment.
(3) Additional Capital Resources and Distribution Levels
The Partnership's initial contributed capital was comprised of the proceeds from
its initial offering, supplemented later by permanent debt in the amount of $35
million. The General Partner 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.
Pursuant to the Limited Partnership Agreement, the Partnership ceased to
reinvest in additional equipment beginning in its eighth year of operations
which commenced on January 1, 1996. The General Partner intends to pursue a
strategy of selectively re-leasing equipment to achieve competitive returns, or
selling equipment that is underperforming or whose operation becomes
prohibitively expensive, in the period prior to the final liquidation of the
Partnership. During this time, the Partnership will use operating cash flow and
proceeds from the sale of equipment to meet its operating obligations and make
distributions to the partners. Although the General Partner intends to maintain
a sustainable level of distributions prior to final liquidation of the
Partnership, actual Partnership performance and other considerations may require
adjustments to then-existing distribution levels. In the long term, changing
market conditions and used-equipment values may preclude the General Partner
from accurately determining the impact of future re-leasing activity and
equipment sales on Partnership performance and liquidity. Consequently, the
General Partner cannot establish future distribution levels with any certainty
at this time.
In the first quarter of 1994, the General Partner completed the refinancing
of a bank loan which was due to mature September 30, 1995. The new debt
comprised notes payable of $35.0 million, and the corresponding loan agreements
require the Partnership to maintain a minimum debt coverage ratio based on the
fair market value of equipment, a minimum fixed charge coverage ratio, and
limits the concentration of any one type of equipment in the Partnership's
equipment portfolio. The refinanced debt begins to mature in March 1996. The
General Partner prepaid the first two annual installments of principal due on
the debt in the first and third quarters of 1995. The maturities of the
remaining principal installments on the debt coincide with the liquidation phase
of the Partnership and will be repaid with proceeds from sales of equipment
during that phase.
As of the first quarter of 1996, the cash distribution rate has been
reduced to more closely reflect current and expected net cash flows from
operations. Continued weak market conditions in certain equipment sectors and
equipment sales have reduced overall lease revenues in the Partnership to the
point where reductions in distribution levels are now necessary. In addition,
with the Partnership expected to enter the liquidation phase in the near future,
the size of the Partnership's remaining equipment portfolio, and, in turn, the
amount of net cash flows from operations, will continue to become progressively
smaller as assets are sold. Although distribution levels will be reduced,
significant asset sales may result in potential special distributions to
Unitholders.
(D) Results of Operations - Year to Year Detail Comparison
Comparison of the Partnership's Operating Results for the Years Ended December
31, 1995 and 1994
(A) Revenues
Total revenues for the years ended December 31, 1995 and 1994, were $19.0
million and $26.3 million, respectively. The decrease in 1995 revenues was
primarily attributable to lower lease revenue and reduced gains on disposition
of equipment. Lower lease revenue resulted from the Partnership's sales of an
interest in a marine vessel, and an aircraft, a railcar, trailers, and marine
containers during 1995 and 1994 sales. The Partnership's ability to liquidate
assets, secure leases, and re-lease those assets whose leases expire during the
duration of the Partnership is subject to many factors and the Partnership's
performance in 1995 is not necessarily indicative of future periods.
(1) Lease revenue declined to $16.8 million in 1995 from $23.3 million in
1994. The following table lists lease revenue earned by equipment type (in
thousands):
For the year ended December 31,
1995 1994
-------------------------------
Trailers and tractors $ 4,972 $ 3,885
Rail equipment 4,785 4,823
Aircraft 3,666 4,935
Marine containers 1,580 1,826
Mobile offshore drilling units 1,436 2,488
Marine vessels 391 5,294
===============================
$ 16,830 $ 23,251
===============================
Significant revenue component changes resulted primarily from:
(a) Declines of $4.9 million in marine vessel revenues due to the sale of
two marine vessels during the third quarter of 1994 and the Partnership's 50%
interest in another marine vessel in the second quarter of 1995;
(b) Declines of $1.3 million in aircraft revenue due to the sale of the
Partnership's 50% interest in a DC-9 aircraft during the second quarter of 1995
and another aircraft being off-lease during part of the fourth quarter of 1995;
(c) A decrease of $1.2 million in mobile offshore drilling unit (rig)
revenue due to the sale of one rig in the fourth quarter of 1994, and a lower
re-lease rate on another rig;
(d) A decrease of $0.2 million in marine container revenue due to the sale
of 2,278 marine containers during 1995;
(e) An increase of $1.1 million in trailer and tractor revenue due to the
purchase of 649 trailers in the third and fourth quarters of 1994.
(2) Interest and other income decreased by $0.1 million due primarily due
to lower cash balances available for investment, offset slightly by an increase
in the interest rate earned on cash investments.
(3) Net gain on disposition of equipment during 1995 totaled $1.5 million
from the sale or disposal of the Partnership's 50% interest in a DC-9 aircraft,
11 trailers, 1 tractor, 2,278 marine containers, 1 railcar, and the
Partnership's 50% interest in a marine vessel with an aggregate net book value
of $5.8 million and unused drydock reserves of $0.3 million, for proceeds of
$7.0 million. Net gains on disposition of equipment during 1994 totaled $2.3
million from the sale or disposal of 2 marine vessels, 2 railcars, 267 trailers,
423 marine containers, and a 12% interest in a mobile offshore drilling unit.
The equipment sold had an aggregate net book value of $13.5 million and accrued
drydock reserves of $2.2 million for proceeds of $13.6 million.
(B) Expenses
Total expenses for the years ended December 31, 1995 and 1994, were $18.0
million and $26.3 million, respectively. The decrease in 1995 expenses was
primarily attributable to decreased marine equipment operating expenses,
depreciation expense, repairs and maintenance, insurance, and management fees,
offset by a slight increase in bad debt expense.
(1) Direct operating expenses (defined as repairs and maintenance,
insurance, and marine equipment operating expenses) decreased to $3.3 million in
1995 from $8.3 million in 1994. This change resulted from:
(a) Decreases of $2.9 million in marine equipment operating expense
resulted from the sale of two marine vessels in the third quarter of 1994 and
the Partnership's 50% interest in another marine vessel in the second quarter of
1995;
(b) Decreases of $1.4 million in repairs and maintenance costs from 1994
levels resulted from the sale of two marine vessels in the third quarter of 1994
and a 50% interest in another marine vessel in the second quarter of 1995. These
declines were offset slightly by increases in aircraft expenses resulting from
the refurbishment of an aircraft prior to being re-leased;
(c) Decreases of $0.7 million in insurance expenses resulted from the sale
of two marine vessels in the second quarter of 1994. The 1994 expenses include a
$0.2 million refund from an insurance pool in which the Partnership's marine
vessels participate, due to lower than expected insurance claims in the pool. A
similar refund was not received in 1995.
(2) Indirect operating expenses (defined as depreciation and amortization
expense, management fees, interest expense, general and administrative expenses,
and bad debt expense) decreased to $14.1 million in 1995 from $17.1 million in
1994. This change resulted from:
(a) Decreases of $2.6 million in depreciation expense from 1994 levels,
reflecting the Partnership's double-declining balance depreciation method and
the effect of asset sales in 1994 and 1995, partially offset by the purchase of
equipment during the later part of 1994;
(b) Decreases of $0.3 million in management fees to affiliates, reflecting
the lower levels of lease revenues in 1995 as compared to 1994;
(c) Decreases of $0.2 million in interest expense from a $0.3 million
write-off in 1994 of unamortized loan origination costs due to the refinancing
of the Partnership's debt in 1994, offset by a $0.1 million increase due to a
higher base rate of interest charged on the Partnership's floating rate debt
during 1995;
(d) Decreases of $0.1 million in general and administrative expenses from
1994 levels, resulting from the write-off of accrued legal and other expenses,
offset by increased administrative costs associated with the short-term rental
facilities due to an additional 636 trailers now operating in the facilities in
1995 when compared to the same period in 1994;
(e) Increases of $0.2 million in bad debt expense reflect the General
Partner's evaluation of the collectibility of receivables due from an aircraft
lessee that encountered financial difficulties.
(3) Loss on revaluation of equipment of $0.7 million in 1995 resulted from
the Partnership reducing the net book value of an aircraft to its estimated net
realizable value.
(C) Net Income
The Partnership's net income of $937,000 for the year ended December 31, 1995,
increased from net income of $67,000 for 1994. During 1995, the Partnership
distributed $11.9 million to the Limited Partners, or $1.60 per Depositary Unit.
Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1994 and 1993
(A) Revenues
Total revenues for the years ended December 31, 1994 and 1993, were $26.3
million and $36.9 million, respectively. The decrease in 1994 revenues was
primarily attributable to lower lease revenue and reduced gains on disposition
of Partnership marine vessels, a mobile offshore drilling unit, trailers and
marine containers during 1994. The Partnership's ability to acquire or liquidate
assets, secure leases, and re-lease those assets whose leases expire during the
duration of the Partnership is subject to many factors and the Partnership's
performance in 1994 is not necessarily indicative of future periods.
(1) Lease revenue declined to $23.3 million in 1994 from $30.0 million in
1993. The following table lists lease revenue earned by equipment type (in
thousands):
For the year ended December 31,
1994 1993
-------------------------------
Marine vessels $ 5,294 $ 12,050
Rail equipment 4,823 5,336
Aircraft 4,935 5,051
Trailers and tractors 3,885 3,590
Mobile offshore drilling unit 2,488 1,418
Marine containers 1,826 2,506
===============================
$ 23,251 $ 29,951
===============================
Significant revenue component changes resulted primarily from:
(a) Declines of $6.8 million in marine vessel revenue due to the sale of
five on-lease marine vessels during the first and fourth quarters of 1993 and
the third quarter of 1994;
(b) Declines of $0.7 million in marine container revenues primarily due to
a group of marine containers which were on-lease in 1993, but off-lease in 1994,
offset, in part, by revenue earned on 1,959 marine containers purchased during
1994;
(c) Declines of $0.5 million in rail equipment revenues due to the sale of
639 railcars during 1993 and two railcars in 1994;
(d) Declines of $0.1 million in aircraft revenues due to the sale of an
aircraft in the fourth quarter of 1993 and a significant rate reduction on a
renewed lease for another aircraft;
(e) Increases of $1.1 million in mobile offshore drilling unit (rig)
revenues due to the acquisition and lease of a 55% interest in a rig during July
of 1993;
(f) Increases of $0.3 million in trailer revenue due to the acquisition of
649 trailers during the third and fourth quarters of 1994.
(2) Net gains on disposition of equipment during 1994 totaled $2.3 million
from the sale or disposal of 2 marine vessels, 2 railcars, 267 trailers, 423
marine containers, and a 12% interest in a mobile offshore drilling unit. The
equipment sold had an aggregate net book value of $13.5 million and accrued
drydock reserves of $2.2 million and proceeds totaled $13.6 million. Net gains
on disposition of equipment during 1993 totaled $6.7 million from the sale or
disposal of 3 marine vessels, 639 railcars, 1 aircraft, 124 tractors and
trailers, and 305 marine containers with an aggregate net book value of $16.0
million and accrued drydock reserves of $1.5 million for proceeds of $21.2
million (see Note 3 to the Financial Statements).
(B) Expenses
Total expenses for the years ended December 31, 1994 and 1993, were $26.2
million and $31.3 million, respectively. The decrease in 1994 expenses was
primarily attributable to decreased depreciation expense, marine equipment
operating expenses, and repairs and maintenance, offset by increases in loss on
revaluation of equipment and interest expense.
(1) Direct operating expenses (defined as repairs and maintenance,
insurance, and marine equipment operating expenses) decreased to $8.2 million in
1994 from $12.3 million in 1993. This change resulted from:
(a) Declines of $2.1 million in marine equipment operating costs due to the
sale of three marine vessels in 1993 and two marine vessels in 1994. This
decrease was offset by increased operating cost for three marine vessels (of
which two were sold at the end of the third quarter of 1994) which operated
under leases (voyage charters and utilization based pooling arrangements) in
which the Partnership paid costs not incurred when the vessels operated under
time charter in the similar period one year earlier;
(b) Declines of $1.2 million in insurance expense which resulted primarily
from the sale of three marine vessels in 1993 and a refund of $0.2 million from
an insurance pool in which the Partnership's marine vessels participate, due to
lower than expected insurance claims in the pool;
(c) declines of $0.7 million in repairs and maintenance costs due to the
sale of three marine vessels in 1993, and two marine vessels in the third
quarter of 1994. These declines were offset by increases in trailer expenses
resulting from the increased number of trailers coming off term leases which
required refurbishment prior to transitioning to short-term rental facilities
operated by an affiliate of the General Partner.
(2) Indirect operating expenses (defined as depreciation and amortization
expense, management fees, interest expense, general and administrative expenses,
and bad debt expense) decreased to $17.1 million in 1994 from $18.9 million in
1993. This change resulted from:
(a) Declines in depreciation expense of $2.4 million reflecting the
Partnership's double-declining depreciation method and the effect of asset sales
in 1993 and 1994, partially offset by the acquisition of the rig in July 1993;
(b) Declines of $0.4 million in management fees to affiliates, reflecting
the lower levels of lease revenue in 1994 as compared to 1993;
(c) Declines in general and administrative expenses of $0.1 million from
1993 levels due to reduced professional services required by the Partnership and
lower storage expenses for two aircraft (one sold in the fourth quarter of 1993)
which were off-lease for most of 1993. These declines were offset, by a slight
increase in legal and other expenses necessary to repossess containers from a
lessee that encountered financial difficulties in the fourth quarter of 1994;
(d) Increases in interest expense of $0.8 million consisted of a $0.3
million write-off of unamortized loan origination costs due to the refinancing
of the Partnership's debt and a $0.5 million increase due to a higher base rate
of interest charged on the Partnership's floating rate debt during 1994;
(e) Increases of $0.2 million in bad debt expense due to the General
Partner's evaluation of the collectability of trade receivables due from the
trailer rental yard lessees, and a container lessee that encountered financial
difficulties in the fourth quarter of 1994.
(3) Loss on revaluation of equipment of $0.9 million in 1994 which resulted from
the Partnership reducing the carrying value of two aircraft to their estimated
net realizable values.
(C) Net Income
The Partnership's net income of $67,000 for the year ended December 31, 1994,
decreased from a net income of $5.6 million for 1993. During 1994, the
Partnership distributed $12.0 million to the Limited Partners, or $1.60 per
Depositary Unit.
Geographic Information
The Partnership operates its equipment in international markets. As such, the
Partnership is exposed to a variety of currency, political, credit, and economic
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 generally through the avoidance of operations in
countries that do not have a stable judicial system and established commercial
business laws. Credit support strategies for lessees range from letters of
credit supported by U.S. banks to cash deposits. Although these credit support
mechanisms generally allow the Partnership 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 General Partner strives to
minimize this risk with market analysis prior to committing equipment to a
particular geographic area. Refer to the notes to the financial statements for
information on the revenues, income, and assets in various geographic regions.
Inflation
There was no significant impact on the Partnership's operations as a result of
inflation during 1995, 1994, or 1993.
Trends
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. In 1995, market conditions, supply and demand equilibrium,
and other factors varied in several markets. In the container and refrigerated
over-the-road trailer markets, oversupply conditions, industry consolidations,
and other factors resulted in falling rates and lower returns. In the dry
over-the-road trailer markets, strong demand and a backlog of new equipment
deliveries produced high utilization and returns. The marine vessel, rail, and
mobile offshore drilling unit markets could be generally categorized by
increasing rates as the demand for equipment is increasing faster than new
additions net of retirements. Finally, demand for narrowbody stage II aircraft,
such as those owned by the Partnership, has increased as expected savings from
newer narrowbody aircraft have not materialized and deliveries of the newer
aircraft have slowed down. These different markets have had individual effects
on the performance of Partnership equipment - in some cases resulting in
declining performance, and in others, in improved performance.
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,
governmental or other regulations, and others. The unpredictability of some of
these factors, or of their occurrence, makes it difficult for the General
Partner to clearly define trends or influences that may impact the performance
of the Partnership's equipment. The General Partner continuously monitors both
the equipment markets and the performance of the Partnership's equipment in
these markets. The General Partner may make an evaluation to reduce the
Partnership's exposure to equipment markets in which it determines that it
cannot operate equipment and achieve acceptable rates of return. Alternatively,
the General Partner may make a determination to enter equipment markets in which
it perceives opportunities to profit from supply-demand instabilities or other
market imperfections.
The Partnership intends to use cash flow from operations to satisfy its
operating requirements, pay loan principal on debt, and pay cash distributions
to the investors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements and Financial Statement Schedules included in Item 14(a) of
this Annual Report.
Table 4, below, is a summary of the results of operations on a quarterly
basis for the Partnership for the years ended December 31, 1995 and 1994 (in
thousands of dollars except per unit amount):
TABLE 4
Three months ended:
(thousands of dollars, except unit amounts)
1995 March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------------------------------------------------------------------------
Total revenues $ 4,726 $ 5,315 $ 4,653 $ 4,289
Net (loss) gain on disposition
of equipment $ 50 $ 804 $ 496 $ 135
Loss on revaluation of equipment $ -- $ -- $ (667)<F1> $ --
Net income (loss) $ 248 $ 683 $ (104) $ 110
Net gain (loss) per Depositary Unit<F2> $ 0.01 $ 0.08 $ (0.08) $ (0.02)
Cash distributions $ 3,146 $ 3,138 $ 3,132 $ 3,133
Cash distributions per Depositary Unit $ 0.40 $ 0.40 $ 0.40 $ 0.40
Number of Depositary Units at end
of quarter<F3> 7,453 7,439 7,439 7,426
<FN>
<F1> At December 31, 1995, the Partnership reduced the carrying value of an
aircraft.
<F2> After reduction of $815 ($0.11 per Depositary Unit) representing a special
allocation to the General Partner (see Note 1 to financial statements).
<F3> Includes 1,150 Depositary Units held in the Treasury.
</FN>
TABLE 4
Three months ended:
(thousands of dollars, except unit amounts)
1994 March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------------------------------------------------------------------------
Total revenues $ 6,863 $ 6,413 $ 6,283 $ 6,767
Net (loss) gain on disposition
of equipment $ 581 $ 59 $ 125 $ 1,582
Loss on revaluation of equipment $ -- $ -- $ -- $ (887)<F1>
Net income (loss) $ 766 $ (816) $ 184 $ (67)
Net gain (loss) per Depositary Unit<F2> $ 0.08 $ (0.14) $ (0.03) $ (0.03)
Cash distributions $ 3,155 $ 3,155 $ 3,155 $ 3,155
Cash distributions per Depositary Unit $ 0.40 $ 0.40 $ 0.40 $ 0.40
Number of Depositary Units at end
of quarter<F3> 7,493 7,493 7,493 7,473
<FN>
<F1> At December 31, 1994, the Partnership reduced the carrying value of 2
aircraft.
<F2> After reduction of $963 ($0.13 per Depositary Unit) representing a special
allocation to the General partner (see Note 1 to the financial statements).
<F3> Includes 1,150 Depositary Units held in the Treasury.
</FN>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(This space intentionally left blank.)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
As of the date of this Annual Report, the directors and executive officers of
PLM International (and key executive officers of its subsidiaries) are as
follows:
Name Age Position
- -------------------------------------- ------------------- -------------------------------------------------------
J. Alec Merriam 60 Director, Chairman of the Board, PLM International,
Inc.; Director, PLM Financial Services, Inc.
Allen V. Hirsch 42 Director, Vice Chairman of the Board, Executive Vice
President of PLM International, Inc.; Director and
President, PLM Financial Services, Inc.; President,
PLM Securities Corp., and PLM Transportation
Equipment Corporation.
Walter E. Hoadley 79 Director, PLM International, Inc.
Robert L. Pagel 59 Director, Chairman of the Executive Committee, PLM
International, Inc.; Director, PLM Financial
Services, Inc.
Harold R. Somerset 61 Director, PLM International, Inc.
Robert N. Tidball 57 Director, President and Chief Executive Officer, PLM
International, Inc.
J. Michael Allgood 47 Vice President and Chief Financial Officer, PLM
International, Inc. and PLM Financial Services, Inc.
Stephen M. Bess 49 President, PLM Investment Management, Inc.; Vice
President, PLM Financial Services, Inc.
David J. Davis 39 Vice President and Corporate Controller, PLM
International and PLM Financial Services, Inc.
Frank Diodati 41 President, PLM Railcar Management Services Canada
Limited.
Douglas P. Goodrich 49 Senior Vice President, PLM International,
PLM Transportation Equipment Corporation;
President PLM Railcar Management Services, Inc.
Steven O. Layne 41 Vice President, PLM Transportation Equipment
Corporation.
Stephen Peary 47 Senior Vice President, General Counsel and Secretary,
PLM International, Inc. and PLM Financial Services, Inc.;
Vice President, PLM Investment Management, Inc., PLM Transportation
Equipment Corporation, PLM Securities, Corp.
Thomas L. Wilmore 53 Vice President, PLM Transportation Equipment
Corporation; Vice President, PLM Railcar Management
Services, Inc.
J. Alec Merriam was appointed Chairman of the Board of Directors of PLM
International in September 1990, having served as a director since February
1988. In October 1988 he became a member of the Executive Committee of the Board
of Directors of PLM International. From 1972 to 1988 Mr. Merriam was Executive
Vice President and Chief Financial Officer of Crowley Maritime Corporation, a
San Francisco area-based company engaged in maritime shipping and transportation
services. Previously, he was Chairman of the Board and Treasurer of LOA
Corporation of Omaha, Nebraska and served in various financial positions with
Northern Natural Gas Company, also of Omaha.
Allen V. Hirsch became Vice Chairman of the Board and a Director of PLM
International in April 1989. He is an Executive Vice President of PLM
International and President of PLM Securities Corp. Mr. Hirsch became the
President of PLM Financial Services, Inc. in January 1986 and President of PLM
Investment Management, Inc. and PLM Transportation Equipment Corporation in
August 1985, having served as a Vice President of PLM Financial Services, Inc.
and Senior Vice President of PLM Transportation Equipment Corporation beginning
in August 1984, and as a Vice President of PLM Transportation Equipment
Corporation beginning in July 1982 and of PLM Securities Corp. from July 1982 to
October 1, 1987. He joined PLM, Inc. in July 1981, as Assistant to the Chairman.
Prior to joining PLM, Inc., Mr. Hirsch was a Research Associate at the Harvard
Business School. From January 1977 through September 1978, Mr. Hirsch was a
consultant with the Booz, Allen and Hamilton Transportation Consulting Division,
leaving that employment to obtain his master's degree in business
administration.
Dr. Hoadley joined PLM International's Board of Directors and its Executive
Committee in September, 1989. He served as a Director of PLM, Inc. from November
1982 to June 1984 and PLM Companies, Inc. from October 1985 to February 1988.
Dr. Hoadley has been a Senior Research Fellow at the Hoover Institute since
1981. He was Executive Vice President and Chief Economist for the Bank of
America from 1968 to 1981 and Chairman of the Federal Reserve Bank of
Philadelphia from 1962 to 1966. Dr. Hoadley had served as a Director of
Transcisco Industries, Inc. from February 1988 through August 1995.
Robert L. Pagel was appointed Chairman of the Executive Committee of the
Board of Directors of PLM International in September 1990, having served as a
director since February 1988. In October 1988 he became a member of the
Executive Committee of the Board of Directors of PLM International. From June
1990 to April 1991 Mr. Pagel was President and Co-Chief Executive Officer of The
Diana Corporation, a holding company traded on the New York Stock Exchange. He
is the former President and Chief Executive Officer of FanFair Corporation which
specializes in sports fans' gift shops. He previously served as President and
Chief Executive Officer of Super Sky International, Inc., a publicly traded
company, located in Mequon, Wisconsin, engaged in the manufacture of skylight
systems. He was formerly Chairman and Chief Executive Officer of Blunt, Ellis &
Loewi, Inc., a Milwaukee-based investment firm. Mr. Pagel retired from Blunt,
Ellis & Loewi in 1985 after a career spanning 20 years in all phases of the
brokerage and financial industries. Mr. Pagel has also served on the Board of
Governors of the Midwest Stock Exchange.
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), a recently-acquired subsidiary of Alexander & Baldwin, Inc.
Mr. Somerset joined C&H in 1984 as Executive Vice President and Chief Operating
Officer, having served on its Board of Directors since 1978, a position in which
he continues to serve. Between 1972 and 1984, Mr. Somerset served in various
capacities with Alexander & Baldwin, Inc., a publicly-held land and agriculture
company headquartered in Honolulu, Hawaii, including Executive Vice President -
Agricultures, Vice President, General Counsel and Secretary. In addition to a
law degree from Harvard Law School, Mr. Somerset also holds degrees in civil
engineering from the Rensselaer Polytechnic Institute and in marine engineering
from the U.S. Naval Academy. Mr. Somerset also serves on the Boards of Directors
for various other companies and organizations, including Longs Drug Stores,
Inc., a publicly-held company headquartered in Maryland.
Robert N. Tidball was appointed President and Chief Executive Officer of
PLM International in March 1989. At the time of his appointment, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989 and a member of the Executive Committee of the
Board of Directors of PLM International in September 1990. Mr. Tidball was
elected President of PLM Railcar Management Services, Inc. in January 1986. 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,
Inc., he was Vice President, a General Manager and a Director of North American
Car Corporation, and a Director of the American Railcar Institute and the
Railway Supply Association.
J. Michael Allgood was appointed Vice President and Chief Financial Officer
of PLM International in October 1992. Between July 1991 and October 1992, Mr.
Allgood was a consultant to various private and public sector companies and
institutions specializing in financial operational systems development. In
October 1987, Mr. Allgood co-founded Electra Aviation Limited and its holding
company, Aviation Holdings Plc of London where he served as Chief Financial
Officer until July 1991. Between June 1981 and October 1987, Mr. Allgood served
as a First Vice President with American Express Bank, Ltd. In February 1978, Mr.
Allgood founded and until June 1981, served as a director of Trade Projects
International/Philadelphia Overseas Finance Company, a joint venture with
Philadelphia National Bank. From March 1975 to February 1978, Mr. Allgood served
in various capacities with Citibank, N.A.
Stephen M. Bess 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 Corp., a manufacturer of computer peripheral
equipment, from October 1975 to November 1978.
David J. Davis was appointed Vice President and Controller of PLM
International in January 1994. From March 1993 through January 1994, Mr. Davis
was engaged as a consultant for various firms, including PLM. Prior to that Mr.
Davis was Chief Financial Officer of LB Credit Corporation in San Francisco from
July 1991 to March 1993. From April 1989 to May 1991, Mr. Davis was Vice
President and Controller for ITEL Containers International Corporation which was
located in San Francisco. Between May 1978 and April 1989, Mr. Davis held
various positions with Transamerica Leasing Inc., in New York, including that of
Assistant Controller for their rail leasing division.
Frank Diodati was appointed President of PLM Railcar Management Services
Canada Limited in 1986. Previously, Mr. Diodati was Manager of Marketing and
Sales for G.E. Railcar Services Canada Limited.
Douglas P. Goodrich was appointed Senior Vice President of PLM
International in March 1994. Mr. Goodrich has also serve 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, a subsidiary of Guardian
Industries Corp. of Chicago, Illinois from December 1980 to September 1985.
Steven O. Layne was appointed Vice President, PLM Transportation Equipment
Corporation's Air Group in November 1992. Mr. Layne was its Vice President,
Commuter and Corporate Aircraft beginning in July 1990. Prior to joining PLM,
Mr. Layne was the Director, Commercial Marketing for Bromon Aircraft
Corporation, a joint venture of General Electric Corporation and the Government
Development Bank of Puerto Rico. Mr. Layne is a major in the United States Air
Force Reserves and senior pilot with 13 years of accumulated service.
Stephen Peary became Vice President, Secretary, and General Counsel of PLM
International in February 1988 and Senior Vice President in March 1994. Mr.
Peary was Assistant General Counsel of PLM Financial Services, Inc. from August
1987 through January 1988. Previously, Mr. Peary was engaged in the private
practice of law in San Francisco. Mr. Peary is a graduate of the University of
Illinois, Georgetown University Law Center, and Boston University (Masters of
Taxation Program).
Thomas L. Wilmore was appointed Vice President - Rail, PLM Transportation
Equipment Corporation, in March 1994 and has served as Vice President, Marketing
for PLM Railcar Management Services, Inc. since May 1988. Prior to joining PLM,
Mr. Wilmore was Assistant Vice President Regional Manager for MNC Leasing Corp.
in Towson, Maryland from February 1987 to April 1988. From July 1985 to February
1987, he was President and Co-Owner of Guardian Industries Corp., Chicago,
Illinois and between December 1980 and July 1985, Mr. Wilmore was an Executive
Vice President for its subsidiary, G.I.C. Financial Services Corporation. Mr.
Wilmore also served as Vice President of Sales for Gould Financial Services
located in Rolling Meadows, Illinois from June 1978 to December 1980.
The directors of the General Partner are elected for a one-year term or
until their successors are elected and qualified. There are no family
relationships between any director or any executive officer of the General
Partner.
(This space intentionally left blank.)
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers or employees. The Partnership has no
pension, profit-sharing, retirement, or similar benefit plan in effect as of
December 31, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to 5% interest in the profits
and losses and distributions of the Partnership. At December 31, 1995,
no investor was known by the General Partner to beneficially own more
than 5% of the Depositary Units of the Partnership.
(b) Security Ownership of Management
Table 5, below, sets forth, as of the date of this report, the amount
and the percent of the Partnership's outstanding Depositary Units
beneficially owned by each director and executive officer and all
directors and executive officers as a group of the General Partner and
its affiliates:
TABLE 5
Name Depositary Units Percent of Units
J. Alec Merriam 1,000 *
Robert N. Tidball 400 *
Allen V. Hirsch 749 *
All directors and officers
as a group (3 people) 2,149 *
-
* Represents less than 1 percent of the Depositary Units outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
During 1995, management fees to IMI were $818,000. The General Partner and its
affiliates were reimbursed $1,026,000 for administrative and data processing
services performed on behalf of the Partnership in 1995. The Partnership paid
Transportation Equipment Indemnity Company Ltd. (TEI), a wholly owned,
Bermuda-based subsidiary of PLM International, $87,000 for insurance coverages
during 1995 which 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.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
None.
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.
(b) Reports on Form 8-K
None.
(c) Exhibits
4. Limited Partnership Agreement of Registrant. Incorporated by
reference to the Partnership's Registration Statement on Form
S-1 (Reg. No. 33-13113) which became effective with the
Securities and Exchange Commission on June 5, 1987.
4.1 Amendment, dated November 18, 1991, to Limited
Partnership Agreement of Partnership.
10.1 Management Agreement between Registrant and PLM Investment
Management, Inc. Incorporated by reference to the
Partnership's Registration Statement on Form S-1 (Reg. No.
33-13113) which became effective with the Securities and
Exchange Commission on June 5, 1987.
10.2 $35,000,000 Note Agreement, dated as of March 1, 1994.
Incorporated by reference to the Partnership's Annual Report
on Form 10-K to the Securities and Exchange Commission dated
March 24, 1995.
10.3 Amended and Restated Warehousing Credit Agreement, dated as of
September 27, 1995, with First Union National Bank of North
Carolina. Incorporated by reference to the Partnership's
Quarterly Report on Form 10-Q to the Securities and Exchange
Commission dated November 10, 1995.
25. Powers of Attorney.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has
signed on behalf of the Partnership by duly authorized officers.
Date: March 20, 1996 PLM EQUIPMENT GROWTH FUND II
Partnership
By: PLM Financial Services, Inc.
General Partner
By: *_____________________
Allen V. Hirsch
President
By: /s/ David J. Davis
-----------------------
David J. Davis
Vice President and
Controller
* Stephen Peary, by signing his 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/Stephen Peary
---------------------
Stephen Peary
Attorney-in-Fact
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
*_____________________
Allen V. Hirsch Director - FSI March 20, 1996
*_____________________
J. Alec Merriam Director - FSI March 20, 1996
*_____________________
Robert L. Pagel Director - FSI March 20, 1996
* Stephen Peary, by signing his 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/ Stephen Peary
- ---------------------
Stephen Peary
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Report of Independent Auditors 32
Balance sheets as of December 31, 1995 and 1994 33
Statements of income for the years ended December 31, 1995,
1994, and 1993 34
Statements of changes in partners' capital for the years
ended December 31, 1995, 1994, and 1993 35
Statements of cash flows for the years ended December 31,
1995, 1994, and 1993 36
Notes to financial statements 37-44
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.
REPORT OF INDEPENDENT AUDITORS
The Partners
PLM Equipment Growth Fund II:
We have audited the financial statements of PLM Equipment Growth Fund II as
listed in the accompanying index These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our 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 PLM Equipment Growth Fund II as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/S/KPMG PEAT MARWICK, LLP
SAN FRANCISCO, CALIFORNIA
March 14, 1996
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars except per unit amounts)
ASSETS
1995 1994
----------------------------------
Equipment held for operating leases, at cost $ 114,683 $ 128,784
Less accumulated depreciation (75,431) (74,672)
----------------------------------
Net equipment 39,252 54,112
Cash and cash equivalents 6,624 12,348
Restricted cash 548 296
Accounts receivable, less allowance for doubtful
accounts of $520 in 1995 and $427 in 1994 2,424 2,258
Lease negotiation fees to affiliate, net of accumulated
amortization of $1,401 in 1995 and $1,669 in 1994 94 178
Debt issuance costs, net of accumulated amortization
of $69 in 1995 and $79 in 1994 167 207
Prepaid expenses and other assets 52 86
----------------------------------
Total assets $ 49,161 $ 69,485
==================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 409 $ 867
Due to affiliates 544 236
Notes payable 27,000 35,000
Prepaid deposits and reserve for repairs 3,012 3,229
----------------------------------
Total liabilities 30,965 39,332
----------------------------------
Partners' capital (deficit):
Limited Partners (7,426,305 and 7,472,705 Depositary Units including 1,150
Depositary Units held in the Treasury at
December 31, 1995 and 1994 respectively) 18,658 30,850
General Partner (462) (697)
----------------------------------
Total partners' capital 18,196 30,153
----------------------------------
Total liabilities and partners' capital $ 49,161 $ 69,485
==================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF INCOME
For the years ended December 31,
(in thousands of dollars except per unit amounts)
1995 1994 1993
------------------------------------------
Revenues:
Lease revenue $ 16,830 $ 23,251 $ 29,951
Interest and other income 668 728 246
Net gain on disposition of equipment 1,485 2,347 6,704
------------------------------------------
Total revenues 18,983 26,326 36,901
Expenses:
Depreciation and amortization 8,552 11,141 13,504
Management fees to affiliate 818 1,150 1,523
Interest expense 2,349 2,550 1,708
Insurance expense to affiliate 87 299 1,082
Other insurance expense 171 618 1,030
Repairs and maintenance 2,867 4,307 4,970
Marine equipment operating expenses 152 3,033 5,185
General and administrative expenses
to affiliates 1,026 732 736
Other general and administrative expenses 895 1,298 1,388
Bad debt expense 462 244 18
Loss on revaluation of equipment 667 887 161
------------------------------------------
Total expenses 18,046 26,259 31,305
------------------------------------------
Net income $ 937 $ 67 $ 5,596
==========================================
Partners' share of net income (loss):
Limited Partners $ 75 $ (899) $ 4,471
General Partner 862 966 1,125
==========================================
Total $ 937 $ 67 $ 5,596
==========================================
Net income (loss) per Depositary Unit (7,426,305, 7,472,705,
and 7,492,905 Depositary Units (including 1,150 Depositary Units
held in the Treasury) at December 31, 1995, 1994, and 1993 $ 0.01 $ (0.12) $ 0.60
==========================================
Cash distributions $ 12,549 $ 12,620 $ 12,665
==========================================
Cash distribution per Depositary Unit $ 1.60 $ 1.60 $ 1.60
==========================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the years ended December 31, 1995, 1994, and 1993
(thousands of dollars)
Limited General
Partners Partner Total
--------------------------------------------------
Partners' capital (deficit) at December 31, 1992 $ 51,527 $ (1,526) $ 50,001
Net income 4,471 1,125 5,596
Cash distributions (12,034) (631) (12,665)
Repurchase of Depositary Units (70) -- (70)
--------------------------------------------------
Partners' capital (deficit) at December 31, 1993 43,894 (1,032) 42,862
Net income (loss) (899) 966 67
Cash distributions (11,989) (631) (12,620)
Repurchase of Depositary Units (156) -- (156)
--------------------------------------------------
Partners' capital (deficit) at December 31, 1994 30,850 (697) 30,153
Net income 75 862 937
Cash distributions (11,922) (627) (12,549)
Repurchase of Depositary Units (345) -- (345)
--------------------------------------------------
Partners' capital (deficit) at December 31, 1995 $ 18,658 $ (462) $ 18,196
==================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31,
(thousands of dollars)
1995 1994 1993
---------------------------------------------
Operating activities:
Net income $ 937 $ 67 $ 5,596
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Net gain on disposition of equipment (1,485) (2,347) (6,704)
Write-off of unamortized loan origination
cost and debt placement fees -- 305 --
Loss on revaluation of equipment 667 887 161
Depreciation and amortization 8,552 11,141 13,504
Changes in operating assets and liabilities:
Restricted cash (252) 150 (162)
Accounts receivable, net (166) 644 (1,209)
Insurance reimbursement receivable -- -- 2,810
Prepaid expenses 34 234 201
Accounts payable and accrued expenses (473) (863) 501
Due to affiliates 308 (121) 46
Accrued drydock expenses 271 2,201 1,458
Prepaid deposits and reserves for repairs (217) (988) 1,088
---------------------------------------------
Net cash provided by operating activities 8,176 11,310 17,290
---------------------------------------------
Investing activities:
Proceeds from disposition of equipment 7,005 13,558 21,229
Payments of acquisition-related fees to affiliate -- (534) (565)
Payments for purchase of equipment -- (11,856) (12,345)
Payment for capital improvements (11) (727) --
Decrease in restricted cash 7,378 (5,852)
Payments of lease negotiation fees to affiliate -- (119) (126)
---------------------------------------------
Net cash provided by investing activities 6,994 7,700 2,341
---------------------------------------------
Financing activities:
Proceeds from notes payable -- 35,000 --
Principal payments on notes payable (8,000) (35,000) (3,218)
Payments of debt issuance costs -- (236) (50)
Cash distributions paid to partners (12,549) (12,620) (12,665)
Repurchase of Depositary Units (345) (156) (70)
---------------------------------------------
Net cash used in financing activities (20,894) (13,012) (16,003)
---------------------------------------------
Cash and cash equivalents:
Net (decrease) increase in cash and cash
equivalents (5,724) 5,998 3,628
Cash and cash equivalents at beginning of year 12,348 6,350 2,722
---------------------------------------------
Cash and cash equivalents at end of year $ 6,624 $ 12,348 $ 6,350
=============================================
Supplemental information:
Interest paid $ 2,302 $ 2,246 $ 1,708
=============================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. Basis of Presentation
Organization
PLM Equipment Growth Fund II, a California limited partnership (the
Partnership) was formed on March 30, 1987. The Partnership engages in
the business of owning and leasing primarily used transportation
equipment. The Partnership commenced significant operations in June,
1987. PLM Financial Services, Inc. (FSI) is the General Partner. FSI is
a wholly-owned subsidiary of PLM International, Inc. (PLM
International).
The Partnership will terminate on December 31, 2006, unless
terminated earlier upon sale of all equipment or by certain other
events. At the conclusion of the Partnership's seventh year of
operations on December 31, 1995, the General Partner stopped
reinvesting excess cash and will start distributing any funds remaining
to the Partners. Beginning in the eleventh year, the General Partner
intends to begin an orderly liquidation of the Partnership's assets.
FSI manages the affairs of the Partnership. The net income (loss)
and distributions of the Partnership are generally allocated 95% to the
Limited Partners and 5% to the General Partner (see Net Income (Loss)
and Distributions per Depositary Unit, below). The General Partner is
entitled to an incentive fee equal to 7.5% of Surplus Distributions as
defined in the Limited Partnership Agreement remaining after the
Limited Partners have received a certain minimum rate of return.
These financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting
principles. This requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Operations
The equipment of the Partnership is managed under a continuing
management agreement by PLM Investment Management, Inc. (IMI), a
wholly-owned subsidiary of FSI. IMI receives a monthly management fee
from the Partnership for managing the equipment (see Note 2). FSI, in
conjunction with its subsidiaries, syndicates investor programs, sells
transportation equipment to investor programs and third parties,
manages pools of transportation equipment under agreements with the
investor programs, and is a General Partner of other Limited
Partnerships.
Accounting for Leases
The Partnership's leasing operations generally consist of operating
leases. Under the operating lease method of accounting, the leased
asset is recorded at cost and depreciated over its estimated useful
life. Rental payments are recorded as revenue over the lease term.
Lease origination costs are capitalized and amortized over the term of
the lease.
Translation of Foreign Currency Transactions
The Partnership is a domestic partnership, however, a limited number of
the Partnership's transactions are denominated in a foreign currency.
The Partnership's asset and liability accounts denominated in a foreign
currency were translated into U.S. dollars at the rates in effect at
the balance sheet dates, and revenue and expense items were translated
at average rates during the year. Gains or losses resulting from
foreign currency transactions are included in the results of operations
and are not material.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. Basis of Presentation (continued)
Depreciation and Amortization (continued)
Depreciation of equipment held for operating leases is computed on the
200% declining balance method taking a full month's depreciation in the
month of acquisition, based upon estimated useful lives of 15 years for
railcars and 12 years for all other types of equipment. The
depreciation method changes to straight line when annual depreciation
expense using the straight line method exceeds that calculated by the
200% declining balance method. Acquisition fees have been capitalized
as part of the cost of the equipment. Major expenditures which are
expected to extend the useful lives or reduce future operating expenses
of equipment are capitalized. Lease negotiation fees are amortized over
the initial equipment lease term. Debt issuance costs are amortized
over the term of the loan for which they are paid.
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued
statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (SFAS 121). This standard
is effective for years beginning after December 15, 1995. The
Partnership adopted SFAS 121 during 1995, the effect of which was not
material as the method previously employed by the Partnership was
consistent with SFAS 121. In accordance with SFAS 121, the Partnership
reviews the carrying value of its equipment at least annually in
relation to expected future market conditions for the purpose of
assessing the recoverability of the recorded amounts. If projected
future lease revenue plus residual values are less than the carrying
value of the equipment, a loss on revaluation is recorded.
Equipment held for operating leases is stated at cost.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are
not covered by the lessee, they are charged against operations as
incurred. To meet the maintenance obligations of certain aircraft
airframes and engines, escrow accounts are prefunded by the lessees.
Estimated costs associated with marine vessel drydockings, which are
included in repairs and maintenance expense, are accrued and charged to
income ratably over the period prior to such drydocking. The reserve
accounts are included in the balance sheet as prepaid deposits and
reserve for repairs.
Net Income (Loss) and Distributions per Depositary Unit
The net income (loss) and distributions of the Partnership are
generally allocated 95% to the Limited Partners and 5% to the General
Partner. During 1995, the General Partner received a special allocation
of income of $815,000 ($963,000 in 1994 and $845,000 in 1993). The
Limited Partners' net income or loss and distributions are allocated
among the Limited Partners based on the number of Depository Units
owned by each Limited Partner. Cash distributions are recorded when
paid. Cash distributions of $3,127,000, $3,146,000, and $3,155,000
($0.40 per Depositary Unit) were declared on December 31, 1995, 1994,
and 1993 and paid on February 15, 1996, 1995, and 1994, respectively,
to the unitholders of record as of December 31, 1995, 1994, and 1993,
respectively. Cash distributions to investors in excess of net income
are considered to represent a return of capital on a Generally Accepted
Accounting Principles (GAAP) basis. Cash distributions to Limited
Partners of $11,847,000, $11,989,000, and $7,563,000 in 1995, 1994, and
1993, respectively, were deemed to be a return of capital.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. Basis of Presentation (continued)
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible to known amounts of cash with original maturities of three
months or less as cash equivalents. Lessee security deposits held by
the Partnership are considered restricted cash.
Reclassifications
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to conform with the 1995 presentation. Transportation
equipment held for operating leases at December 31, 1995 and 1994,
includes equipment previously reported as held for sale.
2. General Partner and Transactions with Affiliates
An officer of FSI contributed $100 of the Partnership's initial
capital. Under the equipment management agreement, IMI receives a
monthly management fee equal to the greater of (i) 5% of Gross Revenues
(as defined in the agreement) prior to the payment of any principal and
interest incurred in connection with any indebtedness, or (ii) 1/12 of
1/2% of the net book value of the equipment portfolio subject to
certain adjustments. Management fees of $195,000, and $542,000, were
payable at December 31, 1995, and 1994, respectively. The Partnership
reimbursed FSI and its affiliates $1,026,000, $732,000, and $736,000
for administrative and data processing services performed on behalf of
the Partnership in 1995, 1994, and 1993, respectively. Debt placement
fees are charged by the General Partner in an amount equal to 1% of the
Partnership's borrowings less amounts paid to third parties in relation
to the debt placement. No debt placement fees were paid or payable to
FSI during 1995, 1994, and 1993.
The Partnership paid lease negotiation and equipment acquisition
fees of $653,000, and $691,000 in 1994, and 1993, respectively, and
none in 1995, to PLM Transportation Equipment Corporation (TEC). TEC is
a wholly owned subsidiary of FSI.
The Partnership paid $87,000, $299,000, and $1,082,000 in 1995,
1994 and 1993 respectively, to Transportation Equipment Indemnity
Company Ltd. (TEI) which provides insurance coverage for Partnership
equipment and other insurance brokerage services to the Partnership.
TEI is an affiliate of the General Partner. A substantial portion of
these amounts was paid to third party reinsurance underwriters or
placed in risk pools managed by TEI on behalf of affiliated
partnerships and PLM International which provide threshold coverages on
marine vessel loss of hire and hull and machinery damage. All pooling
arrangement funds are either paid out to cover applicable losses or
refunded pro rata by TEI.
At December 31, 1995, approximately 31% of the Partnership's
trailer equipment had been transferred into rental yards operated by an
affiliate of the General Partner. Revenues collected under short-term
rental agreements with the rental yards' customers are distributed
monthly to the owners of the related equipment. Direct expenses
associated with the equipment and an allocation of other direct
expenses of the rental yard operations are billed to the Partnership.
The Partnership owns certain equipment for lease in conjunction
with affiliated partnerships. In 1995, this equipment included one
commercial aircraft (50% owned) and one mobile offshore drilling unit
(55% owned).
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
3. Equipment
The components of equipment at December 31, 1995 and 1994, are as
follows (in thousands):
Equipment held for operating leases 1995 1994
--------------------------------
Rail equipment $ 19,747 $ 19,749
Marine containers 13,399 17,939
Marine vessels -- 4,702
Aircraft 45,947 50,644
Trailers and tractors 22,932 23,092
Mobile offshore drilling unit 12,658 12,658
--------------------------------
114,683 128,784
Less accumulated depreciation (75,431) (74,672)
--------------------------------
Net equipment $ 39,252 $ 54,112
================================
Revenues are earned by placing the equipment under operating
leases which are generally billed monthly or quarterly. Some of the
Partnership's marine containers are leased to operators of
utilization-type leasing pools which include equipment owned by
unaffiliated parties. In such instances revenues received by the
Partnership consist of a specified percentage of revenues generated by
leasing the equipment to sublessees, after deducting certain direct
operating expenses of the pooled equipment. Rents for railcars are
based on mileage traveled or a fixed rate; rents for all other
equipment are based on fixed rates.
As of December 31, 1995, all equipment in the Partnership
portfolio was either operating in short-term rental facilities or on
lease, except an aircraft, a railcar, and 115 marine containers. At
December 31, 1994, all equipment in the Partnership portfolio was
either on lease or operating in PLM-affiliated short-term trailer
rental facilities, with the exception of 266 marine containers and one
tractor. The aggregate carrying value of equipment off-lease was $2.0
million and $1.1 million at December 31, 1995, and 1994, respectively.
During 1994, the Partnership purchased 1,959 marine containers and
649 trailers at a cost of $11.9 million and paid acquisition and lease
negotiation fees of $0.6 million to TEC (see Note 2 to the Financial
Statements).
During 1995, the Partnership sold or disposed of its 50% interest
in a DC-9 aircraft, 2,278 marine containers, 11 trailers, 1 tractor, 1
railcar, and its 50% interest in a marine vessel, with an aggregate net
book value of $5.8 million and unused drydock reserves of $0.3 million,
for proceeds of $7.0 million. During 1994, the Partnership sold or
disposed of 423 marine containers, 267 trailers, 2 railcars, 2 marine
vessels, and a 12% interest in a mobile offshore drilling unit with an
aggregate net book value of $13.5 million and accrued drydock reserves
of $2.2 million for aggregate proceeds of $13.6 million.
The Partnership reduced the carrying value of one aircraft by
$667,000 during 1995 and reduced the carrying values of two aircraft by
$887,000 during 1994 to their estimated net realizable value.
All leases are being accounted for as operating leases. Future
minimum rentals receivable under noncancelable leases at December 31,
1995, during each of the next five years are approximately $4,518,000 -
1996; $1,756,000 - 1997; $520,000 - 1998; $463,000 - 1999; and $18,000
- 2000. Contingent rentals based upon utilization were approximately
$2,047,000, $2,821,000, and $2,077,000 in 1995, 1994 and 1993,
respectively.
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
3. Equipment (continued)
The Partnership owns certain equipment which is leased and operated
internationally. All leases relating to this equipment were denominated in
U.S. dollars.
The Partnership leases its aircraft, railcars and trailers to lessees
domiciled in five geographic regions: North America, Middle East, Europe,
Asia, and South Asia. Marine vessels and marine containers are leased to
multiple lessees in different regions who operate the marine vessels and
marine containers worldwide. The tables below sets forth geographic
information about the Partnership's equipment grouped by domicile of the
lessee as of and for the year ended December 31, 1995, 1994, and 1993 (in
thousands):
Region 1995 1994 1993
------------------------------------------
Revenues:
Marine vessels Various $ 391 $ 5,294 $ 12,050
Marine containers Various 1,580 1,826 2,506
Mobile offshore drilling units South Asia 1,436 1,904 827
Middle East -- 584 591
Railcars North America 4,785 4,823 5,336
Trailers North America 4,972 3,885 3,590
Aircraft Asia 630 756 126
South Asia 756 756 761
North America 1,594 1,727 2,228
Europe 686 1,696 1,936
==========================================
Total revenues $ 16,830 $ 23,251 $ 29,951
==========================================
The following table sets forth Identifiable net income (loss) information
by equipment type by region for the year ended December 31, 1995, 1994, and
1993 (in thousands):
Region 1995 1994 1993
-------------------------------------------
Income (loss):
Marine vessels Various $ 302 $ (2,038) $ 2,402
Marine containers Various 1,143 399 1,022
Mobile offshore drilling units South Asia (247) (137) (276)
Middle East -- 1,447 34
Railcars North America 1,937 1,826 9,130
Trailers North America 1,376 1,551 808
Aircraft Asia 173 217 (37)
South Asia 237 155 (17)
North America 460 516 955
Europe (728) (468) 197
-------------------------------------------
Total identifiable net income 4,653 3,468 14,218
Administrative and other (3,716) (3,401) (8,622)
===========================================
Total net income $ 937 $ 67 $ 5,596
===========================================
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
3. Equipment (continued)
The net book value of these assets at December 31, 1995, 1994, and 1993,
are as follows (in thousands):
Region 1995 1994 1993
-------------------------------------------
Marine vessels Various $ -- $ 2,173 $ 13,295
Marine containers Various 3,951 7,533 7,220
Mobile offshore drilling units North America 8,058 9,669 11,601
Middle East -- -- 2,625
Railcars North America 6,380 7,382 8,567
Trailers North America 11,064 13,120 5,662
Aircraft Asia 1,641 2,046 2,455
South Asia 2,214 2,665 3,198
North America 4,100 5,091 5,547
Europe 1,844 4,433 6,246
===========================================
Total Equipment $ 39,252 $ 54,112 $ 66,416
===========================================
There were no lessees that accounted for 10% or more of total revenues
for 1995, 1994, and 1993.
4. Notes Payable
1995 1994
---------------------------------
Notes payable to insurance companies under a $35 million Loan facility,
bearing interest at LIBOR + 1.55% per annum (7.24% at December 31,
1995, and 8.05% at December 31,
1994) payable quarterly in arrears $27,000,000 $35,000,000
---------------------------------
Total notes payable $27,000,000 $35,000,000
=================================
On March 31, 1994, the Partnership completed a refinancing of its
$35 million bank loan which was originally due on September 30, 1995.
The new loan facility is unsecured and nonrecourse, limits additional
borrowings, and specifies covenants related to collateral coverage,
fixed charge coverage, ratios for market value, and composition of the
equipment owned by the Partnership. The loan facility bears interest at
LIBOR + 1.55% per annum (7.24% at December 31, 1995, and 8.05% at
December 31, 1994) and is payable quarterly in arrears. Principal is
payable in annual installments of $4 million due on March 31, 1996 and
1997, $9 million on March 31, 1998 and 1999, and a final payment of $9
million on March 31, 2000. The Partnership paid a facility fee of
$236,000 to the lender in connection with this credit facility. As of
December 31, 1995, the Partnership prepaid $8,000,000 of the
outstanding note payable representing the principal payments due March
31, 1996 and 1997.
The General Partner believes that the book value of the notes
payable approximates fair value due to its variable interest rate.
The General Partner has entered into a joint $25 million credit
facility (the Committed Bridge Facility) on behalf of the Partnership,
PLM Equipment Growth Fund III, PLM Equipment Growth Fund IV, PLM
Equipment Growth Fund V, PLM Equipment Growth Fund VI, PLM Equipment
Growth & Income Fund VII, and Professional Lease Management Income Fund
I (Fund I), all affiliated investment programs, and TEC Acquisub, Inc.
(TECAI), an indirect wholly-owned subsidiary of the General Partner,
which may be used to provide interim financing of up to (i)
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
4. Notes Payable (continued)
70% of the aggregate book value or 50% of the aggregate net fair market
value of eligible equipment owned by the Partnership, Fund I (ii) 50%
of unrestricted cash held by the borrower. The Committed Bridge
Facility became available to EGF VII and TECAI on December 20, 1993,
and became available to the Company on May 8, 1995 and was amended and
restated to include the above mentioned Partnership on September 27,
1995, and to expire on September 30, 1996. The Committed Bridge
Facility also provides for a $5 million Letter of Credit Facility for
the eligible borrowers. Outstanding borrowings by Fund I, TECAI, or PLM
Equipment Growth Funds II through VII reduce the amount available to
each other under the Committed Bridge Facility. Individual borrowings
may be outstanding for no more than 179 days, with all advances due no
later than September 30, 1996. The Committed Bridge Facility prohibits
the Partnership from incurring any additional indebtedness. Interest
accrues at either the prime rate or adjusted LIBOR plus 2.5% at the
borrower's option and is set at the time of an advance of funds. As of
December 31, 1995, neither the Partnership, nor TECAI had any
outstanding borrowings under the Committed Bridge Facility. Due to the
loan covenants of the senior debt, the Partnership cannot access this
line of credit at this time.
The General Partner believes that the book value of the Notes
Payable approximates fair market value due to its variable interest
rate.
5. Income Taxes
The Partnership is not subject to income taxes as any income or loss is
included in the tax returns of the individual Partners. Accordingly, no
provision for income taxes has been made in the financial statements of
the Partnership.
As of December 31, 1995, there were temporary differences of
approximately $14,704,000 between the financial statement carrying
values of certain assets and liabilities and the income tax bases of
such assets and liabilities, primarily due to the differences in
depreciation methods and in the method of providing reserves for
repairs.
6. Repurchase of Depositary Units
On December 28, 1992, the Partnership engaged in a program to
repurchase up to 200,000 Depositary Units. In 1995, the Partnership had
purchased and canceled 46,400 Depositary Units at a cost of $0.3
million. As of December 31, 1995, the Partnership had cumulatively
repurchased 73,300 Depositary Units at a cost of $0.6 million.
7. Future Delisting of Partnership Units
The Partnership depositary units are listed and traded on the American
Stock Exchange under the symbol GFY. Under the Internal Revenue Code
(the Code), the Partnership is classified as a Master Limited
Partnership. The Code treats all Publicly Traded Partnerships as
corporations if they remain publicly traded after December 31, 1997.
Treating the Partnership as a corporation will mean the Partnership
itself will become a taxable, rather than a "flow through" entity. As a
taxable entity, the income of the Partnership will be subject to
federal taxation at both the partnership level and at the investor
level to the extent that income is distributed to an investor. In
addition, the General Partner believes that the trading price of the
Depositary Units may be distorted when the Partnership begins the final
liquidation of the underlying equipment portfolio. In order to avoid
taxation of the Partnership as a corporation and to prevent unfairness
to Unitholders, the General Partner has requested to delist the
Partnership's Depositary Units from the AMEX prior to March 29, 1996.
The last day for trading on the AMEX will be March 22, 1996. While the
Partnership's Depositary Units will no longer be publicly traded on a
national stock exchange, the General Partner will continue to manage
the equipment of the Partnership and
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
7. Future Delisting of Partnership Units (continued)
prepare and distribute quarterly and annual reports and Forms 10-Q and
10-K in accordance with the Securities and Exchange Commission
requirements. In addition, the General Partner will continue to provide
pertinent tax reporting forms and information to Unitholders. The
General Partner anticipates that following delisting, an informal
market for the Partnership's units may develop in the secondary
marketplace similar to that which currently exists for non-publicly
traded partnerships.
8. Subsequent Events
On March 11, 1996, the Partnership declared quarterly distributions of
$0.25 per outstanding depositary unit, payable May 15, 1996 to
Unitholders of record as of March 29, 1996.
PLM EQUIPMENT GROWTH FUND II
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership *
4.1 Amendment to Limited Partnership Agreement of Registrant *
10.1 Management Agreement between Partnership and PLM Investment *
Management, Inc.
10.2 $35,000,000 Note Agreement dated as of March 1, 1994 *
10.3 $25,000,000 Warehousing Credit Agreement, dated as of
September 27, 1995, with
First Union National Bank of North Carolina. *
25. Powers of Attorney. 46-48
* Incorporated by reference. See page 26 of this report.