UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL QUARTER ENDED JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISION FILE NUMBER 1-10553
-----------------------
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 800, SAN FRANCISCO, CA 94105-1301
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (415) 974-1399
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
PLM EQUIPMENT GROWTH FUND II
(A LIMITED PARTNERSHIP)
BALANCE SHEET
(in thousands of dollars, except unit amounts)
June 30, December 31,
1999 1998
-------------------------------
ASSETS
Equipment held for operating lease, at cost $ 33,686 $ 36,212
Less accumulated depreciation (25,995) (27,223)
-------------------------------
Net equipment 7,691 8,989
Cash and cash equivalents 1,557 1,986
Accounts receivable, less allowance for doubtful
Accounts of $98 in 1999 and $91 in 1998 767 975
Investment in an unconsolidated special-purpose entity 598 494
Prepaid expenses and other assets 11 30
Total assets $ 10,624 $ 12,474
===============================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 350 $ 352
Due to affiliates 57 83
Lessee deposits and reserve for repairs 867 772
-------------------------------
Total liabilities 1,274 1,207
-------------------------------
Partners' capital:
Limited partners (7,381,805 depositary units as of
June 30, 1999 and December 31, 1998) 9,350 11,267
General Partner -- --
-------------------------------
Total partners' capital 9,350 11,267
-------------------------------
Total liabilities and partners' capital $ 10,624 $ 12,474
===============================
See accompanying notes to financial statements.
-1-
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF INCOME
(in thousands of dollars, except weighted-average unit amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------------------------------------------------------------------
REVENUES
Lease revenue $ 1,420 $ 1,821 $ 2,877 $ 3,697
Interest and other income 19 54 43 126
Net gain on disposition of equipment 81 1,363 233 5,608
-------------------------------------------------------------------
Total revenues 1,520 3,238 3,153 9,431
-------------------------------------------------------------------
EXPENSES
Depreciation 488 612 1,002 1,326
Repairs and maintenance 441 551 855 996
Interest expense -- -- -- 47
Insurance expense to affiliate -- 24 -- 24
Other insurance expense 8 18 18 40
Management fees to affiliate 63 90 142 188
General and administrative expenses
to affiliates 57 121 140 244
Other general and administrative expenses 136 196 317 454
Provision for (recovery of) bad debt 13 15 10 (73)
-------------------------------------------------------------------
Total expenses 1,206 1,627 2,484 3,246
-------------------------------------------------------------------
Equity in net loss of unconsolidated
special-purpose entities (180) (141 ) (313) (253)
-------------------------------------------------------------------
Net income $ 134 $ 1,470 $ 356 $ 5,932
===================================================================
PARTNERS' SHARE OF NET INCOME:
Limited partners $ 77 $ 1,217 $ 243 $ 5,621
General Partner 57 253 113 311
-------------------------------------------------------------------
Total $ 134 $ 1,470 $ 356 $ 5,932
===================================================================
Net income per weighted-average depositary
Unit $ 0.01 $ 0.16 $ 0.03 $ 0.76
===================================================================
Cash distributions $ 1,136 $ 1,166 $ 2,273 $ 2,331
Special cash distributions -- 3,885 -- 3,885
Total cash distributions $ 1,136 $ 5,051 $ 2,273 $ 6,216
===================================================================
Per weighted-average depositary unit:
Cash distributions $ 0.15 $ 0.15 $ 0.29 $ 0.30
Special cash distributions -- 0.50 -- 0.50
Total cash distributions $ 0.15 $ 0.65 $ 0.29 $ 0.80
===================================================================
See accompanying notes to financial statements.
-2-
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the
period from December 31, 1997 to June 30, 1999
(in thousands of dollars)
Limited General
Partners Partner Total
-------------------------------------------------------
Partners' capital as of December 31, 1997 $ 13,725 $ -- $ 13,725
Net income 5,606 425 6,031
Cash distribution (4,373) (231) (4,604)
Special cash distribution (3,691) (194) (3,885)
Partners' capital as of December 31, 1998 11,267 -- 11,267
Net income 243 113 356
Cash distribution (2,160) (113) (2,273)
--------------------------------------------------------
Partners' capital as of June 30, 1999 $ 9,350 $ -- $ 9,350
========================================================
See accompanying notes to financial statements.
-3-
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Six Months
Ended June 30,
1999 1998
---------------------------------------
OPERATING ACTIVITIES
Net income $ 356 $ 5,932
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,002 1,326
Net gain on disposition of equipment (233) (5,608)
Equity in net loss from unconsolidated special-purpose entities 313 253
Changes in operating assets and liabilities:
Restricted cash -- 395
Accounts receivable, net 208 577
Prepaid expenses and other assets 19 31
Accounts payable and accrued expenses (2) 177
Due to affiliates (26) (113)
Lessee deposits and reserve for repairs 95 (1,059)
---------------------------------------
Net cash provided by operating activities 1,732 1,911
---------------------------------------
INVESTING ACTIVITIES
Proceeds from disposition of equipment 529 7,236
Liquidation distributions from unconsolidated special-purpose entity -- 1,425
(Additional investments in) distributions from unconsolidated special-
purpose entities (417) 332
---------------------------------------
Net cash provided by investing activities 112 8,993
---------------------------------------
FINANCING ACTIVITIES
Principal payments on notes payable -- (2,500)
Cash distribution paid to limited partners (2,160) (5,905)
Cash distribution paid to General Partner (113) (311)
---------------------------------------
Net cash used in financing activities (2,273) (8,716)
---------------------------------------
Net (decrease) increase in cash and cash equivalents (429) 2,188
Cash and cash equivalents at beginning of period 1,986 556
---------------------------------------
Cash and cash equivalents at end of period $ 1,557 $ 2,744
=======================================
SUPPLEMENTAL INFORMATION
Interest paid $ -- $ 47
=======================================
See accompanying notes to financial statements.
-4-
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
1. Opinion of Management
In the opinion of the management of PLM Financial Services, Inc. (the
General Partner), the accompanying unaudited financial statements contain
all adjustments necessary, consisting primarily of normal recurring
accruals, to present fairly the financial position of PLM Equipment Growth
Fund II (the Partnership) as of June 30, 1999 and December 31, 1998, the
statements of income for the three and six months ended June 30, 1999 and
1998, the statements of changes in partners' capital for the period from
December 31, 1997 to June 30, 1999, and the statements of cash flows for
the six months ended June 30, 1999 and 1998. Certain information and note
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted from the accompanying financial statements. For
further information, reference should be made to the financial statements
and notes thereto included in the Partnership's Annual Report on Form 10-K
for the year ended December 31, 1998, on file at the Securities and
Exchange Commission.
2. Schedule of Partnership Phases
In accordance with the limited partnership agreement, the Partnership
entered its passive phase on January 1, 1996 and as a result, the
Partnership is not permitted to reinvest in equipment. On January 1, 1999,
the Partnership entered its liquidation phase and has commenced an orderly
liquidation of the Partnership assets. The Partnership will terminate on
December 31, 2006, unless terminated earlier upon sale of all equipment or
by certain other events.
Since the end of 1995, in accordance with the Partnership Agreement, the
General Partner may no longer reinvest cash flows and surplus funds in
equipment. All future cash flows and surplus funds if any, are to be used
for distributions to partners, except to the extent used to maintain
reasonable reserves. On January 1, 1999, the General Partner began the
liquidation phase of the Partnership with the intent to commence an orderly
liquidation of the Partnership assets. During the liquidation phase, the
Partnership's assets will continue to be recorded at the lower of the
carrying amount or fair value less cost to sell.
3. Cash Distribution
Cash distributions are recorded when paid and may include amounts in excess
of net income that are considered to represent a return of capital. For the
six months ended June 30, 1999 and 1998, cash distributions totaled $2.3
million. For the three months ended June 30, 1999 and 1998, cash
distributions totaled $1.1 million and $1.2 million, respectively. In
addition, a $3.9 million special distribution was paid to the partners
during the six months ended June 30, 1998, from the proceeds realized on
the sale of equipment in 1998 and 1997. No special distributions were paid
in the six months ended June 30, 1999. Cash distributions to the limited
partners of $1.9 million and $0.3 million for the six months ended June 30,
1999 and 1998, respectively, were deemed to be a return of capital.
Cash distributions related to the results from the second quarter of 1999
of $1.1 million, will be paid during August 1999.
4. Transactions with General Partner and Affiliates
Partnership management fees of $0.1 million were payable as of June 30,
1999 and December 31, 1998.
The Partnership's proportional share of the data processing and
administrative expenses incurred by the unconsolidated special-purpose
entities (USPEs) was $3,000 and $4,000 for the six months ended June 30,
1999 and 1998, respectively and $3,000 and $9,000 for the three months
ended June 30, 1999 and 1998, respectively.
-5-
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
5. Equipment
The components of owned equipment were as follows (in thousands of
dollars):
June 30, December 31,
1999 1998
-------------------------------------
Railcars $ 16,311 $ 17,320
Trailers 11,223 11,884
Marine containers 6,152 7,008
-------------------------------------
33,686 36,212
Less accumulated depreciation (25,995) (27,223)
Net equipment $ 7,691 $ 8,989
=====================================
As of June 30, 1999, all equipment was either on lease or operating in
PLM-affiliated short-term trailer rental facilities, except for 68 marine
containers and 70 railcars with an aggregate net book value of $0.3
million. As of December 31, 1998, all equipment was either on lease or
operating in PLM-affiliated short-term trailer rental facilities, except
for 6 railcars and 115 marine containers with an aggregate net book value
of $0.2 million.
During the six months ended June 30, 1999, the Partnership sold or disposed
of marine containers, trailers, and railcars, with an aggregate net book
value of $0.3 million, for proceeds of $0.5 million.
For the six months ended June 30, 1998, the Partnership sold or disposed an
aircraft, marine containers, trailers, and rail equipment, with an
aggregate net book value of $1.7 million, for proceeds of $7.3 million.
6. Investment in Unconsolidated Special-Purpose Entity
The net investment in an USPE consisted of a 50% interest in a trust owning
a Boeing 737-200A aircraft (and related assets and liabilities) totaling
$0.6 million and $0.5 million as of June 30, 1999 and December 31, 1998,
respectively. This aircraft was off lease as of June 30, 1999 and December
31, 1998.
(This space intentionally left blank.)
-6-
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
7. Operating Segments
The Partnership operates in four different segments: railcar leasing,
trailer leasing, marine container leasing and aircraft leasing. Each
equipment leasing segment engages in short-term to mid-term operating
leases to a variety of customers. The following tables present a summary of
the operating segments (in thousands of dollars):
Marine
Railcar Trailer Container Aircraft
For the quarter ended June 30, 1999 Leasing Leasing Leasing Leasing All Other<F1>1 Total
- ----------------------------------- ------- ------- ------- ------- --------- -----
REVENUES
Lease revenue $ 850 $ 534 $ 36 $ -- $ -- $ 1,420
Interest income and other -- -- (1) -- 20 19
Gain on disposition of equipment -- 61 20 -- -- 81
Total revenues 850 595 55 -- 20 1,520
COSTS AND EXPENSES
Operations support 280 165 -- -- 4 449
Depreciation 192 211 85 -- -- 488
Management fees 42 20 1 -- -- 63
General and administrative expenses 42 60 3 1 87 193
(Recovery of) provision for bad debts (4) 18 (1) -- -- 13
Total costs and expenses 552 474 88 1 91 1,206
Equity in net loss of USPE -- -- -- (180) -- (180)
Net income (loss) $ 298 $ 121 $ (33) $ (181) $ (71) $ 134
=====================================================================
Total assets as of June 30, 1999 $ 2,578 $ 4,669 $ 978 $ 598 $ 1,801 $10,624
=====================================================================
Marine
Railcar Trailer Container Aircraft
For the quarter ended June 30, 1998 Leasing Leasing Leasing Leasing All Other<F1>1 Total
- ----------------------------------- ------- ------- ------- ------- --------- -----
REVENUES
Lease revenue $ 1,024 $ 712 $ 35 $ 50 $ -- $ 1,821
Interest income and other -- -- -- -- 54 54
Gain (loss) on disposition of equipment -- 232 (1) 1,132 -- 1,363
Total revenues 1,024 944 34 1,182 54 3,238
COSTS AND EXPENSES
Operations support 335 211 1 16 30 593
Depreciation 204 309 99 -- -- 612
Management fees 51 35 2 2 -- 90
General and administrative expenses 39 138 6 10 124 317
(Recovery of) provision for bad debts (3) 18 -- -- -- 15
Total costs and expenses 626 711 108 28 154 1,627
Equity in net loss of USPE -- -- -- (141) -- (141)
Net income (loss) $ 398 $ 233 $ (74) $ 1,013 $ (100) $ 1,470
=====================================================================
Total assets as of June 30, 1998 $ 3,559 $ 5,974 $1,576 $ 669 $ 3,074 $ 14,852
=====================================================================
-------------------------------------
<FN>
<F1> 1 Includes interest income and costs not identifiable to a particular
segment, such as certain operations support, and general and administrative
expenses.
-7-
</FN>
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
7. Operating Segments (continued)
Marine
Railcar Trailer Container Aircraft
For the six months ended June 30, 1999Leasing Leasing Leasing Leasing All Other<F1>1 Total
REVENUES
Lease revenue $ 1,802 $ 998 $ 77 $ -- $ -- $ 2,877
Interest income and other -- -- (1) -- 44 43
Gain (loss) on disposition of
equipment 192 103 (62) -- -- 233
Total revenues 1,994 1,101 14 -- 44 3,153
COSTS AND EXPENSES
Operations support 575 289 1 -- 8 873
Depreciation 393 436 173 -- -- 1,002
Management fees 89 49 4 -- -- 142
General and administrative expenses 88 133 6 1 229 457
(Recovery of) provision for bad debts (10) 20 -- -- -- 10
Total costs and expenses 1,135 927 184 1 237 2,484
Equity in net loss of USPE -- -- -- (313) -- (313)
Net income (loss) $ 859 $ 174 $(170) $ (314) $ (193) $ 356
=====================================================================
Total assets as of June 30, 1999 $ 2,578 $ 4,669 $ 978 $ 598 $ 1,801 $ 10,624
=====================================================================
Marine
Railcar Trailer Container Aircraft
For the six months ended June 30, 1998Leasing Leasing Leasing Leasing All Other<F1>1 Total
REVENUES
Lease revenue $ 2,076 $ 1,405 $ 133 $ 83 $ -- $ 3,697
Interest income and other -- -- -- -- 126 126
Gain (loss) on disposition of equipmen 398 441 (36) 4,805 -- 5,608
Total revenues 2,474 1,846 97 4,888 126 9,431
COSTS AND EXPENSES
Operations support 616 371 3 34 36 1,060
Depreciation 409 641 202 74 -- 1,326
Interest expense -- -- -- -- 47 47
Management fees 103 70 7 8 -- 188
General and administrative expenses 78 282 11 14 313 698
Recovery of bad debts (1) -- -- (72) -- (73)
Total costs and expenses 1,205 1,364 223 58 396 3,246
Equity in net loss of USPE -- -- -- (253) -- (253)
Net income (loss) $ 1,269 $ 482 $ (126) $ 4,577 $ (270) $ 5,932
=====================================================================
Total assets as of June 30, 1998 $ 3,559 $ 5,974 $ 1,576 $ 669 $ 3,074 $ 14,852
=====================================================================
-------------------------------------
<FN>
<F1> 1 Includes interest income and costs not identifiable to a particular
segment, such as certain operations support, and general and administrative
expenses.
</FN>
-8-
PLM EQUIPMENT GROWTH FUND II
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
8. Net Income Per Weighted-Average Partnership Unit
Net income per weighted-average Partnership unit was computed by dividing
net income attributable to limited partners by the weighted-average number
of Partnership units deemed outstanding during the period. The
weighted-average number of Partnership units deemed outstanding during the
three and six months ended June 30, 1999 and 1998 was 7,381,805.
9. Contingencies
The Partnership, together with affiliates, has initiated litigation in
various official forums in India against a defaulting Indian airline lessee
to repossess Partnership property and to recover damages for failure to pay
rent and failure to maintain such property in accordance with relevant
lease contracts. The Partnership has repossessed all of its property
previously leased to such airline, and the airline has ceased operations.
In response to the Partnership's collection efforts, the airline filed
counter-claims against the Partnership in excess of the Partnership's
claims against the airline. The General Partner believes that the airline's
counterclaims are completely without merit, and the General Partner will
vigorously defend against such counterclaims. The General Partner believes
an unfavorable outcome from the counterclaims is remote.
(This space intentionally left blank.)
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(I) RESULTS OF OPERATIONS
Comparison of the PLM Equipment Growth Fund II's (the Partnership's) Operating
Results for the Three Months Ended June 30, 1999 and 1998
(A) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance and
asset-specific insurance expenses) on owned equipment decreased during the
second quarter of 1999 when compared to the same quarter of 1998. Gains or
losses from the sale of equipment, interest and other income and certain
expenses such as depreciation and general and administrative expenses relating
to the operating segments (see Note 7 to the financial statements), are not
included in the owned equipment operation discussion because they are indirect
in nature and not a result of operations but the result of owning a portfolio of
equipment. The following table presents lease revenues less direct expenses by
segment (in thousands of dollars):
For the Three Months
Ended June 30,
1999 1998
-------------------------------
Railcars $ 570 $ 688
Trailers 369 502
Marine containers 36 33
Aircraft -- 34
Railcars: Railcar lease revenues and direct expenses were $0.9 million and $0.3
million, respectively, for the second quarter of 1999, compared to $1.0 million
and $0.3 million, respectively, during the same quarter of 1998. Railcar
contribution decreased in the second quarter of 1999, compared to the same
quarter of 1998, due to the sale of railcars in 1999 and 1998.
Trailers: Trailer lease revenues and direct expenses were $0.5 million and $0.2
million, respectively, for the second quarter of 1999, compared to $0.7 million
and $0.2 million, respectively, during the same quarter of 1998. The decrease in
trailer contribution was due to the sale of trailers in 1999 and 1998.
Marine containers: Marine container lease revenues were $36,000 and $35,000
during the second quarter of 1999 and 1998, respectively. Lease revenue
increased $3,000 in the second quarter of 1999 compared to the same period in
1998, due to higher utilization of the container fleet. The increase was offset
in part, by a decrease in lease revenue of $2,000 due to the reduction in the
marine container fleet resulting from the sales and dispositions over the past
twelve months.
Aircraft: Aircraft lease revenues and direct expenses were $50,000 and $16,000,
respectively, for the second quarter of 1998. The Partnership's remaining
aircraft was sold in 1998.
(B) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $0.8 million for the second quarter of 1999 decreased
from $1.1 million for the same quarter in 1998. Significant variances are
explained as follows:
(i) A $0.1 million decrease in depreciation expense from 1998 levels
reflects the effect of asset sales in 1999 and 1998.
(ii) A $0.1 million decrease in general and administrative expenses from
1998 levels due to reduced office expenses and professional services required by
the Partnership, resulting from the reduced equipment portfolio.
-10-
(C) Net Gain on Disposition of Owned Equipment
Net gain on disposition of equipment for the second quarter of 1999 totaled $0.1
million, and resulted from the disposal or sale of trailers, and marine
containers, with an aggregate net book value of $19,000, for aggregate proceeds
of $0.1 million. For the same quarter in 1998, net gain on disposition of
equipment totaled $1.4 million, and resulted from the disposal or sale of an
aircraft, trailers, and marine containers, with an aggregate net book value of
$0.6 million, for aggregate proceeds of $2.0 million.
(D) Equity in Net Loss of Unconsolidated Special-Purpose Entities (USPEs)
Equity in net loss of unconsolidated special-purpose entities represents the
Partnership's share of the net loss generated from the operation of
jointly-owned assets accounted for under the equity method (see Note 6 to the
financial statements).
As of June 30, 1999 and 1998, the Partnership owned a 50% interest in an entity
which owns a commercial aircraft that was off lease during the second quarter of
1999 and 1998. Expenses were $0.2 million and $0.1 million, respectively, for
the second quarter of 1999 and 1998, respectively. The Partnership's share of
expenses increased in the second quarter of 1999 due to repairs required in the
second quarter of 1999 that was not needed in the same period of 1998.
(E) Net Income
As a result of the foregoing, the Partnership's net income was $0.1 million for
the second quarter of 1999, compared to net income of $1.5 million during the
second quarter of 1998. The Partnership's ability to operate and liquidate
assets, secure leases, and re-lease those assets whose leases expire is subject
to many factors, and the Partnership's performance in the second quarter of 1999
is not necessarily indicative of future periods. In the second quarter of 1999,
the Partnership distributed $1.1 million to the limited partners, or $0.15 per
weighted-average depositary unit.
Comparison of the Partnership's Operating Results for the Six Months Ended June
30, 1999 and 1998
(A) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance and
asset-specific insurance expenses) on owned equipment decreased during the six
months ended June 30, 1999 when compared to the same period of 1998. Gains or
losses from the sale of equipment, interest and other income and certain
expenses such as depreciation and general and administrative expenses relating
to the operating segments (see Note 7 to the financial statements), are not
included in the owned equipment operation discussion because they are indirect
in nature and not a result of operations but the result of owning a portfolio of
equipment. The following table presents lease revenues less direct expenses by
segment (in thousands of dollars):
For the Six Months
Ended June 30,
1999 1998
-------------------------------
Railcars $ 1,227 $ 1,461
Trailers 709 1,034
Marine containers 76 130
Aircraft -- 49
Railcars: Railcar lease revenues and direct expenses were $1.8 million and $0.6
million, respectively, for the six months ended June 30, 1999, compared to $2.1
million and $0.6 million, respectively, during the same period of 1998. Railcar
contribution decreased in the six months ended June 30, 1999, compared to the
same period of 1998, due to the sale of railcars in 1999 and 1998.
Trailers: Trailer lease revenues and direct expenses were $1.0 million and $0.3
million, respectively, for the six months ended June 30, 1999, compared to $1.4
million and $0.4 million, respectively, during the same period of 1998. The
decrease in trailer contribution was due to the sale of trailers in 1999 and
1998.
Marine containers: Marine container lease revenues were $0.1 million during the
six months ended June 30, 1999 and 1998. The number of marine containers owned
by the Partnership has been declining over the past twelve months due to sales
and dispositions. The result of this declining fleet has been a decrease in
marine container revenues.
Aircraft: Aircraft lease revenues and direct expenses were $0.1 million and
$35,000, respectively, for the six months ended June 30, 1998. The Partnership's
remaining aircraft was sold in 1998.
(B) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $1.6 million for the six months ended June 30, 1999
decreased from $2.2 million for the same period in 1998. Significant variances
are explained as follows:
(i) A $0.3 million decrease in depreciation expense from 1998 levels
reflects the effect of asset sales in 1999 and 1998.
(ii) A $0.2 million decrease in general and administrative expenses from
1998 levels due to reduced office expenses and professional services required by
the Partnership, resulting from the reduced equipment portfolio.
(iii) A $47,000 decrease in interest expense due to the repayment of the
Partnership's outstanding debt in 1998.
(iv) The $0.1 million increase in bad debt expense was due to the recovery
of an outstanding receivable that had previously been reserved for as a bad debt
in the six months ended June 30, 1998. A similar recovery did not occur in 1999.
(C) Net Gain on Disposition of Owned Equipment
Net gain on disposition of equipment for the six months ended June 30, 1999
totaled $0.2 million, and resulted from the disposal or sale of trailers, marine
containers, and railcars, with an aggregate net book value of $0.3 million, for
aggregate proceeds of $0.5 million. For the same period in 1998, net gain on
disposition of equipment totaled $5.6 million, and resulted from the sale or
disposal of an aircraft, marine containers, trailers, and railcars, with an
aggregate net book value of $1.7 million, for aggregate proceeds of $7.3
million.
(D) Equity in Net Loss of Unconsolidated Special-Purpose Entities
Equity in net loss of unconsolidated special-purpose entities represents the
Partnership's share of the net loss generated from the operation of
jointly-owned assets accounted for under the equity method (see Note 6 to the
financial statements).
As of June 30, 1999 and 1998, the Partnership owned a 50% interest in an entity
which owns a commercial aircraft that was off lease during the six months ended
June 30, 1999 and 1998. The Partnership's share of expenses for this entity was
$0.3 million for the six months ended June 30, 1999 and 1998. During the first
six months of 1998, the General Partner sold for approximately its book value
the Partnership's 23% investment in an entity that owned an aircraft.
(E) Net Income
As a result of the foregoing, the Partnership's net income was $0.4 million for
the six months ended June 30, 1999, compared to net income of $5.9 million
during the six months ended June 30, 1998. The Partnership's ability to operate
and liquidate assets, secure leases, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance in the six
months ended June 30, 1999 is not necessarily indicative of future periods. In
the six months ended June 30, 1999, the Partnership distributed $2.2 million to
the limited partners, or $0.29 per weighted-average depositary unit.
-11-
(II) FINANCIAL CONDITION - CAPITAL RESOURCES AND LIQUIDITY
For the six months ended June 30, 1999, the Partnership generated $1.3 million
in operating cash (net cash provided by operating activities less investment in
the USPE to fund its operations) to meet its operating obligations, but used
undistributed available cash from prior periods and asset sale proceeds of
approximately $1.0 million to maintain the level of distributions (total of $2.3
million in the six months ended June 30, 1999) to the partners.
During the six months ended June 30, 1999, the Partnership sold or disposed of
marine containers, trailers, and railcars, with an aggregate net book value of
$0.3 million, for proceeds of $0.5 million.
Lessee deposits and reserve for repairs increased $0.1 million during the six
months ended June 30, 1999 due to the prepaid lease revenue received during
1999. No prepaid lease revenue was received at the end of 1998.
The General Partner has not planned any expenditures, nor is it aware of any
contingencies that would cause the Partnership to require any additional capital
to that mentioned above.
The Partnership is in its active liquidation phase. As a result, 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 may be reduced, significant asset sales
may result in special distributions to the partners.
The amounts reflected for assets and liabilities of the Partnership have not
been adjusted to reflect liquidation values. The equipment portfolio that is
actively being marketed for sale by the General Partner continues to be carried
at the lower of depreciated cost or fair value less cost of disposal. Although
the General Partner estimates that there will be distributions to the
Partnership after final disposal of assets and settlement of liabilities, the
amounts cannot be accurately determined prior to actual disposal of the
equipment.
(III) EFFECTS OF YEAR 2000
It is possible that the General Partner's currently installed computer systems,
software products, and other business systems, or those of the Partnership's
vendors, service providers, and customers, working either alone or in
conjunction with other software or systems, may not accept input of, store,
manipulate, and output dates on or after January 1, 2000 without error or
interruption, a possibility commonly known as the "Year 2000" or "Y2K" problem.
As the Partnership relies substantially on the General Partner's software
systems, applications and control devices in operating and monitoring
significant aspects of its business, any Year 2000 problem suffered by the
General Partner could have a material adverse effect on the Partnership's
business, financial condition and results of operations.
The General Partner has established a special Year 2000 oversight committee to
review the impact of Year 2000 issues on its business systems in order to
determine whether such systems will retain functionality after December 31,
1999. As of June 30, 1999, the General Partner has completed inventory,
assessment, remediation and testing stages of its Year 2000 review of its core
business information systems. Specifically, the General Partner (a) has
integrated Year 2000-compliant programming code into its existing internally
customized and internally developed transaction processing software systems and
(b) the General Partner's accounting and asset management software systems have
been made Year 2000 compliant. In addition, numerous other software systems
provided by vendors and service providers have been replaced with systems
represented by the vendor or service provider to be Year 2000 functional. These
systems will be fully tested September by 30, 1999 and are expected to be
compliant.
As of June 30, 1999, the costs incurred and allocated to the Fund to become Year
2000 compliant have not been material and does not anticipate any additional
Year 2000-compliant expenditures.
Some risks associated with the Year 2000 problem are beyond the ability of the
Partnership or General Partner to control, including the extent to which third
parties can address the Year 2000 problem. The General Partner is communicating
with vendors, services providers, and customers in order to assess the Year 2000
readiness of such parties and the extent to which the Partnership is vulnerable
to any third-party Year 2000 issues. As part of this process, vendors and
service providers were ranked in terms of the relative importance of the service
or product provided. All service providers and vendors who were identified as
medium to high relative importance were surveyed to determine Year 2000 status.
The General Partner has received satisfactory responses to Year 2000 readiness
inquiries from surveyed service providers and vendors.
It is possible that certain of the Partnership's equipment lease portfolio may
not be Year 2000 compliant. The General Partner has contacted equipment
manufacturers of the portion of the Partnership's leased equipment portfolio
identified as date sensitive to assure Year 2000 compliance or to develop
remediation strategies. The Partnership does not expect that non-Year 2000
compliance of its leased equipment portfolio will have an adverse material
impact on its financial statements. The General Partner has surveyed the
majority of its lessees and the majority of those surveyed have responded
satisfactorily to Year 2000 readiness inquiries.
There can be no assurance that the software systems of such parties will be
converted or made Year 2000 compliant in a timely manner. Failure by the General
Partner or such other parties to make their respective systems Year 2000
compliant could have a material adverse effect on the business, financial
position, and results of operations of the Partnership. The General Partner has
made and will continue an ongoing effort to recognize and evaluate potential
exposure relating to third party Year 2000 noncompliance. The General Partner
will implement a contingency plan if the General Partner determines that
third-party noncompliance would have a material adverse effect on the
Partnership's business, financial position, or results of operation.
The General Partner is currently developing a contingency plan to address the
possible failure of any systems or vendors or service providers due to Year 2000
problems. For the purpose of such contingency planning, a reasonably likely
worst case scenarios primarily anticipate a) an inability to access systems and
data on a temporary basis resulting in possible delay in reconciliation of funds
received or payment of monies owed, or b) an inability to continuously employ
equipment assets due to temporary Year 2000 related failure of external
infrastructure necessary to the ongoing operation of the equipment. The General
Partner is evaluating whether there are additional scenarios, which have not
been identified. Contingency planning will encompass strategies up to and
including manual processes. The General Partner anticipates that these plans
will be completed by September 30, 1999.
(IV) OUTLOOK FOR THE FUTURE
Since the Partnership is in its active liquidation phase, the General Partner
will be seeking to selectively re-lease or sell assets as the existing leases
expire. Sale decisions will cause the operating performance of the Partnership
to decline over the remainder of its life. Throughout the remaining life of the
Partnership, the Partnership may periodically make special distributions to the
partners as asset sales are completed.
Several factors may affect the Partnership's operating performance in 1999 and
beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
Liquidation of the Partnership's equipment and investment in USPE represents a
reduction in the size of the equipment portfolio and may result in a reduction
of contribution to the Partnership. Other factors affecting the Partnership's
contribution in 1999 and beyond includes:
1. The Partnership's remaining aircraft which, it jointly owns with an
affiliated Partnership has been off-lease for over two years. This aircraft
required extensive repairs and maintenance and has had difficulty being
re-leased or sold. This aircraft will remain off-lease until it is sold.
2. Railcar loadings in North America have continued to be high, however a
softening in the market is expected in the second half of 1999, which may lead
to lower utilization and lower contribution to the Partnership.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent on many factors, such
as specific market conditions and economic activity, technological obsolescence,
and government or other regulations. The General Partner continually 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.
The Partnership intends to use cash flow from operations to satisfy its
operating requirements and pay cash distributions to the partners.
(V) FORWARD-LOOKING INFORMATION
Except for historical information contained herein, the discussion in this Form
10-Q contains forward-looking statements that involve risks and uncertainties,
such as statements of the Partnership's plans, objectives, expectations, and
intentions. The cautionary statements made in this Form 10-Q should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-Q. The Partnership's actual results could differ materially from
those discussed here.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is that of currency devaluation
risk. During the six months ended June 30, 1999, 28% of the Partnership's total
lease revenues from wholly- and partially-owned equipment came from non-United
States domiciled lessees. Most of the leases require payment in United States
(U.S.) currency. If these lessee's currency devalues against the U.S. dollar,
the lessees could encounter difficulty in making the U.S. dollar denominated
lease payments.
(This space intentionally left blank.)
-12-
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
-13-
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
PLM EQUIPMENT GROWTH FUND II
By: PLM Financial Services, Inc.
General Partner
By: /s/Richard K Brock
Date: July 26, 1999 ----------------------------
Vice President and
Corporate Controller
-14-