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 and
Exchange Act of 1934 For the fiscal quarter ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the transition period from to
Commission file number 1-9670
-------------------------------
PLM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3041257
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Market, Steuart Street Tower,
Suite 800, San Francisco, CA 94105-1301
(Address of principal executive 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: common stock - $.01 par
value; outstanding as of May 11, 1998 - 8,337,603 shares.
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except per share amounts)
For the Three Months
Ended March 31,
1998 1997
------------------------------
Revenues
Operating lease income $ 3,892 $ 4,229
Finance lease income 2,652 1,814
Management fees 2,564 2,861
Partnership interests and other fees 324 486
Acquisition and lease negotiation fees 1,027 178
Aircraft brokerage and services 524 674
Gain on the sale or disposition of assets, net 762 1,368
Other 799 841
----------------------------------
Total revenues 12,544 12,451
Costs and expenses
Operations support 3,925 4,064
Depreciation and amortization 2,550 2,205
General and administrative 1,798 2,016
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Total costs and expenses 8,273 8,285
----------------------------------
Operating income 4,271 4,166
Interest expense (3,070) (2,642)
Interest income 395 386
Other expenses, net (6) (21)
----------------------------------
Income before income taxes 1,590 1,889
Provision for income taxes 607 608
----------------------------------
Net income to common shares $ 983 $ 1,281
==================================
Basic earnings per weighted-average common share outstanding $ 0.12 $ 0.14
==================================
Diluted earnings per weighted-average common share outstanding $ 0.11 $ 0.14
===================================
See accompanying notes to these consolidated financial
statements.
PLM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share amounts)
ASSETS
March 31, December 31,
1998 1997
-------------------------------------------
Cash and cash equivalents $ 5,227 $ 5,224
Receivables 4,842 4,969
Receivables from affiliates 2,874 5,007
Investment in direct finance leases, net 141,704 119,613
Loans receivable 7,914 5,861
Equity interest in affiliates 25,522 26,442
Assets held for sale 433 --
Transportation equipment held for operating leases 52,143 50,252
Less accumulated depreciation (24,751) (26,981 )
-----------------------------------------------
27,392 23,271
Commercial and industrial equipment held for operating leases 25,518 23,268
Less accumulated depreciation (6,239) (4,816 )
-----------------------------------------------
19,279 18,452
Restricted cash and cash equivalents 17,277 18,278
Other, net 8,652 9,166
-----------------------------------------------
Total assets $ 261,116 $ 236,283
===============================================
LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY
Liabilities:
Short-term warehouse facility $ 38,734 $ 23,040
Senior secured loan 19,118 20,588
Senior secured notes 22,588 23,843
Other secured debt 549 413
Nonrecourse debt 96,425 81,302
Payables and other liabilities 20,738 25,366
Deferred income taxes 15,397 14,860
-----------------------------------------------
Total liabilities 213,549 189,412
Minority interest 323 323
Shareholders' equity:
Common stock, ($.01 par value, 50,000,000 shares
authorized, 8,339,298 issued and outstanding as of
March 31, 1998 and 8,400,964 as of December 31, 1997) 112 112
Paid-in capital, in excess of par 74,729 74,650
Treasury stock (3,696,188 and 3,633,883 shares at
respective dates) (13,829) (13,435 )
Accumulated deficit (13,664) (14,647 )
Accumulated other comprehensive loss (104) (132 )
Total shareholders' equity 47,244 46,548
-----------------------------------------------
Total liabilities, minority interest, and shareholders' equity $ 261,116 $ 236,283
===============================================
See accompanying notes to these consolidated financial
statements.
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Year Ended December 31,
1997 and the Three Months Ended
March 31, 1998 (in thousands of
dollars)
Accumulated
Common Stock Deficit &
Paid-in Accumulated
Capital in Other Total
At Excess Treasury Comprehensive Comprehensive Shareholders'
Par of Par Stock Loss Income Equity
------------------------------------------------------------------------------------------------
Balances, December 31, 1996 $ 117 $ 77,778 $ (12,382) $ (19,193 ) $ 46,320
Comprehensive income
Net income 4,667 $ 4,667 4,667
Other comprehensive loss:
Foreign currency translation loss (123 ) (123) (123 )
Comprehensive income 4,544
====================
Common stock repurchases (5 ) (3,128 ) (1,268) (4,401 )
Reissuance of treasury stock, net 215 (38 ) 177
Redemption of shareholder rights (92 ) (92 )
Balances, December 31, 1997 112 74,650 (13,435) (14,779 ) 46,548
Comprehensive income
Net income 983 983 983
Other comprehensive income:
Foreign currency translation gain 28 28 28
Comprehensive income $ 1,011
====================
Common stock repurchases (605) (605 )
Reissuance of treasury stock 79 211 290
----------------------------------------------------------------- --------------
Balances, March 31, 1998 $ 112 $ 74,729 $ (13,829) $ (13,768 ) $ 47,244
================================================================= ==============
See accompanying notes to these consolidated financial
statements.
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Three Months
Ended March 31,
1998 1997
-----------------------------------
Operating activities
Net income $ 983 $ 1,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,550 2,205
Foreign currency translation 28 (17 )
Deferred income tax expense 537 696
Gain on sale or disposition of assets, net (762) (1,368 )
Undistributed residual value interests 200 108
Minority interest in net income of subsidiaries -- 5
Increase in payables and other liabilities 186 1,018
Decrease in receivables and receivables from affiliates 1,184 2,537
Amortization of organization and offering costs 720 722
Decrease (increase) in other assets 283 (1,096 )
----------------------------------
Net cash provided by operating activities 5,909 6,091
----------------------------------
Investing activities
Principal payments received on finance leases 6,356 3,832
Principal payments received on loans 967 478
Investment in direct finance leases (38,809) (16,528 )
Investment in loans receivable (3,020) (777 )
Purchase of property, plant, and equipment (126) (14 )
Purchase of transportation equipment and capital improvements (11,259) (13,170 )
Purchase of commercial and industrial equipment held for operating lease (5,255) (3,277 )
Proceeds from the sale of transportation equipment for lease 1,078 4,717
Proceeds from the sale of assets held for sale 5,366 15,600
Proceeds from the sale of commercial and industrial equipment on finance lease 6,523 14,722
Proceeds from the sale of commercial and industrial equipment on operating lease 2,883 3,207
Decrease (increase) in restricted cash and restricted cash equivalents 1,001 (2,302 )
----------------------------------
Net cash (used in) provided by investing activities (34,295) 6,488
Financing activities
Borrowings of short-term warehouse facility 36,285 23,360
Repayment of short-term warehouse facility (20,591) (31,802 )
Repayment of senior secured loan (1,470) --
Repayment of senior secured notes (1,255) --
Repayment of other secured debt (31) (62 )
Borrowings of other secured debt 167 --
Borrowings of nonrecourse debt 18,121 5,680
Repayment of nonrecourse debt (2,232) (3,398 )
Purchase of stock (605) --
----------------------------------
Net cash provided by (used in) financing activities 28,389 (6,222 )
----------------------------------
Net increase in cash and cash equivalents 3 6,357
Cash and cash equivalents at beginning of period 5,224 7,638
----------------------------------
Cash and cash equivalents at end of period $ 5,227 $ 13,995
==================================
Supplemental information
Net cash paid for interest $ 3,451 $ 2,626
==================================
Net cash paid for income taxes $ 632 $ 15
==================================
Reissuance of treasury stock $ 290 $ 177
==================================
Commercial and industrial purchases included in accounts payable $ 6,031 $ 3,444
==================================
See accompanying notes to these consolidated financial
statements.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. General
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary, consisting primarily of normal
recurring accruals, to present fairly PLM International, Inc. and its wholly-
and majority-owned subsidiaries (the Company's) financial position as of March
31, 1998 and December 31, 1997, statements of income for the three months ended
March 31, 1998 and 1997, statements of changes in shareholders' equity for the
year ended December 31, 1997 and the three months ended March 31, 1998, and
statements of cash flows for the three months ended March 31, 1998 and 1997.
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 consolidated financial
statements. For further information, reference should be made to the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, on file with the Securities and
Exchange Commission.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires enterprises to report, by major
component and in total, all changes in equity from nonowner sources; and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for a public company's
operating segments and related disclosures about its products, services,
geographic areas and major customers. Both statements are effective for the
Company's fiscal year ended December 31, 1998, with earlier application
permitted. The effect of adoption of these statements will be limited to the
form and content of the Company's disclosures and will not affect the Company's
results of operations, cash flow, or financial position. As of the first quarter
of 1998, the Company has adopted SFAS No. 130, disclosing the foreign currency
translation gain (loss) as a component of comprehensive income on a gross basis
because it relates to a foreign investment permanently reinvested outside of the
United States.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits,"
which revises employers' disclosure obligations about pension and other
post-retirement benefit plans. The statement is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. Since the
Company currently has no pension or other post-retirement benefit plans, the
statement has no impact on the Company.
Reclassifications
Certain prior-period amounts have been reclassified to conform to the current
period's presentation.
4. Financing Transaction Activities
The Company's wholly-owned subsidiary, American Finance Group, Inc. (AFG),
originates and manages lease and loan transactions on primarily new commercial
and industrial equipment that is financed by nonrecourse debt, for the Company's
own account, or sold to institutional investment programs or other unaffiliated
investors. Periodically, the Company uses its short-term warehouse facility to
finance the acquisition of the assets, subject to these leases, prior to sale or
permanent financing by nonrecourse debt. The majority of these leases are
accounted for as finance leases, while some transactions qualify as operating
leases or loans.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
Financing Transaction Activities (continued)
Prior to 1998, the Company expensed initial direct lease origination costs,
which were not material, as incurred. Under generally accepted accounting
principles, the effects of such activities, if material, should be capitalized.
Because the Company anticipates its portfolio of equipment on lease to continue
to grow during the next few years, and for the resulting initial direct lease
origination costs to become material, effective January 1, 1998, the Company now
capitalizes these costs which totaled $0.3 million for the three months ended
March 31, 1998. Initial direct lease origination costs are amortized over the
life of the related lease.
During the three months ended March 31, 1998, the Company funded $38.8 million
in equipment that was placed on finance lease. Also during the three months
ended March 31, 1998, the Company sold equipment on finance lease with an
original equipment cost of $6.6 million, resulting in a net gain of $0.1
million.
5. Equipment
Equipment held for operating lease includes transportation equipment, which is
depreciated over its estimated useful life, and commercial and industrial
equipment, which is depreciated over the lease term to an estimated residual
value.
During the three months ended March 31, 1998, the Company funded $5.3 million in
commercial and industrial equipment, which was placed on operating lease. During
the three months ended March 31, 1998, the Company sold commercial and
industrial equipment that was on operating lease, with an original cost of $2.9
million, for a net gain of $0.1 million.
During the first three months of 1998, the Company purchased trailers for $6.4
million and sold trailers with a net book value of $1.0 million for $1.1
million.
The Company classifies equipment as held for sale if the particular asset is
subject to a pending contract for sale or is held for sale to an affiliated
partnership. Equipment held for sale is valued at the lower of the depreciated
cost or the fair value less costs to sell. During the first three months of
1998, the Company purchased railcars for $1.8 million and portable heaters for
$3.0 million. The railcars were sold during the first quarter to an unaffiliated
third party for a net gain of $0.5 million. The portable heaters were resold
during the first quarter to an affiliated program at cost. As of March 31, 1998,
the Company held an aircraft engine with a net book value of $0.3 million and a
20% interest in a commuter aircraft with a net book value of $0.1 million for
sale to third parties. As of December 31, 1997, the Company had no equipment
held for sale.
6. Debt
Assets acquired and held on an interim basis for placement with affiliated
partnerships, for placement in the Company's nonrecourse debt facility, or for
sale to unaffiliated third parties have, from time to time, been partially
funded by a $50.0 million short-term warehouse facility. The Company amended
this facility in 1997 to extend its availability until November 2, 1998. The
facility, which is shared with PLM Equipment Growth Funds (EGFs) V and VI, PLM
Equipment Growth & Income Fund VII (EGF VII), and Professional Lease Management
Income Fund I, LLC (Fund I), allows the Company to purchase equipment prior to
its designation to a specific program or partnership. Borrowings under this
facility by the other eligible borrowers reduce the amount available to be
borrowed by the Company. As of March 31, 1998, the Company had $38.7 million in
borrowings under this facility. There were no other borrowings on this facility
as of March 31, 1998. All borrowings under this facility are guaranteed by the
Company. The Company believes it will be able to extend the facility prior to
its expiration on similar terms.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
Debt (continued)
The Company has available a nonrecourse securitization facility to be used to
acquire assets on a nonrecourse basis, which is secured by direct finance
leases, operating leases, and loans on commercial and industrial equipment that
generally has terms from one to seven years. The Company amended this facility
on October 14, 1997, increasing it from $80.0 million to $125.0 million and
extending its availability until October 13, 1998. As of March 31, 1998,
borrowings under this facility were $82.1 million. The Company believes it will
be able to extend this facility on similar terms prior to its expiration. In
addition, during the first quarter of 1998, the Company assumed $5.1 million in
additional nonrecourse notes payable, bearing interest from 8.32% to 9.5% per
annum, resulting in total nonrecourse notes payable of $14.3 million as of March
31, 1998. Principal and interest on the notes are due monthly beginning January
1, 1998 through October 31, 2001. The notes are secured by direct finance leases
for commercial and industrial equipment that have terms corresponding to the
repayment of the notes.
During the first quarter of 1998, the Company repaid $1.5 million of the senior
secured loan and $1.3 million of the senior secured notes, in accordance with
the debt repayment schedules.
7. Shareholders' Equity
During the first quarter of 1998, the Company completed the $5.0 million common
stock repurchase program authorized by the Company's Board of Directors in March
1997. As of March 31, 1998, 920,054 shares had been repurchased under this plan,
for a total of $5.0 million.
During the three months ended March 31, 1998, 56,588 shares were issued from
treasury stock as part of the senior management bonus program. During the three
months ended March 31, 1998, 118,254 shares were repurchased. Consequently, the
total common shares outstanding decreased to 8,339,298 as of March 31, 1998 from
the 8,400,964 outstanding as of December 31, 1997. Net income per basic
weighted-average common share outstanding was computed by dividing net income to
common shares by the weighted-averag number of shares deemed outstanding during
the period. The weighted-average number of shares deemed outstanding for the
basic earnings per share calculation during the three months ended March 31,
1998 and 1997 was 8,385,299 and 9,168,688, respectively. The weighted-average
number of shares deemed outstanding, including potentially dilutive common
shares, for the diluted earnings per weighted-average share calculation during
the three months ended March 31, 1998 and 1997 was 8,576,397 and 9,441,322,
respectively.
8. Legal Matters
In November 1995, a former employee of PLM International filed and served a
first amended complaint (the complaint) in the United States District Court for
the Northern District of California (Case No. C-95-2957 MMC) against the
Company, the PLM International, Inc. Employee Stock Ownership Plan (ESOP), the
ESOP's trustee, and certain individual employees, officers, and directors of the
Company. The complaint contains claims for relief alleging breaches of fiduciary
duties and various violations of the Employee Retirement Income Security Act of
1974 (ERISA) arising principally from purported defects in the structure,
financing, and termination of the ESOP, and for defendants' allegedly engaging
in prohibited transactions and interfering with plaintiff's rights under ERISA.
Plaintiff seeks monetary damages, rescission of the preferred stock transactions
with the ESOP and/or restitution of ESOP assets, and attorneys' fees and costs
under ERISA. In January 1996, PLMI and other defendants filed a motion to
dismiss the complaint for lack of subject matter jurisdiction, arguing the
plaintiff lacked standing under ERISA. The motion was granted and on May 30,
1996, the district court entered a judgment dismissing the complaint for lack of
subject matter jurisdiction. Plaintiff appealed to the U.S. Court of Appeals for
the Ninth Circuit seeking a reversal of the district court's dismissal of his
ERISA claims, and in an opinion filed on October 23, 1997, the Ninth Circuit
reversed the decision of the district court and remanded the case to the
district court for further proceedings. PLMI filed a petition for rehearing on
November 6, 1997, which was denied on November 20, 1997. The Ninth Circuit
mandate was filed in the district court on December 1, 1997.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
Legal Matters (continued)
On January 12, 1998, plaintiff filed with the district court an expedited motion
for leave to file a second amended complaint in order to bring the fourth,
fifth, and sixth claims for relief as a class action on behalf of himself and
all similarly situated people. These claims allege that PLMI and the other
defendants breached their fiduciary duties and entered into prohibited
transactions in connection with the termination of the ESOP and by causing the
ESOP to sell or exchange the preferred shares held for the benefit of the ESOP
participants for less than their fair market value. The district court granted
the motion on February 9, 1998 and set a trial date of March 20, 1999. In
February 1998, the defendants filed a motion to dismiss the fourth, fifth, and
sixth claims relating to the termination of the ESOP, and plaintiff's seventh
claim relating to defendants' alleged interference with plaintiff's rights under
ERISA, all for failure to state claims for relief. The plaintiff has opposed
this motion and a hearing date has not yet been scheduled. The parties are also
engaged in ongoing discovery. The Company does not believe the claims have any
merit and plans to continue to defend this matter vigorously.
The Company and various of its affiliates are named as defendants in a lawsuit
filed as a class action on January 22, 1997 in the Circuit Court of Mobile
County, Mobile, Alabama, Case No. CV-97-251 (the Koch action). The plaintiffs,
who filed the complaint on their own and on behalf of all class members
similarly situated, are six individuals who allegedly invested in certain
California limited partnerships (the Partnerships) for which FSI acts as the
general partner, including PLM Equipment Growth Fund IV, PLM Equipment Growth
Fund V, PLM Equipment Growth Fund VI, and PLM Equipment Growth & Income Fund
VII. The complaint asserts eight causes of action against all defendants, as
follows: fraud and deceit, suppression, negligent misrepresentation and
suppression, intentional breach of fiduciary duty, negligent breach of fiduciary
duty, unjust enrichment, conversion, and conspiracy. Additionally, plaintiffs
allege a cause of action against PLM Securities Corp. for breach of third party
beneficiary contracts in violation of the National Association of Securities
Dealers rules of fair practice. Plaintiffs allege that each defendant owed
plaintiffs and the class certain duties due to their status as fiduciaries,
financial advisors, agents, general partner, and control persons. Based on these
duties, plaintiffs assert liability against the defendants for improper sales
and marketing practices, mismanagement of the Partnerships, and concealing such
mismanagement from investors in the Partnerships. Plaintiffs seek unspecified
compensatory and recissory damages, as well as punitive damages, and have
offered to tender their limited partnership units back to the defendants.
On March 6, 1997, the defendants removed the Koch action from the state court to
the United States District Court for the Southern District of Alabama, Southern
Division (Civil Action No. 97-0177-BH-C) based on the district court's diversity
jurisdiction, following which plaintiffs filed a motion to remand the action to
the state court. On September 24, 1997, the district court denied plaintiffs'
motion and dismissed without prejudice the individual claims of the California
class representative, reasoning that he had been fraudulently joined as a
plaintiff. On October 3, 1997, plaintiffs filed a motion requesting that the
district court reconsider its ruling or, in the alternative, that the court
modify its order dismissing the California plaintiff's claims so that it is a
final appealable order, as well as certify for an immediate appeal to the
Eleventh Circuit Court of Appeals that part of its order denying plaintiffs'
motion to remand. On October 7, 1997, the district court denied each of these
motions. In responses to such denial, plaintiffs filed a petition for writ of
mandamus with the Eleventh Circuit, which was denied on November 18, 1997. On
November 24, 1997, plaintiffs filed with the Eleventh Circuit a petition for
rehearing and consideration by the full court of the order denying the petition
for a writ of mandamus, which petition was supplemented by plaintiffs on January
27, 1998.
On October 10, 1997, defendants filed a motion to compel arbitration of
plaintiffs' claims, based on an agreement to arbitrate contained in the limited
partnership agreement of each Partnership, and to stay further proceedings
pending the outcome of such arbitration. Notwithstanding plaintiffs' opposition,
the district court granted the motion on December 8, 1997. On December 15, 1997,
plaintiffs filed with the Eleventh Circuit a notice of appeal from the district
court's order granting defendants' motion to compel arbitration and to stay the
proceedings, and of the district court's September 24, 1997 order denying
plaintiffs' motion to remand and dismissing the claims of the California
plaintiff. Plaintiffs filed an amended notice of appeal on December 31, 1997.
Appellate briefs have not yet been filed in this matter.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
8. Legal Matters (continued)
The Company believes that the allegations of the Koch action are completely
without merit and intends to continue to defend this matter vigorously.
On June 5, 1997, the Company and the affiliates who are also defendants in the
Koch action were named as defendants in another purported class action filed in
the San Francisco Superior Court, San Francisco, California, Case No. 987062
(the Romei action). The plaintiff is an investor in PLM Equipment Growth Fund V,
and filed the complaint on her own behalf and on behalf of all class members
similarly situated who invested in certain California limited partnerships for
which FSI acts as the general partner, including the Partnerships. The complaint
alleges the same facts and the same nine causes of action as in the Koch action,
plus five additional causes of action against all of the defendants, as follows:
violations of California Business and Professions Code Sections 17200, et seq.
for alleged unfair and deceptive practices, constructive fraud, unjust
enrichment, violations of California Corporations Code Section 1507, and a claim
for treble damages under California Civil Code Section 3345.
On July 31, 1997, the defendants filed with the district court for the Northern
District of California (Case No. C-97-2847 WHO) a petition under the Federal
Arbitration Act seeking to compel arbitration of plaintiff's claims and for an
order staying the state court proceedings pending the outcome of the
arbitration. In connection with this motion, plaintiff agreed to a stay of the
state court action pending the district court's decision on the petition to
compel arbitration. By memorandum and order dated October 23, 1997, the district
court denied the Company's petition to compel arbitration. On November 5, 1997,
the Company filed an expedited motion for leave to file a motion for
reconsideration of this order, which motion was granted on November 14, 1997.
The parties have agreed to have oral argument on the reconsideration motion set
for July 22, 1998. The state court action has been stayed pending the district
court's decision on this motion.
In connection with her opposition to the Company's petition to compel
arbitration, on August 22, 1997 the plaintiff filed an amended complaint with
the state court alleging two new causes of action for violations of the
California Securities Law of 1968 (California Corporations Code Sections 25400
and 25500), and for violation of California Civil Code Sections 1709 and 1710.
Plaintiff has also served certain discovery requests on defendants. Because of
the stay, no response to the amended complaint or to the discovery is currently
required. The Company believes that the allegations of the amended complaint in
the Romei action are completely without merit and intends to defend this matter
vigorously.
The Company is involved as plaintiff or defendant in various other legal actions
incident to its business. Management does not believe that any of these actions
will be material to the financial condition of the Company.
9. Purchase Commitments
As of March 31, 1998, the Company, through its AFG subsidiary, had committed to
purchase $176.1 million of equipment for its commercial and industrial lease and
finance receivable portfolio.
From April 1, 1998 to May 11, 1998, the Company, through its AFG subsidiary,
funded $5.4 million of the commitments outstanding as of March 31, 1998 for its
commercial and industrial lease and finance receivable portfolio.
As of May 11, 1998, the Company had committed to purchase $179.7 million of
equipment for its commercial and industrial lease and finance receivable
portfolio.
10. Subsequent Events
In April 1998, the Company sold an aircraft engine with a net book value of $0.3
million to an unaffiliated third party for a net gain of $0.7 million. This
aircraft was included in assets held for sale as of March 31, 1998.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
10. Subsequent Events (continued)
In May 1998, the Company sold its 20% interest in a commuter aircraft to an
unaffiliated third party for approximately its net book value of $0.1 million.
This aircraft was included in assets held for sale as of March 31, 1998.
On April 10, 1998, the Court entered a judgment in favor of the Company in its
lawsuit against Tera Power Corporation and others. The judgment awarded the
Company $830,000 plus attorney's fees and costs. On May 4, 1998, the Company
received $950,000 from one of the defendants in full settlement of this case.
In March 1998, the Company announced that its Board of Directors authorized its
management to engage investment bankers for the purpose of undertaking an
initial public offering of common stock for AFG. On May 7, 1998, AFG filed a
registration statement with the Securities and Exchange Commission for the
initial public offering. The offering is expected to commence in the third
quarter of 1998; however, the timing of the offering is subject to market
conditions and other factors.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Commercial and Industrial Equipment Leasing
A major activity of the Company is the funding and management of long-term
direct finance leases, operating leases, and loans through its American Finance
Group, Inc. (AFG) subsidiary. Master lease agreements are entered into with
predominantly investment-grade lessees and serve as the basis for marketing
efforts. The underlying assets represent a broad range of commercial and
industrial equipment, such as materials-handling, computer, point-of-sale,
general plant and warehouse, mining and construction, and communications
equipment. Through AFG, the Company also engages in the servicing of
institutional investment programs for which it originates leases and receives
acquisition and management fees. The Company also earns syndication fees for
arranging purchases and sales of equipment to other unaffiliated third parties.
In March 1998, the Company announced that its Board of Directors authorized its
management to engage investment bankers for the purpose of undertaking an
initial public offering of common stock for AFG. On May 7, 1998, AFG filed a
registration statement with the Securities and Exchange Commission for the
initial public offering. The offering is expected to commence in the third
quarter of 1998; however, the timing of the offering is subject to market
conditions and other factors.
Trailer Leasing
The Company operates 13 trailer rental facilities that engage in short-term and
mid-term operating leases. Equipment operated in these facilities consists of
dry van trailers leased to a variety of customers and refrigerated trailers used
to transport temperature sensitive food products. The Company opened three of
these rental yards in the first quarter of 1998 and intends to open additional
rental yard facilities in the future. The Company is selling certain of its
older trailers and is replacing them with new or late-model refrigerated
trailers. The new trailers will be placed in existing rental facilities or in
new yards.
Other Transportation Equipment Leasing, Management of Investment Programs, and
Other
The Company also owns a portfolio of transportation equipment, in addition to
the dry van and refrigerated over-the-road trailers mentioned above, from which
it earns operating lease revenue and incurs operating expenses. The Company's
transportation equipment held for operating lease and held for sale as of March
31,1998, which consists of a commuter aircraft, a 20% interest in a commuter
aircraft, an aircraft engine, and intermodal trailers, was mainly built prior to
1988. As the equipment ages, the Company continues to monitor the performance of
these assets and current market conditions for leasing equipment in order to
seek the best opportunities for investment. Failure to replace equipment may
result in shorter lease terms, higher costs of maintaining and operating aged
equipment, and, in certain instances, limited remarketability.
The Company also has an 80% interest in a company owning 100% of a company
located in Australia involved in aircraft brokerage and aircraft spare parts
sales.
The Company has syndicated investment programs from which it earns various fees
and equity interests. Professional Lease Management Income Fund I, LLC (Fund I)
was structured as a limited liability company with a no front-end fee structure.
The previously syndicated limited partnership programs allow the Company to
receive fees for the acquisition and initial leasing of the equipment. The Fund
I program does not provide for acquisition and lease negotiation fees. The
Company invests the equity raised through syndication in transportation
equipment and related assets, which it then manages on behalf of the investors.
The equipment management activities for these types of programs generate
equipment management fees for the Company over the life of a program, which is
typically 10 to 12 years. The limited partnership agreements generally entitle
the Company to receive a 1% or 5% interest in the cash distributions and
earnings of a program, subject to certain allocation provisions. The Fund I
agreement entitles the Company to a 15% interest in the cash distributions and
earnings of the program, subject to certain allocation provisions, which will
increase to 25% after the investors have received distributions equal to their
original invested capital.
In 1996, the Company announced the suspension of public syndication of equipment
leasing programs with the close of Fund I. As a result of this decision,
revenues earned from managed programs, which include management fees,
partnership interests and other fees, and acquisition and lease negotiation
fees, will be reduced in the future as the older programs begin liquidation and
the managed equipment portfolio for these programs becomes permanently reduced.
Comparison of the Company's Operating Results for the Three Months Ended March
31, 1998 and 1997
The following analysis reviews the operating results of the Company:
Revenues
For the Three Months
Ended March 31,
1998 1997
--------------------------------------------
(in thousands of dollars)
Operating lease income $ 3,892 $ 4,229
Finance lease income 2,652 1,814
Management fees 2,564 2,861
Partnership interests and other fees 324 486
Acquisition and lease negotiation fees 1,027 178
Aircraft brokerage and services 524 674
Gain on the sale or disposition of assets, net 762 1,368
Other 799 841
---------------------------------------------------
Total revenues $ 12,544 $ 12,451
The fluctuations in revenues for the three months ended March 31, 1998, compared
to the same quarter in 1997, are summarized and explained below.
Operating lease revenues by equipment type:
For the Three Months
Ended March 31,
1998 1997
--------------------------------------------
(in thousands of dollars)
Commercial and industrial equipment $ 1,613 $ 1,243
Dry van and refrigerated over-the-road trailers 1,578 1,210
Intermodal trailers 589 738
Mobile offshore drilling units -- 604
Aircraft 58 269
Marine containers -- 53
Other 54 112
---------------------------------------------------
Total operating lease revenues $ 3,892 $ 4,229
Operating lease revenues include revenues generated from assets held for
operating leases and assets held for sale that are on lease. Operating lease
revenues decreased $0.3 million during the first quarter of 1998, compared to
the same quarter of 1997. Operating lease revenues decreased due to the
following:
During the first quarter of 1997, the Company owned one mobile offshore drilling
unit, as well as a 25.5% interest in another mobile offshore drilling unit,
which generated $0.6 million in lease revenues. Both of these drilling units
were sold at the Company's cost to an affiliated program during the first
quarter of 1997. During the first quarter of 1998, the only revenue the Company
earned on equipment prior to sale to its managed programs was $0.1 million
earned from portable heaters.
As of March 31, 1998, the Company owned transportation equipment held for
operating leases and held for sale, with an original cost of $53.1 million,
which was $12.1 million less than the original cost of transportation equipment
owned and held for operating lease as of March 31, 1997. The reduction in
equipment, on an original cost basis, is a consequence of the Company's
strategic decision to dispose of certain underperforming transportation assets
and exit certain equipment markets, which had resulted in an 89% net reduction
in its aircraft portfolio, a 100% net reduction in its marine container
portfolio, and a 5% net reduction in its intermodal trailer portfolio, compared
to these portfolios as of March 31, 1997. The reduction in transportation
equipment available for lease is the primary reason aircraft, marine container,
and intermodal trailer revenue was reduced, compared to the prior-year
comparable period.
Intermodal trailer revenue also decreased due to lower utilization, compared to
the same quarter of the prior year.
The Company entered into an agreement in January 1997 to lease all of its
storage equipment assets to a third party on a finance lease, as opposed to
short-term operating leases, resulting in a $0.1 million decrease in storage
equipment operating lease revenues.
These decreases were partially offset by a $0.4 million increase in operating
lease revenues generated from commercial and industrial equipment and a $0.4
million increase in operating lease revenues generated from refrigerated trailer
equipment, due to an increase in the amount of these types of equipment owned
and on operating lease.
Finance lease income:
The Company earns finance lease income for certain leases originated by AFG that
are either retained for long-term investment or sold to third parties or to
institutional investment programs. Finance lease income increased $0.8 million
in the first quarter of 1998, compared to the same quarter in 1997, reflecting
an increase in commercial and industrial assets that were on finance lease. For
the quarter ended March 31, 1998, the average investment in direct finance
leases was $120.5 million, compared to $69.3 million for the first quarter of
1997.
Management fees:
Management fees are, for the most part, based on the gross revenues generated by
equipment under management. Management fees were $2.6 million and $2.9 million
for the quarters ended March 31, 1998 and 1997, respectively. The decrease in
management fees resulted from a net decrease in managed equipment from the
remaining older programs. With the termination of syndication activities in
1996, management fees from the older programs are expected to decrease in the
future as they begin liquidation and the associated equipment portfolio becomes
permanently reduced. This decrease has been and is expected to continue to be
offset, in part, by management fees earned from the institutional investment
programs serviced by AFG.
Partnership interests and other fees:
The Company records as revenues its equity interest in the earnings of the
Company's affiliated programs. The net earnings and distribution levels from the
affiliated programs were $0.5 million and $0.6 million for the quarters ended
March 31, 1998 and 1997, respectively. In addition, a decrease of $0.2 million
and $0.1 million in the Company's residual interests in the programs was
recorded during the quarters ended March 31, 1998 and 1997, respectively. The
decrease in net earnings and distribution levels and residual interests in the
quarter ended March 31, 1998, compared to the same quarter of 1997, resulted
mainly from the disposition of equipment in certain of the PLM Equipment Growth
Fund (EGF) programs. Residual income is based on the general partner's share of
the present value of the estimated disposition proceeds of the equipment
portfolios of the affiliated programs when the equipment is purchased. Net
decreases in the recorded residual values result when partnership assets are
sold and the reinvestment proceeds are less than the original investment in the
sold equipment.
Acquisition and lease negotiation fees:
During the quarter ended March 31, 1998, the Company, on behalf of the EGF
programs, purchased transportation and other equipment for $6.4 million and a
beneficial interest in an entity that owns a marine vessel for $9.2 million,
compared to no equipment purchased on behalf of the EGFs during the same quarter
of 1997, resulting in a $0.8 million increase in acquisition and lease
negotiation fees. Also during the quarter ended March 31, 1998, equipment
purchased by AFG for the institutional investment programs was $6.0 million,
compared to $6.3 million for the same quarter in 1997, resulting in $0.2 million
in acquisition and lease negotiation fees for both quarters. Because of the
Company's decision to halt syndication of equipment leasing programs with the
close of Fund I in 1996, and because Fund I has a no front-end fee structure,
acquisition and lease negotiation fees will be substantially reduced in the
future.
Aircraft brokerage and services:
Aircraft brokerage and services revenue, which represents revenue
earned by Aeromil Holdings, Inc., the Company's aircraft leasing, spare part
sales, and brokerage subsidiary, decreased $0.2 million during the quarter ended
March 31, 1998, compared to the same quarter in 1997, due to a decrease in spare
parts sales.
Gain on the sale or disposition of assets, net:
During the quarter ended March 31, 1998, the Company recorded $0.8 million in
gain on the sale or disposition of assets. Of this gain, $0.1 million resulted
from the sale or disposition of trailers and $0.2 million related to the sale of
commercial and industrial equipment. Also during the first quarter of 1998, the
Company purchased and subsequently sold railcars to an unaffiliated third party
for a net gain of $0.5 million. During the quarter ended March 31, 1997, the
Company recorded $1.4 million in gain on the sale or disposition of assets. Of
this gain, $0.2 million resulted from the sale or disposition of trailers,
marine containers, commuter aircraft, and storage units, and $0.8 million
related to the sale of commercial and industrial equipment. Also during the
first quarter of 1997, the Company purchased and subsequently sold a commercial
aircraft to an unaffiliated third party for a net gain of $0.4 million.
Costs and Expenses
For the Three Months
Ended March 31,
1998 1997
--------------------------------------------
(in thousands of dollars)
Operations support $ 3,925 $ 4,064
Depreciation and amortization 2,550 2,205
General and administrative 1,798 2,016
---------------------------------------------------
Total costs and expenses $ 8,273 $ 8,285
Operations support:
Operations support expense, including salary and office-related expenses for
operational activities, equipment insurance, repair and maintenance costs,
equipment remarketing costs, costs of goods sold, and provision for doubtful
accounts, decreased $0.1 million (3%) for the quarter ended March 31, 1998,
compared to the same quarter in 1997. The decrease resulted from a $0.2 million
decrease in compensation and benefits expense, mainly as a result of lower
commission and bonus expenses, offset by a $0.1 million increase in trailer
repair and maintenance expenses.
Depreciation and amortization:
Depreciation and amortization expenses increased $0.3 million (16%) for the
quarter ended March 31, 1998, compared to the quarter ended March 31, 1997. The
increase resulted from an increase in commercial and industrial equipment and
refrigerated trailer equipment on operating lease, which was partially offset by
the reduction in depreciable aircraft, containers, and intermodal trailers
(discussed in the operating lease revenue section).
General and administrative:
General and administrative expenses decreased $0.2 million (11%) during the
quarter ended March 31, 1998, compared to the same quarter in 1997, primarily
due to a $0.1 million decrease in compensation and benefits expenses, after
allocations to the managed programs, as a result of a decrease in staffing
requirements, and a $0.1 million decrease in legal expenses related to the Koch
action (refer to Note 8).
Other Income and Expenses
For the Three Months
Ended March 31,
1998 1997
-------------------------------------------
(in thousands of dollars)
Interest expense $ (3,070) $ (2,642)
Interest income 395 386
Other expense, net (6) (21)
Interest expense:
Interest expense increased $0.4 million (16%) during the quarter ended March 31,
1998, compared to the same quarter in 1997, due to an increase in borrowings on
the nonrecourse debt facility and the senior secured notes facility. The
increase in interest expense caused by these increased borrowings was partially
offset by lower interest expense resulting from reductions in the amounts
outstanding on the senior secured loan and the short-term warehouse facility.
Provision for income taxes:
For the three months ended March 31, 1998, the provision for income taxes was
$0.6 million, representing an effective rate of 38%. For the three months ended
March 31,1997, the provision for income taxes was $0.6 million, representing an
effective rate of 32%. In 1997, the Company's income tax rate included the
benefit of certain income earned from foreign activities that has been
permanently invested outside the United States.
Net Income
As a result of the foregoing, for the three months ended March 31, 1998, net
income was $1.0 million, resulting in basic and diluted earnings per
weighted-average common share outstanding of $0.12 and $0.11, respectively. For
the same quarter in 1997, net income was $1.3 million, resulting in basic and
diluted earnings per weighted-average common share outstanding of $0.14.
Liquidity and Capital Resources
Cash requirements have historically been satisfied through cash flow
from operations, borrowings, and the sale of equipment.
Liquidity in 1998 and beyond will depend, in part, on the continued
remarketing of the equipment portfolio at similar lease rates, the management of
existing sponsored programs, the effectiveness of cost control programs, the
purchase and sale of equipment, the volume of commercial and industrial
equipment leasing transactions for which the Company earns fees and a spread,
and the potential proceeds from the initial public offering of AFG. Management
believes that the Company can accomplish the preceding and that it will have
sufficient liquidity and capital resources for the future. Future liquidity is
influenced by the factors summarized below.
Debt financing:
Senior Secured Loan: The Company's senior loan with a syndicate of insurance
companies, which had an outstanding balance of $19.1 million as of March 31,
1998 and May 11, 1998, provides that equipment sale proceeds from pledged
equipment or cash deposits be placed into collateral accounts or used to
purchase additional equipment to the extent required to meet certain debt
covenants. As of March 31, 1998, the cash collateral balance for this loan was
$9.7 million and is included in restricted cash and cash equivalents on the
Company's balance sheet. The facility required quarterly interest payments
through March 31, 1997, with quarterly principal payments of $1.5 million plus
interest charges beginning June 30, 1997 through termination of the loan in June
2001.
Senior Secured Notes: On June 28, 1996, the Company closed a floating-rate
senior secured note agreement that allowed the Company to borrow up to $27.0
million within a one-year period. During the quarter ended March 31, 1998, the
Company paid $1.3 million on this facility. As of March 31, 1998 and May 11,
1998, the Company had $22.6 million outstanding under this agreement. Principal
payments of $1.3 million are payable quarterly through termination of the loan
on August 15, 2002.
Warehouse Facility: Assets acquired and held on an interim basis for placement
with affiliated programs or sale to third parties or purchased for placement in
the Company's nonrecourse debt facility have, from time to time, been partially
funded by a $50.0 million short-term warehouse facility. During 1997, the
availability of this facility was extended until November 2, 1998. The Company
believes that it will be able to extend this facility on similar terms prior to
its expiration.
This facility, which is shared with PLM Equipment Growth Funds (EGFs) V and VI,
PLM Equipment Growth & Income Fund VII (EGF VII), and Professional Lease
Management Fund I, LLC (Fund I), allows the Company to purchase equipment prior
to its designation to a specific program. Borrowings under this facility by the
other eligible borrowers reduce the amount available to be borrowed by the
Company. As of March 31, 1998, the Company had $38.7 million in borrowings under
this facility. As of May 11, 1998, the Company had $29.6 million in borrowings
under this facility. There were no other borrowings on this facility as of March
31, 1998 or May 11, 1998.
Nonrecourse Debt: The Company has available a nonrecourse debt facility for up
to $125.0 million, secured by direct finance leases, operating leases, and loans
on commercial and industrial equipment that generally have terms of one to seven
years. This facility is available for a one-year period expiring October 13,
1998. Repayment of the facility matches the terms of the underlying leases. The
Company believes that it will be able to renew this facility on substantially
the same terms upon its expiration. As of March 31, 1998, $82.1 million in
borrowings was outstanding under this facility. As of May 11, 1998, $87.4
million in borrowings was outstanding under this facility.
In addition to the $125.0 million nonrecourse debt facility discussed above,
as of March 31, 1998 and May 11, 1998, the Company had $14.3 million and $18.5
million, respectively, in nonrecourse notes payable secured by direct finance
leases on commercial and industrial equipment that have terms corresponding to
the note repayment schedules beginning November 1997 through October 2001. The
notes bear interest from 8.32% to 9.5% per annum.
Interest-Rate Swap Contracts: The Company has entered into interest-rate swap
agreements in order to manage the interest-rate exposure associated with its
nonrecourse debt. As of March 31, 1998, the swap agreements had a
weighted-average duration of 1.0 years, corresponding to the terms of the
related debt. As of March 31, 1998, a notional amount of $86.1 million of
interest-rate swap agreements effectively fixed interest rates at an average of
6.66% on such obligations. For the three months ended March 31, 1998, interest
expense increased by $0.1 million due to these arrangements.
Commercial and industrial equipment leasing:
The Company earns finance lease or operating lease income for leases originated
and retained by AFG. The funding of leases requires the Company to retain an
equity interest in all leases financed through the nonrecourse debt facility.
AFG also originates loans in which it takes a security interest in the assets.
From January 1, 1998 through May 6, 1998, the Company funded commercial and
industrial leases and finance receivables with an original equipment cost of
$52.5 million. A portion of these transactions was financed, on an interim
basis, through the Company's warehouse facility. Some equipment subject to
leases is sold to institutional investment programs for which the Company is the
servicer. Acquisition and management fees are received for the sale and
subsequent servicing of these leases. The Company believes that this lease
origination operation is a growth area for the future.
In March 1998, the Company announced that its Board of Directors authorized its
management to engage investment bankers for the purpose of undertaking an
initial public offering of common stock for AFG. On May 7, 1998, AFG filed a
registration statement with the Securities and Exchange Commission for the
initial public offering. The offering is expected to commence in the third
quarter of 1998; however, the timing of the offering is subject to market
conditions and other factors.
As of March 31, 1998, the Company had committed to purchase $176.1 million of
equipment for its commercial and industrial lease and finance receivable
portfolio, to be held by the Company or sold to the institutional investment
programs or to other third parties.
From April 1, 1998 through May 11, 1998, the Company funded $5.4 million of
commitments outstanding as of March 31, 1998 for its commercial and industrial
lease and finance receivable portfolio.
As of May 11, 1998, the Company had committed to purchase $179.7 million of
equipment for its commercial and industrial lease and finance receivable
portfolio.
Trailer leasing:
The Company operates 13 trailer rental facilities that engage in short-term and
mid-term operating leases. Equipment operated in these facilities consists of
dry van trailers leased to a variety of customers and refrigerated trailers used
to transport temperature sensitive food products. The Company opened three of
these rental yards in the first quarter of 1998 and intends to open additional
rental yard facilities in the future. The Company is selling certain of its
older trailers and is replacing them with new or late-model refrigerated
trailers. The new trailers will be placed in existing rental facilities or in
new yards.
Other transportation equipment leasing, management of investment programs, and
other:
During the first quarter ended March 31, 1998, the Company generated proceeds of
$6.4 million from the sale of transportation equipment. The net proceeds from
the sale of assets that were collateralized as part of the senior secured loan
facility were placed in a collateral account.
Over the last four years, the Company has downsized its transportation equipment
portfolio through the sale or disposal of underperforming assets. The Company
will continue to analyze its transportation equipment portfolio for
underperforming assets to sell or dispose of as necessary.
The Company also has an 80% interest in a company owning 100% of a company
located in Australia involved in aircraft brokerage and aircraft spare parts
sales.
Management believes that through debt and equity financing, possible sales of
equipment, and cash flows from operations the Company will have sufficient
liquidity and capital resources to meet its projected future operating needs.
Year 2000 Compliance:
The Company is currently addressing the year 2000 computer software issues and
is creating a timetable for carrying out any program modifications that may be
required. The Company anticipates all such program modifications will be
completed by the end of 1998. The Company does not anticipate that the cost of
these modifications will be material.
Forward-looking information:
Except for historical information contained herein, the discussion in this Form
10-Q contains forward-looking statements that contain risks and uncertainties,
such as statements of the Company'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 Company's actual results could differ materially from
those discussed here.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to the consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
None.
(B) Reports on Form 8-K
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLM INTERNATIONAL, INC.
/s/ Richard K Brock
---------------------------
Richard K Brock
Vice President and
Corporate Controller
Date: May 11, 1998