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 June 30, 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
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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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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 July 22, 1998 - 8,339,103 shares.
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except per share amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
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Revenues
Operating lease income $ 5,452 $ 3,429 $ 9,344 $ 7,658
Finance lease income 3,042 1,984 5,694 3,798
Management fees 2,535 2,797 5,099 5,658
Partnership interests and other fees 357 507 681 993
Acquisition and lease negotiation fees 1,184 585 2,211 763
Aircraft brokerage and services 362 661 886 1,335
Gain on the sale or disposition of assets, net 1,533 1,233 2,295 2,601
Other 843 694 1,642 1,535
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Total revenues 15,308 11,890 27,852 24,341
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Costs and expenses
Operations support 4,829 4,158 8,754 8,222
Depreciation and amortization 3,497 2,141 6,047 4,346
General and administrative 2,085 2,710 3,883 4,726
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Total costs and expenses 10,411 9,009 18,684 17,294
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Operating income 4,897 2,881 9,168 7,047
Interest expense (3,604) (2,352) (6,674) (4,994)
Interest income 299 452 694 838
Other income (expenses), net 469 (3) 463 (24)
-------------------------------
--------------------------------------
Income before income taxes 2,061 978 3,651 2,867
Provision for income taxes 860 330 1,467 938
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Net income to common shares $ 1,201 $ 648 $ 2,184 $ 1,929
===============================
======================================
Basic earnings per weighted-average common
share outstanding $ 0.14 $ 0.07 $ 0.26 $ 0.21
===================================================================
Diluted earnings per weighted-average common
share outstanding $ 0.14 $ 0.07 $ 0.25 $ 0.20
===================================================================
See accompanying notes to these consolidated financial
statements.
PLM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share amounts)
ASSETS
June 30, December 31,
1998 1997
-------------------------------------------
Cash and cash equivalents $ 3,293 $ 5,224
Receivables 4,299 4,969
Receivables from affiliates 2,764 5,007
Investment in direct finance leases, net 160,482 119,613
Loans receivable 22,634 5,861
Equity interest in affiliates 24,457 26,442
Asset held for sale 2,500 --
Transportation equipment held for operating leases 54,383 50,252
Less accumulated depreciation (24,256) (26,981 )
-----------------------------------------------
30,127 23,271
Commercial and industrial equipment held for operating leases 28,258 23,268
Less accumulated depreciation (7,800) (4,816 )
-----------------------------------------------
20,458 18,452
Restricted cash and cash equivalents 11,772 18,278
Other, net 8,049 9,166
-----------------------------------------------
Total assets $ 290,835 $ 236,283
===============================================
LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY
Liabilities
Warehouse credit facility $ 46,803 $ 23,040
Senior secured loan 17,647 20,588
Senior secured notes 21,333 23,843
Other secured debt 487 413
Nonrecourse securitized debt 123,491 81,302
Payables and other liabilities 15,967 25,366
Deferred income taxes 16,501 14,860
-----------------------------------------------
Total liabilities 242,229 189,412
Minority interest 239 323
Shareholders' equity
Common stock ($.01 par value, 50.0 million shares
authorized, 8,339,103 issued and outstanding as of
June 30, 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 (3,698,074 and 3,633,883 shares at
respective dates) (13,850) (13,435 )
Accumulated deficit (12,463) (14,647 )
Accumulated other comprehensive loss (161) (132 )
Total shareholders' equity 48,367 46,548
-----------------------------------------------
Total liabilities, minority interest, and shareholders' equity $ 290,835 $ 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 Six Months Ended
June 30, 1998 (in thousands of
dollars)
Common Stock Accumulated
--------------------------------------------- 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 )
Total 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 2,184 2,184 2,184
Other comprehensive loss:
Foreign currency translation loss (29 ) (29) (29 )
Total comprehensive income $ 2,155
==============
Common stock repurchases (626) (626 )
Reissuance of treasury stock 79 211 290
----------------------------------------------------------------- ----------
Balances, June 30, 1998 $ 112 $ 74,729 $ (13,850) $ (12,624 ) $ 48,367
================================================================= ==========
See accompanying notes to these consolidated financial
statements.
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Six Months
Ended June 30,
1998 1997
-----------------------------------
Operating activities
Net income $ 2,184 $ 1,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,047 4,346
Foreign currency translation (29) (61 )
Deferred income tax expense 1,641 883
Gain on sale or disposition of assets, net (2,295) (2,601 )
Undistributed residual value interests 546 208
Minority interest in net (loss) income of subsidiaries (84) 8
(Decrease) increase in payables and other liabilities (1,669) 962
Decrease in receivables and receivables from affiliates 2,913 1,535
Amortization of organization and offering costs 1,481 1,443
Decrease (increase) in other assets 521 (323 )
-----------------------------------
Net cash provided by operating activities 11,256 8,329
-----------------------------------
Investing activities
Principal payments received on finance leases 14,441 8,589
Principal payments received on loans 1,878 979
Investment in direct finance leases (82,047) (30,528 )
Investment in loans receivable (18,651) (777 )
Purchase of property, plant, and equipment (110) (483 )
Purchase of transportation equipment and capital improvements (32,919) (18,471 )
Purchase of commercial and industrial equipment held for operating lease (14,938) (3,976 )
Proceeds from the sale of transportation equipment for lease 3,081 9,958
Proceeds from the sale of assets held for sale 19,866 15,600
Proceeds from the sale of commercial and industrial equipment on finance lease 18,842 21,512
Proceeds from the sale of commercial and industrial equipment on operating lease 10,915 3,187
Decrease (increase) in restricted cash and cash equivalents 6,506 (4,118 )
-----------------------------------
Net cash (used in) provided by investing activities (73,136) 1,472
Financing activities
Borrowings of warehouse credit facility 88,065 31,910
Repayment of warehouse credit facility (64,302) (55,735 )
Repayment of senior secured loan (2,941) (1,471 )
Repayment of senior secured notes (2,510) --
Borrowings of senior secured notes -- 9,000
Borrowings of other secured debt 173 --
Repayment of other secured debt (99) (97 )
Borrowings of nonrecourse securitized debt 54,512 14,394
Repayment of nonrecourse securitized debt (12,323) (7,443 )
Purchase of stock (626) (46 )
-----------------------------------
Net cash provided by (used in) financing activities 59,949 (9,488 )
-----------------------------------
Net (decrease) increase in cash and cash equivalents (1,931) 313
Cash and cash equivalents at beginning of period 5,224 7,638
-----------------------------------
Cash and cash equivalents at end of period $ 3,293 $ 7,951
===================================
Supplemental information
Net cash paid for interest $ 5,754 $ 4,786
===================================
Net cash paid for income taxes $ 1,704 $ 43
===================================
Reissuance of treasury stock $ 290 $ 201
===================================
Commercial and industrial purchases included in accounts payable $ 2,805 $ 600
===================================
See accompanying notes to these consolidated financial
statements.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June
30, 1998 and December 31, 1997, statements of income for the three and six
months ended June 30, 1998 and 1997, statements of changes in shareholders'
equity for the year ended December 31, 1997 and the six months ended June 30,
1998, and statements of cash flows for the six months ended June 30, 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 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of June 30, 1998, the
Company is reviewing the effect this standard will have on the Company's
consolidated financial statements.
Reclassifications
Certain prior-period amounts have been reclassified to conform to the current
period's presentation.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
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 securitized debt, for
the Company's own account or for sale to institutional investment programs or
other unaffiliated investors. Periodically, the Company uses its warehouse
credit facility to finance the acquisition of the assets, subject to these
leases, prior to sale or permanent financing by nonrecourse securitized debt.
The majority of these leases are accounted for as finance leases, while some
transactions qualify as operating leases or loans.
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 $0.5 million for the six months ended
June 30, 1998. Initial direct lease origination costs are amortized over the
life of the related lease.
During the six months ended June 30, 1998, the Company purchased $82.0 million
in equipment that was placed on finance lease. Also during the six months ended
June 30, 1998, the Company sold equipment on finance lease with an original
equipment cost of $18.5 million, resulting in a net gain of $0.6 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.
During the six months ended June 30, 1998, the Company purchased $14.9 million
in commercial and industrial equipment, which was placed on operating lease.
During the six months ended June 30, 1998, the Company sold commercial and
industrial equipment that was on operating lease, with a net book value of $10.5
million, for a net gain of $0.4 million.
During the first six months of 1998, the Company purchased trailers for $11.0
million and sold trailers with a net book value of $1.9 million for $2.0
million. In addition, the Company sold an aircraft engine and its 20% interest
in a commuter aircraft, with a combined net book value of $0.4 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
program. Equipment held for sale is valued at the lower of the depreciated cost
or the fair value less the costs to sell. During the first six months of 1998,
the Company purchased railcars for $1.9 million, portable heaters for $3.0
million, and a 100% interest in an entity that owns a marine vessel for $17.0
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 and 85.3% of
the Company's interest in an entity that owns a marine vessel were sold during
the six months ended June 30, 1998 to affiliated programs at cost. As of June
30, 1998, the Company held for sale to an affiliated program a 14.7% interest in
an entity that owns a marine vessel with a cost of $2.5 million. As of December
31, 1997, the Company held no equipment for sale.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
6. Debt
Assets acquired and held on an interim basis for placement with affiliated
programs, for placement in the Company's nonrecourse securitization facility, or
for sale to unaffiliated third parties have, from time to time, been partially
funded by a $50.0 million warehouse credit facility that expires November 2,
1998. This facility was amended on June 1, 1998 to temporarily increase the
Company's AFG subsidiary's borrowing capacity on the facility from $50.0 million
to $55.0 million until September 1, 1998. On June 8, 1998, this facility was
amended again to temporarily increase the Company's AFG subsidiary's borrowing
capacity on the facility from $55.0 million to $60.0 million until July 8, 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. Borrowings under this facility
by the other eligible borrowers reduce the amount available to be borrowed by
the Company. As of June 30, 1998, the Company had $46.8 million in borrowings
under this facility, and EGF V had $1.6 million in borrowings under this
facility. 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.
The Company has available a 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 have
terms from one to seven years. This facility allows the Company to borrow up to
$125.0 million until October 13, 1998. As of June 30, 1998, borrowings under
this facility were $105.9 million. The Company believes it will be able to
extend this facility on similar terms prior to its expiration and increase its
borrowing capacity as needed.
In addition, during the first six months of 1998, the Company assumed $9.5
million in additional nonrecourse notes payable, bearing interest from 8.32% to
9.5% per annum, resulting in total nonrecourse notes payable, net of principal
payments received, of $17.6 million as of June 30, 1998. Principal and interest
on these notes are due monthly beginning November 1997 and ending May 2005. 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 six months ended June 30, 1998, the Company repaid $2.9 million of
the senior secured loan and $2.5 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
February 1997 and amended in July 1997. The Company repurchased 921,940 shares
under this plan, for a total of $5.0 million.
During the six months ended June 30, 1998, 56,588 shares were issued from
treasury stock as part of the senior management bonus program. During the six
months ended June 30, 1998, 118,449 shares were repurchased. Consequently, the
total common shares outstanding decreased to 8,339,103 as of June 30, 1998 from
the 8,400,964 outstanding as of December 31, 1997.
In May 1998, the Company's Board of Directors adopted the 1998 Management Stock
Compensation Plan (the Plan), which reserves 800,000 shares of the Company's
common stock for issuance to certain management and key employees of the Company
upon exercise of stock options. Vesting of these options occurs in three equal
installments of 33 1/3% per year, initiating from the date of grant. During the
six months ended June 30, 1998, 500,000 nonqualified options were granted under
this plan at $6.81 per share, which equals 110% of the average daily closing
price of such shares on the American Stock Exchange for the 10 trading days
immediately preceding the grant (as required by the Plan).
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
7. Shareholders' Equity (continued)
Net income per basic weighted-average common share outstanding was computed by
dividing net income to common shares by the weighted-average 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 June 30, 1998 and 1997 was 8,337,963 and 9,204,167, respectively.
The weighted-average number of shares deemed outstanding for the basic earnings
per share calculation during the six months ended June 30, 1998 and 1997 was
8,399,098 and 9,186,428, 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 June 30, 1998 and 1997 was 8,520,188 and 9,473,719, 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 six months ended June 30, 1998 and 1997 was 8,596,458 and
9,457,520, respectively.
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<0- 45>95<0- 45>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, the Company 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 in
May 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 in October 1997, the
Ninth Circuit reversed the decision of the district court and remanded the case
to the district court for further proceedings. The Company filed a petition for
rehearing, which was denied in November 1997. The Ninth Circuit mandate was
filed in the district court in December 1997.
In February 1998, plaintiff was permitted by the district court 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 the Company 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. Also in February 1998, the defendants filed a motion to
dismiss the fourth, fifth, and sixth claims relating to the termination of the
ESOP, and the seventh claim relating to defendants' alleged interference with
plaintiff's rights under ERISA, all for failure to state claims for relief. The
district court, in an order dated July 14, 1998, granted this motion and
dismissed the fourth through seventh claims for relief.
In June 1998 the defendants filed a motion for summary judgment seeking a ruling
that the first two claims for relief, which allege breaches arising out of the
purchase and sale of stock at the inception of the ESOP, are barred by the
applicable statute of limitations. In an order dated July 14, 1998, the district
court granted in part and denied in part this motion and ruled that these claims
for relief are barred by the statute of limitations to the extent that they rely
on a theory that the automatic conversion feature and other terms and conditions
of the purchase and sale of the preferred stock violated ERISA, but are not so
barred to the extent that they rely on a theory that the purchase and sale of
the preferred stock at the inception of the ESOP was for more than adequate
consideration. Trial in this matter is set for May 3, 1999. The Company does not
believe the remaining claims have any merit and plans to continue to defend this
matter vigorously.
8. Legal Matters (continued)
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 the Company's
wholly-owned subsidiary, PLM Financial Services, Inc. (FSI), acts as the general
partner, including PLM Equipment Growth Funds IV, V, and 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, 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.
In March 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. In September 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.
In October 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 in December 1997.
Following various unsuccessful requests that the district court reverse or
otherwise amend its decisions, plaintiffs filed with the U.S. Court of Appeals
for 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 order denying plaintiffs' motion to remand and
dismissing the claims of the California plaintiff. This appeal was voluntarily
dismissed by plaintiffs in June 1998 pending settlement of the Koch action, as
discussed below.
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 (the 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. In October 1997, the district court denied the Company's
petition to compel arbitration and in November 1997, agreed to hear the
Company's motion for reconsideration of this order. The hearing on this motion
has been taken off calendar and the district court has dismissed the petition
pending settlement of the Romei action, as discussed below. The state court
action continues to be stayed pending such resolution. In connection
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
8. Legal Matters (continued)
with her opposition to the petition to compel arbitration, the plaintiff filed
an amended complaint with the state court in August 1997 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 also served certain discovery
requests on defendants. Because of the stay, no response to the amended
complaint or to the discovery is currently required.
In May 1998, all parties to the Koch and Romei actions entered into a memorandum
of understanding (MOU) related to the settlement of those actions. The MOU
contemplates a settlement and release of all claims in exchange for payment of
up to $6.0 million. The final settlement amount will depend on the number of
authorized claims filed by authorized claimants, the amount of the
administrative costs incurred in connection with the settlement, and the amount
of attorneys' fees awarded by the Alabama district court. The Company will pay
up to $0.3 million of the settlement, with the remainder being funded by an
insurance policy. The defendants will continue to deny each of the claims and
contentions and admit no liability in connection with the proposed settlement.
The settlement remains subject to numerous conditions, including but not limited
to (a) agreement and execution by the parties of a settlement agreement, (b)
notice to and certification of the class for settlement purposes and (c)
preliminary and final approval of the settlement by the Alabama district court.
The Company continues to believe that the allegations of the Koch and Romei
actions are completely without merit and intends to continue to defend this
matter vigorously if the settlement is not consummated.
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 June 30, 1998, the Company, through its AFG subsidiary, had committed to
purchase $99.7 million of equipment for its commercial and industrial lease and
finance receivables portfolio.
From July 1, 1998 to July 22, 1998, the Company, through its AFG subsidiary,
funded $4.5 million of the commitments outstanding as of June 30, 1998 for its
commercial and industrial lease and finance receivables portfolio.
As of July 22, 1998, the Company had committed to purchase $98.1 million of
equipment for its commercial and industrial lease and finance receivables
portfolio.
10. Initial Public Offering
In March 1998, the Company announced that its Board of Directors had authorized
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 or
fourth quarter of 1998; however, the timing of the offering is subject to market
conditions and other factors. The Company will continue to own a majority
interest in AFG after the initial public offering.
Subsequent Event
On July 15, 1998, the Company entered into a revolving line of credit agreement
in the form of a promissory note that allows the Company to borrow up to $5.0
million until October 13, 1998. The promissory note bears interest at the prime
rate, with interest due monthly in arrears. On July 21, 1998, the Company
borrowed $1.6 million on this note.
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 had authorized
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 or
fourth quarter of 1998; however, the timing of the offering is subject to market
conditions and other factors. The Company will continue to own a majority
interest in AFG after the initial public offering.
Trailer Leasing
The Company operates 14 trailer rental facilities that engage in short-term and
mid-term operating leases. Equipment operated in these facilities consists of
refrigerated trailers used to transport temperature-sensitive food products and
dry van trailers leased to a variety of customers. The Company opened four of
these rental yards in the six months ended June 30, 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 intermodal trailers, in addition to the refrigerated and
dry van over-the-road trailers mentioned above, from which it earns operating
lease income and incurs operating expenses. The Company's intermodal trailers
were 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 this equipment in order to seek the best opportunities for investment.
As the Company does not intend to replace its intermodal equipment, this may
result in 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 invested 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 June
30, 1998 and 1997
The following analysis reviews the operating results of the Company:
Revenues
For the Three Months
Ended June 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
Operating lease income $ 5,452 $ 3,429
Finance lease income 3,042 1,984
Management fees 2,535 2,797
Partnership interests and other fees 357 507
Acquisition and lease negotiation fees 1,184 585
Aircraft brokerage and services 362 661
Gain on the sale or disposition of assets, net 1,533 1,233
Other 843 694
---------------------------------------------------
Total revenues $ 15,308 $ 11,890
The fluctuations in revenues for the three months ended June 30, 1998, compared
to the same quarter in 1997, are summarized and explained below.
Operating lease income by equipment type:
For the Three Months
Ended June 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
Commercial and industrial equipment $ 2,686 $ 1,220
Refrigerated and dry van over-the-road trailers 1,854 1,197
Intermodal trailers 590 715
Marine vessel 284 --
Aircraft 16 143
Other 22 154
---------------------------------------------------
Total operating lease income $ 5,452 $ 3,429
Operating lease income includes revenues generated from assets held for
operating lease and assets held for sale that are on lease. Operating lease
income increased $2.0 million during the second quarter of 1998, compared to the
same quarter of 1997. Operating lease income increased due to the following:
(a) A $1.5 million increase in operating lease income was generated from
commercial and industrial equipment. During the quarter ended June 30, 1998, the
average original cost of commercial and industrial equipment on operating lease
was $24.3 million, compared to $15.8 million during the quarter ended June 30,
1997.
(b) A $0.7 million increase in operating lease income was generated from
refrigerated and dry van trailer equipment, due to an increase in the amount of
these types of equipment owned and on operating lease.
(c) During the second quarter of 1998, the Company purchased a 100%
interest in an entity owning a marine vessel that generated $0.3 million in
lease revenues. The Company sold 85.3% of its interest in the entity that owns a
marine vessel, for the amount of the Company's cost, to an affiliated program
during the second quarter of 1998. During the second quarter of 1997, no similar
revenue was earned by the Company.
These increases in operating lease income were partially offset by a $0.4
million decrease in marine container, aircraft, and intermodal trailer operating
lease income, due to the Company's strategic decision to dispose of certain of
these transportation assets and exit certain equipment markets. Intermodal
trailer lease revenues also decreased due to lower utilization, compared to the
same quarter of the prior year.
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 $1.1 million
in the three months ended June 30, 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 June 30, 1998, the average investment in direct
finance leases was $150.1 million, compared to $68.0 million for the same
quarter of 1997.
Management fees:
Management fees are, for the most part, based on the gross revenues generated by
equipment under management. Management fees decreased $0.3 million for the
quarter ended June 30, 1998, compared to the same quarter of the prior year. The
decrease in management fees resulted from a net decrease in managed equipment
from the PLM Equipment Growth Fund (EGF) 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 portfolios become permanently reduced.
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
June 30, 1998 and 1997, respectively. In addition, a decrease of $0.1 million in
the Company's residual interests in the programs was recorded during both the
quarters ended June 30, 1998 and 1997. The decrease in net earnings and
distribution levels and residual interests in the quarter ended June 30, 1998,
compared to the same quarter of 1997, resulted mainly from the disposition of
equipment in certain of the 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 June 30, 1998, the Company, on behalf of the EGF
programs, purchased a commercial aircraft for $7.8 million and a beneficial
interest in an entity that owns a marine vessel for $9.6 million, compared to
$10.0 million of equipment purchased on behalf of the EGFs during the same
quarter of 1997, resulting in a $0.4 million increase in acquisition and lease
negotiation fees. Also during the quarter ended June 30, 1998, equipment
purchased by AFG for the institutional investment programs was $8.1 million,
compared to $1.3 million for the same quarter in 1997, resulting in an increase
of $0.2 million in acquisition and lease negotiation fees for the quarter ended
June 30, 1998. 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 spare part sales and brokerage subsidiary,
decreased $0.3 million during the quarter ended June 30, 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 June 30, 1998, the Company recorded $1.5 million in
gain on the sale or disposition of assets. Of this gain, $0.6 million resulted
from the sale or disposition of an aircraft engine, a 20% interest in a commuter
aircraft, and trailers, and $0.9 million related to the sale of commercial and
industrial equipment. During the quarter ended June 30, 1997, the Company
recorded $1.2 million in net gain on the sale or disposition of assets. Of this
gain, $0.4 million resulted from the sale or disposition of trailers, marine
containers, commuter aircraft, storage units, and railcars, and $0.4 million
related to the sale of commercial and industrial equipment. Also during the
second 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.
Other:
Other revenues increased $0.1 million for the quarter ended June 30, 1998,
compared to the quarter ended June 30, 1997, due to an increase in brokerage and
consulting fees.
Costs and Expenses
For the Three Months
Ended June 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
Operations support $ 4,829 $ 4,158
Depreciation and amortization 3,497 2,141
General and administrative 2,085 2,710
---------------------------------------------------
Total costs and expenses $ 10,411 $ 9,009
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, increased $0.7 million (16%) for the quarter ended June 30, 1998,
compared to the same quarter in 1997. The increase resulted from a $0.5 million
write-down of the Company's spare parts aircraft inventory located in Australia
and a $0.4 million increase in compensation and benefits expense primarily due
to the expansion of PLM Rental, partially offset by a $0.2 million decrease in
costs of goods sold associated with the decrease in aircraft spare parts sales.
Depreciation and amortization:
Depreciation and amortization expenses increased $1.4 million (63%) for the
quarter ended June 30, 1998, compared to the quarter ended June 30, 1997. The
increase resulted from an increase in commercial and industrial equipment and
refrigerated trailer equipment owned and on operating lease, which was partially
offset by the reduction in depreciable aircraft, marine containers, and
intermodal trailers (discussed in the operating lease income section).
General and administrative:
General and administrative expenses decreased $0.6 million (23%) during the
quarter ended June 30, 1998, compared to the same quarter in 1997, primarily due
to a $0.5 million decrease in expenses related to the Company's response to
shareholder-sponsored initiatives in the quarter ended June 30, 1997 and to 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 June 30,
1998 1997
-------------------------------------------
(in thousands of dollars)
Interest expense $ (3,604) $ (2,352)
Interest income 299 452
Other income (expenses), net 469 (3)
Interest expense:
Interest expense increased $1.3 million (53%) during the quarter ended June 30,
1998, compared to the same quarter in 1997, due to an increase in borrowings of
nonrecourse securitized debt and due to an increase in borrowings on the
warehouse credit 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
senior secured notes.
Interest income:
Interest income decreased $0.2 million (34%) during the quarter ended June 30,
1998, compared to the same quarter in 1997, due to a decrease in average cash
balances.
Other income (expenses), net:
Other income (expenses), net increased $0.5 million. During the second quarter
of 1998, the Company recorded income of $0.7 million related to the settlement
of a lawsuit against Tera Power Corporation and others, and recorded expense of
$0.3 million related to a legal settlement for the Koch and Romei actions (refer
to Note 8).
Provision for income taxes:
For the three months ended June 30, 1998, the provision for income taxes was
$0.9 million, representing an effective rate of 42%. For the three months ended
June 30,1997, the provision for income taxes was $0.3 million, representing an
effective rate of 34%. 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 June 30, 1998, net
income was $1.2 million, resulting in basic and diluted earnings per
weighted-average common share outstanding of $0.14. For the same quarter in
1997, net income was $0.6 million, resulting in basic and diluted earnings per
weighted-average common share outstanding of $0.07.
Comparison of the Company's Operating Results for the Six Months Ended June 30,
1998 and 1997
The following analysis reviews the operating results of the Company:
Revenues
For the Six Months
Ended June 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
Operating lease income $ 9,344 $ 7,658
Finance lease income 5,694 3,798
Management fees 5,099 5,658
Partnership interests and other fees 681 993
Acquisition and lease negotiation fees 2,211 763
Aircraft brokerage and services 886 1,335
Gain on the sale or disposition of assets, net 2,295 2,601
Other 1,642 1,535
---------------------------------------------------
Total revenues $ 27,852 $ 24,341
The fluctuations in revenues for the six months ended June 30, 1998, compared to
the same period in 1997, are summarized and explained below.
Operating lease income by equipment type:
For the Six Months
Ended June 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
Commercial and industrial equipment $ 4,299 $ 2,423
Refrigerated and dry van over-the-road trailers 3,432 2,407
Intermodal trailers 1,179 1,453
Marine vessel 284 --
Aircraft 74 451
Mobile offshore drilling units -- 604
Other 76 320
---------------------------------------------------
Total operating lease income $ 9,344 $ 7,658
Operating lease income includes revenues generated from assets held for
operating lease and assets held for sale that are on lease. Operating lease
income increased $1.7 million during the six months ended June 30, 1998,
compared to the same period in 1997. Operating lease income increased due to the
following:
(a) A $1.9 million increase in operating lease income was generated from
commercial and industrial equipment. During the six months ended June 30, 1998,
the average original cost of commercial and industrial equipment on operating
lease was $24.2 million, compared to $16.3 million during the six months ended
June 30, 1997.
(b) A $1.0 million increase in operating lease income was generated from
refrigerated and dry van trailer equipment, due to an increase in the amount of
these types of equipment owned and on operating lease.
(c) During the second quarter of 1998, the Company purchased a 100%
interest in an entity owning a marine vessel that generated $0.3 million in
lease revenues. The Company sold 85.3% of its interest in the entity that owns
the marine vessel, for the amount of the Company's cost, to an affiliated
program during the second quarter of 1998.
These increases in operating lease income were partially offset by the
following:
(a) During the six months ended June 30, 1997, the Company owned one mobile
offshore drilling unit, as well as a 25.5% interest in an entity that owned
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. No similar asset was owned
by the Company during the six months ended June 30, 1998.
(b) A $0.8 million decrease in marine container, aircraft and intermodal
trailer operating lease income was due to the Company's strategic decision to
dispose of certain of these transportation assets and exit certain equipment
markets. Intermodal trailer lease revenues also decreased due to lower
utilization, compared to the same period of the prior year.
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 $1.9 million
in the six months ended June 30, 1998, compared to the same period in 1997,
reflecting an increase in commercial and industrial assets that were on finance
lease. For the six months ended June 30, 1998, the average investment in direct
finance leases was $134.4 million, compared to $68.8 million for the same period
of 1997.
Management fees:
Management fees are, for the most part, based on the gross revenues generated by
equipment under management. Management fees decreased $0.6 million for the six
months ended June 30, 1998, compared to the same period of the prior year. 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 EGF programs are expected to
decrease in the future as they begin liquidation and the associated equipment
portfolios become permanently reduced.
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 $1.0 million and $1.2 million for the six months ended
June 30, 1998 and 1997, respectively. In addition, a decrease of $0.3 million
and $0.2 million in the Company's residual interests in the programs was
recorded during the six months ended June 30, 1998 and 1997, respectively. The
decrease in net earnings and distribution levels and residual interests in the
six months ended June 30, 1998, compared to the same period of 1997, resulted
mainly from the disposition of equipment in certain of the 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 six months ended June 30, 1998, the Company, on behalf of the EGF
programs, purchased transportation and other equipment for $14.1 million and
beneficial interests in entities that own marine vessels for $18.8 million,
compared to $10.0 million in equipment purchased on behalf of the EGFs during
the same period of 1997, resulting in a $1.2 million increase in acquisition and
lease negotiation fees. Also during the six months ended June 30, 1998,
equipment purchased by AFG for the institutional investment programs was $14.1
million, compared to $7.6 million for the same period in 1997, resulting in a
$0.2 million increase in acquisition and lease negotiation fees for the six
months ended June 30, 1998, compared to the same period of the prior year.
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 spare part sales and brokerage subsidiary,
decreased $0.4 million during the six months ended June 30, 1998, compared to
the same period in 1997, due to a decrease in spare parts sales.
Gain on the sale or disposition of assets, net:
During the six months ended June 30, 1998, the Company recorded $2.3 million in
gain on the sale or disposition of assets. Of this gain, $0.8 million resulted
from the sale or disposition of an aircraft engine, a 20% interest in a commuter
aircraft, and trailers, and $1.0 million related to the sale of commercial and
industrial equipment. Also during the six months ended June 30, 1998, the
Company purchased and subsequently sold railcars to an unaffiliated third party
for a net gain of $0.5 million. During the six months ended June 30, 1997, the
Company recorded $2.6 million in gain on the sale or disposition of assets. Of
this gain, $0.6 million resulted from the sale or disposition of trailers,
marine containers, commuter aircraft, storage units, and railcars, and $1.2
million related to the sale of commercial and industrial equipment. Also during
the six months ended June 30, 1997, the Company purchased and subsequently sold
two commercial aircraft to an unaffiliated third party for a net gain of $0.8
million.
Costs and Expenses
For the Six Months
Ended June 30,
1998 1997
--------------------------------------------
(in thousands of dollars)
Operations support $ 8,754 $ 8,222
Depreciation and amortization 6,047 4,346
General and administrative 3,883 4,726
---------------------------------------------------
Total costs and expenses $ 18,684 $ 17,294
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, increased $0.5 million (6%) for the six months ended June 30, 1998,
compared to the same period of 1997. The increase resulted from a $0.5 million
write-down of the Company's spare parts aircraft inventory located in Australia,
and a $0.2 million increase in compensation and benefits expense due to the
expansion of PLM Rental. These increases were partially offset by a $0.2 million
decrease in costs of goods sold associated with the decrease in aircraft spare
parts sales.
Depreciation and amortization:
Depreciation and amortization expenses increased $1.7 million (39%) for the six
months ended June 30, 1998, compared to the six months ended June 30, 1997. The
increase resulted from an increase in commercial and industrial equipment and
refrigerated trailer equipment owned and on operating lease, which was partially
offset by the reduction in depreciable aircraft, marine containers, and
intermodal trailers (discussed in the operating lease income section).
General and administrative:
General and administrative expenses decreased $0.8 million (18%) during the six
months ended June 30, 1998, compared to the same period of the prior year,
primarily due to a $0.5 million decrease in expenses related to the Company's
response to shareholder-sponsored initiatives in the six months ended June 30,
1997, a $0.2 million decrease in legal expenses related to the Koch action
(refer to Note 8), and 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.
Other Income and Expenses
For the Six Months
Ended June 30,
1998 1997
-------------------------------------------
(in thousands of dollars)
Interest expense $ (6,674) $ (4,994)
Interest income 694 838
Other income (expenses), net 463 (24)
Interest expense:
Interest expense increased $1.7 million (34%) during the six months ended June
30, 1998, compared to the same period in 1997, due to an increase in borrowings
of nonrecourse securitized debt and due to an increase in borrowings on the
warehouse credit 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
senior secured notes.
Interest income:
Interest income decreased $0.1 million (17%) during the six months ended June
30, 1998, compared to the six months ended June 30, 1997, due to a decrease in
average cash balances.
Other income (expenses), net:
Other income (expenses), net increased $0.5 million. During the second quarter
of 1998, the Company recorded income of $0.7 million related to the settlement
of a lawsuit against Tera Power Corporation and others, and recorded expense of
$0.3 million related to a legal settlement for the Koch and Romei actions (refer
to Note 8).
Provision for income taxes:
For the six months ended June 30, 1998, the provision for income taxes was $1.5
million, representing an effective rate of 40%. For the six months ended June
30,1997, the provision for income taxes was $0.9 million, representing an
effective rate of 33%. 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 six months ended June 30, 1998, net income
was $2.2 million, resulting in basic and diluted earnings per weighted-average
common share outstanding of $0.26 and $0.25, respectively. For the same period
in 1997, net income was $1.9 million, resulting in basic and diluted earnings
per weighted-average common share outstanding of $0.21 and $0.20, respectively.
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, additional
borrowings, 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 $17.6 million as of June 30, 1998
and July 22, 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 June 30, 1998, the cash collateral balance for this loan was $2.4 million and
is included in restricted cash and cash equivalents on the Company's balance
sheet. During the six months ended June 30, 1998, the Company repaid $2.9
million on this facility. The facility required quarterly interest payments
through June 30, 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 six months ended June 30, 1998, the
Company repaid $2.5 million on this facility. As of June 30, 1998 and July 22,
1998, the Company had $21.3 million outstanding under this agreement. Principal
payments of $1.3 million are payable quarterly through termination of the loan
on August 15, 2002.
Promissory Note: On July 15, 1998, the Company entered into a $5.0 million
revolving line of credit agreement in the form of a promissory note that allows
the Company to borrow up to $5.0 million until October 13, 1998. The promissory
note bears interest at the prime rate, with interest due monthly in arrears. On
July 21, 1998, the Company borrowed $1.6 million on this note.
Warehouse Credit 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 securitization facility have, from time
to time, been partially funded by a $50.0 million warehouse credit facility that
expires November 2, 1998. This facility was amended on June 1, 1998 to
temporarily increase the Company's AFG subsidiary's borrowing capacity on the
facility from $50.0 million to $55.0 million until September 1, 1998. On June 8,
1998, this facility was amended again to temporarily increase the Company's AFG
subsidiary's borrowing capacity on the facility from $55.0 million to $60.0
million until July 8, 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 June 30, 1998, the Company had $46.8 million in borrowings under
this facility, and EGF V had $1.6 million in borrowings under this facility. As
of July 22, 1998, the Company had $46.1 million in borrowings under this
facility. There were no other borrowings under this facility as of July 22,
1998.
Nonrecourse Securitized Debt: The Company has available a nonrecourse
securitization 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 and
increase its borrowing capacity as needed. As of June 30, 1998, $105.9 million
in borrowings was outstanding under this facility. As of July 22, 1998, $107.1
million in borrowings was outstanding under this facility.
In addition to the $125.0 million nonrecourse securitization facility
discussed above, as of June 30, 1998 and July 22, 1998, the Company had $17.6
million and $17.5 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 and ending
May 2005. 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 securitized debt. As of June 30, 1998, the swap agreements had a
weighted-average duration of 1.41 years, corresponding to the terms of the
related debt. As of June 30, 1998, a notional amount of $108.4 million of
interest-rate swap agreements effectively fixed interest rates at an average of
6.66% on such obligations. For the six months ended June 30, 1998, interest
expense increased by $0.2 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 securitization
facility. AFG also originates loans in which it takes a security interest in the
assets. From January 1, 1998 through July 22, 1998, the Company funded
commercial and industrial leases and finance receivables with an original
equipment cost of $120.1 million. A portion of these transactions was financed,
on an interim basis, through the Company's warehouse credit 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 had authorized
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 or
fourth quarter of 1998; however, the timing of the offering is subject to market
conditions and other factors. The Company will continue to own a majority
interest in AFG after the initial public offering.
As of June 30, 1998, the Company had committed to purchase $99.7 million of
equipment for its commercial and industrial lease and finance receivables
portfolio, to be held by the Company or sold to the institutional investment
programs or to other third parties.
From July 1, 1998 through July 22, 1998, the Company funded $4.5 million of
commitments outstanding as of June 30, 1998 for its commercial and industrial
lease and finance receivables portfolio.
As of July 22, 1998, the Company had committed to purchase $98.1 million of
equipment for its commercial and industrial lease and finance receivables
portfolio.
Trailer leasing:
The Company operates 14 trailer rental facilities that engage in short-term and
mid-term operating leases. Equipment operated in these facilities consists of
refrigerated trailers used to transport temperature-sensitive food products and
dry van trailers leased to a variety of customers. The Company opened four of
these rental yards in the six months ended June 30, 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 six months ended June 30, 1998, the Company generated proceeds of
$22.9 million from the sale of transportation and other related 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. This company is being marketed for sale.
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 that all such program modifications will be
completed by the end of 1998, and 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 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders, held June 8, 1998, four items were
submitted to a vote of the Company's security holders.
1. Randall L. -W. Caudill was re-elected to the Board of Directors of the
Company. The votes cast in the election were 5,433,448 votes for, and 1,705,326
votes withheld.
Directors whose terms continued after the Annual Meeting of Stockholders, held
June 8, 1998 are as follows:
Class I (Terms Expire in 2000)
Robert N. Tidball
Robert L. Witt
Class III (Terms Expire in 1999)
Douglas P. Goodrich
Harold R. Somerset
2. The recommendation to repeal Article Eleventh of the Company's Certificate of
Incorporation was approved.
Votes
For Against Abstentions Broker Non Votes
3,333,937 2,412,236 137,419 1,255,182
3. The recommendation to amend the Company's Certificate of Incorporation so
that the Company would not be governed by Section 203 of Delaware General
Corporation Law was approved.
Votes
For Against Abstentions Broker Non Votes
3,154,309 2,590,770 138,513 1,255,182
4. The recommendation to amend Article Sixth of the Company's Certificate of
Incorporation to eliminate the division of the directors into classes so that
all directors are elected annually was approved.
Votes
For Against Abstentions Broker Non Votes
4,447,626 1,308,454 127,512 1,255,182
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
10.1 First Amendment to Restated Warehousing Credit Agreement among American
Finance Group, Inc., First Union National Bank of North Carolina, and Bank of
Montreal, dated as of June 1, 1998.
10.2 Second Amendment to Restated Warehousing Credit Agreement among American
Finance Group, Inc., First Union National Bank, and Bank of Montreal, dated as
of June 8, 1998.
10.3 1998 Management Stock Compensation Plan, dated May 12, 1998.
10.4 $5.0 million Promissory Note, dated July 15, 1998, executed by PLM
International, Inc. in favor of First Union National Bank.
(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: July 22, 1998