UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED MARCH 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9670
-------------------------------
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 4, 1999 - 8,028,594 shares.
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except per share amounts)
For the Three Months
Ended March 31,
1999 1998
--------------------------
REVENUES
Operating lease income $ 6,097 $ 3,892
Finance lease income 3,152 2,652
Management fees 2,368 2,564
Partnership interests and other fees 290 324
Acquisition and lease negotiation fees 461 1,027
Gain on the sale or disposition of assets, net 313 762
Aircraft brokerage and services -- 524
Other 926 799
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Total revenues 13,607 12,544
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COSTS AND EXPENSES
Operations support 3,831 3,810
Depreciation and amortization 3,399 2,550
General and administrative 1,484 1,913
----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 8,714 8,273
----------------------------------------------------------------------------------------------------------------------------
Operating income 4,893 4,271
Interest expense (3,685 ) (3,070 )
Interest income 243 395
Other expenses, net (948 ) (6 )
----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 503 1,590
Provision for income taxes 207 607
----------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of accounting change 296 983
Cumulative effect of accounting change, net of tax of $165 236 --
----------------------------------------------------------------------------------------------------------------------------
Net income to common shares $ 60 $ 983
============================================================================================================================
Basic earnings per weighted-average common share outstanding $ 0.01 $ 0.12
============================================================================================================================
Diluted earnings per weighted-average common share outstanding $ 0.01 $ 0.11
============================================================================================================================
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,
1999 1998
----------------------------------------
Cash and cash equivalents $ 3,903 $ 8,786
Receivables (net of allowance for doubtful accounts of $0.5
million and $0.4 million as of March 31, 1999 and December
31, 1998, respectively) 7,500 7,282
Receivables from affiliates 2,766 2,944
Investment in direct finance leases, net 142,318 145,088
Loans receivable 24,696 23,493
Equity interest in affiliates 21,797 22,588
Assets held for sale 6,841 --
Transportation equipment held for operating leases 70,765 63,044
Less accumulated depreciation (16,694 ) (15,516 )
-------------------------------------------
54,071 47,528
Commercial and industrial equipment held for operating leases 24,268 24,520
Less accumulated depreciation (9,180 ) (7,831 )
-------------------------------------------
15,088 16,689
Restricted cash and cash equivalents 11,050 10,349
Other, net 6,294 7,322
-------------------------------------------
Total assets $ 296,324 $ 292,069
===========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Short-term warehouse facilities $ 45,751 $ 34,420
Senior secured notes 26,319 28,199
Senior secured loan 13,235 14,706
Other secured debt 12,844 13,142
Nonrecourse securitized debt 112,104 111,222
Payables and other liabilities 17,478 21,768
Deferred income taxes 18,469 18,415
-------------------------------------------
Total liabilities 246,200 241,872
Shareholders' equity:
Common stock, ($.01 par value, 50,000,000 shares
authorized, 8,135,951 issued and outstanding as of
March 31, 1999 and 8,159,919 as of December 31, 1998) 112 112
Paid-in capital, in excess of par 75,051 74,947
Treasury stock (3,899,804 and 3,875,836 shares at
respective dates) (15,309 ) (15,072 )
Accumulated deficit (9,730 ) (9,790 )
------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 50,124 50,197
-------------------------------------------
Total liabilities and shareholders' equity $ 296,324 $ 292,069
===========================================
See accompanying notes to these consolidated
financial statements.
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the Year Ended December 31, 1998 and the
Three Months Ended March 31, 1999
(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 Income Income Equity
----------------------------------------------------------------------------------------------
Balances, December 31, 1997 $ 112 $ 74,650 $ (13,435 ) $ (14,779 ) $ 46,548
Comprehensive income
Net income 4,857 $ 4,857 4,857
Other comprehensive income:
Foreign currency translation
income 132 132 132
=================
Comprehensive income $ 4,989
=================
Exercise of stock options 218 211 429
Common stock repurchases (2,059 ) (2,059 )
Reissuance of treasury stock 79 211 290
- ---------------------------------------------------------------------------------------------------- --------------
Balances, December 31, 1998 112 74,947 (15,072 ) (9,790 ) 50,197
Comprehensive income
Net income 60 $ 60 60
=================
Exercise of stock options 18 18
Common stock repurchases (405 ) (405 )
Reissuance of treasury stock 86 168 254
=========================================================== ==============
Balances, March 31, 1999 $ 112 $ 75,051 $ (15,309 ) $ (9,730 ) $ 50,124
=========================================================== ==============
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,
1999 1998
--------------------------------
OPERATING ACTIVITIES
Net income $ 60 $ 983
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,399 2,550
Cumulative effect of accounting change, net of tax of $165 236 --
Write off of costs associated with initial public offering of AFG 948 --
Foreign currency translation -- 28
Deferred income tax expense 54 537
Gain on sale or disposition of assets, net (313 ) (762 )
Undistributed residual value interests 82 200
(Decrease) increase in payables and other liabilities (1,965 ) 186
(Increase) decrease in receivables and receivables from affiliates (40 ) 1,184
Amortization of organization and offering costs 709 720
(Increase) decrease in other assets (65 ) 283
---------------------------------
Net cash provided by operating activities 3,105 5,909
---------------------------------
INVESTING ACTIVITIES
Principal payments received on finance leases 8,917 6,356
Principal payments received on loans 1,807 967
Investment in direct finance leases (11,604 ) (38,809 )
Investment in loans receivable (3,010 ) (3,020 )
Purchase of property, plant, and equipment (409 ) (126 )
Purchase of transportation equipment and capital improvements (21,907 ) (11,259 )
Purchase of commercial and industrial equipment held for operating lease (2,092 ) (5,255 )
Proceeds from the sale of transportation equipment for lease 103 1,078
Proceeds from the sale of assets held for sale 6,960 5,366
Proceeds from the sale of commercial and industrial equipment 5,771 9,406
(Increase) decrease in restricted cash and restricted cash equivalents (701 ) 1,001
---------------------------------
Net cash used in investing activities (16,165 ) (34,295 )
----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowings of short-term warehouse credit facilities 30,916 36,285
Repayment of short-term warehouse credit facilities (19,585 ) (20,591 )
Repayment of senior secured notes (1,880 ) (1,255 )
Repayment of senior secured loan (1,471 ) (1,470 )
Repayment of other secured debt (298 ) (31 )
Borrowings of other secured debt -- 167
Borrowings of nonrecourse debt 12,904 18,121
Repayment of nonrecourse debt (12,022 ) (2,232 )
Proceeds from exercise of stock options 18 --
Purchase of stock (405 ) (605 )
---------------------------------
Net cash provided by financing activities 8,177 28,389
---------------------------------
Net (decrease) increase in cash and cash equivalents (4,883 ) 3
Cash and cash equivalents at beginning of period 8,786 5,224
=================================
Cash and cash equivalents at end of period $ 3,903 $ 5,227
=================================
SUPPLEMENTAL INFORMATION
Net cash paid for interest $ 3,737 $ 3,451
==================================================================================================================================
Net cash paid for income taxes $ 137 $ 632
==================================================================================================================================
See accompanying notes to these consolidated
financial statements.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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, 1999 and December 31, 1998, statements of income for the three months ended
March 31, 1999 and 1998, statements of changes in shareholders' equity and
comprehensive income for the year ended December 31, 1998 and the three months
ended March 31, 1999 and statements of cash flows for the three months ended
March 31, 1999 and 1998. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
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, 1998, on file with
the Securities and Exchange Commission.
2. RECLASSIFICATIONS
Certain prior-period amounts have been reclassified to conform to the current
period's presentation.
3. FINANCING TRANSACTION ACTIVITIES
American Finance Group, Inc. (AFG), a wholly-owned subsidiary of the Company,
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 other unaffiliated investors. The
Company uses one of its warehouse credit facilities to finance the acquisition
of the assets, subject to leases, prior to sale or permanent financing by
nonrecourse securitized debt. The majority of these transactions are accounted
for as direct finance leases, while some transactions qualify as operating
leases or loans.
During the three months ended March 31, 1999, the Company funded $11.6 million
in equipment that was placed on finance lease. Also during the three months
ended March 31, 1999, the Company sold equipment on finance lease with an
original equipment cost of $6.2 million, resulting in a net gain of $0.1
million.
4. EQUIPMENT
Equipment held for operating lease includes transportation equipment and
commercial and industrial equipment which is depreciated on the straight-line
method down to the equipment's estimated salvage value.
During the three months ended March 31, 1999, the Company funded $2.1 million in
commercial and industrial equipment that was placed on operating lease. During
the three months ended March 31, 1999, the Company sold commercial and
industrial equipment that was on operating lease, with an original cost of $2.1
million, for a net gain of $0.2 million.
During the first three months of 1999, the Company purchased trailers for $8.1
million and sold trailers with a net book value of $0.1 million for $0.1
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
1999, the Company purchased marine containers for $13.8 million, and sold marine
containers for $7.0 million to an affiliated program at cost, which approximated
their fair market value. As of March 31, 1999, the Company held containers with
a net book value of $6.8 million for sale to an affiliated program. As of
December 31, 1998, the Company had no equipment held for sale.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
5. DEBT
The Company has warehouse credit facilities for PLM Financial Services, Inc.
(FSI) and AFG. FSI has a $24.5 million warehouse credit facility to be used to
acquire assets on an interim basis prior to sale to affiliated programs or
unaffiliated third parties and to purchase trailers prior to obtaining permanent
financing. FSI's facility is shared with PLM Equipment Growth Fund VI, PLM
Equipment Growth & Income Fund VII, and Professional Lease Management Income
Fund I, LLC. Borrowings under this facility by the other eligible borrowers
reduce the amount available to be borrowed by the Company. All borrowings under
this facility are guaranteed by the Company. AFG has a $60.0 million warehouse
credit facility to be used to acquire assets on an interim basis prior to
placement in the Company's nonrecourse securitization facility or sale to
unaffiliated third parties. These facilities expire December 14, 1999. The
Company believes it will be able to renew these facilities on substantially the
same terms upon expiration. As of March 31, 1999, FSI and PLM Equipment Growth
Fund VI had $11.3 million and $3.7 million in borrowings outstanding on the
$24.5 million facility, respectively. As of March 31, 1999, AFG had $34.5
million in borrowings outstanding on its $60.0 million facility.
The Company has available a nonrecourse securitization facility to be used to
acquire assets by AFG secured by direct finance leases, operating leases, and
loans on commercial and industrial equipment that generally have terms from one
to seven years. The facility allows the Company to borrow up to $150.0 million
through October 12, 1999. The Company believes it will be able to extend this
facility on similar terms prior to its expiration. Repayment of the facility
matches the terms of the underlying leases. As of March 31, 1999 , there were
$105.3 million in borrowings under this facility. The Company is required to
hedge at least 90% of the aggregate discounted lease balance (ADLB) of those
leases and loans used as collateral in its nonrecourse securitization facility.
As of March 31, 1999, 92% of the ADLB had been hedged.
During the first quarter of 1999, the Company made principal payments of $0.8
million on its nonrecourse notes payable. As of March 31, 1999, the Company had
$6.8 million in nonrecourse notes payable. Principal and interest on the notes
are due monthly beginning April 1998 through March 2001. The notes bear interest
ranging from 8.32% to 9.5% per annum and 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 1999, the Company repaid $1.5 million of the senior
secured loan, $1.9 million of the senior secured notes, and $0.3 million of the
other secured debt, in accordance with the debt repayment schedules.
6. SHAREHOLDERS' EQUITY
During the first quarter of 1999, the Company repurchased 67,053 shares of the
Company's common stock for $0.4 million, under the $5.0 million common stock
repurchase program authorized by the Company's Board of Directors in December
1998. As of March 31, 1999, 130,353 shares had been repurchased under this plan,
for a total of $0.8 million.
During the three months ended March 31, 1999, 43,085 shares were issued from
treasury stock as part of the senior management bonus program. Consequently, the
total common shares outstanding decreased to 8,135,951 as of March 31, 1999 from
the 8,159,919 outstanding as of December 31, 1998.
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 March 31, 1999 and 1998 was 8,164,672 and 8,380,578, 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, 1999 and 1998 was 8,288,189
and 8,547,544, respectively.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
7. 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, 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.
On September 30, 1998, plaintiff filed a motion to certify as final, and enter
judgment on, the two July 14, 1998 orders. This motion was denied. Defendants
filed their answer to the second amended complaint on September 18, 1998,
denying the allegations contained in the first, second, and third claims for
relief. The parties reached an agreement to settle this matter on April 15,
1999, subject to preparation, review and execution by all parties of a
settlement agreement and release. Defendants continue to deny each of the claims
and contentions and admit no liability in connection with the settlement. The
matter will be dismissed with prejudice upon the execution of the release and
payment to plaintiff. The amount to be paid by the Company in settlement is not
expected to be material to the financial condition of the Company.
The Company and various of its affiliates are named as defendants in a lawsuit
filed as a purported class action on January 22, 1997 in the Circuit Court of
Mobile County, Mobile, Alabama, Case No. CV-97-251 (the Koch action).
Plaintiffs, who filed the complaint on their own and on behalf of all class
members similarly situated, are six individuals who 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
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
7. LEGAL MATTERS (CONTINUED)
Growth & Income Fund VII (Fund VII). The state court ex parte certified the
action as a class action (i.e., solely upon plaintiffs' request and without the
Company being given the opportunity to file an opposition). 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
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. Removal of the action to federal court automatically nullified
the state court's ex parte certification of the class. In September 1997, the
district court denied plaintiffs' motion to remand the action to state court and
dismissed without prejudice the individual claims of the California plaintiff,
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
defendants' motion in December 1997.
Following various unsuccessful requests that the district court reverse, or
otherwise certify for appeal, its order denying plaintiffs' motion to remand the
case to state court and dismissing the California plaintiff's claims, plaintiffs
filed with the U.S. Court of Appeals for the Eleventh Circuit a petition for a
writ of mandamus seeking to reverse the district court's order. The Eleventh
Circuit denied plaintiffs' petition in November 1997, and further denied
plaintiffs subsequent motion in the Eleventh Circuit for a rehearing on this
issue. Plaintiffs also appealed the district court's order granting defendants'
motion to compel arbitration, but in June 1998 voluntarily dismissed their
appeal 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, 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, but 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 with her
opposition
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
7. LEGAL MATTERS (CONTINUED)
to the petition to compel arbitration, 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 monetary
settlement). The monetary settlement contemplated by the MOU provides for
stipulating to a class for settlement purposes, and a settlement and release of
all claims against defendants and third party brokers in exchange for payment
for the benefit of the class of up to $6.0 million. The final settlement amount
will depend on the number of claims filed by authorized claimants who are
members of the class, 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 monetary
settlement, with the remainder being funded by an insurance policy.
The parties to the monetary settlement have also agreed to an equitable
settlement (the equitable settlement) which provides, among other things: (a)
for the extension of the operating lives of Funds V, VI, and VII by judicial
amendment to each of their partnership agreements, such that FSI, the general
partner of each such partnership, will be permitted to reinvest cash flow,
surplus partnership funds or retained proceeds in additional equipment into the
year 2004, and will liquidate the partnerships' equipment in 2006; (b) that FSI
is entitled to earn front-end fees (including acquisition and lease negotiation
fees) in excess of the compensatory limitations set forth in the NASAA Statement
of Policy by judicial amendment to the partnership agreements for Funds V, VI,
and VII; (c) for a one-time redemption of up to 10% of the outstanding units of
Funds V, VI, and VII at 80% of such partnership's net asset value; and (d) for
the deferral of a portion of FSI's management fees. The equitable settlement
also provides for payment of the equitable class attorneys' fees from
partnership funds in the event that distributions paid to investors in Funds V,
VI, and VII during the extension period reach a certain internal rate of return.
Defendants will continue to deny each of the claims and contentions and admit no
liability in connection with the proposed settlements. The parties completed the
documentation of the monetary and equitable settlements in April 1999. The
monetary settlement remains subject to numerous conditions, including but not
limited to, notice to and certification of the monetary class for purposes of
the monetary settlement, and preliminary and final approval of the monetary
settlement by the Alabama district court. The equitable settlement remains
subject to numerous conditions, including but not limited to: (a) notice to the
current unitholders in Funds V, VI, and VII (the equitable class) and
certification of the equitable class for purposes of the equitable settlement,
(b) preparation, review by the Securities and Exchange Commission (SEC), and
dissemination to the members of the equitable class of solicitation statements
regarding the proposed extensions, (c) disapproval by less than 50% of the
limited partners in Funds V, VI, and VII of the proposed amendments to the
limited partnership agreements, (d) judicial approval of the proposed amendments
to the limited partnership agreements, and (e) preliminary and final approval of
the equitable settlement by the Alabama district court. If the district court
grants preliminary approval, notices to the monetary class and equitable class
will be sent following review by the SEC of the solicitation statements to be
prepared in connection with the equitable settlement. The monetary settlement,
if approved, will go forward regardless of whether the equitable settlement is
approved or not. 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 monetary 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.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
8. PURCHASE COMMITMENTS
As of March 31, 1999, the Company had committed to purchase $37.3 million of
equipment for its commercial and industrial lease and finance receivable
portfolio.
From April 1, 1999 to May 4, 1999, the Company funded $18.7 million of the
commitments outstanding as of March 31, 1999 for its commercial and industrial
lease and finance receivable portfolio.
As of May 4, 1999, the Company had committed to purchase $23.9 million of
equipment for its commercial and industrial lease and finance receivable
portfolio.
9. OPERATING SEGMENTS
The Company operates in three operating segments: trailer leasing, commercial
and industrial equipment leasing and financing, and the management of investment
programs and other transportation equipment leasing. The trailer equipment
leasing segment includes 19 trailer rental facilities that engage in short to
mid-term operating leases of refrigerated and dry van trailers to a variety of
customers, and management of trailers for the investment programs. The
commercial and industrial equipment leasing and financing segment originates
finance and operating leases and loans on commercial and industrial equipment
that is financed through a securitization facility, brokers equipment, and
manages institutional programs. The management of investment programs and other
transportation equipment leasing segment manages its syndicated investment
programs, from which it earns fees and equity interests, and arranges short-term
to mid-term operating leases of other transportation equipment.
The Company evaluates the performance of each segment based on profit or loss
from operations before allocating general and administrative expenses and before
allocating income taxes. The segments are managed separately because each
operation requires different business strategies.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
9. OPERATING SEGMENTS (CONTINUED)
The following tables present a summary of the operating segments (in thousands
of dollars):
Commercial Management
and of Investment
Industrial Programs
Equipment and Other
Leasing Transportation
Trailer and Equipment
For the quarter ended March 31, 1999 Leasing Financing Leasing Other<F1> Total
- -------------------------------------
-------------------------------------------------------------------------
REVENUES
Lease income $3,691 $ 5,323 $ 235 $ $ 9,249
--
Fees earned 205 215 2,699 -- 3,119
Gain (loss) on sale or disposition of
assets, net (9) 322 -- -- 313
Other -- 562 364 -- 926
-------------------------------------------------------------------------
Total revenues 3,887 6,422 3,298 -- 13,607
-------------------------------------------------------------------------
COSTS AND EXPENSES
Operations support 1,899 1,080 494 358 3,831
Depreciation and amortization 1,459 1,830 110 -- 3,399
General and administrative expenses -- -- -- 1,484 1,484
-------------------------------------------------------------------------
Total costs and expenses 3,358 2,910 604 1,842 8,714
-------------------------------------------------------------------------
Operating income (loss) 529 3,512 2,694 (1,842) 4,893
Interest expense, net (554) (2,442) (446) -- (3,442)
Other expenses, net -- (948) -- -- (948)
-------------------------------------------------------------------------
Income (loss) before income taxes $ (25) $ 122 $2,248 $(1,842) $ 503
=========================================================================
Cumulative effect of accounting change,
net of tax of $165 $ -- $ 236 $ -- $ -- $ 236
=========================================================================
Total assets as of March 31, 1999 $57,316 $193,668 $36,271 $ 9,069 $296,324
=========================================================================
<FN>
<F1> Includes costs not identifiable to a particular segment such as general and
administrative and certain operations support expenses.
</FN>
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
9. OPERATING SEGMENTS (CONTINUED)
Commercial Management
and of Investment
Industrial Programs
Equipment and Other
Leasing Transportation
Trailer and Equipment
For the quarter ended March 31, 1998 Leasing Financing Leasing Other<F2> Total
- -------------------------------------
-------------------------------------------------------------------------
REVENUES
Lease income $1,578 $ 4,240 $ 726 $ -- $6,544
Fees earned 262 220 3,433 -- 3,915
Gain on sale or disposition of assets, net 76 519 167 -- 762
Other 3 151 1,169 -- 1,323
-------------------------------------------------------------------------
Total revenues 1,919 5,130 5,495 -- 12,544
-------------------------------------------------------------------------
COSTS AND EXPENSES
Operations support 854 963 1,595 398 3,810
Depreciation and amortization 677 1,296 577 -- 2,550
General and administrative expenses -- -- -- 1,913 1,913
-------------------------------------------------------------------------
Total costs and expenses 1,531 2,259 2,172 2,311 8,273
-------------------------------------------------------------------------
Operating income (loss) 388 2,871 3,323 (2,311) 4,271
Interest expense, net (214) (2,027) (434) -- (2,675)
Other expenses, net -- -- (6) -- (6)
-------------------------------------------------------------------------
Income (loss) before income taxes $ 174 $ 844 $ 2,883 $(2,311) $ 1,590
=========================================================================
Total assets as of March 31, 1998 $38,252 $176,794 $ 39,023 $ 7,047 $261,116
=========================================================================
<FN>
<F2> Includes costs not identifiable to a particular segment such as general and
administrative and certain operations support expenses.
</FN>
10. CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires costs related to start-up activities to be expensed as incurred.
The statement requires that initial application be reported as a cumulative
effect of a change in accounting principle. The Company adopted this statement
during the first quarter of 1999, at which time it took a $0.2 million charge,
net of tax of $0.2 million, related to start-up costs of one of its
subsidiaries.
11. STOCK OFFERING
During 1998, AFG filed a registration statement with the U.S. Securities and
Exchange Commission for the purpose of undertaking an initial public offering of
common stock. During the first quarter of 1999, the Company's Board of Directors
determined that it was in the Company's best interest to sell AFG rather than
proceed with a stock offering. As a result of this decision, the Company wrote
off $0.9 million of costs related to the proposed initial public offering during
the first quarter of 1999, which is included in other expenses, net, on the
consolidated statements of income. The Company has engaged an investment banking
firm to pursue the sale of AFG.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
12. SUBSEQUENT EVENTS
In April 1999, the Company entered into a $5.0 million debt agreement bearing
interest at 6.20%, with payments of $0.1 million due monthly beginning April
1999 with a final payment of $1.3 million due April 2006, secured by certain
trailer equipment. In return for favorable financing terms, this agreement gives
beneficial tax treatment in these secured trailers to the lenders.
On April 28, 1999, the Company amended the Directors' 1995 Nonqualified Stock
Option Plan and the 1998 Management Stock Compensation Plan (1998 Plan) to limit
the amount of common shares that can be purchased in any one calendar year,
pursuant to the exercise of options under the two plans, to no more than 5% of
the Company's outstanding shares on May 12, 1998 (416,880), and to provide that
any excess options sought to be exercised will be purchased by the Company for
the difference between the exercise price of the option and the trading price of
the stock. The 1998 Plan was further amended to reduce the number of shares
reserved for awards under the 1998 Plan from 800,000 to 700,000.
ITEM 2. MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TRAILER LEASING
The Company operates 19 trailer rental facilities that engage in short and
mid-term operating leases. Equipment operated in these facilities consists of
refrigerated trailers used to transport temperature-sensitive food products and
dry van (nonrefrigerated) trailers leased to a variety of customers. The Company
opened 3 of these rental yards in 1999 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.
COMMERCIAL AND INDUSTRIAL EQUIPMENT LEASING AND FINANCING
The Company funds and manages long-term direct finance leases, operating leases,
and loans through its American Finance Group, Inc. (AFG) subsidiary. Master
lease agreements are entered into with predominately 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 point-of-sale,
materials handling, computer and peripheral, manufacturing, general purpose
plant and warehouse, communications, medical, and construction and mining
equipment. Through AFG, the Company is also engaged in the management of
institutional 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 between other unaffiliated third parties.
During 1998, AFG filed a registration statement with the U.S. Securities and
Exchange Commission (SEC) for the purpose of undertaking an initial public
offering of common stock. During the first quarter of 1999, the Company's Board
of Director's determined that it was in the Company's best interest to sell AFG
rather than proceed with a stock offering. The Company has engaged an investment
banking firm to pursue the sale of AFG.
MANAGEMENT OF INVESTMENT PROGRAMS
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 for these programs 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.
The limited partnership agreements generally entitle the Company to receive a 1%
or 5% interest in the cash distributions and earnings of a partnership, 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. The Company's interest in the earnings and
distributions of Fund I 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, 1999 AND 1998
The following analysis reviews the operating results of the Company:
REVENUES
- --------
For the Three Months
Ended March 31,
1999 1998
-----------------------------------------
(in thousands of dollars)
Operating lease income $ 6,097 $ 3,892
Finance lease income 3,152 2,652
Management fees 2,368 2,564
Partnership interests and other fees 290 324
Acquisition and lease negotiation fees 461 1,027
Gain on the sale or disposition of assets, net 313 762
Aircraft brokerage and services -- 524
Other 926 799
-----------------------------------------
Total revenues $ 13,607 $ 12,544
The fluctuations in revenues for the three months ended March 31, 1999, compared
to the same quarter in 1998, are summarized and explained below.
OPERATING LEASE INCOME BY EQUIPMENT TYPE:
For the Three Months
Ended March 31,
1999 1998
-----------------------------------------
(in thousands of dollars)
Refrigerated and dry van over-the-road trailers $ 3,691 $ 1,578
Commercial and industrial equipment 2,225 1,613
Marine containers 179 --
Intermodal trailers -- 589
Other 2 112
-----------------------------------------
Total operating lease income $ 6,097 $ 3,892
Operating lease income includes revenues generated from assets held for
operating leases and assets held for sale that are on lease. Operating lease
income increased $2.2 million during the first quarter of 1999, compared to the
same quarter of 1998, due to the following:
(a) A $2.1 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. For the
quarter ended March 31, 1999, the average investment in refrigerated and
dry van trailer equipment was $66.7 million, compared to $43.4 million for
the first quarter of 1998.
(b) A $0.6 million increase in operating lease income was generated from
commercial and industrial equipment, due to an increase in the amount of
these types of equipment owned and on operating lease.
(c) A $0.2 million increase in operating lease income was generated from marine
containers. During the first quarter of 1999, the Company purchased $13.8
million in marine containers and sold $7.0 million in marine containers to
an affiliated program at cost, which approximated their fair market value.
The Company earned operating lease income on these marine containers during
the first quarter of 1999. There were no marine containers owned by the
Company during the first quarter of 1998.
These increases in operating lease income were partially offset by the
following:
(a) A $0.6 million decrease in operating lease income from intermodal trailers
due to the sale of all of the Company's intermodal trailers during August
1998.
(b) A $0.1 million decrease in other operating lease income was due to the
Company's strategic decision to dispose of certain transportation assets
and exit certain equipment markets.
FINANCE LEASE INCOME:
The Company earns finance lease income for certain leases originated by its AFG
subsidiary that are either retained for long-term investment or sold to third
parties. Finance lease income increased $0.5 million in the first quarter of
1999, compared to the same quarter in 1998, due to an increase in commercial and
industrial assets that were on finance lease. For the quarter ended March 31,
1999, the average investment in direct finance leases was $140.4 million,
compared to $120.5 million for the first quarter of 1998.
MANAGEMENT FEES:
Management fees are, for the most part, based on the gross revenues
generated by equipment under management. Management fees were $2.4 million and
$2.6 million for the quarters ended March 31, 1999 and 1998, respectively. 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
decreasing and are expected to continue to decrease as the programs liquidate
their equipment portfolios.
The Company also earns management fees from the institutional programs
managed by the Company's AFG subsidiary. During both the quarters ended March
31, 1999 and 1998, management fees for the institutional programs were $0.2
million. The Company does not expect to sell assets in the future to the
institutional programs. It will, however, continue to manage the existing
portfolios for these programs. As a result, management fees from the
institutional programs are expected to decrease in the future as equipment is
sold from the existing portfolios and not replaced.
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 $0.4 million and $0.5 million for the quarters ended
March 31, 1999 and 1998, respectively. In addition, a decrease of $0.1 million
and $0.2 million in the Company's residual interests in the programs was
recorded during the quarters ended March 31, 1999 and 1998, respectively. The
decrease in net earnings and distribution levels and residual interests in 1999,
compared to 1998, 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 partnerships when the equipment is purchased. Net
decreases in the recorded residual values result when partnership assets are
sold and the proceeds are less than the original investment in the sold
equipment.
ACQUISITION AND LEASE NEGOTIATION FEES:
During the quarter ended March 31, 1999, the Company, on behalf of the EGF
programs, purchased transportation and other equipment for $7.2 million,
compared to the Company purchasing $15.6 million of transportation and other
equipment during the quarter ended March 31, 1998, resulting in a $0.4 million
decrease in acquisition and lease negotiation fees.
Also during the quarter ended March 31, 1999, there was no equipment purchased
by AFG for the institutional investment programs, compared to $6.0 million for
the same quarter in 1998, resulting in a $0.2 million decrease in acquisition
and lease negotiation fees. The Company does not expect to sell assets in the
future to the institutional programs. It will, however, continue to manage the
existing portfolios for these programs. Because of the Company's decision to
halt syndication of equipment
leasing programs with the close of Fund I in 1996, because Fund I has a no
front-end fee structure, and because the Company does not expect to sell assets
in the future to the institutional programs, acquisition and lease negotiation
fees will be substantially reduced in the future.
GAIN ON THE SALE OR DISPOSITION OF ASSETS, NET:
During the quarter ended March 31, 1999, the Company recorded $0.3
million in gain on the sale or disposition of commercial and industrial
equipment. 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.
AIRCRAFT BROKERAGE AND SERVICES:
Aircraft brokerage and services revenue decreased $0.5 million during the
quarter ended March 31, 1999, compared to the same quarter of 1998, due to the
sale of the Company's aircraft leasing and spare parts brokerage subsidiary in
August 1998.
COSTS AND EXPENSES
- ------------------
For the Three Months
Ended March 31,
1999 1998
-----------------------------------------
(in thousands of dollars)
Operations support $ 3,831 $ 3,810
Depreciation and amortization 3,399 2,550
General and administrative 1,484 1,913
-----------------------------------------
Total costs and expenses $ 8,714 $ 8,273
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, was $3.8 million for both the quarters ended March 31, 1999 and 1998.
Operations support expense related to the trailer leasing segment increased $1.0
million due to the expansion of PLM Rental, with the addition of nine rental
yards and new trailers to existing yards. Operations support expense related to
the commercial and industrial equipment leasing and financing segment increased
$0.1 million due to an increase in compensation and benefits expenses related to
the expansion of the commercial and industrial equipment lease portfolio. These
increases were offset by a $1.1 million decrease in operations support expenses
related to the management of investment programs and other transportation
equipment leasing segment mainly related to the sale of the Company's aircraft
leasing and spare parts brokerage subsidiary in August 1998, and the sale of
other transportation equipment including intermodal trailers (discussed in the
operating lease income section).
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expenses increased $0.8 million (33%) for
the quarter ended March 31, 1999, compared to the quarter ended March 31, 1998.
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 intermodal trailers and other equipment
(discussed in the operating lease income section).
GENERAL AND ADMINISTRATIVE:
General and administrative expenses decreased $0.4 million (22%) during the
quarter ended March 31, 1999, compared to the same quarter in 1998, primarily
due to a $0.2 million decrease in rent and office related expenses, and a $0.2
million decrease in compensation and benefits expenses, net of allocations to
the managed programs.
OTHER INCOME AND EXPENSES
- -------------------------
For the Three Months
Ended March 31,
1999 1998
-----------------------------------------
(in thousands of dollars)
Interest expense $ (3,685 ) $ (3,070 )
Interest income 243 395
Other expenses, net (948 ) (6 )
INTEREST EXPENSE:
Interest expense increased $0.6 million (20%) during the quarter ended
March 31, 1999, compared to the same quarter in 1998, due to an increase in
borrowings of nonrecourse securitized debt for AFG, an increase in borrowings on
the short-term warehouse facilities, and an increase in borrowings of other
secured debt to fund trailer purchases. The increase in interest expense caused
by these increased borrowings was partially offset by lower interest expense
resulting from reductions in the amounts outstanding under the senior secured
debt agreements.
INTEREST INCOME:
Interest income decreased $0.2 million (38%) during the quarter ended
March 31, 1999, compared to the same quarter of 1998, as a result of lower
average cash balances during the quarter ended March 31, 1999, compared to the
same quarter of 1998.
OTHER EXPENSES, NET:
Other expenses of $0.9 million for the quarter ended March 31, 1999 represent
the write off of costs related to the proposed initial public offering of the
Company's AFG subsidiary. During the first quarter of 1999, the Company's Board
of Directors determined that it was in the Company's best interest to sell AFG
rather than proceed with a stock offering, and therefore, wrote-off all
associated offering costs.
PROVISION FOR INCOME TAXES:
For the three months ended March 31, 1999, the provision for income taxes was
$0.2 million, representing an effective rate of 41%. For the three months ended
March 31, 1998, the provision for income taxes was $0.6 million, representing an
effective rate of 38%.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX:
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires costs related to start-up activities to be expensed as incurred.
The statement requires that initial application be reported as a cumulative
effect of a change in accounting principle. The Company adopted this statement
during the first quarter of 1999, at which time it took a $0.2 million charge,
net of tax of $0.2 million, related to start-up costs of one of its
subsidiaries.
NET INCOME
- ----------
As a result of the foregoing, for the three months ended March 31, 1999, net
income was $0.1 million, resulting in basic and diluted earnings per
weighted-average common share outstanding of $0.01. For the same quarter in
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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash requirements have historically been satisfied through cash flow from
operations, borrowings, and the sale of equipment.
Liquidity in 1999 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 and trailer equipment
leasing transactions, additional borrowings, and the potential proceeds from the
sale of AFG. Management believes the Company can accomplish the preceding and
that it will have sufficient liquidity and capital resources for the next twelve
months. Future liquidity is influenced by the factors summarized below.
DEBT FINANCING:
NONRECOURSE SECURITIZED DEBT: The Company has available a nonrecourse debt
facility for up to $150.0 million, secured by direct finance leases, operating
leases, and loans on commercial and industrial equipment at AFG that generally
have terms of one to seven years. The facility is available for a one-year
period expiring October 12, 1999. 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 March 31, 1999, $105.3 million in borrowings
was outstanding under this facility. As of May 4, 1999, $115.1 million in
borrowings was outstanding under this facility.
In addition to the $150.0 million nonrecourse debt facility discussed above,
as of March 31, 1999 and May 4, 1999, the Company also had $6.8 million and $6.6
million, respectively, in nonrecourse notes payable secured by direct finance
leases on commercial and industrial equipment at AFG that have terms
corresponding to the note repayment schedule that began April 1998 and ends
March 2001. The notes bear interest from 8.32% to 9.5% per annum.
FSI WAREHOUSE CREDIT FACILITY: Assets acquired and held on an interim basis by
FSI for sale to affiliated programs or third parties have, from time to time,
been partially funded by this warehouse credit facility. This facility is also
used to temporarily finance the purchase of trailers prior to permanent
financing being obtained. This facility expires on December 14, 1999. The
Company believes it will be able to renew this facility on substantially the
same terms upon its expiration.
This facility is shared with EGF VI, PLM Equipment Growth & Income Fund VII (EGF
VII), and Fund I. Borrowings under this facility by the other eligible borrowers
reduce the amount available to be borrowed by the Company. All borrowings under
this facility are guaranteed by the Company. This facility provides 80%
financing for transportation assets purchased by the Company. The Company can
hold assets under this facility for up to 150 days. Interest accrues at prime or
LIBOR plus 162.5 basis points, at the option of the Company. The Company retains
the difference between the net lease revenue earned and the interest expense
during the interim holding period, since its capital is at risk. As of March 31,
1999, the Company and EGF VI had $11.3 million and $3.7 million of outstanding
borrowings under this facility, respectively. As of May 4, 1999, the Company and
EGF VI had $14.8 million and $3.7 million in borrowings outstanding under this
facility, respectively.
AFG WAREHOUSE CREDIT FACILITY: Assets acquired and held on an interim basis by
AFG for placement in the Company's securitization facility or for sale to
unaffiliated third parties have, from time to time, been partially funded by a
$60.0 million warehouse credit facility. The facility expires December 14, 1999;
however, the Company believes it will be able to renew this facility on
substantially the same terms upon its expiration.
This facility provides for financing of 100% of the present value of the lease
stream of commercial and industrial equipment for up to 90% of original
equipment cost of the assets held on this facility.
Borrowings secured by investment-grade lessees can be held under this facility
until the facility's expiration. Borrowings secured by noninvestment-grade
lessees may by outstanding for 120 days. Interest accrues at prime or LIBOR plus
137.5 basis points, at the option of the Company. The Company retains the
difference between the net lease revenue earned and the interest expense during
the interim holding period, since its capital is at risk. As of March 31, 1999,
the Company had $34.5 million outstanding under this facility. As of May 4,
1999, the Company had $30.9 million in borrowings outstanding under this
facility.
SENIOR SECURED NOTES: The Company's senior secured notes agreement, which had an
outstanding balance of $26.3 million as of March 31, 1999 and May 4, 1999, bears
interest at LIBOR plus 240 basis points. The Company has pledged substantially
all of its future management fees, acquisition and lease negotiation fees, data
processing fees, and partnership distributions as collateral to the facility.
The facility required quarterly interest-only payments through August 15, 1997,
with principal plus interest payments beginning November 15, 1997. Principal
payments of $1.9 million are payable quarterly through termination of the loan
on August 15, 2002.
SENIOR SECURED LOAN: The Company's senior loan with a syndicate of insurance
companies, which had an outstanding balance of $13.2 million as of March 31,
1999 and May 4, 1999, provides that equipment sale proceeds from pledged
equipment or cash deposits be placed into a collateral account or used to
purchase additional equipment to the extent required to meet certain debt
covenants. Pledged equipment for this loan consists of the storage equipment and
virtually all trailer equipment purchased prior to August 1998. As of March 31,
1999, the cash collateral balance for this loan was $0.1 million and is included
in restricted cash and cash equivalents on the Company's balance sheet. The
facility bears interest at 9.78% and required quarterly interest payments
through June 30, 1997, with quarterly principal payments of $1.5 million plus
interest charges beginning June 30, 1997 and continuing until termination of the
loan in June 2001.
OTHER SECURED DEBT: As of March 31, 1999, the Company had $12.8 million in other
secured debt, bearing interest from 5.35% to 5.55%, with payments of $0.2
million due monthly in advance, beginning December 1998 with a final payment of
$3.3 million due November 2005. The debt is secured by certain trailer
equipment.
In April 1999, the Company entered into a $5.0 million secured debt agreement
bearing interest at 6.20%, with payments of $0.1 million due monthly beginning
April 1999 with a final payment of $1.3 million due April 2006, secured by
certain trailer equipment. The Company intends to use this type of debt to
finance the purchase of new trailers in the future as this financing provides
for favorable financing terms in exchange for beneficial tax treatment in these
secured trailers to the lenders.
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 March 31, 1999, the swap agreements had a
weighted-average duration of 1.15 years, corresponding to the terms of the
related debt. As of March 31, 1999, a notional amount of $98.1 million of
interest-rate swap agreements effectively fixed interest rates at an average of
6.58% on such obligations. For the three months ended March 31, 1999, interest
expense increased by $0.3 million due to these arrangements.
TRAILER LEASING:
The Company operates 19 trailer rental facilities that engage in short 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 3 of these
rental yards in 1999 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. During the three
months ended March 31, 1999, the Company purchased $8.1 million of primarily
refrigerated trailers and sold refrigerated and dry van trailers with a net book
value of $0.1 million for proceeds of $0.1 million.
During 1999, the Company generated proceeds of $0.1 million from the sale of
trailers. The net proceeds from the sale of assets that were collateralized as
part of the senior loan facility were placed in a collateral account.
COMMERCIAL AND INDUSTRIAL EQUIPMENT LEASING AND FINANCING:
The Company earns finance lease or operating lease income for leases originated
and retained by its AFG subsidiary. 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 financed. During the three months ended March 31, 1999,
the Company funded lease and loan transactions for commercial and industrial
equipment with an original equipment cost of $16.7 million. During the three
months ended March 31, 1999, the Company sold commercial and industrial
equipment with a net book value of $5.5 million for proceeds of $5.8 million.
The majority 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 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 does not believe it
will be selling assets in the future to the institutional programs. It will,
however, continue to manage the existing portfolios for these programs.
As of March 31, 1999, the Company had committed to purchase $37.3 million of
equipment for its commercial and industrial lease and finance receivables
portfolio, to be held by the Company or sold to third parties, of which $6.2
million had been received by lessees and accrued for as of March 31, 1999.
From April 1, 1999 through May 4, 1999, the Company funded $18.7 million of
commitments outstanding as of March 31, 1999 for its commercial and industrial
lease and finance receivables portfolio.
As of May 4, 1999, the Company had committed to purchase $23.9 million of
equipment for its commercial and industrial lease and finance receivables
portfolio.
During 1998, AFG filed a registration statement with the SEC for the purpose of
undertaking an initial public offering of common stock. During the first quarter
of 1999, the Company's Board of Director's determined that it was in the
Company's best interest to sell AFG rather than proceed with a stock offering.
The Company has engaged an investment banking firm to pursue the sale of AFG.
OTHER TRANSPORTATION EQUIPMENT LEASING AND OTHER:
During the first three months of 1999, the Company purchased marine containers
for $13.8 million, and sold marine containers for $7.0 million to an affiliated
program at cost, which approximated their fair market value.
STOCK REPURCHASE PROGRAM:
In December 1998, the Company announced that its Board of Directors had
authorized the repurchase of up to $5.0 million of the Company's common stock.
As of May 4, 1999, 237,710 shares had been repurchased under this plan for a
total of $1.4 million.
Management believes that, through debt and equity financing, possible sales of
equipment, proceeds from the potential sale of AFG, and cash flows from
operations, the Company will have sufficient liquidity and capital resources to
meet its projected future operating needs over the next twelve months.
EFFECTS OF THE YEAR 2000:
It is possible that the Company's currently installed computer systems, software
products, and other business systems, or those of the Company's vendors, service
providers, and customers, working either alone or in conjunction with other
software or systems, may not accept input of, store, manipulate, and output
dates on or after January 1, 2000 without error or interruption, a possibility
commonly known as the "Year 2000" or "Y2K" problem.
The Company has established a special Year 2000 oversight committee to review
the impact of Year 2000 issues on its software products and other business
systems in order to determine whether such systems will retain functionality
after December 31, 1999. The Company (a) is currently integrating Year
2000-compliant programming code into its existing internally customized and
internally developed transaction processing software systems and (b) the
Company's accounting and asset management software systems have either already
been made Year 2000 compliant or Year 2000-compliant upgrades of such systems
are planned to be implemented by PLMI before the end of fiscal 1999. The Company
believes that its Year 2000 compliance program can be completed by the end of
1999. As of March 31, 1999, the Company has spent approximately $0.1 million to
become Year 2000-compliant. The Company expects to spend an additional $0.1
million in order to become Year 2000-compliant.
It is possible that certain of the Company's equipment lease portfolio may not
be Year 2000 compliant. The Company is currently contacting equipment
manufacturers of the Company's leased equipment portfolio to assure Year 2000
compliance or to develop remediation strategies. The Company does not expect
that non-Year 2000 compliance of its leased equipment portfolio will have an
adverse material impact on its financial statements.
Some risks associated with the Year 2000 problem are beyond the ability of the
Company to control, including the extent to which third parties can address the
Year 2000 problem. The Company is communicating with vendors, services
providers, and customers in order to assess the Year 2000 compliance readiness
of such parties and the extent to which the Company is vulnerable to any
third-party Year 2000 issues. There can be no assurance that the software
systems of such parties will be converted or made Year 2000 compliant in a
timely manner. Any failure by such other parties to make their respective
systems Year 2000 compliant could have a material adverse effect on the
business, financial position, and results of operations of the Company. The
Company will make an ongoing effort to recognize and evaluate potential exposure
relating to third-party Year 2000 noncompliance, and will develop a contingency
plan if the Company determines that third-party noncompliance would have a
material adverse effect on the Company's business, financial position or results
of operation.
The Company is currently developing a contingency plan to address the possible
failure of any systems due to the Year 2000 problems. The Company anticipates
these plans will be completed by September 30, 1999.
ACCOUNTING PRONOUNCEMENT:
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 March 31, 1999,
the Company is reviewing the effect this standard will have on the Company's
consolidated financial statements.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is that of interest rate risk. A
change in the U.S. prime interest rate, LIBOR rate, or lender's cost of funds
based on commercial paper market rates, would affect the rate at which the
Company could borrow funds under its various borrowing facilities. Increases in
interest rates to the Company, which may cause the Company to raise the implicit
rates charged to its customers, could in turn, result in a reduction in demand
for the Company's lease financing. The Company's warehouse credit facilities and
senior secured notes are variable rate debt. The Company estimates a one percent
increase or decrease in the Company's variable rate debt would result in an
increase or decrease, respectively, in interest expense of $0.3 million in 1999,
$0.2 million in 2000, $0.1 million in 2001, and $18,000 in 2002. The Company
estimates a two percent increase or decrease in the Company's variable rate debt
would result in an increase or decrease, respectively, in interest expense of
$0.7 million in 1999, $0.3 million in 2000, $0.2 million in 2001, and $35,000 in
2002.
The Company hedges borrowings under the nonrecourse securitization facility,
effectively fixing the rate of these borrowings. The Company is currently
required to hedge against the risk of interest rate increases for 90% of the
aggregate discounted lease balance of those leases and loans used as collateral
for its nonrecourse securitization facility, but the Company generally does not
enter into hedges for leases designated for syndication or for leases of
transportation equipment. Such hedging activities may limit the Company's
ability to participate in the benefits of any decrease in interest rates with
respect to the hedged portfolio of leases, but may also protect the Company from
increases in interest rates for the hedged portfolio. All of the Company's other
financial assets and liabilities are at fixed rates.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 to the consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
10.1 Master Lease Agreement among PLM International, Inc. and Wells Fargo
Equipment Finance, Inc., dated as of April 2, 1999.
10.2 Amendment to PLM International, Inc. Directors' 1995 Nonqualified Stock
Option Plan, dated April 28, 1999.
10.3 Amendment to PLM International, Inc. 1998 Management Stock Compensation
Plan, dated April 28, 1999.
10.4 Amended Form of Nonqualified Stock Option Agreement.
(B) Reports on Form 8-K
January 18, 1999 - Announcement regarding the election of Howard M. Lorber as a
Class III director of the Board of Directors of the Company.
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 4, 1999