UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL QUARTER ENDED JUNE 30, 1999
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
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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
----------------------------------------------------------------------
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 26 , 1999 - 7,992,574 shares.
PLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands ofdollars, except per share amounts)
For the Three Month For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------------------------------------------------------------------
REVENUES
Operating lease income $ 7,573 $ 5,452 $ 13,670 $ 9,344
Finance lease income 2,736 3,042 5,888 5,694
Management fees 2,271 2,535 4,639 5,099
Partnership interests and other fees 26 357 316 681
Acquisition and lease negotiation fees 618 1,184 1,079 2,211
Gain on the sale or disposition of assets, net 1,317 1,533 1,630 2,295
Aircraft brokerage and services -- 362 -- 886
Other 864 843 1,790 1,642
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Total revenues 15,405 15,308 29,012 27,852
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COSTS AND EXPENSES
Operations support 4,771 4,657 8,602 8,466
Depreciation and amortization 3,663 3,497 7,062 6,047
General and administrative 2,045 2,257 3,529 4,171
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Total costs and expenses 10,479 10,411 19,193 18,684
-----------------------------------------------------------------
Operating income 4,926 4,897 9,819 9,168
Interest expense (3,822) (3,604) (7,507) (6,674)
Interest income 233 299 476 694
Other (expenses) income, net (150) 469 (1,098) 463
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Income before income taxes 1,187 2,061 1,690 3,651
Provision for income taxes 466 860 673 1,467
---------------------------------------------------------------
Net income before cumulative
effect of accounting change 721 1,201 1,017 2,184
Cumulative effect of accounting change,
net of tax of $165 -- -- 236 --
Net income to common shares $ 721 $ 1,201 $ 781 $ 2,184
====================================================================
Basic earnings per weighted-average
common share outstanding $ 0.09 $ 0.14 $ 0.10 $ 0.26
====================================================================
Diluted earnings per weighted-average
common share outstanding $ 0.09 $ 0.14 $ 0.09 $ 0.26
====================================================================
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,
1999 1998
-------------------------------------------
Cash and cash equivalents $ 4,001 $ 8,786
Receivables (net of allowancefor doubtful
accounts of $0.7 million as of
June 30, 1999 and $0.4 million as of
December 31, 1998) 12,583 7,282
Receivables from affiliates 2,841 2,944
Investment in direct finance leases, net 127,655 145,088
Loans receivable 22,766 23,493
Equity interest in affiliates 20,602 22,588
Transportation equipment held for operating leases 87,141 63,044
Less accumulated depreciation (18,127) (15,516)
-----------------------------------------------
69,014 47,528
Commercial and industrial equipment held for operating leases 24,949 24,520
Less accumulated depreciation (10,157) (7,831)
-----------------------------------------------
14,792 16,689
Restricted cash and cash equivalents 11,840 10,349
Other, net 6,009 7,322
-----------------------------------------------
Total assets $ 292,103 $ 292,069
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Short-term warehouse facilities $ 33,279 $ 34,420
Senior secured notes 24,439 28,199
Senior secured loan 11,765 14,706
Other secured debt 22,249 13,142
Nonrecourse securitized debt 107,904 111,222
Payables and other liabilities 23,128 21,768
Deferred income taxes 19,336 18,415
-----------------------------------------------
Total liabilities 242,100 241,872
Shareholders' equity:
Common stock, ($.01 par value, 50,000,000 shares
authorized, 7,992,574 issued and outstanding as of
June 30, 1999 and 8,159,919 as of December 31, 1998) 112 112
Paid-in capital, in excess of par 75,222 74,947
Treasury stock (4,043,181 shares as of June 30, 1999 and
3,875,836 shares as of December 31, 1998) (16,322) (15,072)
Accumulated deficit (9,009) (9,790)
Total shareholders' equity 50,003 50,197
-----------------------------------------------
Total liabilities and shareholders' equity $ 292,103 $ 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 Six Months Ended June 30, 1999
(in thousands of dollars)
Accumulated
Common Stock Deficit &
Paid-in Accumulated
Capital in Other Total
At Excess Treasury Comprehensive Comprehensive Shareholders'
Par of Par Stock Income Income Equity
-------------------------------------------------------------------------------------------------
Balances, December 31, 1997 $ 112 $ 74,650 $ (13,435) $ (14,779) $ 46,548
Compresensive 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 781 $ 781 781
====================
Exercise of stock options 174 245 419
Common stock repurchases (1,604) (1,604)
Reissuance of treasury stock, net 101 109 210
----------------------------------------------------------------- -------------
Balances, June 30, 1999 $ 112 $ 75,222 $ (16,322) $ (9,009) $ 50,003
============================================================= =============
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,
1999 1998
-----------------------------------
OPERATING ACTIVITIES
Net income $ 781 $ 2,184
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,062 6,047
Cumulative effect of accounting change, net of tax of $165 236 --
Write off of costs associated with initial public offering of AFG 975 --
Foreign currency translation -- (29)
Deferred income tax expense 921 1,641
Gain on sale or disposition of assets, net (1,630) (2,295)
Undistributed residual value interests 562 546
Minority interest in net loss of subsidiaries -- (84)
Increase (decrease) in payables and other liabilities 4,810 (1,669)
(Increase) decrease in receivables and receivables from affiliates (5,198) 2,913
Amortization of organization and offering costs 1,424 1,481
(Increase) decrease in other assets (94) 521
-----------------------------------
Net cash provided by operating activities 9,849 11,256
-----------------------------------
INVESTING ACTIVITIES
Principal payments received on finance leases 17,611 14,441
Principal payments received on loans 3,737 1,878
Investment in direct finance leases (24,488) (82,047)
Investment in loans receivable (3,010) (18,651)
Purchase of property, plant, and equipment (466) (110)
Purchase of transportation equipment and capital improvements (38,724) (32,919)
Purchase of commercial and industrial equipment held for operating lease (14,119) (14,938)
Proceeds from the sale of transportation equipment for lease 234 3,081
Proceeds from the sale of assets held for sale 13,801 19,866
Proceeds from the sale of commercial and industrial equipment 35,477 29,757
(Increase) decrease in restricted cash and restricted cash equivalents (1,491) 6,506
-----------------------------------
Net cash used in investing activities (11,438) (73,136)
FINANCING ACTIVITIES
Borrowings of short-term warehouse credit facilities 50,369 88,065
Repayment of short-term warehouse credit facilities (51,510) (64,302)
Repayment of senior secured notes (3,760) (2,510)
Repayment of senior secured loan (2,941) (2,941)
Borrowings of other secured debt 9,827 173
Repayment of other secured debt (720) (99)
Borrowings of nonrecourse debt 26,856 54,512
Repayment of nonrecourse debt (30,174) (12,323)
Reissuance of treasury stock, net 42 --
Proceeds from exercise of stock options 419 --
Purchase of stock (1,604) (626)
-----------------------------------
Net cash (used in) provided by financing activities (3,196) 59,949
-----------------------------------
Net decrease in cash and cash equivalents (4,785) (1,931)
Cash and cash equivalents at beginning of period 8,786 5,224
-----------------------------------
Cash and cash equivalents at end of period $ 4,001 $ 3,293
===================================
SUPPLEMENT INFORMATION
Net cash paid for interest $ 7,431 $ 5,754
====================================================================================
Net cash paid for income taxes $ 206 $ 1,704
====================================================================================
See accompanying notes to these consolidated financial statements.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30,
1999 and December 31, 1998, statements of income for the three and six months
ended June 30, 1999 and 1998, statements of changes in shareholders' equity and
comprehensive income for the year ended December 31, 1998 and the six months
ended June 30, 1999, and statements of cash flows for the six months ended June
30, 1999 and 1998. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying 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 sold to unaffiliated investors. The Company uses
one of its warehouse credit facilities to finance the acquisition of these
assets prior to permanent financing by nonrecourse securitized debt or sale. The
majority of these transactions are accounted for as direct finance leases, while
some transactions qualify as operating leases or loans.
During the six months ended June 30, 1999, the Company funded $24.5 million in
equipment that was placed on finance lease. Also during the six months ended
June 30, 1999, the Company sold equipment on finance lease with an original
equipment cost of $29.8 million, resulting in a net gain of $0.3 million.
During the six months ended June 30, 1999, the Company funded $3.0 million in
loans to customers.
4. EQUIPMENT
Equipment held for operating lease includes transportation equipment and
commercial and industrial equipment that is depreciated on the straight-line
method down to the equipment's estimated salvage value.
During the six months ended June 30, 1999, the Company funded $14.1 million in
commercial and industrial equipment that was placed on operating lease. During
the six months ended June 30, 1999, the Company sold commercial and industrial
equipment that was on operating lease for a net gain of $1.3 million.
During the first six months of 1999, the Company purchased trailers for $24.9
million and sold trailers with a net book value of $0.2 million for
approximately their net book value.
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 six months of 1999,
the Company purchased marine containers for $13.8 million, and sold them to
affiliated programs at cost, which approximated their fair market value. As of
June 30, 1999 and December 31, 1998, the Company held no equipment for sale.
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1999, FSI had $10.4 million in
borrowings outstanding on the $24.5 million facility and there were no other
borrowings outstanding on the facility by any of the other eligible borrowers.
As of June 30, 1999, AFG had $22.9 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 June 30, 1999 , there were
$101.9 million in borrowings under this facility. The Company is required to
hedge the interest rate exposure to the Company on 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 June 30, 1999, 91% of the ADLB
had been hedged.
During the first six months of 1999, the Company made principal payments of $1.6
million on its nonrecourse notes payable. As of June 30, 1999, the Company had
$6.0 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.
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 and 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.
In May 6, 1999, the Company entered into a $15.0 million credit facility loan
agreement bearing interest at LIBOR plus 1.5%. This facility allows the Company
to borrow up to $15.0 million within a one-year period. As of June 30, 1999, the
Company had borrowed $4.8 million under this facility. Payments of $0.1 million
are due quarterly beginning August 2000, with a final payment of $1.4 million
due August 2006.
During the first six months of 1999, the Company repaid $2.9 million of the
senior secured loan, $3.8 million of the senior secured notes, and $0.7 million
of the other secured debt, in accordance with the debt repayment schedules.
6. SHAREHOLDERS' EQUITY
During the first six months of 1999, the Company repurchased 264,115 shares of
the Company's common stock for $1.6 million under the $5.0 million common stock
repurchase program authorized by the Company's Board of Directors in December
1998. As of June 30, 1999, 327,415 shares had been repurchased under this plan,
for a total of $2.0 million.
During the six months ended June 30, 1999, 27,486 shares were issued from
treasury stock as part of the senior management bonus program (net of forfeited
shares), 6,784 shares were issued from treasury
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
6. SHAREHOLDERS' EQUITY (CONTINUED)
stock as a stock grant, and 62,500 shares were issued for the exercise of stock
options. Consequently, the total common shares outstanding decreased to
7,992,574 as of June 30, 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 June 30, 1999 was 8,066,243, and during the three months ended June
30, 1998 was 8,337,963. The weighted-average number of shares deemed outstanding
for the basic earnings per share calculation during the six months ended June
30, 1999 was 8,115,458, and during the six months ended June 30, 1998 was
8,359,271. 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, 1999
was 8,179,429, and during the three months ended June 30, 1998 was 8,501,476.
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, 1999 was 8,239,249, and during
the six months ended June 30, 1998 was 8,525,127.
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
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
7. LEGAL MATTERS (CONTINUED)
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 remaining allegations
contained in the first, second, and third claims for relief.
The parties reached an agreement to settle this matter on April 15, 1999, and
plaintiff filed a notice of voluntary dismissal of the complaint with prejudice
on June 18, 1999. The amount paid by the Company in settlement is not material
to the financial condition of the Company.
The Company and various of its wholly-owned subsidiaries 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 for which the Company's wholly-owned subsidiary,
PLM Financial Services, Inc. (FSI), acts as the general partner, including PLM
Equipment Growth Fund IV (Fund IV), PLM Equipment Growth Fund V (Fund V), PLM
Equipment Growth Fund VI (Fund VI), and PLM Equipment Growth & Income Fund VII
(Fund VII) (the Partnerships). 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) (the court) based on the court's
diversity jurisdiction, following which plaintiffs filed a motion to remand the
action to the state court. Removal of the action automatically nullified the
state court's ex parte certification of the class. In September 1997, the 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 court granted
defendants' motion in December 1997.
Following various unsuccessful requests that the 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 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 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 Fund V, and filed the
complaint on her own behalf and on behalf of all class members similarly
situated who invested
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
7. LEGAL MATTERS (CONTINUED)
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 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 related to the settlement of those actions (the monetary
settlement), following which the parties agreed to an additional equitable
settlement (the equitable settlement). The terms of the monetary settlement and
the equitable settlement are contained in a Stipulation of Settlement that was
filed with the court on February 12, 1999. On June 14, 1999, the parties amended
the stipulation and revised certain exhibits, and requested that the court set a
preliminary approval hearing on the monetary settlement and equitable
settlement.
The monetary settlement 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 court. The Company will pay up to $0.3 million
of the monetary settlement, with the remainder being funded by an insurance
policy. The equitable settlement 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, 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) up to 20% in
excess of the compensatory limitations set forth in the North American
Securities Administrator's Association's Statement of Policy by judicial
amendment to the partnership agreements for Funds V, VI, and VII; (c) for a
one-time repurchase of up to 10% of the outstanding units of Funds V, VI, and
VII by the respective partnership at 80% of such partnership's net asset value;
and (d) for the deferral of a portion of FSI's management fees until such time
as certain performance thresholds have, if ever, been met by the partnerships.
The equitable settlement also provides for payment of the equitable class
attorneys' fees from partnership funds in the event, if ever, 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 monetary
and equitable settlements.
The preliminary approval hearing was set for and occurred on June 25, 1999. On
June 29, 1999, the court entered orders, among other things, granting
preliminary approval of the monetary and equitable settlements, conditionally
certifying the monetary and equitable settlement classes, providing for a final
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
7. LEGAL MATTERS (CONTINUED)
fairness hearing on November 16, 1999, approving the form and content of the
notices to be sent to the monetary class and the equitable class, and staying
all claims, counterclaims, and crossclaims by the monetary and equitable classes
against defendants pending the court's consideration of the fairness of the
monetary and equitable settlements at the final fairness hearing. The monetary
settlement class (the monetary class) consists of all investors, limited
partners, assignees, or unit holders who purchased or received by way of
transfer or assignment any units in the Partnerships between May 23, 1989 and
June 29, 1999. The equitable settlement class (the equitable class) consists of
all investors, limited partners, assignees or unit holders who on June 29, 1999
held any units in Funds V, VI, and VII, and their assigns and successors in
interest. On June 29, 1999 the court also entered an order preliminarily
approving as to form and substance the form of solicitation statement that is to
be distributed to limited partners of Funds V, VI, and VII in connection with
the equitable settlement, following clearance by and with such changes necessary
to comply with the comments, if any, of the Securities and Exchange Commission
(SEC) in its review and clearance procedures. The monetary and equitable class
notices will be sent to the monetary and equitable classes, respectively,
following clearance by the SEC of the solicitation statement.
The monetary settlement remains subject to certain conditions, including but not
limited to notice to the monetary class for purposes of the monetary settlement
and final approval of the monetary settlement by the court following a final
fairness hearing. The equitable settlement remains subject to numerous
conditions, including but not limited to: (a) notice to the equitable class, (b)
review and clearance by the 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) final approval of the equitable settlement by the court following a final
fairness hearing. 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.
8. COMMITMENTS
As of June 30, 1999, the Company had committed to purchase $38.1 million of
equipment for its commercial and industrial lease and finance receivable
portfolio.
From July 1, 1999 to July 26, 1999, the Company funded $4.2 million of the
commitments outstanding as of June 30, 1999 for its commercial and industrial
lease and finance receivable portfolio.
As of July 26, 1999, the Company had committed to purchase $25.9 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 leasing segment
includes twenty trailer rental facilities that engage in short-term 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 owning commercial and industrial equipment. The
management of investment programs and
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
9. OPERATING SEGMENTS (CONTINUED)
other transportation equipment leasing segment involves managing the Company's
syndicated investment programs, from which it earns fees and equity interests,
and arranging 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 certain operating support expenses and before allocating income taxes. The
segments are managed separately because each operation requires different
business strategies.
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 three months ended June 30, 1999 Leasing Financing Leasing Other<F1>1 Total
- -----------------------------------------
REVENUES
Lease income $ 4,986 $ 4,886 $ 437 $ -- $ 10,309
Fees earned 196 192 2,527 -- 2,915
Gain (loss) on sale or disposition of
assets, net (3) 1,320 -- -- 1,317
Other -- 551 313 -- 864
Total revenues 5,179 6,949 3,277 -- 15,405
COSTS AND EXPENSES
Operations support 2,490 1,601 494 186 4,771
Depreciation and amortization 1,780 1,770 113 -- 3,663
General and administrative expenses -- -- -- 2,045 2,045
Total costs and expenses 4,270 3,371 607 2,231 10,479
Operating income (loss) 909 3,578 2,670 (2,231) 4,926
Interest expense, net (634) (2,343) (612) -- (3,589)
Other expenses, net -- (26) -- (124) (150)
Income (loss) before income taxes $ 275 $ 1,209 $ 2,058 $(2,355) $ 1,187
========================================================================
Total assets as of June 30, 1999 $73,260 $175,855 $ 34,034 $ 8,954 $292,103
========================================================================
Commercial Management
and of Investment
Industrial Programs
Equipment and Other
Leasing Transportation
Trailer and Equipment
For the three months ended June 30, 1998 Leasing Financing Leasing Other<F1>1 Total
- -----------------------------------------
REVENUES
Lease income $ 1,855 $ 5,722 $ 917 $ -- $ 8,494
Fees earned 253 414 3,409 -- 4,076
Gain (loss) on sale or disposition of
assets, net (3) 882 654 -- 1,533
Other -- 332 873 -- 1,205
Total revenues 2,105 7,350 5,853 -- 15,308
COSTS AND EXPENSES
Operations support 1,089 1,061 2,120 387 4,657
Depreciation and amortization 850 2,337 310 -- 3,497
General and administrative expenses -- -- -- 2,257 2,257
Total costs and expenses 1,939 3,398 2,430 2,644 10,411
Operating income (loss) 166 3,952 3,423 (2,644) 4,897
Interest expense, net (379) (2,521) (405) -- (3,305)
Other (expenses) income, net (1) -- 470 -- 469
Income (loss) before income taxes $ (214) $1,431 $ 3,488 $(2,644) $ 2,061
========================================================================
Total assets as of June 30, 1998 $33,935 $213,744 $37,726 $ 5,430 $290,835
========================================================================
- --------
<FN>
<F1>1 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
JUNE 30, 1999
9. Operating Segments (continued)
Commercial Management
and of Investment
Industrial Programs
Equipment and Other
Leasing Transportation
Trailer and Equipment
For the six months ended June 30, 1999 Leasing Financing Leasing Other<F2>2 Total
- ---------------------------------------
EVENUES
Lease income $ 8,677 $ 10,257 $ 624 $ -- $ 19,558
Fees earned 401 407 5,226 -- 6,034
Gain (loss) on sale or disposition of
assets, net (12) 1,642 -- -- 1,630
Other -- 1,113 677 -- 1,790
Total revenues 9,066 13,419 6,527 -- 29,012
COSTS AND EXPENSES
Operations support 4,389 2,681 988 544 8,602
Depreciation and amortization 3,239 3,600 223 -- 7,062
General and administrative expenses -- -- -- 3,529 3,529
Total costs and expenses 7,628 6,281 1,211 4,073 19,193
Operating income (loss) 1,438 7,138 5,316 (4,073) 9,819
Interest expense, net (1,188) (4,785) (1,058) -- (7,031)
Other expenses, net -- (974) -- (124) (1,098)
Income (loss) before income taxes $ 250 $ 1,379 $ 4,258 $ (4,197) $ 1,690
========================================================================
Cumulative effect of accounting change,
net of tax of $165 $ -- $ 236 $ -- $ -- $ 236
========================================================================
Total assets as of June 30, 1999 $73,260 $175,855 $ 34,034 $ 8,954 $292,103
========================================================================
Commercial Management
and of Investment
Industrial Programs
Equipment and Other
Leasing Transportation
Trailer and Equipment
For the six months ended June 30, 1998 Leasing Financing Leasing Other<F2>2 Total
- ---------------------------------------
REVENUES
Lease income $ 3,433 $ 9,980 $ 1,625 $ -- $ 15,038
Fees earned 515 804 6,672 -- 7,991
Gain on sale or disposition of assets, net 73 1,086 1,136 -- 2,295
Other 3 628 1,897 -- 2,528
Total revenues 4,024 12,498 11,330 -- 27,852
COSTS AND EXPENSES
Operations support 1,942 2,024 3,831 669 8,466
Depreciation and amortization 1,527 3,633 887 -- 6,047
General and administrative expenses -- -- -- 4,171 4,171
Total costs and expenses 3,469 5,657 4,718 4,840 18,684
Operating income (loss) 555 6,841 6,612 (4,840) 9,168
Interest expense, net (682) (4,548) (750) -- (5,980)
Other (expenses) income, net (1) -- 464 -- 463
Income (loss) before income taxes $ (128) $2,293 $ 6,326 $ (4,840) $ 3,651
========================================================================
Total assets as of June 30, 1998 $33,935 $213,744 $ 37,7 $ 5,430 $290,835
========================================================================
<FN>
<F2>2 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 an 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
PLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
10. CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX (CONTINUED)
AFG. This charge had an effect of reducing basic earnings per weighted-average
common share and diluted earnings per weighted-average common share by $0.03 for
the six months ended June 30, 1999.
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 $1.0 million of costs related to the proposed initial public offering during
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.
12. SUBSEQUENT EVENTS
On July 1, 1999, the Company, through its wholly-owned subsidiary, TEC Acquisub,
Inc., purchased $4.6 million in marine containers, which the Company plans to
sell to affiliated programs. TEC Acquisub, Inc. borrowed $3.6 million on its
short-term warehouse credit facility to partially fund the purchase.
On July 1, 1999, the Company borrowed $1.4 million under its $15.0 million
credit facility loan agreement, increasing the total borrowings outstanding on
the facility to $6.2 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TRAILER LEASING
The Company operates twenty trailer rental facilities that engage in short-term
and mid-term operating leases. Nineteen of these facilities operate
predominantly refrigerated trailers used to transport temperature-sensitive
commodities, consisting primarily of food products. One facility operates only
dry van (non-refrigerated) trailers. The Company intends to move virtually all
of its dry van trailers to this facility plus another two locations that will be
established in 1999. To date in 1999, the Company has opened three new
refrigerated trailer yards. The Company intends to continue to increase its
trailer fleet with new or late-model used refrigerated trailers which will be
placed in existing yards and new facilities to be opened in additional
geographical markets.
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 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 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 receives management fees. In previous years,
the Company acquired equipment for the institutional programs for which it
earned acquisition fees, but the Company does not anticipate acquiring equipment
for the institutional programs in the future. The Company also earns syndication
fees for arranging purchases and sales of equipment between other unaffiliated
third parties.
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. The Company has engaged
an investment banking firm to pursue the sale of AFG.
MANAGEMENT OF INVESTMENT PROGRAMS AND OTHER TRANSPORTATION EQUIPMENT LEASING
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 liquidate and the
managed equipment portfolio for these programs becomes permanently reduced.
The Company will occasionally own transportation equipment prior to sale to
affiliated programs. During this period, the Company earns lease revenue and
incurs interest expense.
COMPARISON OF THE COMPANY'S OPERATING RESULTS FOR THE THREE MONTHS ENDED
JUNE 30, 1999 AND 1998
The following analysis reviews the operating results of the Company:
REVENUES
For the Three Months
Ended June 30,
1999 1998
-----------------------------------
(in thousands dollars)
Operating lease income $ 7,573 $ 5,452
Finance lease income 2,736 3,042
Management fees 2,271 2,535
Partnership interests and other fees 26 357
Acquisition and lease negotiation fees 618 1,184
Gain on the sale or disposition of assets, net 1,317 1,533
Aircraft brokerage and services -- 362
Other 864 843
---------------------------------------------------
Total revenues $ 15,405 $ 15,308
The fluctuations in revenues for the three months ended June 30, 1999, compared
to the same quarter in 1998, are summarized and explained below.
OPERATING LEASE INCOME BY TYPE:
For the Three Months
Ended June 30,
1999 1998
--------------------------------------------
(in thousands of dollars)
Refrigerated and dry van over-the-road trailers $ 4,986 $ 1,854
Commercial and industrial equipment 2,155 2,686
Lease income from assets held for sale 408 284
Intermodal trailers -- 590
Other 24 38
---------------------------------------------------
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 $2.1 million during the second quarter of 1999, compared to the
same quarter of 1998, due to the following:
(a) A $3.1 million increase in operating lease income was generated from
refrigerated and dry van trailer equipment of which approximately $2.8
million was due to an increase in the amount of these types of equipment
owned and on operating lease, and approximately $0.3 million was due to
higher utilization. For the quarter ended June 30, 1999, the average
investment in refrigerated and dry van trailer equipment was $78.8 million,
compared to $39.2 million for the second quarter of 1998.
(b) A $0.1 million increase in operating lease income was generated from assets
held for sale. During the second quarter of 1999, the Company owned $6.8
million in marine containers that were sold on June 30, 1999 to affiliated
programs at cost, which approximated their fair market value. The Company
earned $0.4 million in operating lease income on these marine containers
during the second quarter of 1999. 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 operating lease income. The Company sold 85.3% of
its interest in the entity that owned the marine vessel, at cost which
approximated the fair market value, to an affiliated program during the
second 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
resulted from the sale of all of the Company's intermodal trailers during
August 1998.
(b) A $0.5 million decrease in operating lease income from commercial and
industrial equipment was due to a decrease in the amount of these types of
equipment owned and on operating lease.
FINANCE LEASE INCOME:
The Company earns finance lease income for certain leases originated by its AFG
subsidiary that are either retained for long-term investment or sold to third
parties. Finance lease income decreased $0.3 million in the second quarter of
1999, compared to the same quarter in 1998, due to a decrease in commercial and
industrial assets that were on finance lease. For the quarter ended June 30,
1999, the average investment in direct finance leases was $136.4 million,
compared to $150.1 million for the second 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 $2.3 million for the quarter
ended June 30, 1999 and were $2.5 million for the quarter ended June 30, 1998.
The lower 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 June 30, 1999
and 1998, management fees for the institutional programs were $0.2 million, and
were included in the above amounts. 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 for the quarter ended June 30, 1999 and
were $0.5 million for the quarter ended June 30, 1998. In addition, a decrease
in the Company's residual interests in the programs was recorded as $0.4 million
during the quarter ended June 30, 1999 and as $0.1 million during the quarter
ended June 30, 1998. 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 June 30, 1999, the Company, on behalf of the EGF
programs, purchased transportation and other equipment for $29.9 million. The
Company did not take acquisition and lease negotiation fees on $16.6 million of
this equipment, as the Company has reached certain fee limitations for one of
its limited partnership programs per the partnership agreement. This is compared
to the Company's purchase of $17.4 million in transportation and other equipment
during the quarter ended June 30, 1998, resulting in a $0.4 million decrease in
acquisition and lease negotiation fees.
During the quarter ended June 30, 1999, no equipment was purchased by AFG for
the institutional investment programs, compared to $8.1 million for the same
quarter in 1998, resulting in a $0.2 million comparative 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 June 30, 1999, the Company recorded a $1.3 million gain
on the sale or disposition of commercial and industrial equipment. During the
quarter ended June 30, 1998, the Company recorded a $1.5 million gain on the
sale or disposition of assets. Of this gain, $0.6 million resulted from the sale
or disposition of transportation equipment and $0.9 million related to the sale
of commercial and industrial equipment.
AIRCRAFT BROKERAGE AND SERVICES:
Aircraft brokerage and services revenue decreased $0.4 million during the
quarter ended June 30, 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 June 30,
1999 1998
---------------------------------------
(in thousands of dollars)
Operations support $ 4,771 $ 4,657
Depreciation and amortization 3,663 3,497
General and administrative 2,045 2,257
------------------------------------------
Total costs and expenses $ 10,479 $ 10,411
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 $0.1 million (2%) for the quarter ended June 30, 1999,
compared to the quarter ended June 30, 1998. Operations support expense related
to the trailer leasing segment increased $1.4 million due to the expansion of
PLM Rental, with the addition of ten rental yards and new trailers to existing
yards. Operations support expense related to the commercial and industrial
equipment leasing and financing segment increased $0.5 million due to an
increase in compensation and benefits expenses which resulted from a new bonus
program initiated in 1999 to retain AFG employees during AFG's potential sale
and increased staffing. These increases were partially offset by a $1.8 million
decrease in operations support expenses related to the management of investment
programs and other transportation equipment leasing segment, and other expenses
related mainly 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 $0.2 million (5%) for the
quarter ended June 30, 1999, compared to the quarter ended June 30, 1998. The
increase resulted from an increase in refrigerated trailer equipment on
operating lease, which was partially offset by the reduction in depreciable
commercial and industrial equipment and intermodal trailers and other equipment
(discussed in the operating lease income section).
GENERAL AND ADMINISTRATIVE:
General and administrative expenses decreased $0.2 million (9%) during the
quarter ended June 30, 1999, compared to the same quarter in 1998, primarily due
to a $0.1 million decrease in compensation and benefits expenses, a $0.2 million
decrease in sublease commissions, and a $0.1 million decrease in travel and
entertainment expenses, partially offset by a $0.2 million increase in legal
expenses related to the potential sale of AFG.
OTHER INCOME AND EXPENSES
For the Three Months
Ended June 30,
1999 1998
--------------------------------------
(in thousands of dollars)
Interest expense $ (3,822) $ (3,604)
Interest income 233 299
Other (expenses) income, net (150) 469
INTEREST EXPENSE:
Interest expense increased $0.2 million (6%) during the quarter ended June 30,
1999, compared to the same quarter in 1998, related to the trailer leasing
segment, due to an increase in borrowings to fund trailer purchases.
INTEREST INCOME:
Interest income decreased $0.1 million (22%) during the quarter ended June 30,
1999, compared to the same quarter of 1998, as a result of lower average cash
balances during the quarter ended June 30, 1999, compared to the same quarter of
1998.
OTHER (EXPENSES) INCOME, NET:
Other expenses of $0.2 million for the quarter ended June 30, 1999 are mainly
related to the settlement of a lawsuit. 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 an expense of $0.3
million related to a legal settlement for the Koch and Romei actions (refer to
Note 7).
PROVISION FOR INCOME TAXES:
For the three months ended June 30, 1999, the provision for income taxes was
$0.5 million, representing an effective rate of 39%. For the three months ended
June 30, 1998, the provision for income taxes was $0.9 million, representing an
effective rate of 42%.
NET INCOME
As a result of the foregoing, for the three months ended June 30, 1999, net
income was $0.7 million, resulting in basic and diluted earnings per
weighted-average common share outstanding of $0.09. For the same quarter in
1998, net income was $1.2 million, resulting in basic and diluted earnings per
weighted-average common share outstanding of $0.14.
COMPARISON OF THE COMPANY'S OPERATING RESUTLS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
The following analysis reviews the operating results of the Company:
REVENUES
For the Six Months
Ended June 30,
1999 1998
--------------------------------------------
(in thousands of dollars)
Operating lease income $ 13,670 $ 9,344
Finance lease income 5,888 5,694
Management fees 4,639 5,099
Partnership interests and other fees 316 681
Acquisition and lease negotiation fees 1,079 2,211
Gain on the sale or disposition of assets, net 1,630 2,295
Aircraft brokerage and services -- 886
Other 1,790 1,642
----------------------------------------------
Total revenues $ 29,012 $ 27,852
The fluctuations in revenues for the six months ended June 30, 1999, compared to
the six months ended June 30, 1998, are summarized and explained below.
OPERATING LEASE INCOME BY TYPE:
For the Six Months
Ended June 30,
1999 1998
--------------------------------------------
(in thousands of dollars)
Refrigerated and dry van over-the-road trailers $ 8,677 $ 3,432
Commercial and industrial equipment 4,380 4,299
Lease income from assets held for sale 587 284
Intermodal trailers -- 1,179
Other 26 150
---------------------------------------------------
Total operating lease income $ 13,670 $ 9,344
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 $4.3 million during the six months ended June 30, 1999,
compared to the same period of 1998, due to the following:
(a) A $5.2 million increase in operating lease income was generated from
refrigerated and dry van trailer equipment, of which approximately $4.6
million was due to an increase in the amount of these types of equipment
owned and on operating lease, and approximately $0.6 million was due to
higher utilization. For the six months ended June 30, 1999, the average
investment in refrigerated and dry van trailer equipment was $75.0 million,
compared to $37.7 million for the same period of 1998.
(b) A $0.1 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 $0.3 million increase in operating lease income was generated from assets
held for sale. During the six months ended June 30, 1999, the Company owned
$13.8 million in marine containers that were sold to affiliated programs at
cost, which approximated their fair market value. The Company earned $0.6
million in operating lease income on these marine containers during the six
months ended June 30, 1999. During the six months ended June 30, 1998, the
Company owned a 100% interest in an entity owning a marine vessel that
generated $0.3 million in operating lease income. The Company sold 85.3% of
its interest in the entity that owned the marine vessel at cost, which
approximated fair market value, to an affiliated program during the second
quarter of 1998.
These increases in operating lease income were partially offset by the
following:
(a) A $1.2 million decrease in operating lease income from intermodal trailers
was 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 $0.2 million in the six months ended
June 30, 1999, compared to the same period in 1998, due to an increase in
commercial and industrial assets that were on finance lease. For the six months
ended June 30, 1999, the average investment in direct finance leases was $137.9
million, compared to $134.4 million for the same period of 1998.
MANAGEMENT FEES:
Management fees are, for the most part, based on the gross revenues generated by
equipment under management. Management fees were $4.6 million and $5.1 million
for the six months ended June 30, 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 six months ended June 30, 1999
and 1998, management fees for the institutional programs were $0.4 million, and
were included in the above amounts. 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 $0.8 million for the six months ended June 30, 1999 and
$1.0 million for the six months ended June 30, 1998. In addition, a decrease in
the Company's residual interests in the programs was recorded as $0.5 million
during the six months ended June 30, 1999 and $0.3 million during the six months
ended June 30, 1998. 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 six months ended June 30, 1999, the Company, on behalf of the EGF
programs, purchased transportation and other equipment for approximately $37.1
million. The Company did not take acquisition and lease negotiation fees on
$16.6 million of this equipment, as the Company has reached certain fee
limitations for one of its limited partnership programs per the partnership
agreement. This is compared to the Company's purchase of $32.9 million in
transportation and other equipment during the six months ended June 30, 1998,
resulting in a $0.7 million decrease in acquisition and lease negotiation fees.
During the six months ended June 30, 1999, no equipment was purchased by AFG for
the institutional investment programs, compared to $14.1 million for the same
period in 1998, resulting in a $0.4 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 six months ended June 30, 1999, the Company recorded a $1.6 million
gain on the sale or disposition of commercial and industrial equipment. During
the six months ended June 30, 1998, the Company recorded a $2.3 million gain on
the sale or disposition of assets. Of this gain, $0.8 million resulted from the
sale or disposition of previously leased transportation equipment 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.
AIRCRAFT BROKERAGE AND SERVICES:
Aircraft brokerage and services revenue decreased $0.9 million during the six
months ended June 30, 1999, compared to the same period of 1998, due to the sale
of the Company's aircraft leasing and spare parts brokerage subsidiary in August
1998.
OTHER REVENUE:
Other revenue increased $0.1 million during the six months ended June 30, 1999,
compared to the same period of 1998, due to a $0.5 million increase in financing
income earned on loans made by AFG. The increase in revenue was partially offset
by a $0.2 million decrease in brokerage fees earned by AFG and a $0.2 million
decrease in other revenues.
COSTS AND EXPENSES
For the Six Months
Ended June 30,
1999 1998
----------------------------------------
(in thousands of dollars)
Operations support $ 8,602 $ 8,466
Depreciation and amortization 7,062 6,047
General and administrative 3,529 4,171
---------------------------------------------------
Total costs and expenses $ 19,193 $ 18,684
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 $0.1 million (2%) for the six months ended June 30, 1999,
compared to the six months ended June 30, 1998. Operations support expense
related to the trailer leasing segment increased $2.4 million due to the
expansion of PLM Rental, with the addition of ten rental yards and new trailers
to existing yards. Operations support expense related to the commercial and
industrial equipment leasing and financing segment increased $0.7 million due to
an increase in compensation and benefits expenses resulting from the expansion
of the commercial and industrial equipment lease portfolio, and a new bonus
program initiated in 1999 to retain AFG employees during AFG's potential sale.
These increases were partially offset by a $3.0 million decrease in operations
support expenses related to the management of investment programs and other
transportation
equipment leasing segment, and other expenses related mainly 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 $1.0 million (17%) for the six
months ended June 30, 1999, compared to the six months ended June 30, 1998. The
increase resulted from an increase in refrigerated trailer equipment on
operating lease, which was partially offset by a reduction in depreciable
intermodal trailers and other equipment (discussed in the operating lease income
section).
GENERAL AND ADMINISTRATIVE:
General and administrative expenses decreased $0.6 million (15%) during the six
months ended June 30, 1999, compared to the same period in 1998, primarily due
to a $0.3 million decrease in compensation and benefits expenses; a $0.2 million
decrease in rent and office-related expenses; a $0.1 million decrease in travel
and entertainment expenses; and a $0.2 million decrease in sublease commissions.
This decrease in expenses was partially offset by a $0.2 million increase in
legal expenses related to the potential sale of AFG.
OTHER INCOME AND EXPENSES
For the Six Months
Ended June 30,
1999 1998
-------------------------------------------
(in thousands of dollars)
Interest expense $ (7,507) $ (6,674)
Interest income 476 694
Other (expenses) income, net (1,098) 463
INTEREST EXPENSE:
Interest expense increased $0.8 million (12%) during the six months ended June
30, 1999, compared to the same period in 1998. Interest expense related to the
trailer leasing segment increased $0.5 million due to an increase in borrowings
to fund trailer purchases. Interest expense related to the commercial and
industrial equipment leasing and financing segment increased $0.3 due to an
increase in borrowings to fund commercial and industrial equipment purchases.
INTEREST INCOME:
Interest income decreased $0.2 million (31%) during the six months ended June
30, 1999, compared to the same period of 1998, as a result of lower average cash
balances during the six months ended June 30, 1999, compared to the same period
of 1998.
OTHER (EXPENSES) INCOME, NET:
Other expenses of $1.1 million for the six months ended June 30, 1999 represent
$1.0 million in expense 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), and $0.1 million in expense related to the
settlement of a lawsuit. During the six months ended June 30, 1998, the Company
recorded other 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 7).
PROVISION FOR INCOME TAXES:
For the six months ended June 30, 1999, the provision for income taxes was $0.7
million, representing an effective rate of 40%. For the six months ended June
30, 1998, the provision for income taxes was $1.5 million, representing an
effective rate of 40%.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, MET 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 an 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 AFG.
NET INCOME
As a result of the foregoing, for the six months ended June 30, 1999, net income
was $0.8 million, resulting in basic and diluted earnings per weighted-average
common share outstanding of $0.10 and $0.09, respectively. For the same period
in 1998, net income was $2.2 million, resulting in basic and diluted earnings
per weighted-average common share outstanding of $0.26.
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 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 June 30, 1999, $101.9 million in borrowings
was outstanding under this facility. As of July 26 , 1999, $99.4 million in
borrowings was outstanding under this facility.
In addition to the $150.0 million nonrecourse debt facility discussed above, as
of June 30, 1999 and July 26, 1999, the Company had $6.0 million in nonrecourse
notes payable, secured by direct finance leases on commercial and industrial
equipment at AFG, which 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. As of June 30,
1999, the Company had $10.4 million of outstanding borrowings under this
facility, and there were no borrowings outstanding under this facility by any
other eligible borrowers. As of July 26, 1999, the Company had $15.5 million of
outstanding borrowings under this facility, and there were no borrowings
outstanding under this facility by any other eligible borrowers.
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. As of June 30, 1999, the
Company had $22.9 million outstanding under this facility. As of July 26 , 1999,
the Company had $23.1 million outstanding under this facility.
SENIOR SECURED NOTES: The Company's senior secured notes agreement, which had an
outstanding balance of $24.4 million as of June 30, 1999 and July 26 , 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 $11.8 million as of June 30, 1999
and July 26, 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 June 30, 1999, the
cash collateral balance for this loan was $49,000 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 June 30, 1999, the Company had $12.5 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, and 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, and a final payment of $1.3 million due April 2006. As of June 30,
1999, the Company had $4.9 million in borrowings under this debt agreement. The
debt is 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.
In May 6, 1999, the Company entered into a $15.0 million credit facility loan
agreement bearing interest at LIBOR plus 1.5%. This facility allows the Company
to borrow up to $15.0 million within a one-year period. As of June 30, 1999, the
Company had borrowed $4.8 million under this facility. Payments of $0.1 million
are due quarterly beginning August 2000, with a final payment of $1.4 million
due August 2006. The facility is secured by certain trailer equipment.
INYRTRDY-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, 1999, the swap agreements had a
weighted-average duration of 1.43 years, corresponding to the terms of the
related debt. As of June 30, 1999, a notional amount of $98.4 million of
interest-rate swap agreements effectively fixed interest rates at an average of
6.47% on such obligations. For the six months ended June 30, 1999, interest
expense increased by $0.5 million due to these arrangements.
TRAILER LEASING:
The Company operates twenty trailer rental facilities that engage in short-term
and mid-term operating leases. Nineteen of these facilities operate
predominantly refrigerated trailers used to transport temperature-sensitive
commodities, consisting primarily of food products. One facility operates only
dry van (non-refrigerated) trailers. The Company intends to move virtually all
of its dry van trailers to this facility plus another two locations that will be
established in 1999. To date in 1999, the Company has opened three new
refrigerated trailer yards. The Company intends to continue to increase its
trailer fleet with new or late-model used refrigerated trailers which will be
placed in existing yards and new facilities to be opened in additional
geographical markets. During the six months ended June 30, 1999, the Company
purchased $24.9 million of primarily refrigerated trailers and sold refrigerated
and dry van trailers with a net book value of $0.2 million for proceeds of $0.2
million. 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 six months ended June 30, 1999, the
Company funded lease and loan transactions for commercial and industrial
equipment with an original equipment cost of $41.6 million. During the six
months ended June 30, 1999, the Company sold commercial and industrial equipment
with a net book value of $33.9 million for proceeds of $35.5 million. The
majority of these transactions was financed, on an interim basis, through the
Company's warehouse credit facility.
In previous years, the Company acquired and serviced equipment for the
institutional programs for which it earned acquisition and management fees. 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 June 30, 1999, the Company had committed to purchase $38.1 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 $5.5
million had been received by lessees and accrued for as of June 30, 1999.
From July 1, 1999 through July 26, 1999, the Company funded $4.2 million of
commitments outstanding as of June 30, 1999 for its commercial and industrial
lease and finance receivables portfolio.
As of July 26, 1999, the Company had committed to purchase $25.9 million of
equipment for its commercial and industrial lease and finance receivables
portfolio.
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. The Company has engaged
an investment banking firm to pursue the sale of AFG.
OTHER TRANSPORTATION EQUIPMENT LEASING AND OTHER:
During the first six months of 1999, the Company purchased marine containers for
$13.8 million, and sold them to affiliated programs 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 July 26 , 1999, 327,415 shares had been repurchased under this plan for a
total of $2.0 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 business systems in order to determine
whether such systems will retain functionality after December 31, 1999. As of
June 30, 1999, the Company has completed inventory, assessment, remediation and
testing stages of its Year 2000 review of its core business information systems.
Specifically, the Company (a) has integrated 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 been made Year 2000 compliant. In
addition, numerous other software systems provided by vendors and service
providers have been replaced with systems represented by the vendor or service
provider to be Year 2000 functional. These systems will be fully tested by
September 30, 1999 and are expected to be compliant.
As of June 30, 1999, the Company has spent approximately $0.1 million to become
Year 2000 compliant and does not anticipate any additional Year 2000-compliant
expenditures.
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. As part of this process, vendors and service
providers were ranked in terms of the relative importance of the service or
product provided. All service providers and vendors who were identified as
medium to high relative importance were surveyed to determine Year 2000 status.
The Company has received satisfactory responses to Year 2000 readiness inquiries
from surveyed service providers and vendors.
It is possible that certain of the Company's equipment lease portfolio may not
be Year 2000 compliant. The Company has contacted equipment manufacturers of the
portion of the Company's leased equipment portfolio identified as date sensitive
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. The Company
has surveyed the majority of its lessees and the majority of those surveyed have
responded satisfactorily to Year 2000 readiness inquiries.
There can be no assurance that the software systems of such parties will be
converted or made Year 2000 compliant in a timely manner. 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 has made and will continue an ongoing
effort to recognize and evaluate potential exposure relating to third-party Year
2000 noncompliance. The Company will implement 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 or vendors or service providers due to Year 2000
problems. For the purpose of such contingency planning, a reasonably likely
worst case scenario primarily anticipates an inability to access systems and
data on a temporary basis resulting in possible delay in reconciliation of funds
received or payment of monies owed. The Company is evaluating whether there are
additional scenarios which have not been identified. Contingency planning will
encompass strategies up to an including manual processes. The Company
anticipates that these plans will be completed by September 30, 1999.
ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board (FASB) 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.
FASB Statement No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," issued in June 1999, defers the effective
date of Statement No. 133. Statement No. 133, as amended, is now effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. As of
June 30, 1999, the Company is reviewing the effect SFAS No. 133 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,
$4.8 million of other secured debt, and the senior secured notes are variable
rate debt. The Company estimates that a 1 percent increase or decrease in the
Company's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $0.2 million in 1999, $0.2 million in 2000,
$0.1 million in 2001, $0.1 million in 2002, $31,000 in 2003, and $50,000
thereafter. The Company estimates that a 2 percent increase or decrease in the
Company's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $0.4 million in 1999, $0.4 million in 2000,
$0.3 million in 2001, $0.1 million in 2002, $0.1 million in 2003, and $0.1
million thereafter.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held May 27, 1999, one proposal was
submitted to a vote of the Company's security holders.
Warren G. Lichtenstein and Howard M. Lorber were re-elected to the Board of
Directors of the Company. The votes cast in the election were as follows:
Nominee For Votes Withheld
Warren G. Lichtenstein 6,328,238 212,597
Howard M. Lorber 6,324,746 216,089
Directors whose terms continued after the Annual Meeting of Stockholders held on
May 27, 1999 are as follows:
Class I (Terms Expire in 2000)
Robert N. Tidball
Robert L. Witt
Class II (Terms Expire in 2001)
Randall L.-W. Caudill
Douglas P. Goodrich
Harold R. Somerset
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.1 $15,000,000 Facility Agreement among PLM International, Inc. and
Meespierson N.V., dated May 6, 1999.
10.2 Second Amendment to PLM International, Inc. 1998 Management Stock
Compensation Plan, dated May 29, 1999.
10.3 Employment Agreement among American Finance Group, Inc. and certain
employees, dated January 1, 1999.
10.4 Retention Agreement among American Finance Group, Inc. and certain
employees, dated April 1999.
(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 Brock
--------------------------------
Richard K Brock
Vice President and
Corporate Controller
Date: July 26, 1999
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 26, 1999
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