INDEPENDENT AUDITORS' REPORT
The Owners
Canadian Air Trust #2
We have audited the accompanying balance sheet of the Canadian Air Trust #2 (the
Trust) as of December 31, 1998, and the statements of income, changes in owners'
equity, and cash flows for the years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the owner's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Trust is expected to
liquidate in 2000, as the aircraft in the Trust has been sold.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Trust as of December 31,
1998, and the results of its operations and its cash flows for the years ended
December 31, 1998 and 1997 in conformity with generally accepted accounting
principles. The accompanying 1999 financial statements were not audited by us,
and accordingly, we express no opinion or any other form of assurance on them.
/s/ KPMG
SAN FRANCISCO, CALIFORNIA
June 9, 2000
CANADIAN AIR TRUST #2
(A Trust)
Balance Sheets
December 31,
(in thousands of dollars)
1999 1998
(unaudited)
-------------------------------------
ASSETS
Accounts receivable $ 244 $ 438
--------------------------------------
Total assets $ 244 $ 438
=====================================
LIABILITIES AND OWNERS' EQUITY
Liabilities:
Due to affiliates $ 5 $ --
------------------------------------
Total liabilities 5 --
Owners' equity 239 438
------------------------------------
Total liabilities and owner's equity $ 244 $ 438
====================================
See accompanying auditors' report and notes to financial statements.
CANADIAN AIR TRUST #2
(A Trust)
STATEMENTS OF INCOME
For the Years Ended December 31,
(in thousands of dollars)
1999 1998 1997
-----------------
(unaudited)
---------------------------------------------------------
REVENUES
Lease revenue $ -- $ 1,599 5,765
Interest income 29 47 86
Gain from the sale of aircraft -- 8,196 6,802
---------------------------------------------------------
Total revenues 29 9,842 12,653
---------------------------------------------------------
Expenses
Depreciation and amortization expense -- 853 5,393
Management fees to affiliate -- 26 113
Repairs and maintenance expense -- -- 4
Insurance expense -- 16 33
Administrative expenses to affiliates -- 37 92
Administrative expenses -- 5 22
---------------------------------------------------------
Total expenses -- 937 5,657
---------------------------------------------------------
Net income $ 29 $ 8,905 6,996
=========================================================
See accompanying auditors' report and notes to financial statements.
CANADIAN AIR TRUST #2
(A Trust)
STATEMENTS OF CHANGES IN OWNERS' EQUITY
For the Years Ended December 31, 1999 , 1998, and 1997
(in thousands of dollars)
Owners' equity at December 31, 1996 (unaudited) $ 15,816
Net income 6,996
Distributions paid (7,213)
-----------------
Owners' equity at December 31, 1997 15,599
Net income 8,905
Distributions paid (24,066)
-----------------
Owners' equity at December 31, 1998 438
Net income 29
Distributions paid (228)
-----------------
Owners' equity at December 31, 1999 (unaudited) $ 239
=================
See accompanying auditors' report and notes to financial statements.
CANADIAN AIR TRUST #2
(A Trust)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(in thousands of dollars)
1999 1998 1997
(unaudited)
---------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 29 $ 8,905 $ 6,996
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization -- 853 5,393
Gain from the sale of aircraft -- (8,196) (6,802 )
Changes in operating assets and liabilities:
Accounts receivable 194 958 (603 )
Prepaid deposits -- 6 1
Accounts payable and accrued expenses -- (23) 14
Due to affiliates 5 (41) 32
Lessee deposits -- (288) (1,152)
-------------------------------------------------------
Net cash provided by operating activities 228 2,174 3,879
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Investing activities
Transfer of equipment to owner -- 1,413 --
Proceeds from the sale of aircraft -- 13,313 10,500
-------------------------------------------------------
Net cash provided by investing activities -- 14,726 10,500
-------------------------------------------------------
Financing activities
Payments due from affiliates -- -- (7,166)
Proceeds from affiliates -- 7,166 --
Distributions paid (228) (24,066) (7,213)
---------------------------------------------------------
Net cash used in financing activities (228) (16,900) (14,379)
-------------------------------------------------------
Net change in cash and cash equivalents -- -- --
Cash and cash equivalents at beginning of year -- -- --
--------------------------------------------------------
Cash and cash equivalents at end of year $ -- $ -- $ --
=======================================================
Supplemental information
Noncash transfer of equipment at net book value to
owner $ -- $ 1,413 $ --
See accompanying auditors' report and notes to financial statements.
CANADIAN AIR TRUST #2
(A TRUST)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
In 1995, PLM Equipment Growth Fund III (EGF III), a California limited
partnership, PLM Equipment Growth Fund IV (EGF IV), a California limited
partnership, PLM Equipment Growth Fund V (EGF V), a California limited
partnership, PLM Equipment Growth Fund VI (EGF VI), a California limited
partnership, PLM Equipment Growth & Income Fund VII (EGF VII), a California
limited partnership, and Professional Lease Management Income Fund I (Fund I), a
Delaware Limited Liability Company, (the Owners) entered into a Trust Agreement
(the Trust) with PLM Transportation Equipment Corp. (TEC), a wholly-owned
subsidiary of PLM International, Inc., by the terms of which TEC is owner
trustee for the benefit of the Owners as equal co-beneficiaries. The Trust was
established for the purpose of purchasing seven Boeing 737-200 commercial
aircraft. The Trust has no employees nor operations other than the operation of
the seven Boeing 737-200's.
The Trust contained a provision for allocating specific aircraft to the
beneficial owners under certain circumstances. Two of the commercial aircraft,
one owned by EGF III and another owned by EGF V, were transferred to the owner's
limited partnership during 1998 and 1996, respectively. All of the remaining
aircraft in the Trust had been sold as of December 31, 1998. The Trust is
expected to liquidate in 2000.
PLM Financial Services Inc., (FSI) is the General Partner of EGFs III, IV, V,
VI, and VII and the Manager of Fund I. FSI is a wholly-owned subsidiary of PLM
International, Inc.
The aircraft were purchased during 1995 for $30.1 million. EGF III, EGF IV, EGF
V, EGF VI, and EGF VII (the EGF's) collectively paid acquisition and lease
negotiation fees of $1.4 million to PLM Worldwide Management Services (WMS), a
wholly-owned subsidiary of PLM International, Inc., based on the prorata share
of the cost of the aircraft purchased. No fees were paid by Fund I. Upon the
purchase of the aircraft, a lease with Canadian Airlines International was
entered into with a term expiring in September 2001.
These accompanying financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting principles. This
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
OPERATIONS
The aircraft in the Trust are managed under a continuing management agreement by
PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI. IMI
receives a monthly management fee from the Trust for managing the aircraft (Note
2). FSI, in conjunction with its subsidiaries, sells transportation equipment to
investor programs and third parties, manages pools of transportation equipment
under agreements with the investor programs, and is a general partner in limited
partnerships.
CASH AND CASH EQUIVALENTS
All cash generated from operations is distributed to the owners, accordingly,
the Trust has no cash balance at December 31, 1999 and 1998.
CANADIAN AIR TRUST #2
(A TRUST)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR LEASES
The aircraft under the Trust was leased under an operating lease. Under the
operating lease method of accounting, the leased asset is recorded at cost and
depreciated over its estimated useful life. Rental payments are recorded as
revenue over the lease term in accordance with Financial Accounting Standards
Board Statement No. 13 "Accounting for Leases". Lease origination costs were
amortized equally over 36 months.
DEPRECIATION
Depreciation of aircraft equipment was computed using the double-declining
balance method, taking a full month's depreciation in the month of acquisition,
based upon an estimated useful life of 12 years. Acquisition fees of $1.2
million were paid to WMS and were capitalized as part of the cost of the
equipment and amortized over the life of the aircraft.
AIRCRAFT
In accordance with the Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", FSI reviewed the carrying value of the aircraft under the Trust
at least quarterly, and whenever circumstances indicated that the carrying value
of the aircraft may not be recoverable in relation to expected future market
conditions for the purpose of assessing recoverability of the recorded amounts.
If projected undiscounted future cash flows and fair value were less than the
carrying value of the aircraft, a loss on revaluation would have been recorded.
No reductions to the carrying value of the aircraft were required during 1999,
1998, or 1997.
REPAIRS AND MAINTENANCE
Repair and maintenance for the aircraft are usually the obligation of the
lessee.
Net Income and Cash Distributions to Owners
The net income and cash distributions of the Trust are allocated to the Owners.
The net income are generally allocated to the Owners based on number of aircraft
owned. Certain depreciable and amortizable amounts are allocated specifically to
the EGF's, such as depreciation on acquisition fees and amortization on lease
negotiation fees. Cash distributions are allocated based on the number of
aircraft owned.
COMPREHENSIVE INCOME
The Trust's net income is equal to comprehensive income for the years ended
December 31, 1999, 1998, and 1997.
2. TRANSACTIONS WITH AFFILIATES
Under the equipment management agreement, IMI receives a monthly management fee
equal to the lessor of (i) the fees that would be charged by an independent
third party for similar services for similar equipment or (ii) 5% of the gross
lease revenues attributable to equipment that is subject to operating leases.
The Trust's management fee expense to affiliate was $-0-, $26,000, and $0.1
million during 1999, 1998, and 1997, respectively.
CANADIAN AIR TRUST #2
(A TRUST)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
2. TRANSACTIONS WITH AFFILIATES (CONTINUEd)
The Trust reimbursed FSI $-0-, $37,000, and $0.1 million during 1999, 1998, and
1997, respectively, for data processing and administrative expenses directly
attributable to the Trust.
Trust management fees payable to IMI was $5,000 as of December 31, 1999.
3. AIRCRAFT ON LEASE
Revenues were earned by placing the aircraft in operating leases. A six-year
lease with Canadian Airlines International was signed upon the acquisition of
the aircraft in 1995.
During 1997, the lessee was having financial difficulties and was unable to pay
the Trust 3 months rent. The Trust negotiated a repayment schedule starting
October 1998 in which the lessee would make 10 equal quarterly installments plus
interest of 12% on the unpaid balance secured by a letter-of-credit. The last
quarterly installment is due January 2001. As of July 2000, the lessee remains
current with the repayment plan.
The aircraft lease is accounted for as an operating lease. Future minimum
rentals under noncancelable operating leases, as of December 31, 1999, during
each of the next five years are approximately $7.5 million in 2000, $5.6 million
in 2001, and $0 thereafter.
4. GEOGRAPHIC INFORMATION
The aircraft were leased and operated in Canada.
5. INCOME TAXES
The Trust is not subject to income taxes, as any income or loss is included in
the tax returns of the Owners of the Trust. Accordingly, no provision for income
taxes has been made in the financial statements of the Trust.
As of December 31, 1999, there were no temporary differences between the
financial statements carrying value of assets and the income tax basis.
6. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Trust to concentrations of
credit risk, consist principally of lease receivables.
The aircraft in the Trust were on lease to only one customer during 1998 and
1997. This lessee, Canadian Airlines International, accounted for all of the
lease revenue. Triton Aviation Services, Ltd. purchased three commercial
aircraft with the existing lease attached from the Trust and the gain from the
sale accounted for 83% of total consolidated revenues during 1998. Bahamasair
Holdings, Ltd. purchased two commercial aircraft with the existing lease
attached from the Trust and the gain from the sale accounted for 54% of total
consolidated revenues during 1997.
As of December 31, 1999, the manager believes the Trust had no other significant
concentrations of credit risk that could have a material adverse effect on the
Trust.