10-Q 1 doc1.txt 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, 2002 [ ] 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 1-10553 _______________________ PLM EQUIPMENT GROWTH FUND II (Exact name of registrant as specified in its charter) CALIFORNIA 94-3041013 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 450 CARILLON PARKWAY SUITE 200 ST. PETERSBURG, FL 33716 (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code: (727) 803-8200 _______________________ 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 ______ ---- PLM EQUIPMENT GROWTH FUND II (A LIMITED PARTNERSHIP) CONDENSED BALANCE SHEETS (in thousands of dollars, except unit amounts) (unaudited)

See accompanying notes to unaudited condensed financial statements. PLM EQUIPMENT GROWTH FUND II (A LIMITED PARTNERSHIP) CONDENSED STATEMENTS OF OPERATIONS (in thousands of dollars, except weighted-average unit amounts) (unaudited)

See accompanying notes to unaudited condensed financial statements. PLM EQUIPMENT GROWTH FUND II (A LIMITED PARTNERSHIP) CONDENSED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE PERIOD FROM DECEMBER 31, 2000 TO JUNE 30, 2002 (in thousands of dollars) (unaudited)

See accompanying notes to unaudited condensed financial statements. PLM EQUIPMENT GROWTH FUND II (A LIMITED PARTNERSHIP) CONDENSED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited)

See accompanying notes to unaudited condensed financial statements. PLM EQUIPMENT GROWTH FUND II (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Opinion of Management ----------------------- In the opinion of the management of PLM Financial Services, Inc. (FSI or the General Partner), the accompanying unaudited condensed financial statements contain all adjustments necessary, consisting primarily of normal recurring accruals, to present fairly the unaudited condensed financial position of PLM Equipment Growth Fund II (the Partnership) as of June 30, 2002 and December 31, 2001, the unaudited condensed statements of operations for the three and six months ended June 30, 2002 and 2001, the unaudited condensed statements of changes in partners' capital for the period from December 31, 2000 to June 30, 2002, and the unaudited condensed statements of cash flows for the six months ended June 30, 2002 and 2001. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the accompanying condensed financial statements. For further information, reference should be made to the financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2001, on file at the Securities and Exchange Commission. 2. Schedule of Partnership Phases --------------------------------- The Partnership, in accordance with its limited partnership agreement, entered its liquidation phase on January 1, 1999, and has commenced an orderly liquidation of the Partnership's assets. The Partnership will terminate on December 31, 2006, unless terminated earlier upon the sale of all equipment or by certain other events. The General Partner may no longer reinvest cash flows and surplus funds in equipment. All future cash flows and surplus funds, if any, are to be used for distributions to partners, except to the extent used to maintain reasonable reserves. During the liquidation phase, the Partnership's assets will continue to be recorded at the lower of the carrying amount or fair value less cost to sell. 3. Cash Distribution ------------------ Cash distributions are recorded when paid and may include amounts in excess of net income that are considered a return of capital. No cash distributions were paid to the limited partners during the three and six months ended June 30, 2002. For the three and six months ended June 30, 2001, cash distributions totaled $0.2 million and $1.4 million, respectively. Cash distributions to the limited partners of $1.3 million for the six months ended June 30, 2001, were deemed to be a return of capital. 4. Transactions with General Partner and Affiliates ----------------------------------------------------- The balance due to affiliates as of June 30, 2002 and December 31, 2001 of $33,000 and $42,000, respectively, is a payable due to FSI and its affiliate for management fees. PLM EQUIPMENT GROWTH FUND II (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 5. Equipment --------- Owned equipment held for operating leases is stated at cost. The components of owned equipment were as follows (in thousands of dollars):

As of June 30, 2002, all equipment was on lease, except for 19 marine containers and 39 railcars with an aggregate net book value of $31,000. As of December 31, 2001, all equipment was on lease, except for 223 railcars and 7 marine containers with an aggregate net book value of $0.2 million. For the six months ended June 30, 2002, the Partnership disposed of marine containers, railcars and trailers with an aggregate net book value of $0.1 million for proceeds of $1.3 million. During the six months ended June 30, 2001, the Partnership sold or disposed of marine containers, trailers, and railcars, with an aggregate net book value of $23,000, for proceeds of $0.2 million. 6. Operating Segments ------------------- The Partnership operates or operated in four different segments: aircraft leasing, marine container leasing, trailer leasing and railcar leasing. Each equipment leasing segment engages in short-term to mid-term operating leases to a variety of customers. The following tables present a summary of the operating segments (in thousands of dollars):

1 Includes certain assets not identifiable to a particular segment, such as cash and prepaid expenses. Also includes interest income and costs not identifiable to a particular segment, such as certain operations support and general and administrative expenses. PLM EQUIPMENT GROWTH FUND II (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 6. Operating Segments (continued) -------------------

1 Includes interest income and costs not identifiable to a particular segment, such as certain operations support and general and administrative expenses. PLM EQUIPMENT GROWTH FUND II (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 7. Net Income (Loss) Per Weighted-Average Depositary Unit ------------------------------------------------------------ Net income (loss) per weighted-average depositary unit was computed by dividing net income (loss) attributable to the limited partners by the weighted-average number of depositary units deemed outstanding during the period. The weighted-average number of depositary units deemed outstanding during the three and six months ended June 30, 2002 and 2001 was 7,381,165. 8 Liquidation and Special Distributions ---------------------------------------- On January 1, 1999, the General Partner began the liquidation phase of the Partnership and commenced an orderly liquidation of the Partnership assets. The General Partner is actively marketing the remaining equipment portfolio with the intent of maximizing sale proceeds. During the liquidation phase of the Partnership, the equipment will continue to be leased under operating leases until sold. The amounts reflected for assets and liabilities of the Partnership have not been adjusted to reflect liquidation values. The equipment portfolio continues to be carried at the lower of depreciated cost or fair value less cost to dispose. Although the General Partner estimates that there will be distributions after liquidation of assets and liabilities, the amounts cannot be accurately determined prior to actual liquidation of the equipment. Upon final liquidation, the Partnership will be dissolved. The Partnership is not permitted to reinvest proceeds from the disposition of equipment. These proceeds, in excess of operational cash requirements and reasonable reserves, are periodically paid out to limited partners in the form of special distributions. No special distributions were paid in the six months ended June 30, 2002 and 2001. The sales and liquidations occur because of the determination by the General Partner that it is the appropriate time to maximize the return on an asset through sale of that asset, and, in some leases, the ability of the lessee to exercise purchase options. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------- RESULTS OF OPERATIONS --- -------------- (I) RESULTS OF OPERATIONS Comparison of the PLM Equipment Growth Fund II's (the Partnership's) Operating -------------------------------------------------------------------------------- Results for the Three Months Ended June 30, 2002 and 2001 ------------------------------------------------------------------- (A) Owned Equipment Operations Lease revenues less direct expenses (defined as repairs and maintenance and equipment operating expenses) on owned equipment increased during the second quarter of 2002 compared to the same quarter of 2001. Gains or losses from the sale of equipment, interest and other income and certain expenses such as depreciation and general and administrative expenses relating to the operating segments (see Note 6 to the unaudited condensed financial statements), are not included in the owned equipment operation discussion because they are indirect in nature and not a result of operations but the result of owning a portfolio of equipment. The following table presents lease revenues less direct expenses by segment (in thousands of dollars):

Railcars: Railcar lease revenues and direct expenses were $0.3 million and $0.1 million, respectively, for the second quarter of 2002, compared to $0.3 million and $0.2 million, respectively, during the same quarter of 2001. Direct expenses decreased $0.1 million in the second quarter of 2002 compared to the same period of 2001 due to fewer repairs being required for the railcar portfolio in 2002. Trailers: Trailer lease revenues and direct expenses were $0.3 million and $0.2 million, respectively, for the second quarter of 2002, compared to $0.4 million and $0.2 million, respectively, during the same quarter of 2001. Trailer lease revenue decreased $0.1 million in the three months ended June 30, 2002 compared to the same period of 2001 due to lower utilization on the Partnership's trailer fleet. (B) Indirect Expenses Related to Owned Equipment Operations Total indirect expenses of $0.4 million for the second quarter of 2002 decreased from $0.6 million for the same period in 2001. Significant variances are explained as follows: (i) A $0.1 million decrease in depreciation expense from 2001 levels reflects the effect of asset dispositions in 2002 and 2001. (ii) A $0.1 million decrease in the provision for bad debts due to fewer receivables being reserved for as bad debts in the second quarter of 2002 compared to the same period of 2001. (C) Net (Loss) Gain on Disposition of Owned Equipment Net loss on disposition of equipment in the second quarter of 2002 totaled $11,000, and resulted from the disposition of trailers. Net gain on disposition of equipment for the second quarter of 2001 totaled $30,000, and resulted from the disposal or sale of marine containers and trailers, with an aggregate net book value of $4,000, for aggregate proceeds of $34,000. (D) Net Loss As a result of the foregoing, the Partnership's net loss was $0.2 million for the second quarter of 2002, compared to net loss of $0.4 million during the second quarter of 2001. The Partnership's ability to operate and liquidate assets, secure leases, and re-lease those assets whose leases expire is subject to many factors, and the Partnership's performance in the second quarter of 2002 is not necessarily indicative of future periods. Comparison of the Partnership's Operating Results for the Six Months Ended June -------------------------------------------------------------------------------- 30, 2002 and 2001 -------------------- (A) Owned Equipment Operations Lease revenues less direct expenses on owned equipment increased during the six months ended June 30, 2002 compared to the same period of 2001. The following table presents lease revenues less direct expenses by segment (in thousands of dollars):

Railcars: Railcar lease revenues and direct expenses were $0.5 million and $0.1 million, respectively, for the six months ended June 30, 2002, compared to $0.6 million and $0.5 million, respectively, during the same period of 2001. Lease revenue decreased $0.1 million due to the disposition of railcars in 2001 and 2002. Direct expenses decreased $0.4 million in the six months ended June 30, 2002 compared to the same period of 2001 due to fewer repairs being required for the railcar portfolio in 2002. Trailers: Trailer lease revenues and direct expenses were $0.7 million and $0.5 million, respectively, for the six months ended June 30, 2002, compared to $0.8 million and $0.4 million, respectively, during the same period of 2001. Trailer lease revenue decreased $46,000 in the six months ended June 30, 2002 compared to the same period of 2001 due to lower utilization on the Partnership's trailer fleet. Trailer direct expenses increased $0.1 million in the six months ended June 30, 2002 compared to 2001 due to increased repair and maintenance costs in 2002. Marine containers: Marine container lease revenues were $0 and $(20,000) in the six months ended June 30, 2002 and 2001, respectively. The negative $20,000 of lease revenues in the six months ended June 30, 2001 resulted from actual lease revenue in previous periods being lower than previously accrued. The Partnership has been disposing of marine containers in 2001 and 2002. (B) Indirect Expenses Related to Owned Equipment Operations Total indirect expenses of $0.8 million for the six months ended June 30, 2002 decreased from $1.3 million for the same period in 2001. Significant variances are explained as follows: (i) A $0.2 million decrease in general and administrative expenses during the six months ended June 30, 2002 resulted from the reduction in the size of the Partnership's equipment portfolio over the last twelve months. (ii) A $0.2 million decrease in the provision for bad debts due to fewer receivables being reserved for as bad debts in the six months ended June 30, 2002 compared to the same period of 2001. (iii) A $0.1 million decrease in depreciation expense from 2001 levels reflects the effect of asset dispositions in 2002 and 2001. (C) Net Gain on Disposition of Owned Equipment Net gain on disposition of equipment in the six months ended June 30, 2002 totaled $1.2 million, and resulted from the disposition of marine containers, railcars and trailers with an aggregate net book value of $0.1 million for aggregate proceeds of $1.3 million. Net gain on disposition of equipment for the six months ended June 30, 2001 totaled $0.2 million, and resulted from the disposal or sale of marine containers, trailers, and railcars, with an aggregate net book value of $23,000, for aggregate proceeds of $0.2 million. (D) Net Income (Loss) As a result of the foregoing, the Partnership's net income was $1.0 million for the six months ended June 30, 2002, compared to net loss of $0.7 million during the six months ended June 30, 2001. The Partnership's ability to operate and liquidate assets, secure leases, and re-lease those assets whose leases expire is subject to many factors, and the Partnership's performance in the six months ended June 30, 2002 is not necessarily indicative of future periods. (II) CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On a regular basis, the General Partner reviews these estimates including those related to asset lives and depreciation methods, impairment of long-lived assets, allowance for doubtful accounts, reserves related to legally mandated equipment repairs and contingencies and litigation. These estimates are based on the General Partner's historical experience and on various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The General Partner believes, however, that the estimates, including those for the above-listed items, are reasonable and that actual results will not vary significantly from the estimated amounts. The General Partner believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Partnership's financial statements: Asset lives and depreciation methods: The Partnership's primary business involves the purchase and subsequent lease of long-lived transportation and related equipment. The General Partner has chosen asset lives that it believes correspond to the economic life of the related asset. The General Partner has chosen a deprecation method that it believes matches the benefit to the Partnership from the asset with the associated costs. These judgments have been made based on the General Partner's expertise in each equipment segment that the Partnership operates. If the asset life and depreciation method chosen does not reduce the book value of the asset to at least the potential future cash flows from the asset to the Partnership, the Partnership would be required to record a loss on revaluation. Likewise, if the net book value of the asset was reduced by an amount greater than the economic value has deteriorated, the Partnership may record a gain on sale upon final disposition of the asset. Impairment of long-lived assets: On a regular basis, the General Partner reviews the carrying value of its equipment to determine if the carrying value of the assets may not be recoverable in consideration of current economic conditions. This requires the General Partner to make estimates related to future cash flows from each asset as well as the determination if the deterioration is temporary or permanent. If these estimates or the related assumptions change in the future, the Partnership may be required to record additional impairment charges. Allowance for doubtful accounts: The Partnership maintains allowances for doubtful accounts for estimated losses resulting from the inability of the lessees to make the lease payments. These estimates are primarily based on the amount of time that has lapsed since the related payments were due as well as specific knowledge related to the ability of the lessees to make the required payments. If the financial condition of the Partnership's lessees were to deteriorate, additional allowances could be required that would reduce income. Conversely, if the financial condition of the lessees were to improve or if legal remedies to collect past due amounts were successful, the allowance for doubtful accounts may need to be reduced and income would be increased. Contingencies and litigation: The Partnership is subject to legal proceedings involving ordinary and routine claims related to its business. The ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates in recording liabilities for potential litigation settlements. Estimates for losses from litigation are made after consultation with outside counsel. If estimates of potential losses increase or the related facts and circumstances change in the future, the Partnership may be required to record additional litigation expense. (III) FINANCIAL CONDITION - CAPITAL RESOURCES AND LIQUIDITY For the six months ended June 30, 2002, the Partnership generated $0.4 million in operating cash to meets its operating obligations. During the six months ended June 30, 2002, the Partnership disposed of marine containers, railcars and trailers and received proceeds of $1.3 million. Accounts receivable decreased $0.2 million during the six months ended June 30, 2002 due to the reduction in the size of the Partnership's equipment portfolio. The General Partner has not planned any expenditures, nor is it aware of any contingencies that would cause the Partnership to require any additional capital. The Partnership is in its active liquidation phase. As a result, the size of the Partnership's remaining equipment portfolio and, in turn, the amount of net cash flows from operations will continue to become progressively smaller as assets are sold. Significant asset sales may result in special distributions to the partners. The amounts reflected for assets and liabilities of the Partnership have not been adjusted to reflect liquidation values. The equipment portfolio that is actively being marketed for sale by the General Partner continues to be carried at the lower of depreciated cost or fair value less cost of disposal. Although the General Partner estimates that there will be distributions to the partners after final disposal of assets and settlement of liabilities, the amounts cannot be accurately determined prior to actual disposal of the equipment. (IV) OUTLOOK FOR THE FUTURE Since the Partnership is in its active liquidation phase, the General Partner is seeking to selectively re-lease or sell assets as the existing leases expire. Sale decisions may cause the operating performance of the Partnership to decline over the remainder of its life. Several factors may affect the Partnership's operating performance in the remainder of 2002 and beyond, including changes in the markets for the Partnership's equipment and changes in the regulatory environment in which that equipment operates. Liquidation of the Partnership's equipment represents a reduction in the size of the equipment portfolio and may result in a reduction of contribution to the Partnership. Other factors affecting the Partnership's contribution in 2002 and beyond include: 1. Railcar loadings in North America have weakened over the past year. Utilization and lease rates have been decreasing over this period. Railcar contribution may decrease in 2002 as existing leases expire and renewal leases are negotiated. 2. Industry-wide utilization of intermodal trailers decreased 12% in the six months ended June 30, 2002 compared to the six months ended June 30, 2001. This has led to lower contribution from the Partnership's trailers. 3. The Partnership's fleet of marine containers is in excess of twelve years of age and is no longer suitable for use in international commerce either due to its specific physical condition, or lessee's preferences for newer equipment. Demand for the Partnership's marine containers will continue to be weak due to their age. The ability of the Partnership to realize acceptable lease rates on its equipment in the different equipment markets is contingent on many factors, such as specific market conditions and economic activity, technological obsolescence, and government or other regulations. The unpredictability of these factors, or of their occurrence, makes it difficult for the General Partner to clearly define trends or influences that may impact the performance of the Partnership's equipment. The General Partner continually monitors both the equipment markets and the performance of the Partnership's equipment in these markets. The General Partner may decide to reduce the Partnership's exposure to those equipment markets in which it determines that it cannot operate equipment and achieve acceptable rates of return. The Partnership intends to use cash flow from operations and proceeds from disposition of equipment to satisfy its operating requirements, maintain working capital reserves, and pay cash distributions to the unitholders. (V) FORWARD-LOOKING INFORMATION Except for historical information contained herein, this Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements of the Partnership'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 Partnership's actual results could differ materially from those discussed here. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------------- The Partnership's primary market risk exposure is that of currency devaluation risk. During the six months ended June 30, 2002, 20% of the Partnership's total lease revenues came from non-United States domiciled lessees. Most of the Partnership's leases require payment in United States (U.S.) currency. If these lessees' currency devalues against the U.S. dollar, the lessees could encounter difficulty in making the U.S. dollar denominated lease payments. (This space intentionally left blank) PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ------------------------------------- (a) Exhibits -------- None. (b) Reports on Form 8-K ---------------------- None. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. PLM EQUIPMENT GROWTH FUND II By:PLM Financial Services, Inc. General Partner Date: August 12, 2002 By: /s/ Stephen M. Bess ---------------------- President and Current Chief Accounting Officer CERTIFICATION The undersigned hereby certifies, in their capacity as an officer of the General Partner of PLM Equipment Growth Fund II (the Partnership), that the Quarterly Report of the Partnership on Form 10-Q for the period ended June 30, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Partnership at the end of such period and the results of operations of the Partnership for such period. PLM EQUIPMENT GROWTH FUND II By:PLM Financial Services, Inc. General Partner Date: August 12, 2002 By: /s/ Stephen M. Bess ---------------------- President and Current Chief Accounting Officer Date: August 12, 2002 By: /s/ James A. Coyne --------------------- James A. Coyne Chief Financial Officer

PLM EQUIPMENT GROWTH FUND II 10-Q