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 SEPTEMBER 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 0-26594 _______________________ PLM EQUIPMENT GROWTH & INCOME FUND VII (Exact name of registrant as specified in its charter) CALIFORNIA 94-3168838 (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 & INCOME FUND VII (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 & INCOME FUND VII (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 & INCOME FUND VII (A LIMITED PARTNERSHIP) CONDENSED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE PERIOD FROM DECEMBER 31, 2000 TO SEPTEMBER 30, 2002 (in thousands of dollars) (unaudited)

See accompanying notes to unaudited condensed financial statements.

See accompanying notes to unaudited condensed financial statements. PLM EQUIPMENT GROWTH & INCOME FUND VII (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 & Income Fund VII (the Partnership) as of September 30, 2002 and December 31, 2001, the unaudited condensed statements of operations for the three and nine months ended September 30, 2002 and 2001, the unaudited condensed statements of changes in partners' capital for the period from December 31, 2000 to September 30, 2002 and the unaudited condensed statements of cash flows for the nine months ended September 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 is currently in its investment phase during which the Partnership uses cash generated from operations and proceeds from asset dispositions to purchase additional equipment. The General Partner believes these acquisitions may cause the Partnership to generate additional earnings and cash flow for the Partnership. The Partnership may reinvest its cash flow, surplus cash and equipment disposition proceeds in additional equipment, consistent with the objectives of the Partnership, until December 31, 2004. The Partnership will terminate on December 31, 2013, unless terminated earlier upon sale of all equipment and by certain other events. 3. Reclassification ---------------- Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentations. 4. Cash Distributions ------------------- 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 nine months ended September 30, 2002. For the three and nine months ended September 30, 2001, cash distributions totaled $-0- and $1.4 million, respectively. 5. Transactions with General Partner and Affiliates ----------------------------------------------------- The balance due to affiliates as of September 30, 2002 included $0.1 million due to FSI and its affiliates for management fees and $0.6 million due to affiliated unconsolidated special-purpose entities (USPEs). The balance due to affiliates as of December 31, 2001 includes $0.2 million due to FSI and its affiliates for management fees and $0.4 million due to affiliated USPEs. PLM EQUIPMENT GROWTH & INCOME FUND VII (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 5. Transactions with General Partner and Affiliates(continued) ----------------------------------------------------- The Partnership's proportional share of the affiliated expenses incurred by USPEs during 2002 and 2001 is listed in the following table (in thousands of dollars):

These affiliate expenses reduced the Partnership's proportional share of the equity interest in the income of USPEs. The Partnership and USPEs accrued or paid FSI $0.5 million for equipment acquisition and lease negotiation fees during the nine months ended September 30, 2001. No fees were paid or accrued during the nine months ended September 30, 2002. 6. 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 September 30, 2002, all owned equipment in the Partnership's portfolio was on lease except for 77 railcars. As of December 31, 2001, all owned equipment in the Partnership's portfolio was on lease except for 8 railcars. The net book value of the equipment off lease was $0.8 million as of September 30, 2002 and $0.2 million as of December 31, 2001. No equipment was purchased during the nine months ended September 30, 2002. During the nine months ended September 30, 2001, the Partnership purchased marine containers for $8.0 million and paid acquisition fees of $0.4 million to FSI for this purchase. During the nine months ended September 30, 2002, the Partnership disposed of marine containers with a net book value of $0.1 million for proceeds of $0.1 million. During the nine months ended September 30, 2001, the Partnership disposed of marine containers with a net book value of $19,000 for proceeds of $41,000. 7. Investments in Unconsolidated Special-Purpose Entities ---------------------------------------------------------- The Partnership owns equipment jointly with affiliated programs. These are single purpose entities that do not have any debt or other financial encumbrances. Ownership interest is based on the Partnership's contribution towards the cost of the equipment in the USPEs. The Partnership's proportional share of PLM EQUIPMENT GROWTH & INCOME FUND VII (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 7. Investments in Unconsolidated Special-Purpose Entities (continued) ---------------------------------------------------------- equity and income (loss) in each entity is not necessarily the same as its ownership interest. The primary reason for this difference has to do with certain fees such as management and acquisition and lease negotiation fees varying among the owners of the USPEs. The tables below set forth 100% of the assets, liabilities, and equity of the entities in which the Partnership has an interest and the Partnership's proportional share of equity in each entity as of September 30, 2002 and December 31, 2001 (in thousands of dollars):

1 The Partnership owns a 50% interest of the TWA S/N 49183 Trust that owns an MD-82 stage III commercial aircraft. 2 The Partnership owns a 50% interest in the TWA MD-80 Trust that owns an MD-82 stage III commercial aircraft. 3 The Partnership owns a 38% interest in the Boeing 737-300 Trust that owns a Boeing stage III commercial aircraft. PLM EQUIPMENT GROWTH & INCOME FUND VII (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 7. Investments in Unconsolidated Special-Purpose Entities (continued) ---------------------------------------------------------- The tables below set forth 100% of the revenues, gain on disposition of equipment, direct and indirect expenses, and net income (loss) of the entities in which the Partnership has an interest, and the Partnership's proportional share of income (loss) in each entity for the three and nine months ended September 30, 2002 and 2001 (in thousands of dollars):

As of September 30, 2002 and December 31, 2001, all jointly-owned equipment in the Partnership's USPE portfolio was on lease. ` 1 The Partnership owns a 50% interest of the TWA S/N 49183 Trust that owns an MD-82 stage III commercial aircraft. 2 The Partnership owns a 50% interest in the TWA MD-82 Trust that owns an MD-82 stage III commercial aircraft. 3 The Partnership owns a 38% interest in the Boeing 737-300 Trust that owns a Boeing stage III commercial aircraft. 4 The Partnership owned an 80% interest in the Pacific Source Partnership that owned a handymax dry bulk carrier. PLM EQUIPMENT GROWTH & INCOME FUND VII (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 8. Operating Segments ------------------- The Partnership operates in five primary operating segments: marine vessel leasing, trailer leasing, aircraft leasing, railcar leasing, and marine container 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 specific segment such as cash, certain restricted cash, deferred charges and prepaid expenses. Also includes interest income and costs not identifiable to a particular segment, such as interest expense, and certain amortization, general and administrative and operations support expenses. 2 Includes interest income and costs not identifiable to a particular segment, such as interest expense, and certain amortization, general and administrative and operations support expenses. PLM EQUIPMENT GROWTH & INCOME FUND VII (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 8. Operating Segments (continued) -------------------

9. Net Income (Loss) Per Weighted-Average Limited Partnership Unit ---------------------------------------------------------------------- Net income (loss) per weighted-average limited partnership unit was computed by dividing net income (loss) attributable to limited partners by the weighted-average number of limited partnership units deemed outstanding during the period. The weighted-average number of limited partnership units deemed outstanding during the three and nine months ended September 30, 2002 was 4,981,450 and 4,988,318, respectively. The weighted-average number of limited partnership units deemed outstanding during the three and nine months ended September 30, 2001 was 5,323,569. 1 Includes interest income and costs not identifiable to a particular segment, such as interest expense, and certain amortization, general and administrative and operations support expenses. PLM EQUIPMENT GROWTH & INCOME FUND VII (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 10. Limited Partnership Units --------------------------- During 2001, the General Partner agreed to purchase 351,290 limited partnership units and paid or accrued $3.2 million to the purchasing agent for this purchase. The purchasing agent purchased 281,633 units as of December 31, 2001 and an additional 60,486 units during the nine months ended September 30, 2002, which is reflected as a reduction in limited partnership units. Under the terms of the purchase agreement, only the units held by the owner on the date of the agreement were eligible to be purchased. The General Partner has not been able to purchase the remaining 9,171 units due to the eligible owners selling the units in the open market. The General Partner has determined that the remaining units will not be purchased and has received a $0.1 million refund from the purchasing agent. 11. Debt ---- In July 2002, PLM International, Inc. (PLMI), the parent company of FSI, reached an agreement with the lenders of the $10.0 million warehouse facility to extend the expiration date of the facility to June 30, 2003. The warehouse facility is shared by the Partnership, PLM Equipment Growth Fund V, PLM Equipment Growth Fund VI, Professional Lease Management Income Fund I, LLC and Acquisub LLC, a wholly owned subsidiary of PLMI. The facility provides for financing up to 100% of the cost of the equipment. Outstanding borrowings by one borrower reduce the amount available to each of the other borrowers under the facility. Individual borrowings may be outstanding for no more than 270 days, with all advances due no later than June 30, 2003. Interest accrues either at the prime rate or LIBOR plus 2.0% at the borrower's option and is set at the time of an advance of funds. Borrowings by the Partnership are guaranteed by PLMI. The Partnership is not liable for the advances made to the other borrowers. As of September 30, 2002, there were no outstanding borrowings on this facility by any of the eligible borrowers. 12. Commitments and Contingencies ------------------------------- In October 2002, PLM Transportation Equipment Corp. Inc. (TEC), a wholly owned subsidiary of FSI, arranged for the lease or purchase of a total of 1,050 pressurized tank railcars by (i) partnerships and managed programs in which FSI serves as the general partner or manager and holds an ownership interest (Program Affiliates) or (ii) partnerships or managed programs in which FSI provides management services but does not hold an ownership interest or third parties (Non-Program Affiliates). These railcars will be delivered over the next three years. A leasing company affiliated with the manufacturer will acquire approximately 70% of the railcars and lease them to a Non-Program Affiliate. The remaining approximately 30% will either be purchased by other third parties to be managed by PLMI, or by the Program Affiliates. An affiliate of TEC will manage the leased and purchased railcars. Neither TEC nor its affiliate will be liable for these railcars. TEC estimates that the total value of purchased railcars will not exceed $26.0 million with one third of the railcars being purchased in each of 2002, 2003, and 2004. Although the General Partner has neither determined which Program Affiliates will purchase the railcars nor the timing of any purchases, it is possible the Partnership may purchase some of the railcars. 13. Accounting Pronouncements -------------------------- In April 2002, the Financial Accounting Standards Board (FASB) adopted Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections" ("SFAS No. 145"). The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. As permitted by the pronouncement, the Partnership has elected early adoption of SFAS No. 145 and, accordingly, if the Partnership has a loss on extinguishment of long-term debt, it will be reported as a loss in "Other general and administrative expenses". PLM EQUIPMENT GROWTH & INCOME FUND VII (A LIMITED PARTNERSHIP) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 13. Accounting Pronouncements (continued) -------------------------- The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has issued an exposure draft of a proposed statement of position ("SOP") entitled "Accounting for Certain Costs and Activities Related to Property, Plant and Equipment". The Partnership has historically accrued legally mandated maintenance such as marine vessel dry-docking and aircraft engine maintenance over the periods prior to the required maintenance date. If the SOP is adopted as proposed, the Partnership and USPEs would reverse all previously accrued maintenance reserves. If this proposed change were in effect at September 30, 2002, the Partnership and USPEs would have been required to reverse maintenance reserves of approximately $1.6 million. Maintenance reserves will change in 2002 as maintenance is performed and past maintenance reserves are depleted and additional reserves are recorded. If adopted in its present form, charges related to this proposed change would be taken in the first quarter of 2003 and would be reported as a cumulative effect of an accounting change, in the statements of operations. (This space intentionally left blank) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------- RESULTS OF OPERATIONS ------------------- (I) RESULTS OF OPERATIONS Comparison of the PLM Equipment Growth & Income Fund VII's (the Partnership's) -------------------------------------------------------------------------------- Operating Results for the Three Months Ended September 30, 2002 and 2001 -------------------------------------------------------------------------------- (A) Owned Equipment Operations Lease revenues less direct expenses (defined as repairs and maintenance, equipment operating, and asset-specific insurance expenses) on owned equipment decreased during the three months ended September 30, 2002 compared to the same period of 2001. Gains or losses from the sale of equipment, interest and other income, and certain expenses such as management fees to affiliate, depreciation and amortization, general and administrative expenses, and provision for (recovery of) bad debts relating to the operating segments (see Note 8 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):

Marine containers: Lease revenues and direct expenses for marine containers were relatively the same at $1.6 million and $17,000 respectively, for the three months ended September 30, 2002, compared to $1.6 million and $16,000, respectively, during the same period of 2001. Marine vessels: Marine vessel lease revenues and direct expenses were $1.3 million and $0.7 million, respectively, for the three months ended September 30, 2002, compared to $1.4 million and $0.8 million, respectively, during the same period of 2001. The decrease in lease revenues of $0.1 million during the third quarter of 2002 compared to the same period of 2001 was due to lower lease rates earned on the Partnership's marine vessels. Direct expenses decreased $0.1 million during the third quarter of 2002 resulting from lower repairs and maintenance. Railcars: Railcar lease revenues and direct expenses were $0.5 million and $0.2 million, respectively, for the three months ended September 30, 2002, compared to $0.6 million and $0.1 million, respectively, during the same period of 2001. The decrease in lease revenues of $0.1 million during the third quarter of 2002 compared to 2001 was due to an increase in the number of off-lease railcars. Aircraft: Aircraft lease revenues and direct expenses were relatively the same at $0.3 million and $2,000, respectively, for the three months ended September 30, 2002, compared to $0.3 million and $3,000, respectively, during the same period of 2001. Trailers: Trailer lease revenues and direct expenses were $0.1 million and $0.1 million, respectively, for the three months ended September 30, 2002, compared to $0.2 million and $0.1 million, respectively, during the same period of 2001. The decrease in lease revenues of $32,000 during the third quarter of 2002 was due to the Partnership earning lower lease rates on its trailers. (B) Indirect Expenses Related to Owned Equipment Operations Total indirect expenses of $2.7 million for the three months ended September 30, 2002 decreased from $2.8 million for the same period in 2001. Significant variances are explained as follows: (i) A $0.4 million decrease in depreciation and amortization expenses from 2001 levels reflects the decrease of approximately $0.2 million caused by the double-declining balance method of depreciation which results in greater depreciation in the first years an asset is owned and a decrease of $0.2 million resulting from certain assets being fully depreciated during 2001; (ii) A $0.1 million decrease in interest expense was due to a lower average outstanding debt balance in the third quarter of 2002 compared to the same period of 2001; (iii) A $0.2 million increase in the provision for bad debts was based on PLM Financial Service's, Inc. (FSI's or the General Partner's) evaluation of the collectability of receivables compared to 2001. The provision for bad debt recorded in the third quarter of 2002 primarily related to one aircraft lessee; (iv) A $0.2 million increase in general and administrative expenses due to an increase in administrative services costs during 2002. (C) Interest and Other Income Interest and other income decreased $18,000 due to a decrease in the interest rate earned on cash balances. (D) Gain on Disposition of Owned Equipment The gain on disposition of owned equipment for the third quarter of 2002 totaled $44,000, and resulted from the sale of marine containers with a net book value of $0.1 million for proceeds of $0.1 million. The gain on disposition of owned equipment for the third quarter of 2001 totaled $8,000, and resulted from the sale of marine containers with a net book value of $5,000 for proceeds of $14,000. (E) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities (USPEs) Equity in net income (loss) of USPEs represents the Partnership's share of the net income or loss generated from the operation of jointly owned assets accounted for under the equity method of accounting. These entities are single purpose and have no debt or other financial encumbrances. The following table presents equity in net income (loss) by equipment type (in thousands of dollars):

Aircraft: As of September 30, 2002 and 2001, the Partnership owned an interest in entities that owned three commercial aircraft. During the three months ended September 30, 2002, the Partnership's share of lease revenues of $0.5 million were offset by the Partnership's share of depreciation expense, direct expenses, and administrative expenses of $0.4 million. During the same period of 2001, the Partnership's share of lease revenues of $0.5 million were offset by the Partnership's share of depreciation expense, direct expenses, and administrative expenses of $0.8 million. The decrease in depreciation expense of $0.4 million was caused by a decrease of $0.2 million resulting from the double declining-balance method of depreciation which results in greater depreciation in the first years an asset is owned and by $0.2 million in lower depreciation expense resulting from one aircraft being fully depreciated during 2001. Marine vessel: As of September 30, 2002 and 2001, the Partnership had sold its interest in an entity that owned a marine vessel. During the three months ended September 30, 2002, the Partnership's interest in an entity that owned a marine vessel wrote-off certain operating expenses that were previously accrued for $14,000. During the same period of 2001, the Partnership's share of direct expenses and administrative expenses of $37,000 was the result of the underaccrual of expenses in previous periods. (F) Net Income (Loss) As a result of the foregoing, the Partnership had a net income of $0.2 million for the three months ended September 30, 2002, compared to net loss of $0.1 million during the same period of 2001. The Partnership's ability to acquire, operate, and liquidate assets, secure leases and re-lease those assets whose leases expire is subject to many factors. Therefore, the Partnership's performance in the third quarter of 2002 is not necessarily indicative of future periods. Comparison of the Partnership's Operating Results for the Nine Months Ended -------------------------------------------------------------------------------- September 30, 2002 and 2001 ------------------------------- (A) Owned Equipment Operations Lease revenues less direct expenses on owned equipment decreased during the nine months ended September 30, 2002 compared to the same period of 2001. The following table presents lease revenues less direct expenses by segment (in thousands of dollars):

Marine containers: Lease revenues and direct expenses for marine containers were $4.6 million and $0.1 million respectively, for the nine months ended September 30, 2002, compared to $4.7 million and $0.1 million, respectively, during the same period of 2001. A decrease in lease revenues of $0.1 million was due to lower lease rates earned on the Partnership's marine containers. Marine vessels: Marine vessel lease revenues and direct expenses were $4.0 million and $2.1 million, respectively, for the nine months ended September 30, 2002, compared to $4.3 million and $2.0 million, respectively, during the same period of 2001. The decrease in lease revenues of $0.4 million during the nine months ended September 30, 2002 compared to 2001 was due to lower lease rates earned on the Partnership's marine vessels. The increase in direct expenses of $0.1 million was caused by higher repair and operating costs to one of the owned marine vessels during 2002 compared to 2001. Railcars: Railcar lease revenues and direct expenses were $1.7 million and $0.4 million, respectively, for the nine months ended September 30, 2002, compared to $1.8 million and $0.4 million, respectively, during the same period of 2001. The decrease in lease revenues of $0.1 million during the nine months ended September 30, 2002 compared to 2001 was due to an increase in the number of off-lease railcars. Aircraft: Aircraft lease revenues and direct expenses were $0.8 million and $6,000, respectively, for the nine months ended September 30, 2002, compared to $0.8 million and $5,000, respectively, during the same period of 2001. Trailers: Trailer lease revenues and direct expenses were $0.5 million and $0.3 million, respectively, for the nine months ended September 30, 2002, compared to $0.5 million and $0.2 million, respectively, during the same period of 2001. The decrease in the contribution from trailers of $0.1 million was the result of lower lease revenues of $21,000 caused by lower lease rates earned on the Partnership's trailers and an increase of $0.1 million in higher repairs and maintenance. (B) Indirect Expenses Related to Owned Equipment Operations Total indirect expenses of $7.9 million for the nine months ended September 30, 2002 decreased from $8.7 million for the same period in 2001. Significant variances are explained as follows: (i) A $1.1 million decrease in depreciation and amortization expenses from 2001 levels reflects the decrease of approximately $0.7 million caused by the double-declining balance method of depreciation which results in greater depreciation in the first years an asset is owned and a decrease of $0.4 million resulting from certain assets being fully depreciated during 2001; (ii) A $0.2 million decrease in interest expense was due to a lower average outstanding debt balance in the nine months ended September 30, 2002 compared to the same period of 2001; and (iii) A $0.1 million decrease in management fees was due to lower lease revenues earned by the Partnership during the nine months ended September 30, 2002 compared to the same period of 2001; (iv) A $0.7 million increase in the provision for bad debts was based on the General Partner's evaluation of the collectability of receivables compared to 2001. The provision for bad debt recorded in the nine months ended September 30, 2002 was primarily related to one aircraft lessee. (C) Interest and Other Income Interest and other income decreased $0.1 million due to a one time insurance settlement of $36,000 and a one-time dividend of $33,000 that was earned during the nine months ended September 30, 2001. Similar revenues were not earned during the same period of 2002. Additionally, interest income decreased $45,000 due to a lower interest rate earned on cash balances. (D) Gain on Disposition of Owned Equipment The gain on disposition of owned equipment for the nine months ended September 30, 2002 totaled $46,000 and resulted from the sale of marine containers with a net book value of $0.1 million for $0.1 million. The gain on disposition of equipment for the nine months ended September 30, 2001 totaled $22,000, and resulted from the sale of marine containers with an aggregate net book value of $19,000 for proceeds of $41,000. (E) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities Equity in net income (loss) of USPEs represents the Partnership's share of the net income or loss generated from the operation of jointly owned assets accounted for under the equity method of accounting. These entities are single purpose and have no debt or other financial encumbrances. The following table presents equity in net income by equipment type (in thousands of dollars):

Aircraft: As of September 30, 2002 and 2001, the Partnership owned an interest in trusts that owned three commercial aircraft. During the nine months ended September 30, 2002, the Partnership's share of lease revenues of $1.5 million were offset by the Partnership's share of depreciation expense, direct expenses, and administrative expenses of $1.4 million. During the same period of 2001, the Partnership's share of lease revenues of $1.7 million and other income of $0.8 million were offset by the Partnership's share of depreciation expense, direct expenses, and administrative expenses of $2.8 million. Lease revenues decreased $0.2 million due to the leases for two commercial aircraft in the trusts being renegotiated at a lower rate. Other income decreased $0.8 million during the nine months ended September 30, 2002 due to the recognition of an engine reserve liability as income upon termination of the previous lease agreement during 2001. A similar event did not occur during the same period of 2002. The decrease in expenses of $1.4 million was due to required repairs and maintenance of $0.3 million to the Boeing 737-300 that were not required during 2002, $0.7 million in lower depreciation expense resulting from one aircraft being fully depreciated during 2001, and $0.3 million in lower depreciation expense as the result of the double declining-balance method of depreciation which results in greater depreciation in the first years an asset is owned. Marine vessel: As of September 30, 2002 and 2001, the Partnership had sold its interest in an entity that owned a marine vessel. During the nine months ended September 30, 2002, the Partnership's share of income of $45,000 was the result of an insurance settlement of $32,000 and a reduction in administrative expenses of $13,000. During the same period of 2001, the Partnership's share of lease revenues of $0.7 million and the Partnership's share of the gain of $2.1 million from the sale of the Partnership's interest in an entity that owned a marine vessel were offset by the Partnership's share of depreciation expense, direct expenses, and administrative expenses of $0.8 million. The decrease in marine vessel contribution was due to the sale of the Partnership's interest in an entity that owned a marine vessel during 2001. (F) Net Income As a result of the foregoing, the Partnership had a net income of $0.9 million for the nine months ended September 30, 2002, compared to net income of $2.5 million during the same period of 2001. The Partnership's ability to acquire, operate, and liquidate assets, secure leases and re-lease those assets whose leases expire is subject to many factors. Therefore, the Partnership's performance in the nine months ended September 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 and investments in USPEs to determine if the carrying value of the assets may not be recoverable due to 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. Reserves for repairs: The Partnership accrues for legally required repairs to equipment such as dry docking for marine vessels and engine overhauls to aircraft engines over the period prior to the required repairs. The amount that is reserved is based on the General Partner's expertise in each equipment segment, the past history of such costs for that specific piece of equipment and discussions with independent, third party equipment brokers. If the amount reserved for is not adequate to cover the cost of such repairs or if the repairs must be performed earlier than the General Partner estimated, the Partnership would incur additional repair and maintenance or equipment operating expenses. 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 nine months ended September 30, 2002, the Partnership generated operating cash of $7.6 million (net cash provided by operating activities plus non-liquidating distributions from USPEs) to meet its operating obligations, pay debt and interest payments and maintain working capital reserves. During the nine months ended September 30, 2002, the Partnership disposed of marine containers for proceeds of $0.1 million. Restricted cash increased during the nine months ended September 30, 2002 due to the deposit of $0.2 million into an escrow account related to collection efforts from an aircraft lessee. Accounts receivable decreased $0.1 million in the nine months ended September 30, 2002. This decrease was due to increase in the allowance for bad debts of $0.8 million due to the General Partner's evaluation of the collectibility of accounts receivable. This decrease was partially offset by an increase of $0.7 million during the nine months ended September 30, 2002 due to the timing of cash receipts. Investments in USPEs decreased $1.2 million during the nine months ended September 30, 2002 due to cash distributions of $1.3 million from the USPEs to the Partnership offset, in part, by $0.1 million in income that was recorded by the Partnership for its equity interests in the USPEs. Accounts payable decreased $0.5 million during the nine months ended September 30, 2002. The decrease was due to the payment of $0.8 million due to the purchasing agent that was accrued at December 31, 2001 resulting from the purchase of Partnership units offset, in part, by an increase of $0.3 million due to the timing of cash payments. During the nine months ended September 30, 2002, lessee deposits and reserve for repairs increased $0.3 million due to an increase in the reserve for marine vessel dry docking. The Partnership is scheduled to make an annual debt payment of $3.0 million to the lenders of the notes payable on December 31, 2002. The cash for this payment will come from operations and proceeds from equipment dispositions. In July 2002, PLM International Inc. (PLMI) reached an agreement with the lenders of the $10.0 million warehouse facility to extend the expiration date of the facility to June 30, 2003. The warehouse facility is shared by the Partnership, PLM Equipment Growth Fund V, PLM Equipment Growth Fund VI, Professional Lease Management Income Fund I, LLC and Acquisub LLC, a wholly owned subsidiary of PLMI. The facility provides for financing up to 100% of the cost of the equipment. Outstanding borrowings by one borrower reduce the amount available to each of the other borrowers under the facility. Individual borrowings may be outstanding for no more than 270 days, with all advances due no later than June 30, 2003. Interest accrues either at the prime rate or LIBOR plus 2.0% at the borrower's option and is set at the time of an advance of funds. Borrowings by the Partnership are guaranteed by PLMI. The Partnership is not liable for the advances made to the other borrowers. As of November 13, 2002, the Partnership had no borrowings outstanding under this facility and there were no other borrowings outstanding under this facility by any other eligible borrower. In October 2002, PLM Transportation Equipment Corp. Inc. (TEC), a wholly owned subsidiary of FSI, arranged for the lease or purchase of a total of 1,050 pressurized tank railcars by (i) partnerships and managed programs in which FSI serves as the general partner or manager and holds an ownership interest (Program Affiliates) or (ii) partnerships or managed programs in which FSI provides management services but does not hold an ownership interest or third parties (Non-Program Affiliates). These railcars will be delivered over the next three years. A leasing company affiliated with the manufacturer will acquire approximately 70% of the railcars and lease them to a Non-Program Affiliate. The remaining approximately 30% will either be purchased by other third parties to be managed by PLMI, or by the Program Affiliates. An affiliate of TEC will manage the leased and purchased railcars. Neither TEC nor its affiliate will be liable for these railcars. TEC estimates that the total value of purchased railcars will not exceed $26.0 million with one third of the railcars being purchased in each of 2002, 2003, and 2004. Although the General Partner has neither determined which Program Affiliates will purchase the railcars nor the timing of any purchases, it is possible the Partnership may purchase some of the railcars. (IV) ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board (FASB) adopted Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections" ("SFAS No. 145"). The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. As permitted by the pronouncement, the Partnership has elected early adoption of SFAS No. 145 and, accordingly, if the Partnership has a loss on extinguishment of long-term debt, it will be reported as a loss in "Other general and administrative expenses". The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has issued an exposure draft of a proposed statement of position ("SOP") entitled "Accounting for Certain Costs and Activities Related to Property, Plant and Equipment". The Partnership has historically accrued legally mandated maintenance such as marine vessel dry-docking and aircraft engine maintenance over the periods prior to the required maintenance date. If the SOP is adopted as proposed, the Partnership and USPEs would reverse all previously accrued maintenance reserves. If this proposed change were in effect at September 30, 2002, the Partnership and USPEs would have been required to reverse maintenance reserves of approximately $1.6 million. Maintenance reserves will change in 2002 as maintenance is performed and past maintenance reserves are depleted and additional reserves are recorded. If adopted in its present form, charges related to this proposed change would be taken in the first quarter of 2003 and would be reported as a cumulative effect of an accounting change, in the statements of operations. (V) OUTLOOK FOR THE FUTURE Several factors may affect the Partnership's operating performance during 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. The Partnership's operation of a diversified equipment portfolio in a broad base of markets is intended to reduce its exposure to volatility in individual equipment sectors. Other factors affecting the Partnership's contribution during the remainder of 2002 and beyond include: (1) The cost of new marine containers has been at historic lows for the past several years, which has caused downward pressure on per diem lease rates for this type of equipment. Starting in 2003 and continuing through 2004, a significant number of the Partnership's marine containers currently on a fixed rate lease will be switching to a lease based on utilization. The General Partner anticipates that this will result in a significant decrease in lease revenues; (2) Railcar freight loadings in the United States and Canada decreased 1% and 3%, respectively, through the first nine months of 2002. There has been, however, a recent increase for some of the commodities that drive demand for those types of railcars owned by the Partnership. It will be some time, however, before this translates into new leasing demand by shippers since most shippers have idle railcars in their fleets; (3) Marine vessel freight rates are dependent upon the overall condition of the international economy. Freight rates earned by the Partnership's marine vessel began to decrease during the latter half of 2001 and continued through the first nine months of 2002. This trend is expected to continue during the latter half of 2002 or until international economies stabilize and begin to improve; (4) Utilization of intermodal trailers owned by the Partnership decreased 15% in the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. This decline was similar to the decline in industry-wide utilization. As the Partnership's trailers are smaller than many shippers prefer, the General Partner expects continued declines in utilization over the next few years. Additionally, one of the major shippers that leased the Partnership's trailers has entered bankruptcy. While the Partnership did not have any outstanding receivables from the company, its bankruptcy may cause a further decline in performance of the trailer fleet in the future; and (5) The airline industry began to see lower passenger travel during 2001. The events of September 11, 2001, along with a recession in the United States have continued to adversely affect the market demand for both new and used commercial aircraft and to significantly weaken the financial position of most major domestic airlines. As a result of this, the Partnership has had to renegotiate leases on its owned aircraft during 2001 that will result in a decrease in revenues during 2002. The General Partner believes that there is a significant oversupply of commercial aircraft available and that this oversupply will continue for some time. These events have had a negative impact on the fair market value of the Partnership's owned and partially owned aircraft. Although no revaluations were required during 2002 to these aircraft, the General Partner does not expect these aircraft to return to their September 11, 2001 values. During 2001, the lessee of a Stage II Boeing 737-200 commercial aircraft notified the General Partner of its intention to return this aircraft. The lessee is located in Brazil, a country experiencing severe economic difficultly. As of September 30, 2002, the lessee was thirteen lease payments in arrears to the Partnership. The Partnership has a security deposit from this lessee that could be used to pay a portion of the amount due. During October 2001, the General Partner sent a notification of default to the lessee. The lease, with an expiration date of October 2002, has certain return condition requirements for the aircraft. The General Partner recorded an allowance for bad debts for the amount due less the security deposit. During October 2002, the General Partner reached an agreement with the lessee of this aircraft for the past due lease payments. In order to give the lessee an incentive to make timely payments in accordance with the agreement, the General Partner gave the lessee a discount on the total amount due. If the lessee fails to comply with the payment schedule in the agreement, the discount provision will be waived and the full amount again becomes payable. The lessee made an initial payment during October 2002, to be followed by 23 equal monthly installments beginning in November 2002. Unpaid outstanding amounts will accrue interest at a rate of 5%. Due to the uncertainty of ultimate collection, the General Partner will continue to fully reserve the unpaid outstanding balance from this lessee. (6) The General Partner has seen an increase in its insurance premiums on its equipment portfolio and is finding it more difficult to find an insurance carrier with which to place the coverage. Premiums for aircraft have increased over 50% and for other types of equipment the increases have been over 25%. The increase in insurance premiums caused by the increased rate will be partially mitigated by the reduction in the value of the Partnership's equipment portfolio caused by the events of September 11, 2001 and other economic factors. The General Partner has also experienced an increase in the deductible required to obtain coverage. This may have a negative impact on the Partnership in the event of an insurance claim. 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 some 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 equipment markets in which it determines it cannot operate equipment to achieve acceptable rates of return. Alternatively, the General Partner may make a determination to enter equipment markets in which it perceives opportunities to profit from supply/demand instabilities or other market imperfections. The Partnership may reinvest its cash flow, surplus cash, and equipment sale proceeds in additional equipment, consistent with the objectives of the Partnership, until December 31, 2004. The General Partner believes that these acquisitions may cause the Partnership to generate additional earnings and cash flow for the Partnership. Surplus funds, if any, less reasonable reserves, may be distributed to the partners. The Partnership will terminate on December 31, 2013, unless terminated earlier upon sale of all equipment and by certain other events. (VI) FORWARD-LOOKING INFORMATION Except for the 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 nine months ended September 30, 2002, 84% of the Partnership's total lease revenues from wholly- and partially-owned equipment came from non-United States domiciled lessees. Most of the Partnership's leases require payment in United States (US) currency. If these lessees' currency devalues against the US dollar, the lessees could potentially encounter difficulty in making the US dollar denominated lease payments. ITEM 4. CONTROLS AND PROCEDURES ------------------------- Within the 90-day period prior to the filing of this report, evaluations were carried out under the supervision and with the participation of the General Partner's management, including its President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon those evaluations, the President and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes have been made in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluations. (This space intentionally left blank) PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ------------------------------------- (a) Exhibits -------- 1. November 2002 purchase agreement between PLM Transportation Equipment Corp., Inc. and Trinity Tank Car, Inc. 2. Settlement Agreement between PLM Worldwide Leasing Corp. and Varig S.A. dated October 11, 2002. (b) Reports on Form 8-K ---------------------- None. (This space intentionally left blank) ------ CONTROL CERTIFICATION ---------------------- I, James A. Coyne, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PLM Equipment Growth & Income Fund VII. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this quarterly report is prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and board of Managers: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/ James A. Coyne --------------------- James A. Coyne President ------ CONTROL CERTIFICATION ---------------------- I, Richard K Brock, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PLM Equipment Growth & Income Fund VII. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this quarterly report is prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and board of Managers: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/ Richard K Brock ---------------------- Richard K Brock Chief Financial Officer (Principal Financial Officer) 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 EQUIPMENT GROWTH & INCOME FUND VII By: PLM Financial Services, Inc. General Partner Date: November 13, 2002 By: /s/ Richard K Brock ---------------------- Richard K Brock Chief Financial Officer CERTIFICATION The undersigned hereby certifies, in his capacity as an officer of the General Partner of PLM Equipment Growth & Income Fund VII (the Partnership), that the Quarterly Report of the Partnership on Form 10-Q for the period ended September 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 & INCOME FUND VII By: PLM Financial Services, Inc. General Partner Date: November 13, 2002 By: /s/ James A. Coyne --------------------- James A. Coyne President Date: November 13, 2002 By: /s/ Richard K Brock ---------------------- Richard K Brock Chief Financial Officer

PLM EQUIPMENT GROWTH & INCOME FUND VII 10-Q