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1996 Annual Report ExcerptsTo Our ShareholdersFor your Company, the past year has truly been a period of taking decisive action intended to leave behind the last remnants of underperforming business segments and to build for the future. In May, we undertook the most profound change in PLM International's entire 25-year history. We announced our decision to suspend investment program syndication activities and instead focus on expanding the Company's leasing and management operations in the transportation, industrial, and commercial equipment sectors. Although the effects of this new strategic direction are only beginning to be reflected in the Company's financial results, as we describe to you in this report, we feel confident that we have chosen a future course for PLM International that will create sustained, predictable long-term growth in profitability and value for you, our fellow shareholders. PLM International achieved its ninth consecutive quarter of positive results in the fourth quarter of 1996. Consolidated revenues for 1996 totaled $51.5 million, compared to $60.1 million in 1995. Net income totaled $4.1 million, or $0.40 per common share in 1996, compared to 1995 net income of $6.0 million, or $0.51 per common share. As anticipated, revenues and net income for the year were less than in 1995, reflecting our change in strategic direction, which included the sale of older, underperforming transportation assets, as well as one-time charges associated with discontinued activities. These sales are almost complete, results from our new strategic direction are building, and we anticipate that a new era of revenue and net income growth will commence in 1997. We continued to make progress in reducing overhead costs and improving PLM International's financial position during 1996. Operations support expenses and general and administrative expenses decreased by 16% and 26%, respectively, from 1995 levels, due primarily to staff reductions and a subsequent consolidation of our head office space. By July, we had repaid the entire $11.5 million balance remaining on the Company's subordinated debt, followed in October by a $10.0 million paydown of the entire floating rate portion of the senior loan. As a result of these debt payments, total interest expense for 1996 increased only 3%, despite significant increased nonrecourse borrowing activity associated with the growth of our new subsidiary, American Finance Group. The full-year benefits of these cost and debt reductions will be seen beginning in 1997. The Company continued to repurchase its common stock over the past year, reflecting the belief that our shares remain undervalued. During 1996, 1.7 million shares were repurchased at a cost of $6.5 million. This brings the cumulative number of shares acquired since our first repurchase program in early 1995 to 2.5 million shares and reduces the total number of shares outstanding by more than 22%. Further underscoring our belief in the stock's long-term potential, we announced a new $5 million repurchase program in early March of this year. For the past 20 years, PLM International has been a leader in the syndication of public equipment leasing investment programs, cumulatively raising more syndicated equity than any other equipment leasing sponsor in the United States. The PLM Equipment Growth Fund series, introduced in 1986, has been the top-selling equipment leasing program over the past decade. However, in recent years, we have become increasingly concerned over the continued decline in overall partnership industry syndication sales, as lower fee investment alternatives have become more attractive to investors. In response to this competitive climate, in early 1995, we introduced Professional Lease Management Income Fund I, the first-ever no front-end fee equipment leasing program. Although the broader appeal of this "no load" program generated higher sales, results still fell below our expectations. After concluding that future sales would not reach the levels required to make syndication activities financially attractive to the Company, we made the necessary decision to suspend further syndication of investment programs. Concurrent with this decision, your Board of Directors announced a new, three-pronged strategic plan designed to build reliable, predictable revenue and earnings. This growth strategy consists of: first, building American Finance Group's commercial and industrial equipment lease origination and management activities; second, expanding PLM Rental, Inc., the Company's trailer leasing and management subsidiary; and third, continuing portfolio management and lease origination activities for existing investor programs, as well as for additional equipment portfolios that we may manage either through future acquisitions or on behalf of other organizations. American Finance Group (AFG) is active in the origination, servicing, and management of commercial and industrial equipment leases for investment-grade, Fortune 2000 companies. Key to its success is AFG's ability to differentiate itself from much larger competitors by offering greater flexibility in lease structures and terms and a consistently high level of customer service, backed by sophisticated reporting systems. During 1996, its first full year of operation, the AFG equipment portfolio grew to $96.9 million, generating over $8.0 million in direct finance and operating lease revenue for the year. The longer-term AFG leases provide a predictable cash stream that PLM International is able to leverage using nonrecourse securitized debt. We intend to substantially expand AFG's equipment portfolio in the future and expect AFG's revenue and income to grow dramatically in 1997. PLM Rental, Inc. began operations eight years ago, originally as a strategic action to place our owned and managed trailers on short-term rentals as they came off term leases. Since then, PLM Rental has expanded to comprise 10 locations in major U.S. metropolitan areas, collectively operating over 6,000 trailers, nearly 2,000 of which are refrigerated and constitute the largest short-term, on-demand refrigerated fleet in the United States. This short-term rental niche gives us a unique vantage point from which to identify new growth areas within the refrigerated and other trailer market segmentsareas in which existing and potential new customers may be underserved. With most of the necessary infrastructure already in place, we intend to expand our trailer operations with relatively little increase in overhead. The first trailer growth niche we are targeting is the domestic foodservice distribution industry. Spurred by the continuing consumer popularity of restaurant and take-out food, this industry is expanding rapidly, with current annual revenues totaling $125 billion. Industry sources estimate that foodservice distributors utilize approximately 40,000 to 50,000 trailers, most of which are highly specialized refrigerated units. Foodservice distributors face serious cost-versus-efficiency pressures. Due in part to the substantial cost of these trailers, they are induced to retain them for 10 years or more to recover their investment. Yet, as the units age, failure rates and maintenance costs escalate. Our strategy is to "partner" with the distributors by offering them brand-new refrigerated trailers, incorporating the latest features in technology and design, on a five-year, full-service lease. At the end of the lease, we will provide the distributors with new trailers and rotate the trailers coming off lease into our PLM Rental fleet. This strategy enables us to increase our volume of longer-term leases while continuing to expand our successful short-term rental business. Our new trailer program, which we introduced to foodservice distributors at the industry's largest trade show late last fall, has been well received to date. As the third component of our strategic plan, we will continue to manage all of the existing investor programs. Although the relatively predictable management fees and carried interest revenues that PLM International earns from managing the programs will decrease over time as these programs reach the end of their scheduled 10- to 12-year terms, the cash flows generated provide the foundation to grow the AFG and trailer rental business segments. During the past five years, PLM International's earnings have fluctuated greatly due in large part to the decision to sell the Company's portfolio of underperforming transportation equipment. This process is now virtually complete. Additionally, the cessation of syndication sales will eliminate another source of earnings instability, since these earnings were driven by the timing of the investment of the capital raised, which was difficult to predict. Future earnings from trailer rentals, partnership management, and the growth in AFG's portfolio should be more predictable and less subject to extreme fluctuation, which should make the Company's progress more understandable to the investment community. We began the process of repositioning PLM International for long-term growth in 1992 by focusing on strengthening the Company's financial position. Over the past five years, we have made substantial progress through major reductions in total debt; refinancing of senior debt on more flexible, less expensive terms; and elimination of the Employee Stock Ownership Plan and preferred share dividend. While these improvements were achieved at a cost to the Company, namely a smaller asset base and reduced operating lease revenue, they have allowed us to embark on our new strategic plan to grow the Company. We are encouraged by the progress we have made since we began this three-part plan last May, particularly within AFG. As revenues from our managed programs become a less important revenue source over time, we expect AFG's contribution to increase substantially. Since we are utilizing relatively low-cost, nonrecourse, securitized debt, our plans for expanding the AFG portfolio are not limited by traditional borrowing constraints. We believe there are also significant growth opportunities in the trailer markets, as well as in managing additional equipment portfolios, either on behalf of others or through acquisitions. With the continued trend among American businesses to outsource noncore functions, we are in a strong position to leverage our equipment leasing, management, and administrative expertise to increase our market share in these areas. Clearly, we have much work ahead of us. However, your management team is committed to achieving growth in profitability and value for PLM International shareholders. For 1997 and beyond, we will not be satisfied with anything less. Sincerely, J. Alec Merriam Robert N. Tidball April 2, 1997 |
Copyright © 1997, PLM
International, Inc.
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