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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
[ ] 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 1-10813
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PLM EQUIPMENT GROWTH FUND III
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0146197
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MARKET, STEUART STREET TOWER
SUITE 800, SAN FRANCISCO, CA 94105-1301
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (415) 974-1399
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock: N/A
Indicate the number of units outstanding of each of the issuer's classes of
depositary units, as of the latest practicable date:
Class Outstanding at March 17, 2000
Limited partnership depositary units: 9,871,073
General Partnership units: 1
An index of exhibits filed with this Form 10-K is located at page 27.Total
number of pages in this report: 49.
PART I
ITEM 1. BUSINESS
(A) Background
On October 27, 1987, PLM Financial Services, Inc. (FSI or the General Partner),
a wholly-owned subsidiary of PLM International, Inc. (PLM International or
PLMI), filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission with respect to a proposed offering of 10,000,000 depositary
units (the units) in PLM Equipment Growth Fund III, a California limited
partnership (the Partnership, the Registrant, or EGF III). The Partnership's
offering became effective on March 21, 1988. FSI, as General Partner, owns a 5%
interest in the Partnership. The Partnership engages in the business of
investing in diversified equipment portfolio consisting primarily of used,
long-lived, low-obsolescence capital equipment that is easily transportable by
and among prospective users.
The Partnership's primary objectives are:
(1) to maintain a diversified portfolio of long-lived, low-obsolescence,
high residual-value equipment which were purchased with the net proceeds of the
initial partnership offering, supplemented by debt financing, and surplus
operating cash during the investment phase of the Partnership. All transactions
over $1.0 million must be approved by the PLM International Credit Review
Committee (the Committee), which is made up of members of PLM International
Senior Management. In determining a lessee's creditworthiness, the Committee
will consider, among other factors, the lessee's financial statements, internal
and external credit ratings, and letters of credit;
(2) to generate sufficient net operating cash flow from lease operations to
meet liquidity requirements and to generate cash distributions to the limited
partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(3) To selectively sell equipment when the General Partner believes that,
due to market conditions, market prices for equipment exceed inherent equipment
values or that expected future benefits from continual ownership of a particular
asset will have an adverse affect on the Partnership. Proceeds from these sales,
together with excess net cash flow from operations (net cash provided by
operating activities plus distributions from unconsolidated special-purpose
entities (USPEs)), are used for distributions to the partners or for repayment
of outstanding debt;
(4) To preserve and protect the value of the portfolio through quality
management, maintaining diversity, and constantly monitoring equipment markets.
(5) To maximize sales proceeds through the timely marketing of equipment.
The offering of the units of the Partnership closed on May 11, 1989. The General
Partner contributed $100 for its 5% general partner interest in the Partnership.
On August 16, 1991, the units of the Partnership began trading on the American
Stock Exchange (AMEX). Thereupon each unitholder received a depositary receipt
representing ownership of the number of units owned by such unitholder. The
General Partner delisted the Partnership's depositary units from the AMEX on
April 8, 1996. The last day for trading on the AMEX was March 22, 1996.
As of December 31, 1999, there were 9,871,073 depositary units outstanding.
Beginning in the eleventh year of operations of the Partnership, which commenced
on January 1, 2000, the General Partner began the dissolution and liquidation
the assets of the Partnership in an orderly fashion. The Partnership will
terminate on December 31, 2000, unless the Partnership is terminated earlier
upon sale of all of the Partnership's equipment or by certain other events.
Table 1, below, lists the equipment and the cost of the equipment in the
Partnership's portfolio, and the cost of investments in unconsolidated
special-purpose entities, as of December 31, 1999 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
- ----------------------------------------------------------------------------------------------------------------------
Owned equipment held for operating leases:
3 737-200 Stage II commercial aircraft Boeing $ 30,506
1 Dash 8-300 Stage II commuter aircraft Dehavilland 5,748
1 737-200 Stage III commercial aircraft Boeing 5,746
724 Non-pressurized tank railcars Various 17,470
472 Pressurized tank railcars Various 11,314
119 Coal railcars Various 4,788
255 Marine containers Various 4,453
53 Refrigerated trailers Various 1,599
162 Intermodal trailers Various 2,503
12 Dry trailers Stoughton and Strick 64
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Total owned equipment held for operating leases $ 84,1911
==============
Investments in unconsolidated special-purpose entitiy:
0.56 Bulk carrier marine vessel Naikai Zosen $ 7,1632
--------------
Total investments in unconsolidated special-purpose entity $ 7,163
1 Includes equipment and investments purchased with the proceeds from
capital contributions, undistributed cash flow from operations, and Partnership
borrowings. Includes costs capitalized subsequent to the date of acquisition,
and equipment acquisition fees paid to PLM Transportation Equipment Corporation.
All equipment was used equipment at the time of purchase, except for 50 marine
containers and 164 dry piggyback trailers.
2 Jointly owned: EGF III (56%) and an affiliated program.
==============
The equipment is leased under operating leases with terms of one to six years.
All of the Partnership's marine containers are leased to operators of
utilization-type leasing pools, that include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment. The majority of rents for railcars are based on a fixed rate; in some
cases they are based on mileage traveled, rents for all other equipment are
based on fixed rates.
As of December 31, 1999, approximately 29% of the Partnership's trailer
equipment is operated in rental yards owned and maintained by PLM Rental, Inc.,
the short-term trailer rental subsidiary of PLM International doing business as
PLM Trailer Leasing. Rents are reported as revenue in accordance with Financial
Accounting Standards Board Statement No.13 "Accounting For Leases". Direct
expenses associated with the equipment are charged directly to the Partnership.
An allocation of indirect expenses of the rental yard operations is charged to
the Partnership monthly. The remaining trailer fleet operated with a short-line
railroad system.
The lessees of the equipment include but are not limited to: Continental
Airlines, Inc., Canadian Airlines International, Varig S.A. (Viaco Aerea Rio -
Grandense), Time Air, Inc., and Terra Nitrogen.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the Partnership's equipment. The Partnership's management
agreement with IMI is to co-terminate with the dissolution of the Partnership,
unless the limited partners vote to terminate the agreement prior to that date
or at the discretion of the General Partner. IMI has agreed to perform all
services necessary to manage the equipment on behalf of the Partnership and to
perform or contract for the performance of all obligations of the lessor under
the Partnership's leases. In consideration for its services and pursuant to the
Partnership agreement, IMI is entitled to a monthly management fee (see Notes 1
and 2 to the financial statements).
(C) Competition
(1) Operating Leases versus Full Payout Leases
The equipment owned or invested in by the Partnership is leased out on an
operating lease basis wherein the rents received during the initial
noncancelable term of the lease are insufficient to recover the Partnership's
purchase price of the equipment. The short to mid-term nature of operating
leases commands a higher rental rate than longer-term, full payout leases and
offers lessees relative flexibility in their equipment commitment. In addition,
the rental obligation under an operating lease need not be capitalized on the
lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize
full payout leases on new equipment, i.e. leases that have terms equal to the
expected economic life of the equipment. While some lessees prefer the
flexibility offered by a shorter-term operating lease, other lessees prefer the
rate advantages possible with a full payout lease. Competitors may write full
payout leases at considerably lower rates and for longer terms than the
Partnership offers, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers who offer operating leases
and full payout leases. Manufacturers may provide ancillary services that the
Partnership cannot offer, such as specialized maintenance service (including
possible substitution of equipment), training, warranty services, and trade-in
privileges.
The Partnership also competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), GATX Corp., General Electric
Railcar Services Corporation, General Electric Capital Aviation Services
Corporation, XTRA Corporation, and other investment programs that lease the same
types of equipment.
(D) Demand
The Partnership currently operates in five primary operating segments: aircraft
leasing, marine vessel leasing, marine container leasing, railcar leasing, and
trailer leasing. Each equipment leasing segment engages in short-term to
mid-term operating leases to a variety of customers. Except for those aircraft
leased to passenger air carriers, the Partnership's transportation equipment is
used to transport materials and commodities, rather than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Aircraft
(a) Commercial Aircraft
After experiencing relatively robust growth over the prior four years, demand
for commercial aircraft softened somewhat in 1999. Boeing and Airbus, the two
primary manufacturers of new commercial aircraft, saw a decrease in their volume
of orders, which totaled 368 and 417 during 1999, compared to 656 and 556 in
1998. The slowdown in aircraft orders can be partially attributed to the full
implementation of US Stage III environmental restrictions, which became fully
effective on December 31, 1999. Since these restrictions effectively prohibit
the operation of noncompliant aircraft in the United States after 1999, carriers
operating within or into the United States either replaced or modified all of
their noncompliant aircraft before the end of the year. The continued weakness
of the Asian economy has also served to slow the volume of new aircraft orders.
However, with the Asian economy now showing signs of recovery, air carriers in
this region are beginning to resume their fleet building efforts.
Demand for, and values of, used commercial aircraft have been adversely affected
by the Stage III environmental restrictions and an oversupply of older aircraft
as manufacturers delivered more new aircraft that the overall market required.
Boeing predicts that the worldwide fleet of jet-powered commercial aircraft will
increase from approximately 12,600 airplanes as of the end of 1998 to about
13,700 aircraft by the end of 2003, an average increase of 220 units per year.
However, actual deliveries for the first two years of this period, 1998 and
1999, already averaged 839 units annually. Although some of the resultant
surplus used aircraft have been retired, the net effect has been an overall
increase in the number of used aircraft available. This has resulted in a
decrease in both market prices and lease rates for used aircraft. The weakness
in the used commercial aircraft market may be mitigated in the future as
manufacturers bring their new production more in line with demand and given the
anticipated continued growth in air traffic. Worldwide, demand for air passenger
services is expected to increase at about 5% annually and freight services at
about 6% per year, for the foreseeable future.
This fund owns one Stage III-compliant aircraft and four Stage II aircraft, the
latter of which are operating outside the United States and thus not subject to
Stage III environmental restrictions. Four of these aircraft remained on lease
throughout 1999 and were not affected by changes in market conditions; however,
one Stage II aircraft, which was off lease, has been impacted by the soft market
conditions described above.
(b) Commuter Aircraft
Major changes have occurred in the commuter market due to the 1993 introduction
of small regional jets. The original concept for regional jets was to take over
the North American hub-and-spoke routes served by the large turboprops, but they
are also finding successful niches in point-to-point routes. The introduction of
this smaller aircraft has allowed major airlines to shift the regional jets to
those marginal routes previously operated by narrowbody (single-aisle) aircraft,
allowing larger-capacity aircraft to be more efficiently employed in an
airline's route system.
The Partnership leases commuter turboprops containing from 36 to 50 seats. These
aircraft all fly in North America, which continues to be the fastest-growing
market for commuter aircraft in the world. The Partnership's aircraft possess
unique performance capabilities, compared to other turboprops, which allow them
to readily operate at maximum payloads from unimproved surfaces, hot and high
runways, and short runways. However, the growing use of regional jets in the
commuter market has resulted in an increase in demand for regional jets at the
expense of turboprops. Several major turboprop programs have been terminated and
all turboprop manufacturers are cutting back on production due to reduced
demand.
These conditions have adversely affected the market for the Partnership's one
turboprop aircraft. As a result, this aircraft was off lease during 1999.
(2) Railcars
(a) Nonpressurized, General Purpose Tank Cars
These cars, which are used to transport bulk liquid commodities and chemicals
not requiring pressurization, such as certain petroleum products, liquefied
asphalt, lubricating and vegetable oils, molten sulfur, and corn syrup,
continued to be in high demand during 1999. The overall health of the market for
these types of commodities in closely tied to both the US and global economies,
as reflected in movements in the Gross Domestic Product, personal consumption
expenditures, retail sales, and currency exchange rates. The manufacturing,
automobile, and housing sectors are the largest consumers of chemicals. Within
North America, 1999 carloadings of the commodity group that includes chemicals
and petroleum products rose 2.5% over 1998 levels. Utilization of the
Partnership's nonpressurized tank cars was above 98% again during 1999.
(b) Pressurized Tank Cars
Pressurized tank cars are used to transport primarily liquefied petroleum gas
(natural gas) and anhydrous ammonia (fertilizer). The major US markets for
natural gas are industrial applications (40% of estimated demand in 1998),
residential use (21%), electrical generation (15%), and commercial applications
(14%). Within the fertilizer industry, demand is a function of several factors,
including the level of grain prices, the status of government farm subsidy
programs, amount of farming acreage and mix of crops planted, weather patterns,
farming practices, and the value of the US dollar. Population growth and dietary
trends also play an indirect role.
On an industrywide basis, North American carloadings of the commodity group that
includes petroleum and chemicals increased 2.5% in 1999, compared to 1998.
Correspondingly, demand for pressurized tank cars remained solid during 1999,
with utilization of this type of railcar within the Partnership remaining above
98%. While renewals of existing leases continue at similar rates, some cars have
been renewed for "winter only" terms of approximately six months. As a result,
it is anticipated that there will be more pressurized tank cars than usual
coming up for renewal in the spring.
(c) Coal Railcars
Since most coal is shipped to domestic electric utilities, demand for coal is
greatly influenced by summer air conditioning and to a lesser extent, winter
heating requirements. Coal car loadings in North America in 1999 increased 3%
from 1998.
Coal railcars owned by the Partnership are on long-term leases and operated at
100% utilization during 1999.
(3) Marine Containers
The marine container leasing market started 1999 with industrywide utilization
rates in the mid 70% range, down somewhat from the beginning of 1998. The market
strengthened throughout the year such that most container leasing companies
reported utilization of 80% by the end of 1999. Offsetting this favorable trend
was a continuation of historically low acquisition prices for new containers
acquired in the Far East, predominantly China. These low prices put pressure on
fleetwide per diem leasing rates.
Industry consolidation continued in 1999 as the parent of one of the world's top
ten container lessors finalized the outsourcing of the management of its
container fleet to a competitor. However, the General Partner believes that such
consolidation is a positive trend for the overall container leasing industry,
and ultimately will lead to higher industrywide utilization and increased per
diem rates. Since this Partnership is in the liquidation phase, containers
remain off lease while waiting to be sold and thus utilization on the
Partnerships containers decreased in 1999.
(4) Trailers
(a) Refrigerated Trailers
After a very strong year in 1998, the temperature-controlled trailer market
leveled off somewhat in 1999, as equipment users began to absorb the expanded
equipment supply created over the prior two years. Refrigerated trailer users
have been actively retiring their older units and consolidating their fleets in
response to improved refrigerated trailer technology. Concurrently, there is a
backlog of six to nine months on orders for new equipment. As a result of these
changes in the refrigerated trailer market, it is anticipated that trucking
companies and shippers will utilize short-term trailer leases more frequently to
supplement their existing fleets. Such a trend should benefit the Fund, whose
trailers are typically leased on a short-term basis.
(b) Intermodal (Piggyback) Trailers
Intermodal (piggyback) trailers are used to transport a variety of goods either
by truck or by rail. Over the past decade, intermodal trailers have been
gradually displaced by domestic containers as the preferred method of transport
for such goods. During 1999, demand for intermodal trailers was more volatile
than usual. Slow demand occurred over the first half of the year due to customer
concerns over rail service problems associated with mergers in the rail
industry, however, demand picked up significantly over the second half of the
year due to both a resolution of these service problems and the continued
strength of the US economy. Due to rise in the demand which occurred over the
latter half of 1999, overall activity within the intermodal trailer market
declined less than expected for the year, as total intermodal trailer shipments
decreased by only approximately 1.8% compared to the prior year.
The General Partner stepped up its marketing and asset management program for
the Partnership's intermodal trailers during 1999. These efforts resulted in
average utilization of the Partnership's intermodal trailers of approximately
82% for the year, up to 2% compared to 1998 levels.
Although the trend towards using domestic containers instead of intermodal
trailers is expected to continue in the future, overall intermodal trailer
shipments are forecast to decline by only 2% to 3% in 2000, compared to the
prior year, due to the anticipated continued strength of the overall economy. As
such, the nationwide supply of intermodal trailers is expected to remain
essentially in balance with demand for 2000. For the Partnership's intermodal
fleet, the General Partner will continue to minimize trailer downtime at repair
shops and terminals.
(c) Nonrefrigerated (Dry) Trailers
The US nonrefrigerated (dry) trailer market continued it's growth, as the strong
domestic economy resulted in heavy freight volumes. With unemployment low,
consumer confidence high, and industrial production sound, the outlook for
leasing this type of trailer remains positive, particularly as the equipment
surpluses of recent years are being absorbed by the buoyant market. In addition
to high freight volumes, improvements in inventory turnover and tighter
turnaround times have lead to a stronger overall trucking industry and increased
equipment demand. After remaining well above 70% during 1998, the Partnership's
dry van fleet ended 1999 at 77% utilization.
(5) Dry Bulk Vessel
The Partnership has an investment with an affiliated program in a small, dry
bulk vessel that operates in international markets carrying commodity-type
cargoes. Demand for commodity-based shipping is closely tied to worldwide
economic growth patterns, which can affect demand by causing changes in volume
on trade routes. The General Partner operates the Partnership's vessels through
period charters, an approach that provides the flexibility to adapt to changes
in market conditions.
Dry bulk shipping is a cyclical business that induces capital investment during
periods of high freight rates and leads to a contraction in investment during
periods of low rates. Currently, the industry environment is one of slow growth.
Fleet size is relatively stable, the overall bulk carrier fleet grew by less
than 1% in 1999, as measured by deadweight tons, and the total number of ships
shrank slightly.
Freight rates, after declining in 1998 due in large part to the Asian recession,
improved for dry bulk vessels of all sizes during 1999. Freight rates increased
during the year such that by the end of 1999, they had reverted back to 1997
levels, although these levels are still moderate by historical comparison. The
1999 improvement was driven by increases in United States grain exports as well
as stronger trade in iron ore and steel products.
Total dry bulk trade, as measured in deadweight tons, is estimated to have grown
by approximately 2% during 1999, compared to a flat year in 1998. Forecasts for
2000 indicate that bulk trade should continue to grow, albeit at slow rates.
During 1999, ship values reversed the declines of the prior year, ending as much
as 30% above the levels seen at the beginning of the year for certain vessel
types. This upturn in ship values was due to a general improvement in dry bulk
trade as well as increases in the cost of new building as compared to 1998. A
slow but steady rise in trade volumes, combined with low fleet expansion, both
of which are anticipated to continue in 2000, may provide some basis for
increases in freight rates and ship values in the future. For example, it is
believed that should growth in demand return to historic levels of 3% annually,
this could stimulate increases in freight rates and ship values, and ultimately,
induce further investment in new building.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign government authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require its removal from service or extensive modification to meet these
regulations, at considerable cost to the Partnership. Such regulations include
but are not limited to:
(1) the US Oil Pollution Act of 1990, which established liability for operators
and owners of vessels that create environmental pollution. This regulation has
resulted in higher oil pollution liability insurance. The lessee of the
equipment typically reimburses the Partnership for these additional costs;
(2) the US Department of Transportation's Aircraft Capacity Act of 1990, which
limits or eliminates the operation of commercial aircraft in the United States
that do not meet certain noise, aging, and corrosion criteria. In addition,
under United States Federal Aviation Regulations, after December 31, 1999, no
person may operate an aircraft to or from any airport in the contiguous United
States unless that aircraft has been shown to comply with Stage III noise
levels. The Partnership has Stage II aircraft that do not meet Stage III
requirements. The cost to husk-kit a Stage II aircraft is approximately $2.0
million, depending on the type of aircraft. The Partnership's Stage II aircraft
are with air carriers that are outside Stage III-legislated areas, or are for
sale.
(3) the Montreal Protocol on Substances that Deplete the Ozone Layer and the US
Clean Air Act Amendments of 1990, which call for the control and eventual
replacement of substances that have been found to cause or contribute
significantly to harmful effects to the stratospheric ozone layer and which are
used extensively as refrigerants in refrigerated marine cargo containers and
refrigerated trailers;
(4) the US Department of Transportation's Hazardous Materials Regulations, which
regulate the classification of and packaging requirements of hazardous materials
and which apply particularly to the Partnership's tank railcars. The Federal
Railroad Administration has mandated that effective July 1, 2000, all jacketed
and non-jacketed tank railcars must be re-qualified to insure tank shell
integrity. Tank shell thickness, weld seams, and weld attachments must be
inspected and repaired if necessary to re-qualify a tank railcar for service.
The average cost of this inspection is $1,800 for non-jacketed tank railcars and
$3,600 for jacketed tank railcars, not including any necessary repairs. This
inspection is to be performed at the next scheduled tank test.
As of December 31 1999, the Partnership was in compliance with the above
government regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased its interests in entities that own equipment for leasing
purposes. As of December 31, 1999, the Partnership owned a portfolio of
transportation and related equipment and investments in equipment owned by USPEs
as described in Item 1, Table 1. The Partnership acquired equipment with the
proceeds of the Partnership offering of $199.7 million, proceeds from debt
financing of $41.9 million, and by reinvesting a portion of its operating cash
flow in additional equipment.
The Partnership maintains its principal office at One Market, Steuart Street
Tower, Suite 800, San Francisco, California 94105-1301. All office facilities
are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
The Partnership, together with affiliates, has initiated litigation in various
official forums in India against a defaulting Indian airline lessee to repossess
Partnership property and to recover damages for failure to pay rent and failure
to maintain such property in accordance with relevant lease contracts. The
Partnership has repossessed all of its property previously leased to such
airline, and the airline has ceased operations. In response to the Partnership's
collection efforts, the airline filed counter-claims against the Partnership in
excess of the Partnership's claims against the airline. The General Partner
believes that the airline's counterclaims are completely without merit, and the
General Partner will vigorously defend against such counterclaims. The General
Partner believes the liklihood of an unfavorable outcome from the counterclaims
is remote.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1999.
(This space intentionally left blank)
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT
MATTERS
As of March 17, 2000, there were 9,871,073 depositary units outstanding. There
are 8,701 depositary unitholders of record as of the date of this report.
There are several secondary markets that will facilitate sales and purchases of
depositary units. Secondary markets are characterized as having few buyers for
depositary units and therefore are viewed as inefficient vehicles for the sale
of depositary units. Presently, there is no public market for the depositary
units and none is likely to develop.
To prevent the units from being considered publicly traded and thereby to avoid
taxation of the Partnership as an association treated as a corporation under the
Internal Revenue Code, the depositary units will not be transferable without the
consent of the General Partner, which may be withheld in its absolute
discretion. The General Partner intends to monitor transfers of units in an
effort to ensure that they do not exceed the percentage or number permitted by
certain safe harbors promulgated by the Internal Revenue Service. A transfer may
be prohibited if the intended transferee is not an US citizen or if the transfer
would cause any portion of the depositary units of a "Qualified Plan" as defined
by the Employee Retirement Income Security Act of 1974 and Individual Retirement
Accounts to exceed the allowable limit.
On January 10, 2000 the General Partner announced that it has begun recognizing
transfers involving trading of units in the partnership for the 2000 calendar
year. The partnership is listed on the OTC Bulletin Board under the symbols
GFZPZ.
In making the announcement, the General Partner noted that, as in previous
years, it will continue to monitor the volume of such trades to ensure that the
Partnership remain in compliance with Internal Revenue Service (IRS) Notice
88-75 and IRS Code Section 7704. These IRS regulations contain safe harbor
provisions stipulating the maximum number of partnership units that can be
traded during a calendar year in order for a partnership not to be deemed a
publicly traded partnership for income tax purposes.
Should the Partnership approach the annual safe harbor limitation later on in
2000, the General Partner will, at that time, cease to recognize any further
transfers involving trading of Partnership units. Transfers specifically
excluded from the safe harbor limitations, referred to in the regulations as
"transfers not involving trading," which include transfers at death, transfers
between family members, and transfers involving distributions from a qualified
retirement plan, will continue to be recognized by the General Partner
throughout the year.
Pursuant to the terms of the partnership agreement, the General Partner is
entitled to a 5% interest in the profits and losses and distributions of the
Partnership subject to certain special allocation provisions.
The Partnership engaged in a plan to repurchase up to 250,000 depositary units
on behalf of the Partnership. There were no repurchases of depositary units in
1999 and 1998. As of December 31, 1999, the Partnership had purchased a
cumulative total of 128,853 depositary units at a total cost of $0.9 million.
The General Partner does not plan any future repurchase of depositary units on
behalf of the Partnership.
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the Years Ended December 31,
(In thousands of dollars, except weighted-average depositary unit amounts)
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
Operating results:
Total revenues $ 17,494 $ 22,507 $ 28,592 $ 28,374 $ 28,055
Of equipment 2,197 3,808 5,629 6,450 2,936
Equity in net income of unconsolidated
Special-purpose entities 1,413 49 857 7,475 --
Net income 4,039 2,917 1,937 9,760 2,706
At year-end:
Total assets $ 18,690 $ 35,512 $ 56,395 $ 82,272 $ 83,317
Total liabilities 10,362 21,219 34,397 51,117 52,980
Note payable 7,458 18,540 29,290 40,284 41,000
Cash distribution $ 7,793 $ 10,394 $ 10,391 $ 11,964 $ 16,737
Cash distribution representing a return
of capital to the limited partners $ 3,754 $ 7,477 $ 8,454 $ 2,204 $ 14,031
Per weighted-average depositary unit:
Net income $ 0.371 $ 0.241 $ 0.141 $ 0.931 $ 0.191
Cash distribution $ 0.75 $ 1.00 $ 1.00 $ 1.15 $ 1.60
Cash distribution representing a return
of capital to the limited partners $ 0.38 $ 0.76 $ 0.86 $ 0.22 $ 1.41
- ----------------------------------
1 After reduction of income of $0.2 million ($0.02 per weighted-average
depositary unit) in 1999, $0.4 million ($0.04 per weighted-average depositary
unit) in 1998 and 1997, $0.1 million ($0.01 per weighted-average depositary
unit) in 1996, $0.7 million ($0.07 per weighted-average depositary unit) in
1995, representing allocations to the General Partner resulting from an
amendment to the partnership agreement (see Note 1 to the financial statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth Fund III
(the Partnership). The following discussion and analysis of operations focuses
on the performance of the Partnership's equipment in the various segments in
which it operates and its effect on the Partnership's overall financial
condition.
(B) Results of Operations -- Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Partnership's equipment portfolio to repricing risk
occurs whenever the leases for the equipment expire or are otherwise terminated
and the equipment must be remarketed. Major factors influencing the current
market rate for Partnership's equipment include, supply and demand for similar
or comparable types of transport capacity, desirability of the equipment in the
leasing market, market conditions for the particular industry segment in which
the equipment is to be leased, overall economic conditions, and various
regulations of concerning the use of the equipment. Equipment that is idle or
out of service between the expiration of one lease and the assumption of a
subsequent lease can result in a reduction of contribution to the Partnership.
The Partnership experienced re-leasing or repricing activity in 1999 primarily
in its aircraft, marine containers, trailers, railcars and marine vessel.
(a) Aircraft: One Boeing 737-200 Stage III commercial aircraft was off
lease during 1999. One DC-9 commercial aircraft came off lease during the end of
the third quarter and was sold in the fourth quarter of 1999.
(b) Marine containers: All of the Partnership's marine containers are
operated in utilization-based leasing pools and, as such, are highly exposed to
repricing activity. The Partnership saw lower utilization on the marine
container fleet during 1999.
(c) Trailers: All of the Partnership's trailer portfolio operates in
short-term rental facilities or short-line railroad systems. The relatively
short duration of most leases in these operations exposes the trailers to
considerable re-leasing activity.
(d) Railcars: While this equipment experienced some re-leasing activity,
lease rates in this market remain relatively constant. While renewals of
existing leases continue at similar rates, some cars have been renewed for
"winter only" terms of approximately six months. As a result, it is anticipated
that there will be more pressurized tank cars than usual coming up for renewal
in the spring.
(e) Marine vessel: Freight rates increased during the year such that by the
end of 1999, they had reverted back to 1997 levels, although these levels are
still moderate by historical comparison. The vessel in which the Partnership has
an interest operates in a short-term charter market and is thus subject to
repricing risk.
(2) Equipment Liquidations
Liquidation of Partnership equipment and investments in USPEs represents a
reduction in the size of the equipment portfolio and may result in a reduction
of contribution to the Partnership. In 1999, the Partnership disposed of owned
equipment that included marine containers, trailers, railcars, and an aircraft
for total proceeds of $3.8 million.
(3) Equipment Valuation
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the General Partner reviews the carrying value of the
Partnership's equipment portfolio at least quarterly and whenever circumstances
indicate the carrying value of an asset may not be recoverable in relation to
expected future market conditions for the purpose of assessing the
recoverability of the recorded amounts. If projected undiscounted future lease
revenues plus residual values are less than the carrying value of the equipment,
a loss on revaluation is recorded. No reductions to the carrying values of
equipment were required during 1999, 1998, or 1997.
As of December 31, 1999, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including the Partnership's
interest in equipment owned by USPEs, to be $49.0 million. This estimate is
based on recent market transactions for equipment similar to the Partnership's
equipment portfolio and the Partnership's interest in equipment owned by USPEs.
Ultimate realization of fair market value by the Partnership may differ
substantially from the estimate due to specific market conditions, technological
obsolescence, and government regulations, among other factors that the General
Partner cannot accurately predict.
(C) Financial Condition -- Capital Resources and Liquidity
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering of $199.7 million and permanent
debt financing of $41.9 million. No further capital contributions from the
limited partners are permitted under the terms of the Partnership's limited
partnership agreement. The Partnership relies on operating cash flow to meet its
operating obligations and to make cash distributions to the limited partners.
For the year ended December 31, 1999, the Partnership generated $8.1 million in
operating cash (net cash provided by operating activities plus minority interest
less additional investments in USPEs) to fund operations to meet its operating
obligations and to make distributions (total of $7.8 million in 1999) to the
partners.
The Partnership's note payable, which bears interest at 1.5% over LIBOR, had an
outstanding balance of $7.5 million as of December 31, 1999 and March 17, 2000.
Commencing October 1, 1997, the loan required quarterly principal payments equal
to the net proceeds from asset sales from that quarter, or maintain the minimum
of the facility balance specified in the loan agreement. During 1999, the
Partnership paid $11.1 million of the outstanding loan balance mainly as a
result of asset sales.
In September 1999, the General Partner loaned the Partnership $600,000. This
loan was repaid in full including interest of $10,000 on February 1, 2000.
The Partnership lessee deposits and reserve for repairs increased by $0.3
million, due to the increase in engine reserves for the aircraft on lease to a
South American lessee.
The Partnership is in the active liquidation phase. As a result the size of the
Partnerships remaining equipment portfolio and, in turn, the amount of cash
flows from operations will continue to become progressively smaller as assets
are sold. Although distribution levels may be reduced, significant asset sales
may result in special distributions to the Partners. The Partnership will
terminate on December 31, 2000, unless the Partnership is terminated earlier
upon sale of all Partnership property or by certain other events.
The General Partner has not planned any expenditures, nor is it aware of any
contingencies that would cause it to require any additional capital to that
mentioned above.
(D) Results of Operations -- Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1999 and 1998
(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 for the year ended December 31, 1999 when compared to the same period
of 1998. Certain expenses such as depreciation and amortization and general and
administrative expenses relating to the operating segments (see Note 5 to the
audited financial statements), are not included in the owned equipment operation
discussion because these expenses are more indirect in nature, not a result of
operations but more the result of owning a portfolio of equipment.
In September 1999, the General Partner amended the corporate-by-laws of the
USPEs in which the Partnership owns an interest greater than 50%. The amendment
to the corporate-by-law provides that all decisions regarding the acquisition
and disposition of the investment as well as other significant business
decisions of that investment would be permitted only upon unanimous consent of
the Partnership and all the affiliated programs that have an ownership in the
investment regardless of the percentage of ownership. As such, although the
Partnership may own a majority interest in a USPE, the Partnership does not
control its management and thus the equity method of accounting is used for this
entity after adoption of the amendment. As a result of the amendment, as of
September 30, 1999, all jointly owned equipment in which the Partnership owned a
majority interest, which had been consolidated, were reclassified to investments
in USPEs. Accordingly, as of December 31, 1999, the balance sheet reflects all
investments in USPEs on an equity basis.
The following table presents lease revenues less direct expenses by segment (in
thousands of dollars):
For the Years
Ended December 31,
1999 1998
------------------------------------------------------------------------------
Rail equipment $ 5,100 $ 4,768
Aircraft 4,977 5,150
Marine vessel 660 1,215
Trailers 512 1,035
Marine containers 118 272
Mobile offshore drilling unit -- 738
Rail equipment: Railcar lease revenues and direct expenses were $6.9 million and
$1.8 million, respectively, for 1999, compared to $7.1 million and $2.4 million,
respectively, during 1998. The decrease in lease revenues of $0.2 million was
due to the disposition of rail equipment during 1999 and 1998. The decrease in
direct expenses of $0.6 million was a result of fewer running repairs being
required on rail equipment in 1999 than was needed during 1998.
Aircraft: Aircraft lease revenues and direct expenses were $5.6 million and $0.7
million, respectively, for 1999, compared to $6.5 million and $1.3 million,
respectively, during 1998. A $0.9 million decrease in lease revenues was due to
an aircraft being offlease during the entire year of 1999 and another aircraft
coming off lease in the third quarter of 1999. Both of these aircraft were on
lease for all of 1998. The decrease in lease revenue was partially offset by the
increase in lease revenue of $0.5 million from an aircraft that was transferred
into the Partnership's owned equipment portfolio from a trust during the second
quarter of 1998. Direct expense decreased by $0.6 million due to repairs
required on one aircraft in 1998 that were not needed in 1999.
Marine vessel: Marine vessel lease revenues and direct expenses were $1.5
million and $0.8 million, respectively, for 1999, compared to $2.5 million and
$1.3 million respectively for 1998. In September 1999, the General Partner
amended the coporate-by-laws of the USPEs in which the Partnership owns an
interest greater than 50%. As a result of the amendment and the related change
in accounting for these USPEs from consolidation basis to equity basis, lease
revenues for the Partnership's majority held marine vessel decreased $0.6
million for the year ended December 31, 1999, when compared to the same period
of 1998. Direct expenses for the Partnership's majority held marine vessel also
decreased $0.2 due to the amendment and related change in accounting.
Trailers: Trailer lease revenues and direct expenses were $0.7 million and $0.2
million, respectively, for 1999, compared to $1.3 million and $0.2 million,
respectively, during 1998. The number of trailers owned by the Partnership has
been declining due to sales and dispositions. The result of this declining fleet
has been a decrease in trailer contribution.
Marine containers: Marine containers lease revenues and direct expenses were
$0.1 million and $2,000, respectively in 1999 compared to $0.3 million and
$6,000 respectively in 1998. Lease revenues decreased by $0.2 million in 1999
compared to 1998 due to lower utilization rates.
Mobile offshore drilling unit: Mobile offshore drilling unit (MODU) lease
revenues and direct expenses were $0.8 million and $19,000, respectively, for
1998. The decrease in contribution in 1999 compared to 1998 was due to the sale
of the Partnership's MODU in June of 1998.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $11.4 million for 1999 decreased from $14.3 million
for 1998. Significant variances are explained as follows:
(i) A decrease of $2.8 million in depreciation and amortization expense
from 1998 levels resulted from an approximately $0.7 million decrease due to the
sale of certain assets during 1999 and 1998 and an approximately $2.1 million
decrease resulting from the use of the double-declining balance depreciation
method which results in greater depreciation the first years an asset is
owned.reflects the sale or disposition of certain Partnership assets.
(ii)A decrease of $0.7 million in interest expense was due to lower average
debt balance outstanding during 1999 when compared to 1998.
(iii)A decrease of $0.2 million in management fees was due to lower lease
revenues in 1999, compared to 1998.
(iv)An increase of $0.6 million in bad debt expense from 1998 was due to
the collection of $0.4 million from past due receivables during 1999 that had
previously been reserved for as a bad debt and the General Partner's evaluation
of the collectability of receivables due from certain lessees.
(v) An increase of $0.2 million in general and administrative expenses was
primarily due to higher legal and consulting fees related to one of the
Partnership's aircraft.
(c) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment was $2.2 million for 1999 and resulted
from the disposition of marine containers, trailers, railcars, and an aircraft.
These assets had an aggregate net book value of $1.6 million and were sold or
liquidated for proceeds of $3.8 million. The net gain on disposition of
equipment totaled $3.8 million for 1998 and resulted from the disposition of
marine containers, trailers, railcars, and a mobile offshore drilling unit.
These assets had an aggregate net book value of $8.3 million and were sold or
liquidated for proceeds of $12.1 million.
(d) Interest and Other Income
Interest and other income increased by $0.2 million for 1999 due to higher
income on the railcars related to mileage charges.
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by segment (in
thousands of dollars):
For the Years
Ended December 31,
1999 1998
------------------------------
Aircraft, aircraft engines, and rotables $ 1,477 $ 49
Marine vessel (64) --
==============================
Equity in net income of USPEs $ 1,413 $ 49
==============================
Aircraft, aircraft engines, and rotables: As of December 31, 1999, the
Partnership had no remaining interest in entities owning aircraft, aircraft
engines, or rotables. The interest in the trust was sold in 1999, for a gain of
$1.6 million. The Partnerships share of aircraft, aircraft engines, and rotables
revenue and expenses were $0 and $0.1 million respectively, for 1999, compared
to $1.2 million and $1.2 million resepectively, during 1998. The decrease in
revenue and expenses is due to the sale of the aircraft, aircraft engines, and
rotables in the first quarter of 1999.
Marine vessel: The Partnership's share of revenues and expenses of marine
vessels was $0.2 million and $0.3 million, respectively, for 1999. In September
1999, the General Partner amended the coporate-by-laws of the USPEs in which the
Partnership owns an interest greater than 50%. As a result of the amendment and
the related change in accounting for these USPEs from consolidation basis to
equity basis, lease revenues and direct expenses are discussed in owned
equipment operations for the nine months ended September 30, 1999, and for the
entire year ended December 31,1998, for the Partnership's majority held marine
vessel
(f) Net Income
As a result of the foregoing, the Partnership's net income for 1999 was $4.0
million, compared to net income of $2.9 million during 1998. The Partnership's
ability to operate, liquidate assets, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance during the
year ended December 31, 1999 is not necessarily indicative of future periods. In
the year ended December 31, 1999 and 1998, the Partnership distributed $7.4
million and $9.9 million, respectively to the limited partners, or $0.75 and
$1.00 per weighted-average depositary unit, respectively.
(2) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1998 and 1997
(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 for the year ended December 31, 1998 when compared to the same period
of 1997. Certain expenses such as depreciation and amortization and general and
administrative expenses relating to the operating segments (see Note 5 to the
audited financial statements), are not included in the owned equipment operation
discussion because these expenses are more indirect in nature, not a result of
operations but more the result of owning a portfolio of equipment. The following
table presents lease revenues less direct expenses by segment (in thousands of
dollars):
For the Years
Ended December 31,
1998 1997
---------------------------------
Aircraft $ 5,150 $ 6,499
Rail equipment 4,768 5,319
Marine vessels 1,215 573
Trailers 1,035 1,539
Mobile offshore drilling unit 738 1,612
Marine containers 272 1,077
Aircraft: Aircraft lease revenues and direct expenses were $6.5 million and $1.3
million, respectively, for 1998, compared to $7.9 million and $1.4 million,
respectively, during 1997. A decrease of $1.5 million in lease revenues was due
to the sale of a total of two aircraft during the third and fourth quarters of
1997 and a $0.5 million decrease in lease revenues was due to one aircraft that
went offlease during the third quarter of 1998. The decrease in lease revenue
was partially offset by the incremental lease revenue of $0.7 million earned
from an aircraft that was transferred into the Partnership's owned equipment
portfolio from a trust during the second quarter of 1998.
Rail equipment: Railcar lease revenues and direct expenses were $7.1 million and
$2.4 million, respectively, for 1998, compared to $7.5 million and $2.2 million,
respectively, during 1997. The decrease in lease revenues was due to the
disposition of rail equipment during 1998 and 1997. The increase in direct
expenses resulted from running repairs required on certain rail equipment in the
fleet during 1998 that were not needed during 1997.
Marine vessels: Marine vessel lease revenues and direct expenses were $2.5
million and $1.3 million, respectively, 1998, compared to $2.5 million and $1.9
million, respectively, during 1997. The decrease in direct expenses was due to
lower insurance expenses in 1998 when compared to 1997.
Trailers: Trailer lease revenues and direct expenses were $1.3 million and $0.2
million, respectively, for 1998, compared to $1.8 million and $0.3 million,
respectively, during 1997. The number of trailers owned by the Partnership has
been declining due to sales and dispositions. The result of this declining fleet
has been a decrease in trailers net contribution.
Mobile offshore drilling unit: Mobile offshore drilling unit (MODU) lease
revenues and direct expenses were $0.8 million and $19,000, respectively, for
1998, compared to $1.6 million and $31,000, respectively, during 1997. The
decrease in contribution was due to the sale of the Partnership's MODU in June
of 1998.
Marine containers: Marine containers lease revenues and direct expenses were
$0.3 million and $6,000, respectively, for 1998, compared to $1.1 million and
$10,000, respectively, during 1997. The number of marine containers owned by the
Partnership has been declining due to sales and dispositions. The result of this
declining fleet has been a decrease in marine container net contribution.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $14.4 million for 1998 decreased from $21.6 million
for 1997. Significant variances are explained as follows:
(i) A decrease of $4.7 million in depreciation and amortization expense
from 1997 levels. A $1.2 million decrease in depreciation and amortization
expense reflects the sale or disposition of certain Partnership assets during
1998 and 1997. A $3.5 million decrease in depreciation and amortization expense
reflects the Partnership's use of the double-declining balance method of
depreciation, which results in greater depreciation in the first years an asset
is owned.
(ii)A decrease of $1.5 million in interest expense was due to lower average
debt outstanding during 1998 when compared to 1997.
(iii) A decrease of $0.8 million in bad debt expense from 1997 due to the
collection of $0.4 million from past due receivables during 1998 that had
previously been reserved for as a bad debt and the General Partner's evaluation
of the collectability of receivables due from certain lessees.
(iv)A decrease of $0.3 million in general and administrative expenses was
primarily due to reduced legal fees to collect outstanding receivables due from
an aircraft lessee.
(v) A decrease of $0.2 million in management fees was due to lower lease
revenues in 1998, compared to 1997.
(vi)An increase of $0.3 million in minority interests was due to $0.3
million decrease in insurance expenses.
(c) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment was $3.8 million for 1998 and resulted
from the disposition of marine containers, trailers, railcars, and a mobile
offshore drilling unit. These assets had an aggregate net book value of $8.3
million and were sold or liquidated for proceeds of $12.1 million. The net gain
on disposition of equipment totaled $5.6 million for 1997 and resulted from the
disposition of marine containers, trailers, railcars, and aircraft. These assets
had an aggregate net book value of $6.5 million and were sold or liquidated for
proceeds of $12.1 million.
(d) Interest and Other Income
Interest and other income decreased by $0.2 million for 1998 compared to 1997
primarily due to lower cash balances available for investment.
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
(USPEs)
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by segment (in
thousands of dollars):
For the Years
Ended December 31,
1998 1997
-----------------------------------
Aircraft, aircraft engines, and rotables $ 49 $ 857
===================================
Equity in net income of USPEs $ 49 $ 857
===================================
Aircraft, aircraft engines, and rotables: The Partnership's share of aircraft
revenues and expenses were $1.2 million and $1.2 million, respectively, for
1998, compared to $2.8 million and $1.9 million, respectively, during 1997. As
of December 31, 1998 and 1997, the Partnership had an interest in two trusts
that own a total of three commercial aircraft, two aircraft engines, and a
portfolio of aircraft rotables. As of December 31, 1997, the Partnership also
owned an interest in a trust that owned four commercial aircraft. The aircraft
in this trust was transferred out of the trust into the Partnership's owned
equipment portfolio in the second quarter of 1998. The decrease of $1.0 million
in lease revenues was due to the renewal of the leases in 1998 for three
commercial aircraft, two aircraft engines, and a portfolio of aircraft rotables
at a lower rate than was in place during the same period of 1997. In addition,
the lease revenues decreased $0.6 million because of the aircraft that was
transferred out of a trust into the Partnership's owned equipment portfolio went
offlease during the second quarter of 1998. Depreciation expenses decreased $0.5
million as a result of this transfer and $0.2 million decrease in depreciation
expenses was due to the double-declining balance method of depreciation, which
results in greater depreciation in the first years an asset is owned.
(f) Net Income
As a result of the foregoing, the Partnership's net income for 1998 was $2.9
million, compared to net income of $1.9 million during 1997. The Partnership's
ability to operate, liquidate assets, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance during the
year ended December 31, 1998 is not necessarily indicative of future periods. In
the year ended December 31, 1998 and 1997, the Partnership distributed $9.9
million to the limited partners, or $1.00 per weighted-average depositary unit.
(E) Geographic Information
Certain of the Partnership's equipment operates in international markets.
Although these operations expose the Partnership to certain currency, political,
credit, and economic risks, the General Partner believes that these risks are
minimal or has implemented strategies to control the risks. Currency risks are
at a minimum because all invoicing, with the exception of a number of railcars
operating in Canada, is conducted in United States (US) dollars. Political risks
are minimized by avoiding operations in countries that do not have a stable
judicial system and established commercial business laws. Credit support
strategies for lessees range from letters of credit supported by US banks to
cash deposits. Although these credit support mechanisms allow the Partnership to
maintain its lease yield, there are risks associated with slow-to-respond
judicial systems when legal remedies are required to secure payment or repossess
equipment. Economic risks are inherent in all international markets and the
General Partner strives to minimize this risk with market analysis prior to
committing equipment to a particular geographic area. Refer to Note 6 to the
audited financial statements for information on the revenues, net income (loss),
and net book value of equipment in various geographic regions.
Revenues and net operating income by geographic region are impacted by the time
period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years of
ownership due to the use of the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to change significantly in the future, as assets come
off lease and decisions are made to either redeploy the assets in the most
advantageous geographic location or sell the assets.
The Partnership's owned equipment on lease to the United States domiciled
lessees consisted of railcars, trailers, and an aircraft. During 1999, US lease
revenues accounted for 24% of the lease revenues generated by wholly-and
partially-owned equipment, and these operations accounted for a $0.1 million net
loss while the Partnership had total aggregate net income of $4.0 million.
The Partnership's owned equipment on lease to Canadian-domiciled lessees
consisted of railcars and an aircraft that was transferred into the
Partnership's owned equipment portfolio from a trust during the second quarter
of 1998. Canadian lease revenues accounted for 40% of total lease revenues
generated by wholly-and partially-owned equipment, while these operations
accounted for $4.3 million in net income of the Partnerships total aggregate net
income of $4.0 million.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to Europeon domiciled leases, consisted of three owned aircraft and an
interest in two trusts that own three aircraft, two aircraft engines, and
aircraft rotable components. During 1999, the lease revenues for these
operations accounted for 24% of total lease revenues generated by wholly-and
partially-owned equipment and accounted for income of $0.7 million in 1999 of
the Partnership's total aggregate net income of $4.0 million.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to lessees in the rest of the world consisted of marine containers and a
partially owned marine vessel. During 1999, lease revenues for these operations
accounted for 12% of the total lease revenue generated by wholly-and
partially-owned equipment, while these operations accounted for $26,000 in net
loss while the Partnership had total aggregate net income of $4.0 million.
(F) Effects of Year 2000
As of March 24, 2000, the Partnership has not experienced any material Year 2000
(Y2K) issues with either its internally developed software or purchased
software. In addition, to date, the Partnership has not been impacted by any Y2K
problems that may have impacted our customers and suppliers. The amount
allocated to the Partnership by the General Partner related to Y2K issues has
bot been material. The General Partner continues to monitor its systems for any
potential Y2K issues.
(G) Inflation
Inflation did not significantly impact on the Partnership's operations during
1999, 1998, or 1997.
(H) Forward-Looking Information
Except for historical information contained herein, the discussion in this Form
10-K 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-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.
(I) Outlook for the Future
The Partnership entered its liquidation phase on January 1, 2000. The General
Partner is seeking to selectively re-lease or sell assets as the existing leases
expire. Sale decisions will cause the operating performance of the Partnership
to decline over the remainder of its life. The General Partner anticipates that
the liquidation of Partnership assets will be completed by the scheduled
termination of the Partnership at the end of the year 2000.
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 to satisfy its
operating requirements, pay loan principal on debt, and pay cash distributions
to the investors.
Factors affecting the Partnership's contribution during the year 2000:
1. A worldwide increase in available marine containers to lease has led to
declining rates for this equipment. In addition, some of the Partnership's
refrigerated marine containers have become delaminated. This condition
lowers the demand for these marine containers which has lead to declining
lease rates and lower utilization.
2. Depressed economic conditions in Asia during most of 1999 has led to
declining freight rates for dry bulk marine vessels. As Asia begins its
economic recovery and in the absence of new additional orders, this market
would be expected to stabilize and improve over the next one to two years.
3. Railcar loading in North America has continued to be high, however, a
softening in the market in the last quarter of 1999, may lead to lower
utilization and lower contribution to the Partnership as existing leases
expire and renewal leases are negotiated.
Several other factors may affect the Partnership's operating performance in the
year 2000, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
(1) Repricing Risk
Certain of the Partnership's aircraft, marine containers, railcars and trailers
will be remarketed in 2000 as existing leases expire, exposing the Partnership
to some repricing risk/opportunity. Additionally, the Partnership entered its
liquidation phase on January 1, 2000 and has commenced an orderly liquidation of
the Partnership's assets. In either case, the General Partner intends to sell
equipment at prevailing market rates; however, the General Partner cannot
predict these future rates with any certainty at this time, and cannot
accurately assess the effect of such activity on future Partnership performance.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the General Partner has
observed rising insurance costs to operate certain vessels in US ports,
resulting from implementation of the US Oil Pollution Act of 1990. Ongoing
changes in the regulatory environment, both in the United States and
internationally, cannot be predicted with accuracy, and preclude the General
Partner from determining the impact of such changes on Partnership operations,
purchases, or sale of equipment. Under US Federal Aviation Regulations, after
December 31, 1999, no person may operate an aircraft to or from any airport in
the contiguous United States unless that aircraft has been shown to comply with
Stage III noise levels. The Partnership has Stage II aircraft that do not meet
Stage III requirements. The cost to husk-kit a Stage II aircraft is
approximately $2.0 million, depending on the type of aircraft. The Partnership's
Stage II aircraft are either positioned with air carriers that are outside Stage
III-legislated areas or anticipated to be sold or leased outside of Stage III
areas before the year 2000.
(3) Distributions
During the liquidation phase, the Partnership will use operating cash flow and
proceeds from the sale of equipment to meet its operating obligations, make loan
principal and interest payments on debt, and make distributions to the partners.
Although the General Partner intends to maintain a sustainable level of
distributions prior to final liquidation of the Partnership, actual Partnership
performance and other considerations may require adjustments to existing
distribution levels which could include using available operating cash flow to
meet future Partnership debt obligations. Pending asset sales, the use of
operating cash flows to meet Partnership debt obligation could result in the
Partnership being unable to make a regularly scheduled quarterly distribution,
as occured in the fourth quarter of 1999. In the long term, changing market
conditions precludes the General Partner from accurately determining the impact
of future re-leasing activity and equipment sales on Partnership performance and
liquidity.
Since the Partnership has entered the active liquidation phase, 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. Although distribution levels may be reduced, significant asset sales
may result in special distributions to unitholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposures are that of interest rate and
currency devaluation risk. The Partnership's senior secured note is a variable
rate debt. The Partnership estimates a one percent increase or decrease in the
Partnership's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $0.1 million in 2000. The Partnership
estimates a two percent increase or decrease in the Partnership's variable rate
debt would result in an increase or decrease, respectively, in interest expense
of $0.15 million in 2000.
During 1999, 76% 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 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements included in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(PART III)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM INTERNATIONAL
AND PLM FINANCIAL SERVICES, INC.
As of the date of this annual report, the directors and executive officers of
PLM International and of PLM Financial Services, Inc. (and key executive
officers of its subsidiaries) are as follows:
Name Age Position
- ---------------------------------------- ------- ------------------------------------------------------------------
Robert N. Tidball 61 Chairman of the Board, Director, President, and Chief Executive
Officer, PLM International, Inc.;
Director, PLM Financial Services, Inc.;
Vice President, PLM Railcar Management Services, Inc.;
President, PLM Worldwide Management Services Ltd.
Randall L.-W. Caudill 52 Director, PLM International, Inc.
Douglas P. Goodrich 53 Director and Senior Vice President, PLM International, Inc.;
Director and President, PLM Financial Services, Inc.; President,
PLM Transportation Equipment Corporation; President, PLM Railcar
Management Services, Inc.
Warren G. Lichtenstein 34 Director, PLM International, Inc.
Howard M. Lorber 51 Director, PLM International, Inc.
Harold R. Somerset 64 Director, PLM International, Inc.
Robert L. Witt 59 Director, PLM International, Inc.
Robin L. Austin 53 Vice President, Human Resources, PLM International, Inc. and PLM
Financial Services, Inc.
Stephen M. Bess 53 President, PLM Investment Management, Inc.; Vice President and
Director, PLM Financial Services, Inc.
Richard K Brock 37 Vice President and Chief Financial Officer, PLM International,
Inc. and PLM Financial Services, Inc.
Susan C. Santo 37 Vice President, Secretary, and General Counsel, PLM
International, Inc. and PLM Financial Services, Inc.
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment as President and Chief Executive Officer, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989. Mr. Tidball was appointed a Director of PLM
Financial Services, Inc. in July 1997 and was elected President of PLM Worldwide
Management Services Limited in February 1998. He has served as an officer of PLM
Railcar Management Services, Inc. since June 1987. Mr. Tidball was Executive
Vice President of Hunter Keith, Inc., a Minneapolis-based investment banking
firm, from March 1984 to January 1986. Prior to Hunter Keith, he was Vice
President, General Manager, and Director of North American Car Corporation and a
director of the American Railcar Institute and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997.
He is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm serving emerging growth companies. Prior to founding
Dunsford Hill Capital Partners, Mr. Caudill held senior investment banking
positions at Prudential Securities, Morgan Grenfell Inc., and The First Boston
Corporation. Mr. Caudill also serves as a director of Northwest Biotherapeutics,
Inc., VaxGen, Inc., SBE, Inc., and RamGen, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Senior Vice President of PLM International in March 1994, and
appointed Director and President of PLM Financial Services, Inc. in June 1996.
Mr. Goodrich has also served as Senior Vice President of PLM Transportation
Equipment Corporation since July 1989 and as President of PLM Railcar Management
Services, Inc. since September 1992, having been a Senior Vice President since
June 1987. Mr. Goodrich was an executive vice president of G.I.C. Financial
Services Corporation of Chicago, Illinois, a subsidiary of Guardian Industries
Corporation, from December 1980 to September 1985.
Warren G. Lichtenstein was elected to the Board of Directors in December 1998.
Mr. Lichtenstein is the Chief Executive Officer of Steel Partners II, L.P.,
which is PLM International's largest shareholder, currently owning 16% of the
Company's common stock. Additionally, Mr. Lichtenstein is Chairman of the Board
of Aydin Corporation, a NYSE-listed defense electronics concern, as well as a
director of Gateway Industries, Rose's Holdings, Inc., and Saratoga Beverage
Group, Inc. Mr. Lichtenstein is a graduate of the University of Pennsylvania,
where he received a Bachelor of Arts degree in economics.
Howard M. Lorber was elected to the Board of Directors in January 1999. Mr.
Lorber is President and Chief Operating Officer of New Valley Corporation, an
investment banking and real estate concern. He is also Chairman of the Board and
Chief Executive Officer of Nathan's Famous, Inc., a fast food company.
Additionally, Mr. Lorber is a director of United Capital Corporation and Prime
Hospitality Corporation and serves on the boards of several community service
organizations. He is a graduate of Long Island University, where he received a
Bachelor of Arts degree and a Masters degree in taxation. Mr. Lorber also
received charter life underwriter and chartered financial consultant degrees
from the American College in Bryn Mawr, Pennsylvania. He is a trustee of Long
Island University and a member of the Corporation of Babson College.
Harold R. Somerset was elected to the Board of Directors of PLM International in
July 1994. From February 1988 to December 1993, Mr. Somerset was President and
Chief Executive Officer of California & Hawaiian Sugar Corporation (C&H Sugar),
a subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined C&H Sugar in 1984
as Executive Vice President and Chief Operating Officer, having served on its
Board of Directors since 1978. Between 1972 and 1984, Mr. Somerset served in
various capacities with Alexander & Baldwin, Inc., a publicly held land and
agriculture company headquartered in Honolulu, Hawaii, including Executive Vice
President of Agriculture and Vice President and General Counsel. Mr. Somerset
holds a law degree from Harvard Law School as well as a degree in civil
engineering from the Rensselaer Polytechnic Institute and a degree in marine
engineering from the U.S. Naval Academy. Mr. Somerset also serves on the boards
of directors for various other companies and organizations, including Longs Drug
Stores, Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993,
Mr. Witt has been a principal with WWS Associates, a consulting and investment
group specializing in start-up situations and private organizations about to go
public. Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel Corporation, an international advanced materials company with sales
primarily in the aerospace, transportation, and general industrial markets. Mr.
Witt also serves on the boards of directors for various other companies and
organizations.
Robin L. Austin became Vice President, Human Resources of PLM Financial
Services, Inc. in 1984, having served in various capacities with PLM Investment
Management, Inc., including Director of Operations, from February 1980 to March
1984. From June 1970 to September 1978, Ms. Austin served on active duty in the
United States Marine Corps and served in the United States Marine Corp Reserves
from 1978 to 1998. She retired as a Colonel of the United States Marine Corps
Reserves in 1998. Ms. Austin has served on the Board of Directors of the
Marines' Memorial Club and is currently on the Board of Directors of the
International Diplomacy Council.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Investment Management, Inc. in
August 1989, having served as Senior Vice President of PLM Investment
Management, Inc. beginning in February 1984 and as Corporate Controller of PLM
Financial Services, Inc. beginning in October 1983. Mr. Bess served as Corporate
Controller of PLM, Inc. beginning in December 1982. Mr. Bess was Vice
President-Controller of Trans Ocean Leasing Corporation, a container leasing
company, from November 1978 to November 1982, and Group Finance Manager with the
Field Operations Group of Memorex Corporation, a manufacturer of computer
peripheral equipment, from October 1975 to November 1978.
Richard K Brock was appointed Vice President and Chief Financial Officer of PLM
International and PLM Financial Services, Inc. in January 2000, after having
served as Acting CFO since June 1999. Mr. Brock served as an accounting manager
beginning in September 1991 and as Director of Planning and General Accounting
beginning in February 1994. Mr. Brock was a division controller of Learning Tree
International, a technical education company, from February 1988 through July
1991.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM
International and PLM Financial Services, Inc. in November 1997. She has worked
as an attorney for PLM International since 1990 and served as its Senior
Attorney since 1994. Previously, Ms. Santo was engaged in the private practice
of law in San Francisco. Ms. Santo received her J.D. from the University of
California, Hastings College of the Law.
The directors of PLM International, Inc. are elected for a three-year term and
the directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM International Inc. or PLM
Financial Services, Inc., PLM Transportation Equipment Corp., or PLM Investment
Management, Inc.
(This space is intentionally left blank)
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership had no
pension, profit sharing, retirement, or similar benefit plan in effect as of
December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is entitled to a 5% interest in the profits and losses and
distributions of the Partnership subject to certain allocations of income. In
addition to its General Partner interest, FSI owned 8,000 units in the
Partnership as of December 31, 1999. As of December 31, 1999, no investor was
known by the General Partner to beneficially own more than 5% of the depositary
units of the Partnership.
(B) Security Ownership of Management
Table 3, below, sets forth, as of the date of this report, the amount and
percent of the Partnership's outstanding depositary units beneficially owned by
each of the directors and executive officers and all directors and executive
officers as a group of the General Partner and its affiliates:
TABLE 3
Name Depositary Units Percent of Units
Robert N. Tidball 2,000 *
All directors and officers
As a group (1 person) 2,000 *
* Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
During 1999, the Partnership paid or accrued the following fees to FSI or its
affiliates: management fees, $0.8 million. The Partnership reimbursed FSI or its
affiliates $0.5 million for administrative and data processing services
performed on behalf of the Partnership during 1999.
During 1999, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Partnership's proportional share of ownership):
management fees, $12,000 and administrative and data processing services,
$6,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on
Form 10-K.
(B) Reports on Form 8-K
None.
(C) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated by
reference to the Partnership's Registration Statement on Form S-1
(Reg. No. 33-18104), which became effective with the Securities
and Exchange Commission on March 25, 1988.
4.1 Amendment, dated November 18, 1991, to Limited Partnership
Agreement of Partnership. Incorporated by reference to the
Partnership's Annual Report on Form 10-K dated December 31, 1991
filed with the Securities and Exchange Commission on March 30,
1992.
10.1 Management Agreement between Partnership and PLM Investment
Management, Inc. Incorporated by reference to the Partnership's
Registration Statement on Form S-1 (Reg. No. 33-18104), which
became effective with the Securities and Exchange Commission on
March 25, 1988.
10.2 $41,000,000 Credit Agreement dated as of December 13, 1994 with
First Union National Bank of North Carolina incorporated by
reference to the Partnership's Annual Report on Form 10-K dated
December 31, 1994, filed with the Securities and Exchange
Commission on March 24, 1995.
24. Powers of Attorney.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on
behalf of the Partnership by duly authorized officers.
Date: March 24, 2000 PLM EQUIPMENT GROWTH FUND III
PARTNERSHIP
By: PLM Financial Services, Inc.
General Partner
By: /s/ Douglas P. Goodrich
Douglas P. Goodrich
President & Director
By: /s/ Richard K Brock
Richard K Brock
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors of the Partnership's General
Partner on the dates indicated.
Name Capacity Date
*___________________
Robert N. Tidball Director, FSI March 24, 2000
*___________________
Douglas P. Goodrich Director, FSI March 24, 2000
*___________________
Stephen M. Bess Director, FSI March 24, 2000
*Susan C. Santo, by signing her name hereto, does sign this document on behalf
of the persons indicated above pursuant to powers of attorney duly executed by
such persons and filed with the Securities and Exchange Commission.
/s/ Susan C. Santo
Susan C. Santo
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' report 30
Balance sheets as of December 31, 1998 and 1998 31
Statements of income for the years ended December 31,
1999, 1998, and 1997 32
Statements of changes in partners' capital for
the years ended December 31, 1999, 1998, and
1997 33
Statements of cash flows for the years ended December 31,
1999, 1998, and 1997 34
Notes to financial statements 35-45
All other financial statement schedules have been omitted because the required
information is not pertinent to the registrant or is not material, or because
the information required is included in the financial statements and notes
thereto.
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth Fund III:
We have audited the accompanying financial statements of PLM Equipment Growth
Fund III (the Partnership) as listed in the accompanying index to financial
statements. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, PLM Equipment Growth Fund
III, in accordance with the limited partnership agreement, entered its
liquidation phase on January 1, 2000 and has commenced an orderly liquidation of
the Partnership assets. The Partnership will terminate on December 31, 2000,
unless terminated earlier upon sale of all equipment or by certain other events.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth Fund III
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
SAN FRANCISCO, CALIFORNIA
March 24, 2000
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
1999 1998
-----------------------------------
Assets
Equipment held for operating leases, at cost $ 84,191 $ 109,680
Less accumulated depreciation (69,303) (81,298)
---------------------------------
Net equipment 14,888 28,382
Cash and cash equivalents 486 3,429
Accounts receivable, net of allowance for doubtful
accounts of $1,757 in 1999 and $1,469 in 1998 727 1,328
Investments in unconsolidated special-purpose entities 2,498 2,160
Lease negotiation fees to affiliates, net of accumulated
amortization of $0 in 1999 and $155 in 1998 -- 50
Debt issuance costs, net of accumulated
amortization of $309 in 1999 and $248 in 1998 31 91
Prepaid expenses and other assets 60 72
---------------------------------
Total assets $ 18,690 $ 35,512
=================================
Liabilities, minority interest and partners' capital
Liabilities
Accounts payable and accrued expenses $ 786 $ 1,369
Due to affiliates 699 168
Lessee deposits and reserve for repairs 1,419 1,142
Note payable 7,458 18,540
---------------------------------
Total liabilities 10,362 21,219
---------------------------------
Minority interests -- 2,211
Partners' capital
Limited partners (9,871,073 depositary units
as of December 31, 1999 and 1998) 8,328 12,082
General Partner -- --
---------------------------------
Total partners' capital 8,328 12,082
---------------------------------
Total liabilities, minority interests and partners' capital $ 18,690 $ 35,512
=================================
See accompanying notes to financial statements
.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
STATEMENTS OF INCOME
For the Years Ended December 31,
(in thousands of dollars, except weighted-average unit amounts)
1999 1998 1997
--------------------------------------------
Revenues
Lease revenue $ 14,852 $ 18,413 $ 22,515
Interest and other income 445 286 448
Net gain on disposition of equipment 2,197 3,808 5,629
-------------------------------------------
Total revenues 17,494 22,507 28,592
-------------------------------------------
Expenses
Depreciation and amortization 7,628 10,461 15,177
Repairs and maintenance 2,619 3,978 3,954
Equipment operating expenses 668 1,006 1,110
Insurance expense to affiliate 10 (20) 180
Other insurance expenses 227 323 721
Management fees to affiliate 807 1,049 1,279
Interest expense 1,021 1,706 3,164
General and administrative expenses to affiliates 504 587 809
Other general and administrative expenses 1,098 863 952
Provision for (recovery of) bad debts 308 (335) 458
------------------------------------------------------------------------------------------------------------------
Total expenses 14,890 19,618 27,804
-------------------------------------------
Minority interests 22 (21) 292
Equity in net income of unconsolidated
special-purpose entities 1,413 49 857
-------------------------------------------
Net income $ 4,039 $ 2,917 $ 1,937
===========================================
Partners' share of net income
Limited partners $ 3,649 $ 2,397 $ 1,417
General Partner 390 520 520
-------------------------------------------
Total $ 4,039 $ 2,917 $ 1,937
===========================================
Net income per weighted-average depositary unit $ 0.37 0.24 $ 0.14
===========================================
Cash distribution $ 7,793 10,394 $ 10,391
===========================================
Cash distribution per weighted-average depositary unit $ 0.75 1.00 $ 1.00
===========================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 1999, 1998, and 1997
(in thousands of dollars)
Limited General
Partners Partner Total
------------------------------------------------
Partners' capital as of December 31, 1996 $ 28,013 $ -- $ 28,013
Net income 1,417 520 1,937
Cash distribution (9,871) (520) (10,391)
------------------------------------------------
Partners' capital as of December 31, 1997 19,559 -- 19,559
Net income 2,397 520 2,917
Cash distribution (9,874) (520) (10,394)
------------------------------------------------
Partners' capital as of December 31, 1998 12,082 -- 12,082
Net income 3,649 390 4,039
Cash distribution (7,403) (390) (7,793)
------------------------------------------------
Partners' capital as of December 31, 1999 $ 8,328 $ -- $ 8,328
================================================
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(In thousands of dollars)
1999 1998 1997
---------------------------------------------
Operating activities
Net income $ 4,039 $ 2,917 $ 1,937
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 7,628 10,461 15,177
Net gain on disposition of equipment (2,197) (3,808) (5,629)
Equity in net income from unconsolidated special-
purpose entities (1,413) (49) (857)
Changes in operating assets and liabilities:
Restricted cash -- -- 5,966
Accounts receivable 210 207 246
Prepaid expenses and other assets (33) 23 41
Accounts payable and accrued expenses (482) (275) 79
Due to affiliates (6) (267) (881)
Lessee deposits and reserves for repairs 478 (94) (6,716)
Minority interests (224) (228) (703)
--------------------------------------------
Net cash provided by operating activities 8,000 8,887 8,660
--------------------------------------------
Investing activities
Equipment purchased and placed in unconsolidated
special-purpose entities -- (1,198) --
Due to affiliates (36) -- --
Payment of capitalized repairs (26) (126) (248)
Payments of acquisition fees to affiliate -- (54) --
Payments of lease negotiation fees to affiliate -- (12) -
Proceeds from disposition of equipment 3,790 12,077 12,085
Liquidation distribution from unconsolidated
special-purpose entities 3,548 -- --
(Investment in ) distribution from unconsolidated
special-purpose entities 56 2,552 1,921
-------------------------------------------
Net cash provided by investing activities 7,332 13,239 13,758
-------------------------------------------
Financing activities
Net receipts (repayments to) from affiliate 600 (1,792) 1,792
Principal payments on note payable (11,082) (10,750) (10,994)
Cash distribution paid to limited partners (7,403) (9,874) (9,871)
Cash distribution paid to General Partner (390) (520) (520)
--------------------------------------------
Net cash used in financing activities (18,275) (22,936) (19,593)
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,943) (810) 2,825
Cash and cash equivalents at beginning of year 3,429 4,239 1,414
--------------------------------------------
Cash and cash equivalents at end of year $ 486 $ 3,429 $ 4,239
============================================
Supplemental information
Interest paid $ 1,021 $ 1,712 $ 3,339
============================================
See accompanying notes to financial statements.
EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Basis of Presentation
Organization
PLM Equipment Growth Fund III, a California limited partnership (the
Partnership), was formed on October 15, 1987 to engage in the business of
owning, leasing, or otherwise investing in predominately used
transportation and related equipment. PLM Financial Services, Inc. (FSI) is
the General Partner of the Partnership. FSI is a wholly-owned subsidiary of
PLM International, Inc. (PLM International).
Beginning in the Partnership's eleventh year of operations which commenced
on January 1, 2000, the General Partner began the orderly liquidation of
the Partnership's assets. During the liquidation phase, the Partnership's
assets will continue to be reported at the lower of carrying amount or fair
value less cost to sell. The Partnership will terminate on December 31,
2000, unless terminated earlier upon sale of all equipment or by certain
other events.
FSI manages the affairs of the Partnership. The cash distributions of the
Partnership are generally allocated 95% to the limited partners and 5% to
the General Partner. Net income is allocated to the General Partner to the
extent necessary to cause the General Partner's capital account to equal
zero. The General Partner is also entitled to a subordinated incentive fee
equal to 7.5% of surplus distributions, as defined in the limited
partnership agreement, remaining after the limited partners have received a
certain minimum rate of return.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operations
The equipment owned by the Partnership is managed, under a continuing
management agreement by PLM Investment Management, Inc. (IMI), a
wholly-owned subsidiary of FSI. IMI receives a monthly management fee from
the Partnership for managing the equipment (see Note 2). FSI, in
conjunction with its subsidiaries, sells equipment to investor programs and
third parties, manages pools of equipment under agreements with the
investor programs, and is a general partner of other programs.
Accounting for Leases
The Partnership's leasing operations consist of operating leases. Under the
operating lease method of accounting, the leased asset is recorded at cost
and depreciated over its estimated useful life. Rental payments are
recorded as revenue over the lease term. Lease origination costs were
capitalized and amortized over the term of the lease.
Depreciation and Amortization
Depreciation of transportation equipment, held for operating leases, is
computed on the double-declining balance method, taking a full month's
depreciation in the month of acquisition, based upon estimated useful lives
of 15 years for railcars and 12 years for most other types of equipment.
Certain aircraft are depreciated under the double-declining balance method
over the lease term which approximates the assets economic life. The
depreciation method is changed to straight-line method
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Basis of Presentation (continued)
Depreciation and Amortization (continued)
when annual depreciation expense using the straight-line method exceeds
that calculated by the double-declining balance method. Acquisition fees
have been capitalized as part of the cost of the equipment and amortized
over the equipment's depreciable life. Lease negotiation fees are amortized
over the initial equipment lease term. Debt placement fees are amortized
over the term of the related loan. Major expenditures that are expected to
extend the useful lives or reduce future operating expenses of equipment
are capitalized and amortized over the estimated remaining life of the
equipment.
Transportation Equipment
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the General Partner reviews the carrying value
of the Partnership's equipment portfolio at least quarterly and whenever
circumstances indicate the carrying value of an asset may not be
recoverable in relation to expected future market conditions for the
purpose of assessing the recoverability of the recorded amounts. If
projected undiscounted future cash flows are less than the carrying value
of the equipment, a loss on revaluation is recorded. No reductions to the
carrying values of equipment were required during 1999, 1998, or 1997.
Investments in Unconsolidated Special-Purpose Entities
In September 1999, the General Partner amended the corporate-by-laws of the
USPEs in which the Partnership owns an interest greater than 50%. The
amendment to the corporate-by-law provides that all decisions regarding the
acquisition and disposition of the investment as well as other significant
business decisions of that investment would be permitted only upon
unanimous consent of the Partnership and all the affiliated programs that
have an ownership in the investment regardless of the percentage of
ownership. As such, although the Partnership may own a majority interest in
a USPE, the Partnership does not control its management and thus the equity
method of accounting is used for this entity after adoption of the
amendment. As a result of the amendment, as of September 30, 1999, all
jointly owned equipment in which the Partnership owned a majority interest,
which had been consolidated, were reclassified to investments in USPEs.
Accordingly, as of December 31, 1999, the balance sheet reflects all
investments in USPEs on an equity basis.
The Partnership's investment in USPEs includes acquisition and lease
negotiation fees paid by the Partnership to PLM Transportation Equipment
Corporation (TEC) and PLM Worldwide Management Services (WMS). TEC is a
wholly-owned subsidiary of FSI and WMS is a wholly-owned subsidiary of PLM
International. The Partnership's interest in USPEs are managed by IMI. The
Partnership's equity interest in the net income (loss) of USPEs is
reflected net of management fees paid or payable to IMI and the
amortization of acquisition and lease negotiation fees paid to TEC or WMS.
Repairs and Maintenance
Repair and maintenance costs for railcars, marine vessels and trailers, are
usually the obligation of the Partnership. Maintenance costs of the other
equipment are the obligation of the lessee. If they are not covered by the
lessee, they are charged against operations as incurred. To meet the
maintenance requirements of certain aircraft airframes and engines, reserve
accounts are prefunded by the lessee. Estimated costs associated with
marine vessel dry docking are accrued and charged to income ratably over
the period prior to such dry-docking. The reserve accounts are included in
the balance sheet as lessee deposits and reserve for repairs.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Basis of Presentation (continued)
Net Income (Loss) and Distributions Per Depositary Unit
Cash distributions of the Partnership are allocated 95% to the limited
partners and 5% to the General Partner and may include amounts in excess of
net income. Net income is allocated to the General Partner through
allocation to the extent necessary to cause the General Partner's capital
account to equal zero. The General Partner received an allocation in the
amount of $0.2 million, $0.4 million, and $0.4 million from the gross gain
on disposition of equipment for the years ended December 31, 1999, 1998,
and 1997, respectively. The limited partners' net income (loss) and
distributions are allocated among the limited partners based on the number
of depositary units owned by each limited partner and on the number of days
of the year each limited partner is in the Partnership.
Cash distributions are recorded when paid. Cash distributions to investors
in excess of net income are considered a return of capital. Cash
distributions to the limited partners of $3.8 million, $7.5 million, and
$8.5 million for the years ended December 31, 1999, 1998, and 1997,
respectively, were deemed to be a return of capital.
Cash distributions relating to the fourth quarter of 1998 and 1997, of $2.1
million and $2.6 million, respectively, were paid during the first quarter
of 1999 and 1998. There were no cash distributions relating to the fourth
quarter of 1999 paid in 2000.
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 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 years ended December 31, 1999, 1998, and 1997 were 9,871,073.
Comprehensive Income
The Partnership's net income was equal to comprehensive income for the
years ended December 31, 1999, 1998, and 1997.
Cash and Cash Equivalents
The Partnership considers highly liquid investments that are readily
convertible into known amounts of cash with original maturities of three
months or less to be cash equivalents.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
2. General Partner and Transactions with Affiliates
An officer of FSI, a wholly-owned subsidiary of the General Partner,
contributed $100 of the Partnership's initial capital. Under the equipment
management agreement, IMI, subject to certain reductions, receives a
monthly management fee attributable to either owned equipment or interests
in equipment owned by the USPEs equal to the lesser of (a) the fees that
would be charged by an independent third party for similar services for
similar equipment or (b) the sum of (i) 5% of the gross lease revenues
attributable to equipment that is subject to operating leases, (ii) 2% of
the gross lease revenues attributable to equipment that is subject to full
payout net leases, and (iii) 7% of the gross lease revenues attributable to
equipment for which IMI provides both management and additional services
relating to the continued and active operation of program equipment, such
as on-going marketing and re-leasing of equipment, hiring or arranging for
the or operating personnel for equipment, and similar services. The
Partnership's proportional share of USPE management fees of $12,000 and
$3,000 were payable as of December 31, 1999 and 1998, respectively. The
Partnership's proportional share of USPEs management fee expense during
1999, 1998, and 1997 was $0.1 million. The Partnership reimbursed FSI and
its affiliates $0.5 million, $0.6 million, and $0.8 million for
administrative and data processing services performed on behalf of the
Partnership in 1999, 1998, 1997, respectively.
The Partnership's proportional share of USPEs administrative and data
processing services reimbursed to FSI was $6,000, $26,000 and $38,000
during 1999, 1998, and 1997, respectively.
The Partnership paid $2,000 and $6,000 to Transportation Equipment
Indemnity Company Ltd. (TEI), an affiliate of the General Partner, that
provides marine insurance coverage and other insurance brokerage services
in 1998 and 1997, respectively. No fees for owned equipment were paid to
TEI in 1999. The Partnership received a refund of $0.1 million in 1998 from
lower loss-of-hire insurance claims from the Partnership and other insured
affiliated programs. No similar refund was received during 1997 or 1999.
PLM International liquidated TEI in the first quarter of 2000.
The Partnership paid lease negotiation and equipment acquisition fees of
$0.1 million to TEC and PLM WMS during 1998. No lease negotiation and
equipment acquisition fees were paid to TEC or WMS during 1999 or 1997.
As of December 31, 1999, approximately 29% of the Partnership's trailer
equipment was in rental facilities operated by PLM Rental, Inc., an
affiliate of the General Partner, doing business as PLM Trailer Leasing.
Revenues under short-term rental agreements with the rental yards'
customers are reported as revenue in accordance with Financial Accounting
Standards Board Statement No.13 "Accounting For Leases". Direct expenses
associated with the equipment are charged directly to the Partnership. An
allocation of indirect expenses of the rental yard operations is charged to
the Partnership monthly.
The Partnership owns certain equipment in conjunction with affiliated
programs (see Note 4).
During 1999, the Partnership borrowed a total of $0.6 million from the
General Partner. The General Partner charged the Partnership market
interest rates. Total interest paid to the General Partner was $10,000.
The balance due to affiliates as of December 31, 1999 included $0.1 million
due to FSI and its affiliates for management fees and $0.6 million to FSI
for the loan made to the Partnership. The balance due to affiliates as of
December 31, 1998 included $0.2 million due to FSI and its affiliates for
management fees.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
3. Equipment
The components of owned equipment as of December 31, are as follows (in
thousands of dollars):
Equipment Held for Operating Leases: 1999 1998
--------------------------------
Aircraft $ 42,000 $ 52,028
Rail equipment 33,572 33,999
Marine containers 4,453 5,606
Trailers 4,166 5,257
Marine vessel -- 12,790
--------------------------------
84,191 109,680
Less accumulated depreciation (69,303) (81,298)
--------------------------------
Net equipment $ 14,888 $ 28,382
================================
Revenues are earned by placing the equipment under operating leases. All of
the Partnership's marine containers are leased to operators of
utilization-type leasing pools, which include equipment owned by
unaffiliated parties. In such instances, revenues received by the
Partnership consist of a specified percentage of revenues generated by
leasing the pooled equipment to sublessees, after deducting certain direct
operating expenses of the pooled equipment. The majority of rents for
railcars are based on a fixed rate; in some cases they are based on mileage
traveled, rents for all other equipment are based on fixed rates.
During September 1999, the Partnership's investment in a marine vessel was
reclassified to an investment in unconsolidated special purpose entity.
(See Note 1).
As of December 31, 1999, all owned equipment in the Partnership portfolio
was on lease or operating in PLM-affiliated short-term trailer rental
yards, except for 40 railcars, and an aircraft. As of December 31, 1998,
all owned equipment in the Partnership portfolio was on lease or operating
in PLM-affiliated short-term trailer rental yards, except for 25 marine
containers, 69 railcars, and an aircraft. The aggregate net book value of
equipment off lease was $1.2 million and $2.4 million as of December 31,
1999 and 1998, respectively.
During 1999, the Partnership sold or disposed of marine containers,
trailers, railcars, and an aircraft with an aggregate net book value of
$1.6 million for proceeds of $3.8 million.
During 1998, the Partnership sold or disposed of marine containers,
trailers, railcars, and a mobile offshore drilling unit with an aggregate
net book value of $8.3 million for proceeds of $12.1 million.
In the fourth quarter of 1996, the Partnership ended its investment phase
in accordance with the limited partnership agreement; therefore, no
equipment was purchased during 1999, 1998, or 1997. Capital improvements to
the Partnership's existing equipment of $26,000 million and $0.1 million
were made during 1999 and 1998, respectively.
All leases for owned equipment are being accounted for as operating leases.
Future minimum rentals under noncancelable leases for owned equipment as of
December 31, 1999 during 2000 are approximately $10.7 million. Per diem and
short-term rentals consisting of untilization rate lease payments included
in revenue amounted to approximately $0.3 million, $0.8 million, and $3.9
million in 1999, 1998, and 1997, respectively.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
4. Investments in Unconsolidated Special Purpose Entities
In September 1999, the General Partner amended the corporate-by-laws of the
USPEs in which the Partnership owns an interest greater than 50%. The
amendment to the corporate-by-law provides that all decisions regarding the
acquisition and disposition of the investment as well as other significant
business decisions of that investment would be permitted only upon
unanimous consent of the Partnership and all the affiliated programs that
have an ownership in the investment regardless of the percentage of
ownership. As such, although the Partnership may own a majority interest in
a USPE, the Partnership does not control its management and thus the equity
method of accounting is used for this entity after adoption of the
amendment. As a result of the amendment, as of September 30, 1999, all
jointly owned equipment in which the Partnership owned a majority interest,
which had been consolidated, were reclassified to investments in USPEs.
Accordingly, as of December 31, 1999, the balance sheet reflects all
investments in USPEs on an equity basis.
The net investments in USPEs include the following jointly-owned equipment
(and related assets and liabilities) as of December 31, (in thousands of
dollars):
1999 1998
----------- -----------
56% interest in an entity owning a bulk-carrier marine vessel $ 2,440 $ --
25% interest in a trust that owned four 737-200 Stage II commercial
aircraft 58 106
17% interest in two trusts that owned a total of three 737-200
Stage II commercial aircraft, two Stage II aircraft engines, and
a portfolio of aircraft rotables
-- 2,054
----------- -----------
Net investments $ 2,498 $ 2,160
=========== ===========
During 1999, the Partnership sold the 17% interest in two trusts that owned
a total of three commercial aircraft, two aircraft engines, and a portfolio
of aircraft rotables.
During September 1999, the Partnership's investment in a marine vessel was
reclassified to an investment in unconsolidated special purpose entity.
(See Note 1).
During 1998, the Partnership increased its investment in a trust owning
four commercial aircraft by funding the installation of a hushkit on an
aircraft assigned to the Partnership in the trust for $1.2 million. The
Partnership paid a total of $0.1 million lease negotiation and equipment
acquisition fees to TEC for the installation of the hushkit. The
Partnership was required to install a hushkit per the Partnership
agreement. In this trust, all of the commercial aircraft except the
commercial aircraft designated to the Partnership were sold by the
affiliated programs. The aircraft, designated to the Partnership, was
transferred out of the trust into the Partnership's owned equipment
portfolio. As of December 31, 1999, the Partnership's remaining interest in
the trust were $0.1 million of receivables from the former lessee.
The following summarizes the financial information for the USPEs and the
Partnership's interests therein as of and for the years ended December 31,
(in thousands of dollars):
1999 1998 1997
--------------------------- --------------------------- -------------------------
Net Net Net
Total Interest Total Interest Total Interest
USPEs of USPEs Of USPEs of
Partnership Partnership Partnership
------------ ----------- ------------ ------------ ------------ -----------
Net investments $ 4,881 $ 2,498 $ 12,581 $ 2,160 $ 39,471 $ 6,075
Lease revenues 1,910 243 6,279 1,229 16,356 2,785
Net income 8,902 1,413 9,214 49 11,741 857
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
5. Operating Segments
The Partnership operates or operated primarily in six different segments:
aircraft leasing, marine container leasing, mobile offshore drilling unit
(MODU) leasing, marine vessel 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 General Partner evaluates the performance of each segment based on
profit or loss from operations before allocation of general and
administrative expenses, interest expense, and certain other expenses. The
segments are managed separately due to different business strategies for
each operation.
The following tables present a summary of the operating segments (in
thousands of dollars):
Marine
Aircraft Container Marine Trailer Railcar All
For the Year Ended December 31, 1999 Leasing Leasing Vessel Leasing Leasing Other Total
------------------------------------ ------- ------- ------ ------- ------- ----- -----
Revenues
Lease revenue $ 5,632 $ 120 $ 1,477 $ 741 $ 6,882 $ -- $ 14,852
Interest income and other 47 -- 45 -- 170 183 445
Net gain (loss) on disposition of
equipment 1,760 96 -- (42) 383 -- 2,197
------------------------------------------------------------------------
Total revenues 7,439 216 1,522 699 7,435 183 17,494
Expenses
Operations support 656 2 817 229 1,782 38 3,524
Depreciation and amortization 4,693 114 643 344 1,766 68 7,628
Interest expense -- -- -- -- -- 1,021 1,021
Management fee expense 213 6 75 41 472 -- 807
General and administrative expenses 419 4 45 132 270 732 1,602
Provision for (recovery of) bad 222 -- -- (15) 101 -- 308
debts
------------------------------------------------------------------------
Total costs and expenses 6,203 126 1,580 731 4,391 1,859 14,890
------------------------------------------------------------------------
Minority interests -- -- -- -- -- (22) (22)
------------------------------------------------------------------------
Equity in net income (loss) of USPEs 1,477 -- (64) -- -- -- 1,413
------------------------------------------------------------------------
========================================================================
Net income (loss) $ 2,713 $ 90 $ (122) $ (32) $ 3,044 $ (1,654) $ 4,039
========================================================================
As of December 31, 1999
Total assets $ 6,954 $ 325 $ 2,443 $ 1,738 $ 6,588 $ 642 $ 18,690
========================================================================
1 Includes costs not identifiable to a particular segment such as interest
expense, certain amortization expense, certain interest income and other,
operations support expenses and general and administrative expenses.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
5. Operating Segments (continued)
Marine
Aircraft Container MODU Trailer Railcar All
For the Year Ended December 31, 1998 Leasing Leasing Leasing Leasing Leasing Other1 Total
------------------------------------ ------- ------- ------- ------- ------- ----- -----
Revenues
Lease revenue $ 6,471 $ 278 $ 756 $ 1,256 $ 7,144 $ 2,508 $ 18,413
Interest income and other 23 -- -- -- 78 185 286
Net gain (loss) on disposition of
equipment (14 ) 60 3,619 (123) 266 -- 3,808
------------------------------------------------------------------------
Total revenues 6,480 338 4,375 1,133 7,488 2,693 22,507
Expenses
Operations support 1,321 6 18 221 2,376 1,345 5,287
Depreciation and amortization 6,240 240 512 496 1,849 1,124 10,461
Interest expense -- -- -- -- -- 1,706 1,706
Management fee 298 14 38 77 497 125 1,049
General and administrative expenses 211 5 6 186 285 757 1,450
Provision for (recovery of) bad (358 ) -- -- 44 (22 ) 1 (335 )
debts
------------------------------------------------------------------------
Total costs and expenses 7,712 265 574 1,024 4,985 5,058 19,618
------------------------------------------------------------------------
Minority interests -- -- -- -- -- 21 21
------------------------------------------------------------------------
Equity in net income of USPEs 49 -- -- -- -- -- 49
------------------------------------------------------------------------
========================================================================
Net income (loss) $ (1,183 )$ 73 $ 3,801 $ 109 $ 2,503 $ (2,386 ) $ 2,917
========================================================================
As of December 31, 1998
Total assets $ 14,788 $ 512 $ -- $ 2,148 $ 8,072 $ 9,992 $ 35,512
========================================================================
Marine
Aircraft Container MODU Trailer Railcar All
For the Year Ended December 31, 1997 Leasing Leasing Leasing Leasing Leasing Other1 Total
------------------------------------ ------- ------- ------- ------- ------- ----- -----
Revenues
Lease revenue $ 7,873 $ 1,087 $ 1,642 $ 1,850 $ 7,537 $ 2,526 $ 22,515
Interest income and other 45 17 -- -- 82 304 448
Net gain on disposition of
equipment 5,493 48 -- 51 37 -- 5,629
------------------------------------------------------------------------
Total revenues 13,411 1,152 1,642 1,901 7,656 2,830 28,592
Expenses
Operations support 1,374 10 30 311 2,218 2,022 5,965
Depreciation and amortization 8,943 753 1,487 725 1,941 1,328 15,177
Interest expense 12 -- -- -- -- 3,152 3,164
Management fee 351 54 83 121 517 153 1,279
General and administrative expenses 181 8 21 287 284 980 1,761
Provision for bad debts 379 1 -- 5 71 2 458
------------------------------------------------------------------------
Total costs and expenses 11,240 826 1,621 1,449 5,031 7,637 27,804
------------------------------------------------------------------------
Minority interests -- -- -- -- -- (292) (292)
------------------------------------------------------------------------
------------------------------------------------------------------------
Equity in net income of USPEs 857 -- -- -- -- -- 857
------------------------------------------------------------------------
========================================================================
Net income (loss) $ 3,028 $ 326 $ 21 $ 452 $ 2,625 $ (4,515) $ 1,937
========================================================================
As of December 31, 1997
Total assets $ 22,249 $ 1,168 $ 7,422 $ 3,434 $ 10,031 $ 12,091 $ 56,395
========================================================================
1 Includes costs not identifiable to a particular segment such as interest
expense, certain amortization expense, certain interest income and other,
operations support expenses and general and administrative expenses.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
6. Geographic Information
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Partnership leases or leased its aircraft, railcars, and trailers to
lessees domiciled in four geographic regions: the United States, Canada,
Europe, and Asia. The marine vessels, mobile offshore drilling unit, and
marine containers are leased to multiple lessees in different regions that
operate this equipment worldwide.
The table below set forth lease revenue by geographic region for the
Partnership's owned equipment and investments in USPEs grouped by domicile
of the lessee as of and for the years ended December 31, (in thousands of
dollars):
Region Owned Equipment Investments in USPEs
- ----------------------------- ----------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
----------------------------------- -----------------------------------
United States $ 3,651 $ 4,917 $ 5,227 $ -- $ -- $ --
Canada 5,984 5,474 5,479 -- 449 1,019
Europe 3,620 3,619 3,620 -- 780 1,766
Asia -- 861 2,558 -- -- --
Rest of the world 1,597 3,542 5,631 243 -- --
=================================== ===================================
Lease revenues $ 14,852 $ 18,413 $ 22,515 $ 243 $ 1,229 $ 2,785
=================================== ===================================
The following table sets forth net income (loss) information by region for
the owned equipment and investments in USPEs for the years ended December
31, (in thousands of dollars):
Region Owned Equipment Investments in USPEs
- ----------------------------- ----------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
----------------------------------- -----------------------------------
United States $ (64) $ 1,513 1,130 $ -- $ -- $ --
Canada 4,273 1,556 3,340 1,477 10 84
Europe 723 (551) (2,662) -- 39 773
Asia (1,627) (1,138) 3,771 -- -- --
Rest of the world 38 3,836 569 (64) -- --
----------------------------------- -----------------------------------
Regional income (loss) 3,343 5,216 6,148 (64 ) 49 857
Administrative and other
net loss (717) (2,348) (5,068) -- -- --
=================================== ===================================
Net income 2,626 $ 2,868 1,080 $ 1,413 $ 49 $ 857
=================================== ===================================
The net book value of these assets as of December 31, were as follows (in
thousands of dollars):
Region Owned Equipment Investments in USPEs
- ----------------------------- ----------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
----------------------------------- -----------------------------------
United States $ 6,470 $ 6,475 8,639 $ -- $ -- $ --
Europe -- 7,258 11,175 -- 2,054 4,021
Canada 4,400 7,114 6,866 58 106 2,054
Asia 1,051 1,951 2,852 -- -- --
Rest of the world 2,967 5,584 14,629 2,440 -- --
=================================== ===================================
Net book value $ 14,888 $ 28,382 44,161 $ 2,498 $ 2,160 $ 6,075
=================================== ===================================
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
7. Note Payable
The Partnership had a note outstanding for $7.5 million as of December 31,
1999, with interest computed at LIBOR plus 1.5% per annum. The interest
rate was 7.69% as of December 31, 1999 and 6.8% as of December 31, 1998.
Commencing October 1, 1997, quarterly principal payments will be equal to
75% of net proceeds from asset sales from that quarter, or maintain the
minimum facility balance specified on the loan agreements. During 1999, the
Partnership paid $11.1 million of the outstanding loan balance mainly as a
result of asset sales.
The General Partner believes that the book value of the debt approximates
fair market value due to its variable interest rate.
8. Concentrations of Credit Risk
No single lessee accounted for more than 10% of total consolidated revenues
for the year ended December 31, 1999, 1998, and 1997. However, R & B Falcon
Drilling, Inc. purchased a mobile offshore drilling unit from the
Partnership and the gain from the sale accounted for 15% of total
consolidated revenues from wholly-and partially-owned equipment during
1998. Aramco Associated Co. purchased an aircraft from the Partnership and
the gain from the sale accounted for 16% of total consolidated revenues
from wholly-and partially-owned equipment during 1997.
As of December 31, 1999 and 1998, the General Partner believes the
Partnership had no significant concentrations of credit risk that could
have a material adverse effect on the Partnership.
9. Income Taxes
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
As of December 31, 1999, the financial statement carrying amount of assets
and liabilities was approximately $35.7 million lower than the federal
income tax basis of such assets and liabilities, primarily due to
differences in depreciation methods, equipment reserves, provision for bad
debt, prepaid deposits, and the tax treatment of underwriting commissions
and syndication costs.
10. Contingencies
The Partnership, together with affiliates, has initiated litigation in
various official forums in India against a defaulting Indian airline lessee
to repossess Partnership property and to recover damages for failure to pay
rent and failure to maintain such property in accordance with relevant
lease contracts. The Partnership has repossessed all of its property
previously leased to such airline, and the airline has ceased operations.
In response to the Partnership's collection efforts, the airline filed
counter-claims against the Partnership in excess of the Partnership's
claims against the airline. The General Partner believes that the airline's
counterclaims are completely without merit, and the General Partner will
vigorously defend against such counterclaims. The General Partner believes
the liklihood of an unfavorable outcome from the counter claims is remote.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
11. Liquidation of Partnership
During the first quarter of 2000, the Partnership completed its 11th year
of operations. The Partnership must be liquidated by the end of 2000. The
General Partner is actively marketing the remaining equipment portfolio
with the intent of maximizing sale proceeds. As sale proceeds are received
the General Partner intends to periodically declare special distributions
to distribute the sale proceeds to the partners. During the liquidation
phase of the Partnership, the equipment will continue to be leased under
operating leases until sold. Operating cash flows, to the extent they
exceed Partnership expenses, will continue to be distributed on a quarterly
basis to partners. The amounts reflected for assets and liabilities of the
Partnership have not been adjusted to reflect liquidation values. The
equipment portfolio continues to be reported at the lower of depreciated
cost of fair value less cost to dispose. Any excess proceeds over expected
Partnership obligations will be distributed to the Partners throughout the
liquidation period. Upon final liquidation, the Partnership will be
dissolved.
PLM EQUIPMENT GROWTH FUND III
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership. *
4.1 Amendment, dated November 18, 1991, to Limited Partnership *
Agreement of Partnership.
10.1 Management Agreement between Partnership and PLM Investment *
Management, Inc.
10.2 $41,000,000 Credit Agreement dated as of December 13, 1994 with *
First Union National Bank of North Carolina.
24. Powers of Attorney. 24
- ----------------------
* Incorporated by reference. See page 27 of this report.